Plastic Films The Growth Wrap
May 16, 2019
Shradha Sheth +91 22 6623 3308 Edelweiss Securities Limited [email protected] Plastic Films
Executive Summary
Fortifying businesses against commodity cycles can unlock significant value. When the upcycle kicks in, growth can unfold rather rapidly. We observe a cyclical upturn is underway in plastic films and would benefit Indian players (primarily BOPET). What’s more, although BOPET has been
(Click here for deeply cyclical historically, we argue the current cycle would video clip) be shallower and longer owing to lower supply addition (CAGRs of 2% in capacity against 6% in demand) over CY18– 21E. Indian BOPET players, which boast scale and global competitiveness, are churning out structurally strong volume growth of 6–7% on the back of packaging demand and are poised to ride the uptrend. Yet, they are trading at an undemanding FY21E EV/EBITDA of 2.2x, a 74% discount to global peers (8.4x) and 32% to their average historical valuation (3.3x), factoring in an earnings CAGR of ~15% with a 185bp jump in RoCE to 13–14% over FY19–21E. Polyplex (strong play on BOPET upcycle), Uflex (beneficiary of value chain integration in to packaging) are our top ‘BUY’ ideas with 50% upside. In the packaging space, we maintain ‘HOLD’ on Essel Propack due to capping of valuations following Blackstone’s acquisition of majority stake in the company at current price.
Plastic packaging and films: Structural drivers AMI Consulting, a polymers consulting company, envisages a potent mix of structural drivers to roll out annual volume growth of 6–7% in the USD11bn global BOPET films market over CY18–21E. Demand for BOPET films, one of the key raw materials (23%) for plastic packaging, is driven by: a) Sticky demand for plastic packaging due to its favourable properties: lightweight, low cost, corrosion resistance, and excellent barrier to oxygen, water and carbon dioxide. Among the substitutes available, plastic packaging is growing faster at a CAGR of 5.5% versus 3.6% for the overall industry. b) Within plastic packaging, demand for flexible plastic packaging (20% of overall packaging industry) is driven by the high product-to-package ratio, favourable economics and sustainability benefits. c) Further Flexible packaging demand is driven by food & beverages sector (71% of consumption), whose demand is non-discretionary and steadily growing.
What’s different? A shallower but longer business cycle Historically, BOPET films has been a deeply cyclical business. But we contend the current down cycle will be shallower and longer owing to lower supply additions than demand growth. Therefore, despite being cyclical, the industry boasts clear earnings visibility for two–three years. A moderate capacity addition CAGR of merely 2% over CY18–21E (versus 17% over CY10–14) against demand CAGR of over 6% is expected to lift capacity utilisation from ~76% in CY18 to 84% by CY21E. Furthermore, the extent of new capacity addition is commensurate with growth in demand over next 1.5 years.
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Plastic Films
The business moat: Barrier to scale The BOPET films industry is fragmented with the top ten players commanding ~40% of capacity. Barriers to entry are low, but the barrier to scale is high. In fact, few Indian plastic films companies boast scale. Furthermore, these few players are reinforcing their global competitiveness with focus on integration, economies of scale, geographic expansion, value addition and innovation. A case in point is deployment of steady free cash flows by Indian players to set up modern plants across key regional markets (on-shoring). This is enabling them to move closer to customers, effectively meet demand, and keep tabs on innovation cycles. Such players have also scaled up the proportion of value-added products in the overall mix and diversified geographically, leading to sustainable improvement in profitability.
Outlook and valuation: Tensile strength, undemanding valuations We believe growth is steadily unfolding at Indian BOPET players. The industry is in the midst of an upturn and capacity utilisation is improving amid favourable demand-supply balance. This, we argue, would lead to a shallower and longer cycle.
The flexible packaging segment and BOPET films’ superior technical properties underpin structural growth for the Indian BOPET films industry. That said, few Indian plastic films companies boast global competitiveness backed by scale, balance sheet strength, onshoring models and better product portfolios. And yet, they are trading at an undemanding FY21E EV/EBITDA of 2.2x (2.6x FY20E EV/EBITDA), a 74% discount to global peers (8.4x) and 32% to their average historical valuation (3.3x EV/EBITDA one-year forward).
While we acknowledge the cyclical nature of the BOPET films business, we do believe the Indian players would deliver an earnings CAGR of about 15% with a 185bp jump in RoCE to 13–14% over FY19–21E. Our top ‘BUYs’ are Polyplex, a strong play on the films upcycle, Uflex, which is a beneficiary of enhanced value chain integration into packaging. In light of capping of valuations due to open offer from Blackstone at the current price, triggered following its acquisition of majority stake in EPL, we maintain ‘HOLD’.
Table 1: Competitive positioning: Few Indian plastic films’ companies are well placed Company Leadership Position Uflex Ranked top 5 players globally in BOPET plastic films Ranked No 1 player in packaging in organised sector in India with ~25% market share Well diversified product portfolio with shifting focus to high margin packaging segment (39% of overall sales), which provides stability through cycles Polyplex Ranked as top 8th player and to emerge among the top five players globally in BOPET plastic films post its expansion Value added portfolio of films at 49% of overall sales Essel Propack Global leadership in oral care category; 3+x opportunity in non oral care Source: Company
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Table 2: Valuation framework Uflex Polyplex Essel Propack Valuation metric Q2FY21E EV/EBITDA Rationale i) In-line with 5-year average 1-year forward EV/EBITDA for films business ii) In-line with forward valuation of peers for packaging business Business Segments Packaging Films 3.3x 3.3x NA Packaging Products 6.0x NA 8.0x % Group discount 35 NA NA % estimated growth Revenue 10 11 10 over FY19-21E EBITDA 14 15 12
PAT 18 12 20 Value per share 326 729 140 % upside over CMP 51.9 48.4 5.3 (as on 13 May 2019) Absolute rating BUY BUY HOLD
Source: Edelweiss estimates
In order to capture the structural opportunity in BOPET films while factoring in business cyclicality, we value BOPET films players at Q2FY21E EBITDA of 3.3x and the packaging segment at 6x. Our valuation for the films segment is in line with their historical five-year average EV/EBITDA. We have valued the packaging segment in line with forward valuation of peers in the flexible packaging space.
Despite an uptick of 20%-plus in sales over 9MFY19, plastic film stocks are trading at an FY21E EV/EBITDA of 2.2x. This implies a discount of about 74% to valuations of pure-play global plastic film players and packaging companies, which are trading at 8.4x FY21E EV/EBITDA and an average discount of 32% to their five-year historical valuation. Our target prices imply an FY21E PE of 5.2x and 6.4x for Uflex consolidated and Polyplex, respectively.
The Indian BOPET films players have evolved across business cycles and now have better balance sheets. Besides, value-added products deter end-consumers from switching over to other alternatives. Furthermore, the current cycle is more calibrated given measured capacity additions that would drive earnings CAGR of 15% and RoCE expansion to 13–14%, over FY19–21E, which are higher than their respective five-year historical averages.
Key risks to our thesis Stronger-than-expected capacity additions a la 2011 when excess capacity skewed demand-supply is a key risk to our investment thesis.
Disruption in plastic demand due to technological advancements and environmental concerns cannot be ruled out.
Governance issues have hurt the sector in the past and remain an overhang.
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Table 3: Valuation snapshot of key players covered in films and packaging
Price Mcap EV Revenue (INR Mn) EBITDA (INR Mn) Earnings (INR Mn) EV/EBITDA P/E RoE (%) Name (local) (Local Mn) (Local Mn) FY19E FY20E FY21E % CAGR FY19E FY20E FY21E % CAGR FY19E FY20E FY21E % CAGR FY20 FY21 FY20 FY21 FY20 FY21 Indian film companies UFLEX LTD 215 15,493 29,512 80,514 84,876 98,016 10% 9,953 10,828 12,936 14% 3,254 3,665 4,502 18% 2.7 2.3 4.2 3.4 8.6 9.9 Polyplex Corp Ltd 491 15,710 20,444 44,338 46,584 54,458 11% 7,134 8,086 9,450 15% 2,904 3,106 3,635 12% 2.5 2.2 5.1 4.3 11.1 12.2 Essel Propack Ltd 133 41,903 46,430 27,069 29,770 32,510 10% 4,991 5,719 6,283 12% 1,905 2,479 2,787 21% 8.1 7.4 16.9 15.0 16.9 16.8 Source: Edelweiss estimates Market data as on May-13,2019
Chart 1: Historical one-year forward EV/EBITDA: Current trading levels at significant discount to five-year average EV/EBITDA Polyplex UFLEX Essel Propack 9.0 5.0 12.5
7.2 4.2 10.0
5.4 3.4 7.5 7.4 2.3 3.6 2.6 32% Discount In-Line with 5.0 5-year average 2.2 1.8 1.8 31% Discount 2.5 0.0 1.0
0.0
15 17 18 14 16 19
14 15 16 17 18 19
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14 15 17 18 19 16
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May May May May May May
May May May May May May
May May May May May 1-year forward EV/EBITDA 1-year forward EV/EBITDA May 1-year forward EV/EBITDA 5-year average 5-year average 5-year average Source: Company, Edelweiss research
Historical stock returns Despite being cyclical, the companies that we have zeroed in on have alleviated the impact of commodity cycles and enhanced value for stakeholders.
Table 4: Shareholder value creation (% CAGR) Polyplex Uflex Essel Propack 1 year 3.4 1 year -29.3 1 year 3.2 2 year 1.6 2 year -23.8 2 year -0.8 3 year 28.1 3 year 5.6 3 year 12.0 5 year 26.6 5 year 20.8 5 year 28.1 10 year 21.7 10 year 12.0 10 year 31.2 Source: Edelweiss research Market data as on May-13,2019
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Story in charts
Chart 2: Strong demand CAGR of 9% over CY07–10… …drove up capacity expansion by 17% CAGR over CY10–14… 3.5 100.0 7.0 100.0 90.4 90.4 83.4 86.3 83.9 84.9 5.9 2.8 80.0 5.6 77.6 80.0 68.2 64.6
2.1 60.0 4.2 60.0 (%)
3.2 (%)
(Mn MT) (Mn 3.2 (Mn MT) (Mn 1.4 2.7 2.9 40.0 2.8 40.0 2.2 3.8 0.7 20.0 1.4 2.9 20.0
0.0 0.0 0.0 0.0 2007 2008 2009 2010 2010 2011 2012 2013 2014 Installed capacity Demand Utilization Installed capacity Demand Utilization Source: Polyplex annual report
Chart 3: Capacity addition moderated over CY14–17 …and likely to be more rational, driving up utilization 7.5 100.0 7.3 100.0
6.0 80.0 6.4 84.2 80.0 70.4 72.0 81.2 64.6 64.5 76.2 79.6 72.0
4.5 60.0 5.6 60.0 (%)
6.6 (%) (Mn MT) (Mn 3.0 5.9 40.0 MT) (Mn 4.7 6.0 40.0 4.8 7.1 3.8 1.5 20.0 3.9 6.64.8 20.0
0.0 0.0 3.0 0.0 2014 2015 2016 2017 2017 2018E 2019E 2020E 2021E Installed capacity Demand Utilization Installed capacity Demand Utilization Source: Polyplex annual report, Edelweiss research
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Contents
Executive Summary ...... 1
Plastic films – Key raw material for packaging ...... 7
Plastic packaging: The material of choice ...... 9
Packaging undergoing a shift from rigid to flexible ...... 10
Demand drivers for packaging ...... 13
Cyclical drivers ...... 16
Indian plastic players’ competitive edge ...... 22
Value chain and key players ...... 23
Financial footing ...... 31
Valuation ...... 34
Risks ...... 37
Companies
Polyplex ...... 40
Uflex ...... 59
Essel Propack ...... 81
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Plastic films – Key raw material for packaging
In the USD700bn packaging industry globally, plastic packaging (42% of industry) is the fastest emerging substitute. Plastic films, one of the key raw materials for plastic packaging, constitute about 23% of the packaging market. Globally, plastic BOPET films account for 17% (USD11bn) of the overall films market. Global demand for thin BOPET film is expected to grow 5–7% over the next few years with India and ‘Other Asia’ outgrowing at 9–10%.
The global packaging market was USD700bn in 2016 (Source: FICCI). Among the substitutes available, plastic packaging is growing faster at a CAGR of 5.5% versus 3.6% for the overall industry over CY11–16 (Source: Plastic Market Watch). Globally, plastics comprise 42% of packaging with the rigid type accounting for 22% and flexible 20%.
Chart 4: Overall USD700bn global packaging industry by value (%) Films account for 23% of packaging cost at USD68bn Plastic packaging: USD294bn BOPET Films: USD11bn Metal Rigid 15% packaging 22% Others 14% PVC 7% Polyethylene Plastic films – 23% of plastic packaging 33%
BOPET – 17% of plastic films PET 17% Board Flexible Polypropylene 31% packaging 29% 20% Others Glass 5% 7% Source: Industry Reports, FICCI
Films, one of the key raw materials for plastic packaging, is currently a USD68bn market Globally, BOPET plastics films’ accounting for about 23% of the packaging market. Some of the commonly used films in market was about USD11bn in 2017 plastic packaging include polyethylene teraphthalate (PET), polyvinyl chloride (PVC), polyethylene (PE), polypropylene (PP) and others. Within various plastic films, global PET films accounts for 17% of the market and is estimated to be USD11bn in size. Unlike many other petrochemical products, PET film is not a pure commodity, but has thousands of SKUs based on specific type, treatment, length & width combinations.
Healthy demand in global BOPET Films BOPET is a clear, strong and lightweight plastic that is widely used to produce a wide variety of packaging materials for beverages, foods, personal care, home care, pharmaceuticals and other consumer and industrial products. Global demand for BOPET films (below 50 microns), a higher-end preferred substrate in packaging, rose at a CAGR of 8% over 2007–17 to 3.6mn MTPA. Asia has become a dominant player in the industry with BOPET demand increasing at a CAGR of 9%. Asia is the largest market for thin BOPET films, accounting for 68% of global films
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consumption. Global demand for thin BOPET film is expected to grow 5–7% over the next few Asia is the largest market for thin years with India and ‘Other Asia’ outgrowing at 9–10%. The demand for Asian BOPET film BOPET films, accounting for 68% of companies is also driven by exports to developed markets. global consumption Global plastic films by region Chart 5: Thin BOPET film demand by region Chart 6: Thin BOPET film capacity by region Thin PET Film Demand, 2017 - 3.6mn MTPA Thin PET Film Capacity, 2017 - 5.0mn MTPA Americas RoW Americas RoW 9% 12% 12% 10% Europe 5% Other Far Europe Other Far East 8% East 11% 15%
India 12% India 14% China China 47% 45% Source: Polyplex Annual Report
Thin BOPET Film driven by packaging markets
BOPET players’ capacity is diversified The largest application of thin BOPET film is flexible packaging, which accounts for 72% of total and caters to key markets globally thin film consumption. Long-term prospects for BOPET films are strong because of flexible packaging segment and superior technical properties of BOPET films.
The largest market for flexible packaging is Asia, accounting for 43% of industry sales followed by America at 35% and Europe 17%. Hence BOPET film players’ capacity is diversified that caters to key packaging markets globally.
Chart 7: Packaging – Largest application for BOPET films Chart 8: Flexible packaging breakdown by region in 2019 Other Middle Western industrial East & Europe 20% Africa 14% 5% Eastern Europe Electrical/E South East 3% lectronics Asia & 8% Oceania 18% North America 29% Packaging and Central & Central & metallized East Asia South films 25% America 72% 6%
Source: Polyplex annual report, PCI Wood Mackenzie Report
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Structural drivers
Plastic packaging boasts superior technical properties: lightweight, low-cost, corrosion resistance, and excellent barrier to oxygen, water and carbon dioxide.
Within packaging, demand for flexible plastic packaging (20% of industry) is driven by its high product-to-package ratio, favourable economics and sustainability benefits. This should help the global flexible plastic packaging market expand at a CAGR of 5.2% to USD200bn by 2022 (USD140bn in 2016).
Packaging demand (72% of BOPET films consumption) is led by the food & beverages sector (71% of packaging consumption) and consumer staples, whose demand is non-discretionary and thereby steadily feeds packaging demand.
The Indian flexible packaging industry, estimated to be USD5.5bn, is expected to grow 10%-plus annually to about USD9bn by 2022.
Plastic packaging: The material of choice Plastics are preferred in packaging Plastics have been the preferred choice in packaging globally and in India. They act as an globally, including India, due to excellent barrier to oxygen, water and carbon dioxide. And they are inert to acids, alkalis their superior technical properties and most solvents and, therefore, preserve freshness and hygiene of contents while making (barrier to oxygen, water and the packaging durable. Traditional packaging materials such as paper boards, metals, wood carbon dioxide) and cost and glass have been replaced by plastics in many applications due to their superior cost-to- effectiveness performance ratio.
CRISIL Research expects polymers to substitute metal and glass packaging in the future owing to its aforementioned favourable properties. The contribution of plastics to overall packaging in India is expected to increase to 64% in FY20 from 61% in FY17.
Plastic packaging likely to dominate in India
Chart 9: Current and estimated packaging consumption breakdown in India by material type (%) FY17 FY20 (E) Glass Glass 7% Metal 6% Metal 11% 14%
Paper 19% Paper Polymer 18% 61% Polymer 64%
Source: CRISIL
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Table 5: Change in packaging materials for select products Traditional Product Current Trend Material Milk/ Edible Oil Glass/ Metal 3/5 Layer Film Pouches Toiletries (Soap / Paper/ Glass Plastic Pouches / Shampoos) Films MPCG (Cement / Jute PP/ HDPE Woven Fertiliser) Sack Toothpaste Metal Plastic Lamitube Source: FICCI report
Packaging undergoing a shift from rigid to flexible The shift towards flexible packaging The shift is further happening toward flexible packaging driven by key attributes that benefit is attributable to benefit for the members of the entire packaging value chain including brand owners, retailers and, most entire packaging value chain importantly, consumers. Packaging will offer numerous solutions to various parts of the value including brand owners, retailers chain from delivering easier to use products, that are well protected, to better distribution that and, most importantly, consumers optimizes weight and package/product dimensions for cost and efficiency.
The global flexible plastic packaging market, at USD140bn in 2016, is likely to expand at a CAGR of 5.2% to over USD200bn by 2022. The way consumerism has evolved over the years has had a direct bearing on flexible packaging both qualitatively and quantitatively. As consumers become more strapped for time, companies are seeking to provide more convenient solutions.
Fig. 1: Drivers of flexible packaging and packaging implications for the end users
Source: PTIS Flexible Packaging Sustainability Report
Flexible packaging in India According to PCI Wood Mackenzie, the Indian flexible plastic packaging industry is about USD5.5bn and is expected to grow over 10% annually to USD9bn by 2022. Changing lifestyles are pushing consumers towards processed foods, which augurs well for the industry. Furthermore, growth is also fuelled by the increase in exports of packaging materials to countries with high production costs, particularly Europe and the US.
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Flexible packaging has a high Flexible packaging provides unmatched value vis-à-vis rigid packaging since it is lightweight, product-to-package ratio, which occupies lesser shelf space, generates relatively less waste and is most cost-effective. As implies lightweight packaging of end- plastics are lightweight, they have a high product-to-package ratio, which keeps the packaged product, and it is low-cost too end-product lightweight. For example, only 1.5 pounds of flexible plastics is required to package about 60 pounds of beverage compared with three pounds of aluminium or 50 pounds of glass. Thereby, with high product to package ratio, the overall cost of ownership For example, only 1.5 pounds of decreases. flexible plastics is required to package about 60 pounds of Thus, plastic packaging enables shipping of more products given less of the packaging material beverage compared with three is needed. Besides, it reduces fuel consumption and the overall transportation cost. On pounds of aluminium or 50 pounds expensive retail shelves, plastic packaging enables greater space utilisation as it occupies little of glass space.
Within plastics, significant environmental benefits can be reaped by switching over from the rigid type to the flexible type. This yields savings of over 50% in material and energy consumption, and is driving this trend.
Sustainability benefits Compared with other packaging formats, flexible packaging results in a number of sustainability benefits throughout the life cycle of packaging. These include: material/resource efficiency, transportation benefits due to inbound format and lightweight nature, shelf life Flexible packaging has a number of extension, reduced materials to landfill, high product-to-package ratio and beneficial life cycle sustainability benefits: material metrics (carbon impact, fossil fuel used, water consumption). efficiency, lower transportation
costs, shelf life extension, reduced As can be seen from the table and charts below, the effective amount of flexible packaging materials to landfill, high product-to- materials required is much lower than materials required in other forms of packaging. Flexible package ratio and beneficial life cycle packaging is the most economical method to package, preserve and distribute food, beverages, metrics consumables, pharmaceuticals and other products that need extended shelf life.
Table 6: Laundry detergent packaging comparison summary Format Component Pkg Wt. (g) Product % Package % Pkg wt. Pkg Pkg (g)/1000 kg recycled landfilled food (g)/1000 kg (g)/1000 kg food food Stand-up pouch with Pouch with 20 97.90% 2.10% 21,209 - 21,209 zipper zipper Rigid PET container PET 148.9 89.40% 10.60% 118,175 35,689 82,486 Container/Lid Source: PTIS Flexible Packaging Sustainability Report
Packaging recycling and packaging discard rates are based on the following assumptions: Despite no recycling in flexible BOPET, rigid PET container results in BOPET container recycling of 30.1% (2015 APR Post Consumer Bottle Recycling report) nearly four times as much material Flexible packaging at 0% recycling rate ending up in municipal solid waste as that from the flexible stand-up pouch Package landfilled is the amount of packaging not recycled, and is treated as municipal solid waste
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The data above show that the stand-up pouch with zipper makes up only about 2% of the package weight and the remaining 98% is the product weight. Taking current recycling rates into consideration, the rigid PET container results in nearly four times as much material ending up in municipal solid waste as that of the flexible stand-up pouch.
In order for the PET container to have the same level of municipal solid waste as the stand- up pouch has today, the recycling rate of both the container and cap would need to reach over 80%.
Table 7: Motor oil packaging – Recycled landfilled comparison Format Component Pkg Wt. (g) Product % Package % Pkg wt. Pkg Pkg (g)/1000 kg recycled landfilled food (g)/1000 kg (g)/1000 kg food food Stand-up pouch with Pouch/fitment 19.2 96.10% 3.90% 26,301 - 26,301 fitment HDPE Bottle Bottle/Closure 56.4 93.70% 6.30% 67,602 22,100 45,502 Source: PTIS Flexible Packaging Sustainability Report
We worked out the packaging recycled and packaging discard rate based on the following assumptions: HDPE bottle recycling rate of 34.4% (NAPCOR/APR report) Flexible packaging at 0% recycling rate Closures and fitments at 0% recycling rate
Furthermore, a stand-up flexible pouch with fitment package has a much lower usage of fossil fuel (HDPE consumes 169% higher fossil fuel than stand-up pouch with fitment) as well as While flexible packaging has lower carbon (HDPE emits 1.75x that of stand-up pouch with fitment) and water (HDPE consumes recovery, it notably reduces the 499% higher water than stand-up pouch with fitment) impact compared with the primary material sent to landfill versus other package. packaging formats The larger end-of-life impact for a plastic bottle – even though HDPE bottles are recycled at a rate of 34.4% – is attributable to the fact that about twice as much material ends up as municipal solid waste. The examples above highlight that while many flexible plastics are not being recovered in any significant amounts, they still result in a substantial reduction in the amount of material sent to landfill versus other package formats.
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Demand drivers for packaging The key growth drivers for the industry are underlying growth in F&B, pharmaceuticals and organised retail.
Fig. 2: Packaging growth driven by growth in F&B, pharmaceutical and organised retail
Food & Beverages Pharmaceuticals Organised retail i) The Indian F&B industry is expected to i) India's domestic pharmaceutical market deliver a strong 18% CAGR over the next is witnessing double digit growth at 10– i) Organised retail and the continued five years to USD78bn. 12% annually. boom in e-commerce offers huge potential for the packaging sector.
ii) About 40% of the food items in India ii) Pharmaceutical companies rely more currently perish before reaching the on packaging and labelling to protect and ii) The Indian retail industry is expected to market fuelling strong demand for promote their products, increase patient log a 16% CAGR over the next five years. packaging. compliance, and meet regulations. iii) Development of modem supply chains iv) AMI consulting estimates the share of iii) Plastic packasging is preferred for and logistics is driving growth in food packaging in overall demand to properties such as barrier against packaging solutions. increase to 56% by 2020 (54% in 2016). moisture, high dimensional stability and impact strength, low water absorption, etc.
Source: FICCI, TATA
Food & beverage packaging Packaging demand is resilient as it is driven by the consumption of food products and The food & beverage sector is the consumer staples, whose usage is non-discretionary. The food & beverage sector is the biggest biggest consumer of flexible consumer of flexible packaging globally with a share in excess of 70%. Plastic packaging in the packaging with a share in excess of food & beverage segment has outgrown GDP in most countries driven by its steady demand. 70% Chart 10: Global packaging end markets: F&B a big user
Others 20%
Cosmetics 5% Food packaging 51% Pharma and healthcare 6%
Beverage 18%
Source: Global packaging report by EY
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Food waste reduction 1.3bn tons of food goes waste annually Approximately one-third of all food produced is disposed of before it is consumed, resulting in 1.3bn tons of food thrown out annually. Previous studies, highlighted in Figure below, show flexible packaging increases the shelf life of a number of products.
Fig.3: Shelf life extension through flexible packaging
Source: PTIS Flexible Packaging Sustainability Report
The Indian F&B industry is expected to deliver a strong 18% CAGR over the next five years to About 40% of food items in India USD78bn. Since packaged foods is the fastest growing segment, it would fuel demand for currently perish before reaching the plastic packaging. About 40% of the food items in India currently perish before reaching the market; this structural challenge market. This structural challenge is a huge opportunity for plastic packaging manufacturers. presents a huge opportunity for As a result, we estimate the share of food packaging in overall demand would increase to plastic packaging manufacturers 56% by 2020. Furthermore, consumers are looking at nutritional value with portion control, which is a driver of food packaging, a big user industry.
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Chart 11: Food packaging is the major driver of Indian packaging industry Total Demand as on 2010- 0.2Mn Total Demand as on 2016- 0.4Mn Estimated Demand as on 2020- MT Non- MT Non- 0.6Mn MT Non- packag packag ing packag ing 20% Food ing 19% Food packag 20% packag ing ing 54% Non- 43% Food food Non- Non- packag packag food food ing ing packag packag 56% 37% ing ing 26% 25% Source: AMI Consulting
Pharmaceuticals packaging Besides Food & Beverage, pharmaceuticals' are another major user of packaging. India's domestic pharmaceutical market is clocking double-digit growth of 10–12% annually. Pharmaceuticals companies rely Pharmaceutical packaging is emerging as a major part of the drug delivery system. more on packaging and labelling as Pharmaceutical companies rely more on packaging and labelling as media to protect and media to protect and promote their promote their products, increase patient compliance, and meet new regulations. products, increase patient compliance, and meet new Besides, plastics have been gaining increasing importance in packaging of pharmaceutical regulations goods due to properties such as barrier against moisture, high dimensional stability, high impact strength, resistance to strain, low water absorption, transparency, resistance to heat and flame, etc. Pharmaceutical companies rely on packaging and labelling to protect and promote products, respectively.
Organised retail and implications Development of modem supply Organised retail and the continued boom in e-commerce offers huge potential for the chains and logistics is driving growth packaging sector. Significant growth will continue in the e-commerce channel, creating the in packaging solutions need for new packaging in traditional retail and would help regain share.
E-commerce is still in its infancy and is expected to grow globally from USD2.29tn (2017) to USD4.8tn by 2021 (eMarketer 2017), 21% CAGR. The Indian retail industry is expected to log a 16% CAGR over the next five years. Development of modem supply chains and logistics is driving growth in packaging solutions.
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Cyclical drivers
From 2007–10, global average capacity utilisation in thin BOPET films averaged 87%. Since 2010, the utilisation has slid to about 70% due to excess capacity.
From 2010–14, capacity rose at a CAGR of 17% with 85% of incremental capacity coming up in Asia, which dragged industry utilisation to 65% in 2014 from its peak of 90% in 2010.
With demand growth likely to continue to increase at a CAGR of 6% to 6mn MT and supply expected to rise merely about 2% to 7.1mn MT over CY18–21E, we expect a favourable demand-supply scenario for the BOPET industry.
Conducive scenario with demand-supply balance to bolster earnings Over 2007–10, global average capacity utilisation in BOPET films averaged 86%. By 2016, utilisation had tanked to about 70% due to excess capacity build-up. Around 80%of the incremental capacity between 2010 and 2018 came up in Asia, primarily in China. Installed capacity in 2018 stood at 6.6mn MTPA, implying a CAGR of 9% over CY07–18, and demand stood at 5.0mn MTPA, implying a CAGR of 8% over the same period, respectively.
Chart 12: Total BOPET capacity, demand and utilisation
7.0 100.0 90.4 86.3 83.9 6.0 83.4 84.9 77.6 76.2 80.0 70.4 72.0 5.0 68.2 64.6 64.5 4.0 60.0
3.0 (%) (Mn MT) (Mn 40.0 2.0 20.0 1.0
- 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E Installed capacity Demand Utilization
Source: Polyplex annual report
CY07–10: Strong growth in demand drives margin and RoCE expansion Demand rose strongly at a CAGR of 9% while supply lagged at a CAGR of Demand rose strongly at a CAGR of 9% over 2007–10. During the same period, supply 6% over CY07–10, leading to a spike lagged at a CAGR of 6%. The tight supply led to unusually high margins across the BOPET in gross value addition to industry. USD1.87/kg in 2010 versus Gross value addition in BOPET peaked at USD1.87/kg in 2010, up from USD0.89/kg in USD0.89/kg in 2007 2007. During the same period, the RoCE of Polyplex – which has significant exposure to BOPET and therefore a proxy for the industry – peaked at 44%. This spurred substantial investments in new capacity in the following years.
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CY10–14: Incremental capacity additions outpace demand growth Between 2010 and 2014, about Between 2010 and 2014, about 2.7mn tonnes of BOPET capacity was added worldwide, 2.7mn tonnes of new BOPET implying a CAGR of 17%. Out of this, over 2mn tonnes was for thin BOPET films and the capacity was added worldwide, rest for thick BOPET films. Notably, a dominant 85% of new capacity came up in Asia, implying a 17% CAGR, with a largely in China and followed by India. dominant 85% coming up in Asia Strong capacity additions over 2010–14 coupled with moderate demand CAGR of 7% over the same period dragged industry capacity utilisation to 65% in 2014 from its peak of 90% in 2010. Consequently, gross value addition, in USD/kg, dropped to 0.71.
Chart 13: Total PET capacity, demand and utilisation over CY07–14
7.5 90.4 100.0 83.4 86.3 83.9 84.9 77.6 5.9 6.0 68.2 80.0 Strong capacity addition over CY10– 64.6 14 at 17% CAGR versus moderate 4.5 60.0 demand of 7% CAGR dragged industry capacity utilisation to 65% 3.2 (%)
(Mn MT) (Mn 3.0 40.0 in 2014 from peak of 90% in 2010
1.5 2.9 20.0 2.2 2.6
0.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014
Installed capacity Demand Utilization
Source: Company annual reports, Polyplex
Chart 14: Gross value addition in BOPET, USD/kg over CY07–14 2.0 1.87 Strong gross value addition lifted profitability of players 1.6
1.2
($/kg) 0.89 0.8 0.71
0.4
0.0 2007 2008 2009 2010 2011 2012 2013 2014
Gross value addition, $ per kg
Source: Company annual reports
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The supply-demand situation in Moderation in capacity addition over CY14–17 supports margin and return profile global BOPET film market improved A series of capacity additions during CY10-14 and a slowdown in demand in 2015 due to the over CY14–17 owing to restructuring reduction of film components used for LCD backlighting and slowing sales of smartphones and undertaken by producers in the tablets led to oversupply of optical films. This oversupply combined' with the competing wake of slowing LCD demand in Chinese LCD panel market led to recalibration of production facilities by some producers and 2015 eventually closure of obsolete plants.
Over CY14–17 supply increased at a After witnessing a prolonged supply-demand imbalance, the plastic film industry experienced a mere 4% CAGR while demand stable situation in BOPET over CY14–17 led by a supply slowdown. During the period, supply outgrew with a CAGR of 8% increased at a CAGR of merely 4% while demand remained strong at a CAGR of 8%.
Chart 15: BOPET capacity moderation over CY14–17… 7.5 100.0
6.0 80.0 70.4 72.0 64.6 64.5 4.5 60.0
6.6 (%)
(Mn MT) (Mn 3.0 5.9 40.0 4.8 3.8 1.5 20.0
0.0 0.0 2014 2015 2016 2017 Installed capacity Demand Utilization
Source: Company annual reports
Soft capacity addition over CY17–20E likely to improve margins and returns ratios Capacity utilisation in the industry at large is improving. Hence, we expect the cycle to be Over CY18–21E, demand CAGR of favourable for BOPET players. We estimate installed capacity would increase by 0.47mn MT about 6% versus supply CAGR of between CY18 and CY21, which implies a supply CAGR of merely 2%. Over the same period, merely ~2% would lift capacity demand is expected to increase at a CAGR of over 6%, driving up capacity utilisation from 76% utilisation from 76% to 84% currently to 84% in CY21E.
As a result, with increasing demand and utilisation, and a gradual build-up in capacity, we expect RoCEs to move up.
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Chart 16: Expected capacity additions in CY17–21 7.3 100.0
6.4 84.2 80.0 79.6 81.2 76.2 72.0
5.6 60.0 (%)
(Mn MT) (Mn 4.7 40.0 7.1 6.0 3.9 6.6 4.8 20.0
3.0 0.0 2017 2018E 2019E 2020E 2021E Installed capacity Demand Utilization
Source: Polyplex annual report, Company information, Edelweiss research
Industry performance: Volatility trending down Irrational capacity expansion, especially in China and India, is unlikely as all stakeholders (promoters, lenders and management) are under pressure to deliver economic returns.
Direct and indirect subsidies and government-push for new investments in China are no longer available.
Closures (such as JBF) and insolvencies (particularly in China such as CIFU) have nudged lenders and regulatory authorities to tighten norms, thereby significantly impacting the Closures (e.g. JBF) and insolvencies availability of easy funding for new projects. (especially in China, e.g. CIFU) have led lenders to tighten norms, which The China factor: No longer a worry significantly impacted the availability Large capacities were built over the past five–ten years, but no new line was ordered over of easy funding for new projects the last three–four years. China now accounts for about 47% of the global thin BOPET film capacity, but accounts for a miniscule portion of global trade.
Despite a large share of global capacity, the impact of Chinese producers in international markets is limited because of a combination of quality, multiplicity of products, language, fragmented end user industry, tariff barriers and lack of onshore presence.
Industry shakeup is evident with bankruptcies, closures and shutdown in lines.
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Table 8: BOPET players’ capacity additions over next three years Expected Proposed capacity additions Mn MT commercialization Polyplex Indonesia - PET Thin 2019 0.044 SRF Hungary - Bopet 2020 0.040 Thaliand - Bopet 2020 0.040 Uflex Hungary - Bopet 2021 0.040 Cosmo Films India - Bopet 2020 0.035 Titan Group (Siberia) Total capacity addition of 0.47mn Russia - Bopet (two units) 2020 0.070 MT expected over next three years is Novatex commensurate with one and half Pakistan - Bopet 0.060 years’ demand growth and unlikely Astro to alter demand-supply situation Iran - Bopet 0.030 Trias Indonesia - Bopet 0.030 Surat Metalliks 2019 0.036 Jindal Polyfilms India/Europe - Bopet 0.044 Total 0.469 Total installed capacity in the industry post-capex 7.1 % increase in installed capacity 7.1 Source: Company information, Edelweiss research
Additional investments in capacity announced in Indonesia, Thailand, India, Pakistan North America and Greater Europe Europe, Russia and Nigeria. However, the extent of new capacity (with start-up between (including Turkey and Russia) are late 2019 to 2022) is commensurate with growth in demand and unlikely to alter the expected to suffer shortages, even market situation, with just a blip on each plant start-up. with new capacity Furthermore, North America and Greater Europe (including Turkey and Russia) are expected to suffer from shortages, even with the new capacity. This will be a natural additional advantage for onshore/near-shore players.
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Management commentaries indicate continued upcycle for BOPET players Polyplex: A slowdown in capacity addition has helped demand-supply become more balanced with a consequent uptick in utilisation globally. While this would inevitably create additional capacity in the future to cater to demand growth, we believe that supply growth would be more moderate and rational this time around.
Uflex: BOPET has been in an upcycle since 2016. Margins in FY19 have seen improvement over FY18. Going into FY20, margins are expected to be better.
SRF: There will slight impact on BOPET margins in near term due to increase in supply by three-four lines (1.2 Lakh Tonne) in Q2FY20/ Q3FY20. However, demand outlook is healthy in the BOPET segment and is likely to outstrip supply growth. Hence, global capacity utilization is likely to remain robust in the near future.
Ester Industries: Momentum in Film business is expected to continue in the coming year as well – largely on the back of favorable demand – supply dynamics. Domestic demand continues to remain strong and the market is expected to absorb the incremental capacities likely to hit the market in the current year with minimal disruption
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Indian plastic players’ competitive edge
Scale, geographic expansion and value addition – Key to success Being cyclical, the plastic films industry focuses on the degree of integration, economies of scale and geographic expansion. Indian plastic films companies have developed strong competitive positioning globally and a better product mix in terms of the proportion of value-added in the overall, both of which are driving growth and profitability. Furthermore, they are constantly investing in innovation and have emerged as leaders in certain products or processes.
Table 9: Companies’ business model competency framework Parameters Uflex Polyplex Essel Propack Expertise Fifth largest player in BOPET Eight largest player in BOPET Has established global leadership in films globally, largest player in films globally to move upto the oral care tube packaging organised packaging space in among the top five post category (market size: 14bn units) India expansion with 33% market share
Contribution of oral care to overall revenue stands at 64%, as on FY19E Geography wise Strong presence in Dubai, Within BOPET, PCL has ~8% Geographically well diversified with opportunity Mexico, Egypt, Poland in films market share in India, 25% 35% of sales from AMESA (India and and India driven by packaging market share in highly Egypt); 20% from Americas (US, profitable Turkey, 20% share Mexico and Colombia); 21% from High-growth India market in Thailand and ~9% share in Europe (Poland, Russia and accounts for 56% of overall sales Indonesia (expected to go Germany) and 24% from East Asia mix upto ~20% post the capex) Pacific (China and Philippines). Growth Play on the cycle uptick in the Cycle uptick in BOPET with Focusing on the non-oral care opportunity 11bn USD BOPET for next 3 years; 16% capacity addition category which is three times or Play on the USD5.5bn flexible more large as compared to oral care packaging market in India and tube market. We estimate the non- the INR20bn tetrapack market in oral category to be a USD5bn market India (based on overall tube packaging market of USD6.75bn as per Mordor Intelligence) Moving up the High margin metallised films and Value-added sales, has Non-oral category’s revenue value chain packaging together contribute increased from 35% to 49% contribution has grown from 29% in 60% of sales by value over FY14-18 FY16 to 42% in FY19, recording a strong 23% sales CAGR over FY16-19.
Source: Company, Edelweiss research
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Value chain and key players
Polyplex and Uflex are well- 1. Well-integrated players across value chain integrated across value chain with Polyplex and Uflex are placed well due to forward as well as backward integration. strong positioning in value added Being fully integrated helps them control the value chain and generates cost synergies. products All in all, it helps them improve margins and reduce business volatility.
Table 10: Domestic players positioning: Uflex and Polyplex lead the pack in BOPET and value-added segments
PET resin/PET Packaging and Installed Chips/Other Holographi Flexible converting capacity ancilliaries Coated BOPP Film BOPET CPP Film Metallizing c films packaging machines Thermal (MT) (TPA) films (TPA) (TPA) Film (TPA) (TPA) film (TPA) (TPA) (TPA) (TPA) (TPA) Uflex NA NA 65,000 2,56,000 16,000 93,600 8,600 1,35,000 90,570 NA Polyplex 2,73,300 24,000 35,000 2,14,800 18,845 77,400 NA NA NA NA Jindal 1,76,400 14,000 4,66,000 1,27,000 NA 71,610 NA NA NA NA Polyfilm SRF 87,500 7,000 64,000 1,23,500 0 59,000 1,200 0 0 0 Cosmo NA 10,000 1,96,000 NA 10,000 22,200 NA NA NA 40,000 films Ester 67,000 0 0 57,000 0 13,200 0 0 0 0 industries Source: Edelweiss research
Forward integration into value-added films: As the table above shows, Polyplex and Uflex have strong forward integration with highest capacities in value-added coated and metallised films.
Chart 17: Polyplex’s proportion of value-added capacity Chart 18: Value-added sales mix (%) Coated 100% 8% 80% 51% 58% 54% 52% 65% Metalliser 60% 27% 40%
48% 49% 20% 42% 46% Base Film 35% 65% 0% FY14 FY15 FY16 FY17 FY18 Value added film Base film
Source: Company information, Edelweiss research Note: Metalliser Films are value-added products made from base films. Hence, such capacity does not add to incremental volumes.
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Polyplex accounts for about 27% and 8% of overall capacity from metallised films (22% Polyplex accounts for about 35% of higher realisation than base films) and coated films (realization higher by 84%), overall capacity and 49% of overall respectively. By value, these value-added films make up 49% of overall sales. sales by value from value-added films
Chart 19: Uflex: Proportion of value-added in installed capacity Films mix Packaging mix Overall capacity mix Hologr Hologr Metalli aphic Metalli aphic ser Packag ser Packag Films ing Films ing 28% 6% 20% 2%
Non- Non- Non- hologr metalli Non- hologr aphic ser Metalli aphic Packag Films ser Packag ing 51% Films ing 27% 72% 94% Source: Company information, Edelweiss research Note: Metalliser, Coated Films and Holographic Packaging are value-added products
Uflex is in a sweet spot given its o Uflex’s value-added metalliser capacity constitutes ~28% of total film and 20% of high value-added film sales as well overall capacity. Furthermore, the company has significant exposure to higher- as forward integration into the margin flexible packaging, which accounts for 29% of its total installed capacity. higher-margin packaging segment Overall, about 49% of Uflex’s capacity (packaging + metallised films) is for products with higher profitability. High-value packaging contributes about 39% of overall sales by value.
Products with higher profitability make up about 49% of Uflex’s capacity (packaging + metallised)
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Fig. 4: Integration – How companies under our coverage stack up
Basic petrochemicals Raw materials Plastic film business Flexiblepackaging
Coatings
MEG (derived from Ethylene) and PTA Base film (BOPET and Pouches, tubes and Film grade PET resin Metallsing (derived from BOPP) liquid packs paraxylene)
Poplypropylene PP resin Holography
Polyplex Corp
UFLEX
SRF Group
Huhtamaki
Source: Edelweiss research
Furthermore, Polyplex is backward integrated—it procures petrochemicals such as MEG Polyplex is backward integrated as it and PTA, and converts them into raw materials and further processes and converts into procures petrochemicals and base films. This helps the company in cost control as well value chain. converts them into base films; this
enables greater cost control 2. Positioning A significant portion of the total installed capacity in BOPET and BOPP films is held by Indian companies. Uflex and Polyplex are the fifth and eighth largest players in BOPET capacity globally, respectively. Uflex and Polyplex are large players Furthermore, despite their presence in packaging, as some of films’ customers are in BOPET films; Uflex is among the present in, Uflex has been able to garner a market share of ~25% in the organised largest organised players in packaging segment in India. packaging in India
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Table 11: Major global BOPET (top 11) producers by capacity (MT) Company Name Headquarter Factory Location BOPET Jiangsu Shuangxing Color China China 435,500 Plastic New Materials Co. Toray Japan Japan, USA, Korea, 356,500 Uflex is the fifth-largest player, and China & France Polyplex, the eight-largest in BOPET Dupont Teijin USA Indonesia, China, 283,000 films globally Japan, USA, Luxembourg, UK SKC Inc. Korea China, USA & 256,200 Indonesia Uflex Ltd. India India, Mexico, Egypt, 256,000 Dubai, Poland, Kentucky Mitsibushi Polyester Film Japan USA, Indonesia, Japan, 242,000 Germany Tianjin Wanhua Co. Ltd. China China 230,000 Polyplex Corp India India, Thailand, USA & 214,800 Turkey Jindal Poly Films India India, Belgium, USA, 127,000 Italy & Netherlands SRF* India India, Thailand & 120,500 South Africa Zhejiang Cifu Group Co., Ltd. China China 120,000 Total 2,641,500 Source: Company, Edelweiss research
Essel Propack is the global leader with a market share of 33% in the oral care category. The company is growing in the non-oral category, which is 3x-plus in market size by value and also boasts higher margin. Uflex is the largest player in the domestic flexible packaging market with a market share of 25%.
Table 12: Competitive positioning in packaging: Uflex and Essel Propack Company Operation Postioning Essel Propack Tube packaging Global leader with a 33% market share in the oral care category with in tube packaging Uflex Flexible packaging Largest player in the organised flexible packaging market in India with 25% market share Source: Edelweiss research
3. Capital utilisation and capex Capacity additions from Indian companies include:
Polyplex and SRF are well placed to Polyplex: Given its strong balance sheet, the company is in the process of adding capture the cyclical uptick with capacity of 44,000MT (an increase of 16%), taking its total to 312,645MT. capacity expansion in the short term in BOPET while Uflex is well placed to SRF: The company plans to raise capacity by 65% to 203,500MT by FY20–21, with a capitalise on the structural uptick in 40,000MT BOPET plant in Hungary and another 40,000MT plant in Thailand. packaging Uflex has incurred capex of INR19bn over FY15-18, mainly for the value-added asepto (INR5.3bn). Liquid packaging is dominated entirely by Tetra Pak, which commands a market share of about 90%; the rest is imported. Uflex is trying to
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position itself as an alternative supplier and gain market share. Furthermore, within packaging (ex-asepto), the company is logging utilisation of ~61%. Hence, it is well placed to tap growth potential in packaging over the next three years. However, in terms of films, the company is almost running out of capacity. Management has announced capacity expansion of 15% (40,000MT) in Hungary, which will come on stream by FY21–22.
Both Polyplex and SRF are well positioned in BOPET, in our view, given their upcoming capacities in the near future to capitalise on the potential mismatch in demand-supply of films over the next two years. Uflex too is expanding capacity in films that would be commissioned by FY21. Hence, we believe Uflex is better placed to capture the uptick in the packaging sector, but we will monitor the upcycle given its capacity in BOPET is scheduled to come up later.
4. Product innovation Polyplex The company has been constantly introducing specialty products with innovative applications and uses. The recent examples include films for back-side sheets for solar Polyplex’s “Twist N Wrap” panels, thick films for electrical and electronic appliances, foldable films for medical and industrial uses, transparent barrier films for food packaging, specialty-coated BOPET films and films for print media suitable for digital printable and UV inks, among others.
Consumers now look for increasing convenience in packaging formats and therefore Re-closability, Easy to tear and Save for later have become regular features in the packaging market. Such features facilitate customer convenience through easy opening/closing of pouches.
Twist N Wrap is one innovation that’s gaining share among leading chocolate brands in India. It allows for a two-layer laminate packaging instead of the typical three-layer laminate.
Saracote PET release tape for roofing shingle Saracote PET label liner for beverages Polyplex’s ‘easy and straight’ tear
Uflex The company has been developing innovative customised solutions by upgrading processes and products that are either unique or offer affordable import substitution. It has a strong in-house R&D capability, including a sophisticated laboratory.
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Some of the recent innovative products/solutions by the company include:
Pomegranates packaged with Flexfresh Flexfresh technology that extends shelf life of fresh produce. that leads to shelf life extension Anti-counterfeiting and brand protection solutions such as thermal holography film, cold foil, Unigram, Latentogram and Fresnel lens that help distinguish originals from look-alikes.
Fully automatic Robotic Laser Engraving line set up at Noida for manufacturing rotogravure cylinders.
The company was granted a US patent covering entire categories of formable films that include one or more BOPET layers used in Alu blister packaging in the Uflex is granted a US patent pharmacueticals sector. The patent was issued for a period of 20 years, lending a covering BOPET layers used in Alu competitive advantage to the company’s films business over its opponents in the blister packaging in the cold-formed pharmaceuticals packaging industry. Having won the patent, the pharmacueticals sector. It replaces company gets exclusive rights for manufacturing and sale of this special BOPET film nylon and is a potential USD20bn in the US, Europe and India. It replaces nylon and is a potential USD20bn market market globally globally.
Essel Propack The R&D function (a.k.a. Creativity & Innovation (C&I)) has been one of the key growth drivers for the company. The C&I function intensely works on sustainability and continually launches environment-friendly tubes and comes out with improved processes.
To date, the company has filed as many as 142 patent applications in different geographies for various inventions by its R&D, and has been granted 38 patents so far.
Go Green – Green Maple Leaf (GML) is a product with recyclable all-plastic laminate, which reduces carbon footprint and makes it extremely eco-friendly. GML supports and strengthen Essel’s Go Green Initiatives.
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Creativity & Innovation (C&I) has been a key growth driver for Essel Propack
The company has filed as many as 142 patent applications to date in various geographies, and has been granted 38 patents so far
Source: Company
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5. Geographic mix Uflex and Polyplex have both diversified manufacturing While India is higher-growth geography, a diversified geographic mix helps in geographically as well as strengthening global deliveries. That said, films fetch better margins outside India. distribution presence as the move Polyplex has a presence in plastic films in key regional markets of India while 75% strengthens their global delivery of sales come from the key regions of Thailand, Turkey, the US, and Indonesia. capabilities Uflex logs 55% of its overall sales in India (driven by packaging) and 45% overseas. While India is a relatively Within films, the company derives 27% of sales from India and 73% from the key high-growth geography, regions of Dubai, Mexico, Egypt, Poland and the US. international geographies log better margins due to premium Essel has a global presence with 34% of sales coming from AMESA (India and pricing Egypt), 21% from the Americas (US, Mexico and Colombia), 21% from Europe (Poland, Russia and Germany) and 24% from East Asia Pacific (China and Philippines).
Chart 20: Polyplex sales by region Chart 21: Uflex overall sales by region End market sales Africa RoW Films Middle RoW Films 1% 8% East Films 4% Est. growth - 4% India 8% 23% India Europe Est. growth - 7.4% Packaging Americas Films 39% 23% 16% Est. growth - 4%
Other Asian Europe Americas Countries 26% 20% Films Est. growth - 3% 16% India Films Est. growth - 7.4% 16%
Chart 22: Essel Propack overall sales by region
FY19 Sales Mix Europe 21% AMESA 34%
AMERICAS 21%
EAP 24% Source: Company annual report
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Financial footing
Ability to manage across cycles and improve Given the cyclical nature of the plastic films industry, the companies that have allocated capital judiciously over the years have been able to scale up. That said, we believe companies with relatively strong balance sheets in terms of leverage and cash flow profiles would be able to scale up in time to cater to potential demand growth.
Over FY08–19E, both Polyplex and Uflex have expanded their manufacturing films capacity by 3.4x and 2.1x, respectively. Nonetheless, despite the cyclical nature of their business, both companies have been able to keep leverage significantly lower than peers. Furthermore, with relatively low levels of leverage in comparison with peers and stronger balance sheets, we believe Polyplex and Uflex will be able to withstand the cycles better.
Chart 23: Polyplex and Uflex have relatively low levels of leverage… 1.7 Net debt/Equity
1.3 1.0 0.9 0.9
0.8 (X) 0.5 0.4 0.3 0.1 -0.1 (0.3) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Jindal Polyfilms Uflex Polyplex Cosmo Films ESTER INDUSTRIES SRF
8.0 Net debt/EBITDA
6.0 4.8 4.0 3.9
3.2 (X) 2.0 1.6 1.2 0.0 -1.0 (2.0) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Jindal Polyfilms Uflex Polyplex Cosmo Films ESTER INDUSTRIES SRF
Source: Edelweiss research
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Chart 24: …despite significant capacity expansion over the years 372,000 350,000 Polyplex - Installed capacity Uflex - Installed capacity of films 2,90,000 312,645 312,000 280,000
210,000 252,000 1,40,000
140,000 (MTPA)
(MTPA) 192,000 70,000 132,000 91,147 0
72,000
FY15 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY16 FY17 FY18
FY19E
FY10 FY09 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
FY08 Overseas packaging films business FY19E Overall Polyplex base films capacity Domestic packaging films business
Source: Company, Edelweiss research
Favourable industry dynamics and companies’ improving competitiveness drove up RoCE and fortified financial position Polyplex and Uflex are well placed in terms of returns ratios owing to improving utilization and fixed asset turn (from an average of 1.6x to 2.5x), with their ROCE moving up to 13–14% over FY19-21E.
Chart 25: Improving demand scenario leads to increase in utilization and fixed asset turnover Improving capacity utilisation across segments… …and improving asset turns 100 99.1 3.0 95.9 88 86.7 2.6 2.5 81.2 76 74.6 2.2 2.2
2.1
(x) (%) 64 1.8 1.8 1.6 52 1.4 51.6 40 1.0 FY17 FY18 FY19E FY20E FY21E FY17 FY18 FY19E FY20E FY21E Uflex Films Uflex Packaging Polyplex film Average Fixed Asset turnover, x Source: Company, Edelweiss research
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Chart 26: ...driving margin expansion at both Uflex and Polyplex Operating profit margin Net profit margin 17,000 19 6,000 8.0
14,000 17 4,800 6.4 5.7 5.6 5.3 5.5 3,600 4.8
11,000 16 4.5 (%) 15.1 15.3 (%)
(INRmn) 2,400 3.2 (INRmn) 8,000 14.0 14.2 14.2 14
5,000 13 1,200 1.6
2,000 11 0 0.0 FY17 FY18 FY19E FY20E FY21E FY17 FY18 FY19E FY20E FY21E Uflex Polyplex Average EBITDA Margin, % Uflex Polyplex Average PAT Margin, % Source: Company, Edelweiss research
Chart 27: RoCE and RoE expand significantly 20.0 20.0
16.0 16.0 13.7 11.9 12.1 11.1 12.0 12.0 9.8 9.5 9.9
9.0 8.8 (%)
(%) 7.4 8.0 8.0
4.0 4.0
0.0 0.0 FY17 FY18 FY19E FY20E FY21E FY17 FY18 FY19E FY20E FY21E Average RoCE Average RoE Source: Company, Edelweiss research
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Valuation
We value the companies under our coverage on Q2FY21E EV/EBITDA. BOPET companies under our coverage are trading at FY21E EV/EBITDA of 2.2x, an average discount of 32% to their five-year forward EV/EBITDA of 3.3x. Furthermore, they are trading at a discount of about 74% to valuations of pure-play global plastic film players and packaging companies, which are trading at 8.4x FY21E EV/EBITDA. This is despite an uptick of 20%-plus in sales over 9MFY19.
To capture the structural business opportunity along with cyclicality over time frames, we value BOPET film players at an FY20E EV/EBITDA of 3.3x and the packaging segment at an EV/EBITDA of 6x. We ascribe the valuation for the films segment in line with their five-year average EV/EBITDA.
We have valued Uflex’s packaging segment is in line with forward valuation of peers in the flexible packaging space. There is further scope of an uptick as companies having evolved across business cycles with better balance sheets and a higher proportion of value-added. This creates stickiness among end-consumers.
Furthermore, the current cycle is more calibrated given measured capacity additions that would drive an earnings CAGR of 15% and ~185bps jump in RoCE to 13–14% over FY19–21E, which outshines the average of past five years.
Compelling valuations
Chart 28: EV/EBITDA: At an average ~32% discount to 5 year historic average Polyplex UFLEX Essel Propack 9.0 5.0 12.5
7.2 4.2 10.0
5.4 3.4 7.5 7.4 2.3 3.6 2.6 32% Discount In-Line with 5.0 5-year average 2.2 1.8 1.8 31% Discount 2.5 0.0 1.0
0.0
15 17 18 14 16 19
14 15 16 17 18 19
------
------
14 15 17 18 19 16
------
May May May May May May
May May May May May May
May May May May May 1-year forward EV/EBITDA 1-year forward EV/EBITDA May 1-year forward EV/EBITDA 5-year average 5-year average 5-year average Source: Company, Edelweiss research
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Chart 29: Historical one-year forward P/E Polyplex Uflex 9.0 12.5 25 Essel Propack
7.2 10.0 20
5.4 7.5 15 4.3 15.3 3.6 10 In-Line with 5-year 5.0 3.4 In-Line with 1.8 average 5-year average 2.5 32% Discount 5 0.0
0.0 0
19 14 15 16 17 18
------
14 17 15 16 18 19
------
14 15 19 16 17 18
------
May May May May May May
May May May May May May
May May May May May 1-year forward P/E 1-yearMay forward P/E 1-year forward P/E 5-year average 5-year average 5-year average Source: Company, Edelweiss research
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NA
8.5
9.9
FY21
30.0
38.6
18.2
22.1
19.2
26.7
16.0
44.9
20.0
16.8
20.8
13.8
18.2
12.8 16.8
12.2
RoE (%) RoE
8.2 6.1
8.6
FY20
25.6
55.7
19.2
24.8
18.5
30.9
16.0
51.1
20.9
16.9
19.8
13.1
18.2
11.1
16.9
11.1
NA
NA
5.9
5.9
5.9
3.9
3.9
4.3
3.4
FY21
14.6
14.5
22.6
10.7
17.0
13.0
23.3
11.4
14.6
12.8
18.3
15.0
16.1
15.0
13.6
19.7
13.4
13.4
14.9
11.9
P/E
7.3
4.5
4.6
4.5
5.1
4.2
FY20
15.6
15.6
25.0
11.6
17.2
13.8
25.5
12.5
15.6
14.4
19.1
16.9
18.5
16.9
16.3
22.2
15.1
15.1
17.4
12.7
10.3
10.3
13.3
NA
NA
9.1
9.4
8.4
9.4
8.6
7.5
8.9
9.1
7.4
7.5
7.4
8.0
7.0
7.9
7.9
9.2
6.6
8.4
8.4
8.4
2.2
2.2
2.2
2.3
FY21
13.4
12.3
10.8
9.6
9.9
8.9
9.6
8.9
7.7
9.5
9.7
8.1
8.3
8.1
9.1
7.6
8.8
8.8
7.2
9.3
9.3
6.6
2.7
3.5
5.2
2.5
2.7
FY20
14.3
13.1
11.3
10.4
12.1
EV/EBITDA
6%
2%
6%
8%
9%
8%
5%
NA
NA
12%
10%
19%
21%
24%
49%
20%
21%
12%
18%
% CAGR %
NA
NA
488
887
2,787
9,533
3,635
4,502
FY21E
67,069
53,115
25,854
18,004
21,448
40,357
19,366
72,388
20,242
61,144
13,990
407
786
856
2,479
8,132
5,372
3,106
3,665
FY20E
60,756
49,123
25,606
16,905
19,561
36,890
18,094
64,625
19,389
57,088
11,302
Earnings (INR Mn) (INR Earnings
319
401
500
1,905
6,601
4,552
9,572
2,904
3,254
FY19E
53,088
47,677
24,949
15,879
17,791
34,567
16,233
51,329
17,459
55,795
3%
5%
2%
4%
3%
6%
4%
4%
NA
NA
-6%
11%
15%
12%
18%
14%
16%
15%
14%
% CAGR %
NA
NA
987
6,283
2,977
9,450
FY21E
56,275
45,149
46,614
40,093
42,674
18,623
19,246
12,936
144,129
135,094
106,965
137,669
171,645
871
5,719
2,740
5,911
2,235
8,086
FY20E
55,101
43,764
43,457
37,824
40,769
16,491
24,653
10,828
EBITDA (INR Mn) (INR EBITDA
135,008
126,899
104,017
128,269
157,957
707
4,991
2,282
5,029
1,711
7,134
9,953
FY19E
53,707
42,053
37,740
35,803
39,265
13,790
21,796
136,454
122,389
100,896
103,547
159,264
4%
5%
3%
2%
6%
2%
4%
2%
7%
6%
NA
NA
12%
10%
17%
12%
10%
11%
10%
% CAGR %
NA
NA
5,542
FY21E
32,510
29,187
88,556
54,458
98,016
862,051
838,702
394,116
318,615
214,319
588,893
286,773
837,671
291,155
197,030
1,548,000
4,842
FY20E
29,770
26,517
79,695
55,272
26,603
46,584
84,876
823,107
820,476
387,458
314,129
204,343
574,926
274,837
802,963
286,535
191,296
1,491,000
Revenue Mn) (INR
4,074
FY19E
27,069
23,321
76,927
49,579
22,817
44,338
80,514
797,008
763,854
369,284
304,754
189,389
563,103
263,726
668,914
280,162
176,290
1,283,000
EV
7,889
46,430
20,792
71,345
11,548
20,444
29,512
527,804
388,741
571,423
799,943
357,528
460,028
171,491
162,147
1,935,405
1,131,645
1,248,013
1,141,095
(Local Mn) (Local
Mcap Mcap
6,648
3,822
41,903
17,486
71,345
83,036
15,710
15,493
568,201
439,662
233,207
499,772
460,150
282,412
930,117
370,511
141,598
727,010
1,516,707
(Local Mn) (Local
63
91
28
76
57
38
19
32
72
334
135
100
111
132
108
315
basic basic
1,158
1,632
1,156
shares
No. No. Of
62
803
133
240
232
446
197
491
215
Price
4,537
4,200
4,401
2,099
7,945
3,497
2,620
4,063
2,466
2,214
(local)
Market data as on May-13, 2019
**SRF Film**SRF business accounts for 32% of topline and 33% of operating income
* Toray* Film business accounts for 36% of topline and 39% of operating income
Median
Mean
Ball Corp
Crown Holdings Inc
Sonoco Products Co
Silgan Holdings Inc
AptarGroup Inc
Berry Global Group Inc
Huhtamaki OYJ
Amcor Ltd/Australia
Bemis Co Inc
Global packaging companies packaging Global
Median
Mean
Essel Propack Ltd
Mold-Tek Packaging Ltd
Huhtamaki PPL Ltd
Indian packaging companies packaging Indian
Median Median
Mean
SRF Films**
Toray*
Diversified
Median Median
Mean
Jiangsu Shuangxing
SKC Ltd Co.
Global film companies film Global
Median
Mean
Cosmo Films Ltd
Polyplex Corp Ltd
UFLEX LTD UFLEX
Indian film companies film Indian
Name Table 13: Valuation snapshot of key Indian and global players in films and packaging industry packaging and films in players global and 13:Table key of Indian snapshot Valuation
36 Edelweiss Securities Limited Plastic Films
Risks
Strong oversupply: Strong oversupply can drag industry capacity utilisation and undermine prices and profitability. However, capacity additions between late 2019 and 2022 have been commensurate with demand.
Disruption in applications such as maturity of LCD screens leads to lower demand.
Growing environmental concerns around plastic use. Given environmental concerns on plastic use are growing by the day, the ability to recycle plastic waste is driving formalisation in the industry. Besides, plastic Waste Management Rules (2016) and introduction of extended producer responsibility (EPR) would push recyclability, which should help organised players gain market share.
Downgauging. Companies/customers are constantly looking to cut packaging costs without compromising functionality, which may affect volume growth for all players in the industry.
Strong historical capacity additions driving oversupply Strong oversupply can drag industry capacity utilisation and bring down prices and profitability. To be precise, between 2010 and 2014, new BOPET capacity addition worldwide expanded at a CAGR of 17%. This was driven by tight supply CAGR of 6% versus demand CAGR of 9% over v2007–10. Strong capacity additions ensued and dragged down industry capacity utilisation to 65% in 2014 and, hence, gross value addition. However, capacity additions between late 2019 and 2022 are likely to be commensurate with demand. Besides, North America and Greater Europe are expected to remain short-supplied, in spite of the new industry capacity.
Down-gauging Consumers’ constant search for reduced packaging cost without compromising functionality is tamping down plastic film players’ volume growth. Uflex faced a stiff challenge in offering Downgauging by customers leads to manufacturing packaging solutions for wheat flour (5kg packs) while keeping its pricing lower volumes for plastic film players within 2.5–3% of MRP since down-gauging typically compromises functionalities and as was the case for Uflex in FY16 strength. To ensure that the wheat-flour packaging is sturdy enough, Uflex optimised the films and reduced the PE thickness by almost 38%. This made the packaging lightweight while keeping it sturdy. This is the prime reason for Uflex’s flat volumes in FY16.
Disruption in applications Rapid developments in end-use technology is a cause for volatility. For example, growth in demand for LCD screens led to a surge in demand for BOPET optical films, but this market seems to be saturating owing to plateauing demand for flat screen TVs, smartphones and tablets. Therefore, industry players need to quickly formulate response strategies.
37 Edelweiss Securities Limited 1 Plastic Films
Growing environmental concerns driving legislation on packaging In light of initiatives such as extended producer responsibility There are growing environmental concerns around plastic packaging. About 94% of waste (EPR), organised players with generated in the country is thermoplastic (such as PET and PVC) and is recyclable. The Indian economies of scale are well government introduced stronger Plastic Waste Management Rules, 2016, which is shifting the positioned to establish their own onus onto producers via Extended Producer Responsibility (EPR). recollection infrastructure and grab market share from the unorganised In light of this, we believe organised players with economies of scale are well positioned to players establish their own recollection infrastructure and grab the market share from unorganised players. According to FICCI, the number of recycling units in India is 7,500.
38 Edelweiss Securities Limited Plastic Films
COMPANIES
39 Edelweiss Securities Limited 1 s
p INITIATING COVERAGE a
c d i
M POLYPLEX
a i
d Fortified BOPET player
n I
India Equity Research| Plastic Films
EDELWEISS RATINGS Polyplex Corporation (PCL) is the eight-largest global producer of thin polyester (BOPET) films and has the right strategic attributes for strong Absolute Rating BUY growth. We believe the following key factors would propel PCL’s growth: Investment Characteristics Growth
i) healthy cycle and structural tailwinds, which would drive a sales CAGR of 11% over FY19–21E; ii) a strong balance sheet (net cash of INR5.4bn as MARKET DATA (R: PLYP.BO, B: PPC IN) on FY18), which would facilitate capacity augmentation by 16% to CMP : INR 491 312,645MT (thereby breaking into top five players in BOPET); and iii) Target Price : INR 729 geographic diversification and value-added portfolio (scaled up from 35% 52-week range (INR) : 667 / 408 in FY14 to 49% in FY18), which provides earning stability. Given PCL’s Share in issue (mn) : 32.0 healthy growth drivers, we expect an EBITDA CAGR of 15% with RoCE M cap (INR bn/USD mn) : 16 / 229 expansion to 14.3% over FY19–21E. Adjusted for cash, RoCE is estimated Avg. Daily Vol. BSE/NSE (‘000) : 59.3 to expand 407 bps to 20.1% over FY19-21E. We are initiating coverage
with a ‘BUY’ and valuing the company at Q2FY21E EV/EBITDA of 3.3x, SHARE HOLDING PATTERN (%) which yields a target price of INR729 implying 48% upside potential. Current Q3FY19 Q2FY19 Promoters * 50.0 50.0 50.0
Strong positioning in BOPET; Capacity addition to capture growth MF's, FI's & BKs 5.3 4.6 4.6 PCL is among leading players (eight-largest) in the thin BOPET film packaging business FII's 2.1 2.1 1.9 with a globalised asset and resource base, and market shares of about 8% in India, 25% Others 42.6 43.3 43.5 in Turkey, 20% in Thailand and about 9% in Indonesia. Healthy capacity augmentation * Promoters pledged shares : NIL (% of share in issue) (up ~16%, by 44,000MT) in the growing southeast Asia (Indonesia) region puts PCL in a
sweet spot to capture the upcycle. As a result, it would clock an overall sales CAGR of RELATIVE PERFORMANCE (%) 11% over FY19–21E. After its planned capacity augmentation, Polyplex is expected to Stock over be among the top-five players globally. Sensex Stock Sensex
Value addition and demand-supply equilibrium driving profitability 1 month (4.1) (6.1) (2.0) 3 months 4.2 10.6 6.4 The share of value-added films in PCL’s total film sales rose from 35% in FY14 to 49% in 12 months 5.0 7.4 2.4 FY18, lifting its gross profit/kg from INR49 to INR58 over FY14–18. Furthermore, given
value-added sales are expected to rise to 55% of total by FY20 and the cycle is likely to
be stable, we estimate EBITDA CAGR would be 15% over FY19–21E.
Outlook and valuation: Strong drivers; initiating with ‘BUY’ We value Polyplex at 3.3x Q2FY21E EV/EBITDA (in line with its five-year average), which yields a TP of INR729, implying upside potential of 48%. We are initiating with ‘BUY’. It is trading at an FY21E PE of 4.3x and EV/EBITDA of 2.2x (FY20E: 5.1x / 2.5x).
Financials (Consolidated) (INRmn) Year to March FY18 FY19E FY20E FY21E Revenues (INR mn) 35,723 44,338 46,584 54,458 EBITDA (INR mn) 5,435 7,134 8,086 9,450 Adjusted Profit (INR mn) 1,595 2,904 3,106 3,635 Shradha Sheth Adjusted Diluted EPS (INR) 49.9 90.8 97.1 113.7 +91 22 6623 3308 [email protected] Diluted P/E (x) 9.9 5.4 5.1 4.3
EV/EBITDA (x) 3.8 2.9 2.5 2.2 ROAE (%) 6.6 11.1 11.1 12.2 May 13, 2019 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Polyplex Corporation
Investment Summary
We are initiating coverage on PCL with a ‘BUY’ and target price of INR729, implying upside potential of about 48%. PCL is among the leading players in the thin BOPET film packaging business with a globalised asset and resource base. It is the eight-largest BOPET player globally with about 214,800MT of BOPET and 53,845MT of BOPP capacity. The company clocked a sales CAGR of about 14% over the past decade. Within BOPET, PCL has a market share of about 8% in India, 25% in Turkey, 20% in Thailand and about 9% in Indonesia (expected to go up to ~20% following capex). It posted an adjusted EPS CAGR of 25% during FY15–18. We expect PCL to sustain earnings growth with an EBITDA CAGR of ~15% and turn in RoCE expansion of 90bps over FY19–21E to 14.3%. All in all, a combination of healthy demand drivers and strong positioning makes PCL a compelling story for the next “A slowdown in the pace of capacity three years in our view. addition has helped demand-supply become more balanced with a consequent increase in utilisation Investment highlights rates globally.” We expect PCL to deliver CAGRs of 11% in sales and 15% in EBIDTA over FY19–21E based on its: Mr. Pranay Kothari Chief Executive Officer strong presence in high-growth developing and profitable developed countries;
Timely capacity expansion capitalising on the cyclical uptick;
increasing mix of higher realisation and margin value-added products; and
strong balance sheet, which would support growth.
I) Strong presence in high-growth developing and profitable developed countries
PCL has a strong positioning being High-growth developing markets the eighth-largest BOPET films Global thin BOPET film growth is expected to be 5–7% for the next few years. Demand player globally and expected to in India and ‘Other Asia’ (68% of global demand) is growing 9–10%. For PCL, about 58% catapulate among top five players of its overall capacity is installed in developing countries India and Thailand – 29% each. post its capacity augmentation Expansion into Indonesia would take its capacity in developing countries to 72% of total.
i) India For PCL, India – a high-growth market – accounts for ~29% of overall production and 23% of sales. The estimated demand for BOPET films in India is expected to increase at a CAGR of 7.4% over CY17–20E (as per AMI Consulting) driven by strong consumption. To cater to this growing demand, PCL has 55,000 tpa BOPET capacity PCL is well placed to capture the (8% market share in India) as on FY18 and 30% of which caters to exports. BOPET demand uptick in high- growth India and Thailand markets, ii) Healthy demand in southeast Asia; presence in Thailand with its 8% and 20% share As much as 29% of PCL’s overall production capacity is based in Thailand while 20% respectively of its sales come from high-growth Asian countries (ex-India). Polyplex Thailand (PTL) generates 20% of its sales within Thailand, which is a 20% share in the 42,000MT market size. The balance 80% sales come from exports. The demand- supply scenario for PET films in South East Asia is favourable with a 7% demand CAGR over FY15–20E (as per PCI Consulting).
41 Edelweiss Securities Limited Plastic Films
iii) Indonesia PCL will gain strongly in Indonesia In order to capture growing demand in the Indonesian market and to increase its following its capacity expansion, share in southeast Asia market, the company is setting up a new plant of 44,000MT which would increase its market pa, which will increase overall capacity by 16% to 312,645MT per annum. This will share from 9% to about 20% increase its market share from 9% to 20% in Indonesia. The new line will be backward integrated with the PET resin line of about 73,000 MT per annum and metalliser of 6,000MT/annum. It is expected to be commissioned in H1FY19–20.
More profitable developed markets The company also boasts a strong position in the highly profitable markets.
i) Exports to US favourable The US accounts for 10% of PCL’s production and 23% of sales. Given favourable duties for imports from its group entities particularly for those in India and Turkey (refer to the table below), the outlook for the US business continues to be benign.
Table 1: Favourable duties for imports from PCL’s group entities Other Countries Other Countries Duty rates Country of Polyplex Other India Producer Duty on whom AD/CVD (AD+CVD) except Polyplex Import Duty(AD+CVD) Rates (AD+CVD)(Min-Max) applicable Group (Min-Max) USA 9.09%(PCL) 7.47%-65.59% China 31.24%-76.72% Taiwan 1.34%-4.48% Brazil 28.72%-44.36% UAE 4.05%-18.90% Brazil 259.79($/Mt)(PCL) 222.15($/Mt)-938.35($/Mt) Turkey 646.12($/Mt) 67.44($/Mt) (PE) UAE 436.78($/Mt)-576.32($/Mt) Mexico 1013.98($/Mt) Egypt 419.45($/Mt)-483.83($/Mt) China 946.36($/Mt) Source: Company annual report
ii) Turkey PCL is in a strong position in Turkey PCL has a presence in Turkey through Polyplex Europa (PE), a subsidiary of Polyplex with a healthy market share of 25% Thailand Limited (PTL). As much as 18% of PCL’s overall production capacity is and strong margin of ~30% based in Turkey and 26% of its sales come from the profitable European region. It generates strong margins of 30%. PE is currently the largest producer of BOPET films in Turkey with a 25% market share.
The company has gained a foothold in Western Europe due to lack of capacity in the region. The European subsidiary helps it get around dumping issues and other duties imposed on India-produced films.
42 Edelweiss Securities Limited Polyplex Corporation
Chart 1: Capacity and sales by region: Well-diversified across high growth and profitable geographies Installed capacity End market sales RoW Indonesia 8% 14% Est. growth - 4% India India 23% 29% Est. growth - 7.4% USA Americas 10% 23% Est. growth - 4%
Other Turkey Asian Europe 18% Countries 26% 20% Thailand Est. growth - 3% Est. growth - 7.4% 29% Source: Company annual report
II) Capitalising the cycle with expansion: to drive up revenue and profitability
In light of favourable demand- After witnessing a prolonged supply-demand imbalance, the BOPET cycle has started supply, the company's 16% capacity stabilizing since 2016 with capacity utilisation improving to about 70% for the industry, expansion should help it register a leading to improvement in margins. Furthermore, the cycle is favourable with less 11% CAGR in consolidated sales players adding capacity. This should improve industry utilisation to 81% in FY20E and over FY19–21E 84% in FY21E. All in all, we expect PET film prices to remain firm.
To capitalize on the cyclical uptick, PCL is expanding capacity by 16% in FY19. In light of the rising capacity and demand, we expect PCL's PET films segment to register a volume CAGR of 9% over FY19–21E.
Chart 2: Adding capacity to capture demand
3,50,000 3,50,000 100.0% 96% 87% 3,30,000 3,20,000 80% 80.0% 3,12,645 3,12,645 3,12,645
3,10,000 2,90,000 60.0% (MTPA)
2,90,000 2,60,000 40.0% (MTPA)
2,68,645 2,70,000 2,30,000 20.0%
2,50,000 2,00,000 0.0% FY18 FY19E FY20E FY21E FY19E FY20E FY21E Installed capacity Production volume Utilization
Source: Company, Edelweiss estimates
43 Edelweiss Securities Limited Plastic Films
Overall, given its capacity expansion plans, we expect PCL to register a consolidated sales CAGR of 11% over FY19–21E.
Furthermore, there is potential for brownfield expansion in all locations, particularly the US and India.
III) Moving up the value chain In the plastic films sector, we observe that barriers to entry are low, but barriers to scale are very high. In other words, films companies generally struggle with scaling up service quality and value added portfolio. Thereby companies which have focus on innovation and value added portfolios are preferred suppliers for large multinational customers. The share of value-added films in PCL’s total films sales increased from 35% in FY13–14 to 49% in FY17–18. Furthermore, going forward, the company expects the proportion to rise to 55% over the next two–three years.
Chart 3: Overall sales mix: Value-added scaled up to 49% of sales 100% Value-added constitutes metalliser (23% of sales; realisation higher by 80% 51% 58% 54% 52% 22%) and coated films (13% of 65% sales; realization higher by 84%) 60%
40%
49% 42% 46% 48% 20% 35%
0% FY14 FY15 FY16 FY17 FY18 Value added film Base film
Source: Company annual report
Value-added sales constitute metalliser films (23% of overall sales) with realisation higher by 22% and coated films capacity (13% of overall sales) with realisation higher by 84%.
Chart 4: Strong value-added sales and realisation
Coated OPP/CPP/ Metalliser 13% Blown PP 19% FY19E Sales Mix Others Base PET 23% Others 56% 44% Others 81% Others 87% 77%
FY19E Realization INR170/kg INR208/kg INR313/kg INR127/kg*
Note: *Corresponds to blended realization of OPP/CPP/Blown PP Films and Chips Source: Company, Edelweiss estimates
44 Edelweiss Securities Limited Polyplex Corporation
Increasing share of value-added films will temper cyclicality in base films in the long run
and improve margins. Besides, PCL’s accelerated investments in niche downstream products such as Extrusion Coating lines in Thailand, Silicone Coating lines in India and Thailand, Offline Coaters in Turkey for packaging, and holography machines in India provide scalable platforms that may further aid margins.
Chart 5: Value-added on the rise: Metalliser and coated make up 27% and 8% of overall capacity, respectively 1,00,000 30,000 83,400 24,000 80,000 24,000
60,000 18,000 14,497
(MTPA) 37,700
40,000 12,000 (MTPA)
20,000 6,000
0 0
FY14 FY15 FY10 FY11 FY12 FY13 FY16 FY17 FY18
FY16 FY10 FY11 FY12 FY13 FY14 FY15 FY17 FY18
FY19E FY19E Metallizer Holographic films Coating
Source: Company annual report
As can be seen above, the value added capacity is continuously on the rise for PCL.
Value-added capacity addition: New Saracote line in Thailand – Further in order to enhance its portfolio and cater to demand for new applications, PCL is setting up a third siliconised coating line in Thailand with annual capacity of 50mn sqm (~895MTPA), expanding capacity by ~3-4%.
PCL’s focus on innovation and collaborative application development has helped it emerge as a preferred supplier/partner with several large multinational customers. It supplies PET films to most all large global flexible packaging converters as a tier 1 partner.
Fig. 1: Key customers: Global presence and portfolio PCL’s focus on innovation and collaborative application development has helped it emerge as a tier 1 partner to all large global flexible packaging converters
Source:Company
45 Edelweiss Securities Limited Plastic Films
Financial strength a prerequisite to scaling up The sector is fragmented with the top ten players accounting for ~35% of capacity. PCL has expanded capacity by 2.5x Furthermore, the sector is cyclical. Therefore, only companies with liquid and strong over the last nine years, capitalising balance sheets have flexibility to tap growth opportunities. on its strong balance sheet strength PCL has a strong balance sheet in spite of operating in a capital-intensive sector; it has gross cash of INR12.8bn and net cash of INR5.4bn, which should help it support growth in the upcycle. In fact, the company has expanded capacity by 2.5x over the past nine years capitalising on its strong balance sheet without any dilution while riding the upcycle in plastic films.
Chart 6: Consistent capacity addition while maintaining healthy balance sheet
4,00,000 12,000 8,091
3,40,000 7,200
5,422
3,12,645
4,142
4,406 1,325 2,80,000 2,400
(MTPA) 2,20,000 (2,400)
FY18 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
(INR mn)(INR
752
FY19E -
1,60,000 (7,200)
1,23,284
4,553
-
5,224
- 7,247
1,00,000 (12,000) -
8,882
-
FY11 FY10 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E Installed capacity Net cash and cash equivalents
Source:Company
46 Edelweiss Securities Limited Polyplex Corporation
Financial Analysis
Capacity expansion and firm prices to lift top line Notwithstanding the economic downturn, PCL – on a consolidated basis – registered a moderate volume CAGR of 5% and sales value CAGR of 3% over FY14–18. With the BOPET cycle being favourable, we expect realisation to rise at a CAGR of about 1.4% over FY19–21E With favorable BOPET cycle, we and volume growth to perk up at a 9.2% CAGR led by an increase of 16% in overall capacity expect overall net sales CAGR of 11% in FY19, spearheaded by Indonesia. We thus estimate sales would expand at a CAGR of over FY19-21E driven by 9.2% about 11% in FY19–21. volume and 1.4% realisation CAGR Over 9MFY19, sales shot up about 31% on the back of 5% increase in volume and a 26% uptick in average realisation.
While overall sales growth would moderate in FY20 amid weaker realisation growth, we expect sales volumes to pick up over FY20–21E led by the commissioning of new PET film capacity in Indonesia.
Chart 7: Top-line expansion: Both volume and value growth at play 3,15,200 213 61,000
2,83,200 192 53,800
2,51,200 171 46,600
(MTPA) 2,19,200 149
(INR/KG) 39,400 (INR mn)(INR
1,87,200 128 32,200
1,55,200 107 25,000
FY14 FY15 FY16 FY17 FY18
FY14 FY15 FY16 FY17 FY18
FY19E FY20E FY21E
FY19E FY20E FY21E Volume, MTPA Realization, INR/kg Total sales
Source:Company, Edelweiss estimates
Improving mix and stable cycle to lift margins An uptick of 26% in realisation/kg lifted overall gross profit/kg by 20%, which translated into EBITDA/kg jump of 32% YoY to INR30. As a result, EBITDA rose by about 38% YoY in 9MFY19. Furthermore, for the full-year FY19, we expect EBITDA to jump 31% YoY. Over FY19–21, we Over FY19–21, we expect EBITDA estimate EBITDA CAGR would be 15% driven by a 11% sales CAGR and a 6% CAGR in CAGR of 15% driven by 6% CAGR in operating profit/kg. operating profit/kg Downstream businesses such as metallising, silicone coating, extrusion coating, holography and offline chemical coating have enabled PCL to improve value-added sales and provide further impetus to operations and margins.
Over the past five years, the company’s share of value-added films in the total film sales turnover has risen from 35% in FY13–14 to 49% in FY17–18. This along with improving cycle is reflecting in improving gross profit/kg over the years.
47 Edelweiss Securities Limited Plastic Films
Chart 8: Improving mix and stable cycle leading to higher profitability Gross profit and operating 84 profit/kg improved over FY14–19E and is expected to keep improving 68 further led by higher value-added sales 53
(INR/kg) 37
22
6 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Gross profit per KG EBITDA per KG Source: Company, Edelweiss estimates
RoCE rises as utilisation ramps up Despite PCL’s high capex of By FY18, PCL’s pre-tax RoCE had fallen to 8.6% from 11% in FY12 owing to heavy capex over INR8.5bn, we expect its pre-tax FY12–14 and the cycle turning unfavourable. This time around, the company has chalked RoCE to increase 90bps to 14.3% out total capex of INR8.5bn for FY19–21 to capture the uptick in the BOPET cycle. About by FY21E from 13.4% in FY19 amid INR5.5bn would be utilised towards greenfield expansion in Indonesia, which would expand a steady BOPET cycle overall capacity by 16%; ~INR2bn is earmarked for the value-added offline coater, holography in India and siliconised coating line in Thailand; and the balance INR1bn would go towards maintenance capex.
Despite PCL’s high capex, we expect its RoCE to expand amid a steady BOPET cycle. Increasing utilisation would lead to greater total asset turn (from 0.9x to 1.0x). Hence, we estimate pre- tax RoCE would increase 90bps to 14.3% over FY19–21E. Further adjusted for huge cash on balance sheet, we expect pre-tax RoCE to expand 410bps to 20.1% over FY19–21E.
Chart 9: RoCE – Strong despite heavy capex 6,000 20.0
5,000 17.0 14.3 13.4
4,000 3,750 14.0 13.2 (%)
(INR mn) (INR 3,000 2,750 11.0
2,000 2,000 8.0
1,000 5.0 FY19 FY20E FY21E FY19E FY20E FY21E Capex RoCE
Source: Company, Edelweiss research
48 Edelweiss Securities Limited Polyplex Corporation
Excise, corporate tax exemption benefits Tax Turkey operates in a free trade zone.
Earnings from investments in Thailand are exempted for ten years based on the BOI (board of investments) scheme. While increment investments qualify for tax exemption, it made the majority of investments in Thailand in FY14. Hence, the tax rate – currently 4–5% –is expected to go up to 15% in the next few years.
US has accumulated losses pertaining to the plant commissioned in 2013. However, a full tax rate of 22% is expected from FY21.
India has a tax outflow equivalent to MAT with 80 IC benefit in Uttarakhand till FY20, after that the overall tax rate would be 34% in India. Tax rate is expected to inch up from 13–14% over FY19–21E to 20% from Earnings from investments in Indonesia are fully taxable at 20%. FY21–22E Thereby, tax rate will continue to be 13–14% over FY19-21E. However, from FY21–22 we expect the tax rate to go up to 20%.
Chart 10: Tax rate to gradually increase 100.0
80.0 74.7
60.0 (%) 40.0
20.0 13.0 13.0 14.0 9.5 3.9 0.0 FY16 FY17 FY18 FY19 FY20 FY21 Tax rate
Source:Company, Edelweiss estimates
Trade duties The company undertakes all safeguards to insulate itself against risks arising out of anti- dumping actions and other trade barriers imposed by importing countries. A well-diversified manufacturing presence and an end-to-end product portfolio also helps mitigate the fallout of such actions.
PCL is favorably placed in the US and Brazil in terms of exports from its other plants into these geographies. A summary of the anti-dumping/countervailing duties on PET films applicable in its major export markets is given below.
49 Edelweiss Securities Limited Plastic Films
Table 2: Imports duties Other Countries Duty rates Country of Polyplex Other India Producer Duty Other Countries on whom (AD+CVD) except Polyplex Import Duty(AD+CVD) Rates (AD+CVD)(Min-Max) AD/CVD applicable Group (Min-Max) USA 9.09%(PCL) 7.47%-65.59% China 31.24%-76.72%
Taiwan 1.34%-4.48% Brazil 28.72%-44.36%
UAE 4.05%-18.90% Brazil 259.79($/Mt)(P 222.15($/Mt)-938.35($/Mt) Turkey 646.12($/Mt) CL) 67.44($/Mt) UAE 436.78($/Mt)-576.32($/Mt) (PE) Mexico 1013.98($/Mt)
Egypt 419.45($/Mt)-483.83($/Mt)
China 946.36($/Mt) Korea 12.92%(PCL) 12.9% Japan 6.0% 3.67%PTL) Thailand 3.68%-3.71% Taiwan 8.7% UAE 7.98%-60.95% China 7.42%-12.92% Indonesia 8.5%(PCL) 4.00%-8.50% China 2.60%-10.60% 2.20%(PTL) Thailand 5.40%-7.10% Turkey 21.61%(PCL) 4.25%-21.61% Source: Company
50 Edelweiss Securities Limited Polyplex Corporation
Valuation
Strong earnings growth with reasonable valuation We are initiating coverage on PCL with a ‘BUY’ and target price of INR729, implying 48% upside potential. We estimate EBITDA and EPS CAGR would be ~15% and 12%, respectively, over FY19–21E at the group level. This will potentially cause the stock to re‐rate, currently trading at FY21E PE of 4.3x and EV/EBITDA of 2.2x (FY20E: 5.1x / 2.5x). The company has delivered an earnings CAGR of 7% over the past decade in spite of cyclicality led by packaging growth globally.
Outlook The demand-supply situation in global PET thin and thick films market has improved during the year and is expected to balance out further in the near term. PCL boasts well-distributed manufacturing operations, diversified value-added product portfolio, quality consistency, an international customer base, an efficient supply chain and a conservative balance sheet, which have allowed it to grow profitably and withstand industry volatilities better and should help hereon as well.
Flexible packaging by nature is highly adaptable and hence many companies are planning to devise innovative products. This is driving substitution of traditional packaging (rigid to flexi). The wide range of innovative flexible materials and new design concepts being introduced in this industry to minimise waste in terms of environment conservation and cost is attracting a number of customers. Sharpening focus on product innovation and value-added products are driving sales and margins of films players.
Hence, we estimate PCL’s top line would post a CAGR of 11% over FY19–21E while EBITDA margin would improve steadily from 16.1% in FY19 to 17.4% in FY21. We expect the PAT to expand at a CAGR of 12% to INR3.6bn and RoE to improve steadily from 11.1% to 12.2%, and RoCE to rise by 90bps from 13.4% to 14.3% over FY19–21E. Adjusted for cash, RoCE is estimated to expand 407 bps to 20.1% over FY19-21E.
PCL holds a 51% stake in its listed Thailand subsidiary Polyplex Thailand (PTL), which has a market cap of INR28.4bn and is trading at FY2018E P/BV of 1.1x. However, PCL has a market cap of INR15.7bn or FY2018E P/BV of 0.6x, which implies a discount of ~45% to PTL's P/B. Over the past five years, PCL has traded in a range of 0.2–0.7x one-year forward P/BV.
We have assigned PCL an EV/EBITDA of 3.3x to Q2FY21E EBIDTA, closer to its average of past five years, which implies potential upside of ~48%. The stock is trading at an FY20E EV/EBITDA of 2.2x. Initiating with a ‘BUY’.
51 Edelweiss Securities Limited Plastic Films
Key risks
Currency fluctuations: PCL derives about 78% of its top line overseas and is hence exposed to foreign currency risk arising from transactions & translation. The overseas operations are largely in the US, Thailand, Turkey and Indonesia. While the company attempts to create a natural cash flow hedge by matching its financial assets with liabilities, any adverse movement in the exchange rates can have material impact on its profitability.
Cyclicality: PCL is a pure-play film manufacturing business integrated backwards with resin manufacturing. The company’s profitability is vulnerable to significant capacity additions in an environment where demand may not keep up. To be fair, the company has somewhat addressed this by increasing the mix of value-added products. Nonetheless, the risk remains.
52 Edelweiss Securities Limited Polyplex Corporation
Company background
Polyplex Corporation Limited (PCL) is among the largest global integrated manufacturers of thin BOPET films operating close to regional markets with supply points spread across the globe. Since its inception in 1984, it has grown from a small single-line facility to a half a billion-dollar company with an international presence. The company has manufacturing facilities in four countries – India, Thailand, Turkey, USA – currently and is in the process of expanding into fifth country – Indonesia. The company has total installed base film capacity of 2,68,645MTPA, out of which BOPET thin and thick films account for 1,86,000MTPA and 28,800MTPA, respectively. Additional capacity of 44,000MTPA of BOPET thin films in Indonesia is expected to be commercialised in FY20.
Over the years, PCL has moved closer to markets to deliver more efficiently and effectively. It has a diversified business portfolio ranging from BOPET, BOPP, Blown PP/PE and CPP films. The company has integrated green-field film lines with upstream resin plants and downstream metallisers and other offline coating capabilities, which ensures cost- competitiveness and minimises environmental impact besides making it a one-stop for a portfolio of film products. PCL' products have gained wide acceptance in the global markets such as the US, Europe, southeast Asia, South America and Australia.
The company has two key subsidiaries - Polyplex Asia (PAPL), which is 100% wholly-owned, and Polyplex Thailand (PTL), which is 17.19% directly held and 33.81% indirectly via PAPL. PTL has multiple step-down subsidiaries including Polyplex USA (PU), Polyplex Europa (PE), PT Indonesia, all of which are 100%-owned by PTL. PTL is listed on the Stock Exchange of Thailand.
Fig. 2: Polyplex group structure
Source: Company
53 Edelweiss Securities Limited Plastic Films
In terms of revenue contribution, Polyplex India accounts for 27% of consolidated revenue, Polyplex Thailand 23%, Polyplex Europa 19% and Polyplex USA 24%; the rest comes from other subsidiaries.
Subsidiary background Polyplex (Asia) Pte. Ltd. (PAPL) PAPL was established as a 100% subsidiary of PCL in July, 2004. It has a 33.81% stake in Polyplex Thailand (PTL). PAPL was incorporated as PCL’s investment and trading company for overseas investments.
Polyplex Thailand (PTL) PTL was incorporated as a private company on 26 March, 2002 to manufacture and distribute PET film (polyethylene terephthalate film or PET film). The company was promoted by PCL. The registered capital of the company was subsequently increased to THB400mn in April/May 2002. In December 2004, the company went public. As on date, PCL has a 51% stake in PTL through both direct and indirect shareholding.
Polyplex Europa Polyester Film Sanayi Ve Ticaret Anonim Srketi (PE) PTL decided to set up its wholly owned investment holding company in Singapore (PSPL) to invest in the PET film manufacturing factory in Turkey so as to tap into the demand in European and other related markets. PSPL incorporated a 100%-owned subsidiary company, PE, in Turkey to operate a greenfield polyester film plant for exports to European and other proximate markets. The commercial operations started in December 2005 with the start-up of the first thin PET film line.
Polyplex USA LLC The company is a 100% wholly owned subsidiary of PAPL. It was created to cater to the US market.
Polyplex Films Indonesia (PT Indonesia) It is a 100% wholly owned subsidiary of PTL. The company is setting up a new BOPET plant of 44,000MTPA, which will be backward integrated with the PET resin line of about 73,000MTPA and metalliser of 6,000MTPA. It is expected to be commissioned in H1FY19–20.
54 Edelweiss Securities Limited Polyplex Corporation
Fig. 3: Milestones
1988 2005 2010 2018 Commissioned first PET thin Expanded into Turkey with Commissioned its first BOPP Commissioned second film line in India manufacturing of thin PET line in India and a CPP line in Blown PP line and third films Thailand, in an attempt to silicone coating line in diversify the product mix Thailand Established a trading and Announced investment in distribution company in three holographic and two China coater lines in India Commissioned a thin PET Announced Greenfield PET film line, a PET resin plant line, metallizer and resinf and a metallizer in India project in Indonesia
2003 2009 2013 Commissioned two Thin PET Commenced further capacity Entered USA with Thin PET film lines in Thailand, expansion in Thailand Film line, resin plant and thereby moving out of India metaliser for the first time
Source:Edelweiss research, Company
Table 3: Key management personnel Sanjiv Saraf Chairman Pranay Kothari Executive Director
Management team
India USA Kapil Gupta Profit Centre Head - India Amit Kalra Profit Centre Head - USA Sunil Kumar Corporate Head - HR Ravi Singhal Plant Head - USA Manish Gupta Chief Financial Officer Bhavin R. Patel Business Head - Saracote Rajpal Yadav Corporate Head - Projects Manav S. Nim Sales & Marketing Head - USA R.S. Gaur Operations Head - India R.R. Kuchipudi Corporate Head - NPD, R&D and Thailand & Turkey Tech Services Manoj Agarwal Corporate Expert - Resins Amit Prakash Profit Centre Head - Thailand & Turkey A.K. Gurnani Company Secretary S.K. Jha Plant Head - Thailand Harminder Singh Indirect Taxation & Administration Vaibhav K. Jain Business Head - Turkey Head - India Rakesh Kakkar Sales & Marketing Head - India Ashish K. Ghosh Sales & Marketing Head - Thailand Saleem Ahmad Business Unit Head - BOPET & Ramesh K. Gupta Business Head - Saralam Chips, India Amarnath J. Parida Business Unit Head - BOPP, India
Ravindra K. Gupta Services, PDC & Civil Head India
Source: Company
55 Edelweiss Securities Limited Plastic Films Financial Statements
Key Assumptions Income statement (INR mn) Year to March FY18 FY19E FY20E FY21E Year to March FY17 FY18 FY19E FY20E FY21E MACRO ASSUMPTIONS Net revenues 35,723 44,338 46,584 54,458 GDP(Y-o-Y %) 6.7 7.1 7.1 7.3 Raw material costs 21,497 26,918 27,645 32,210 Inflation (Avg) 3.6 3.7 4.0 4.5 Gross profit 14,226 17,420 18,938 22,248 Employee expenses 3,032 3,259 3,504 3,767 Repo rate (exit rate) 6.00 6.25 5.75 5.75 Other expenses 5,759 7,026 7,349 9,031 USD/INR (Avg) 64.5 70.0 72.0 72.0 Operating expenses 8,791 10,286 10,853 12,798 SECTOR ASSUMPTIONS Total expenditure 30,288 37,204 38,498 45,008 Crude price (Brent) 56.4 69.0 65.0 75.0 Adjusted EBITDA 5,435 7,134 8,086 9,450 Y-o-Y rise % in Crude 15.1% 22.3% -5.8% 15.4% Depreciation & amortisation 1,850 2,128 2,236 2,614 FINANCIAL ASSUMPTIONS EBIT 3,585 5,006 5,850 6,836 Capacity Packaging Films (TPA) 268,645 268,645 312,645 312,645 Less: Interest Expense 394 446 470 429 % increase in capacity 0% 0% 16% 0% Add: Other income (52) 1,195 776 879 Add: Exceptional items 0 0 0 0 Volume growth - Films (%) 3% 3% 8% 10% Profit Before Tax 3,139 5,755 6,156 7,287 Realisation growth - Films (%) 9% 19% -3% 6% Less: Provision for Tax 298 748 800 1,020 Total Revenue growth (%) 12% 24% 5% 17% Reported Profit 2,841 5,007 5,356 6,267 Capacity utilisation - Films (%) 90% 80% 87% 96% Minority interest (1,247) (2,103) (2,249) (2,632) EBIDTA - Films (INR/kg) 21 28 29 31 Adjusted Profit 1,595 2,904 3,106 3,635 EBIDTA per kg growth (%) 19% 28% 4% 7% No. of Shares outstanding (mn) 32.0 32.0 32.0 32.0 Adjusted Basic EPS 50 91 97 114 No. of Dil. Sh.outstanding (mn) 32.0 32.0 32.0 32.0 BALANCE SHEET ASSUMPTIONS Adjusted Diluted EPS 49.9 90.8 97.1 113.7 Capex (INR mn) 1,369 2,750 3,750 2,000 Adjusted Cash EPS 107.7 157.4 167.1 195.4 Inventory (days) 85 85 85 85 Dividend per share (DPS) 40.0 36.3 38.9 45.5 Receivables (days) 52 50 50 50 Dividend Payout Ratio (%) 80.2 40.0 40.0 40.0 Payable (days) 44 44 42 42 Common size metrics (% net revenues) 1.37 Year to March FY17 FY18 FY19E FY20E FY21E Material costs 60.2 60.7 59.3 59.1 Gross margin 39.8 39.3 40.7 40.9 Staff costs 8.5 7.4 7.5 6.9 SG&A expenses 16.1 15.8 15.8 16.6 Depreciation 5.2 4.8 4.8 4.8 Interest 1.1 1.0 1.0 0.8 Operating expenses 24.6 23.2 23.3 23.5 EBITDA margins 15.2 16.1 17.4 17.4 EBIT margin 10.0 11.3 12.6 12.6 Net profit margin 4.5 6.5 6.7 6.7
Growth metrics (%) Year to March FY17 FY18 FY19E FY20E FY21E Revenues 11.6 24.1 5.1 16.9 Gross Profit 12.4 22.4 8.7 17.5 EBITDA 22.8 31.3 13.3 16.9 PBT (16.5) 83.3 7.0 18.4 Adjusted Profit (11.9) 82.1 7.0 17.0 EPS (11.9) 82.1 7.0 17.0
56 Edelweiss Securities Limited Polyplex Corporation
Balance sheet (INR mn) Profitability ratios As on 31st March FY17 FY18 FY19E FY20E FY21E Year to March FY18 FY19E FY20E FY21E Share capital 326 326 326 326 RoACE (%) 8.6 13.4 13.2 14.3 Reserves & surplus 25,157 26,725 28,402 30,365 RoACE - Ex Cash (%) 12.3 16.0 17.9 20.1 Shareholder equity 25,482 27,050 28,728 30,690 RoAE (%) 6.6 11.1 11.1 12.2 Minority interest 10,722 12,825 15,074 17,706 ROA (%) 3.9 6.3 6.2 6.8 Long term borrowings 2,548 4,398 4,198 3,998 Inventory (days) 85 85 85 85 Short term borrowings 4,839 4,439 4,039 3,639 Receivables (days) 52 50 50 50 Total Borrowings 7,387 8,837 8,237 7,637 Payables (days) 44 44 42 42 Long Term Liabilities & Provisions 101 95 95 95 Cash conversion cycle (days) 92.6 91.0 93.0 93.0 Deferred Tax Liability (net) (494) (480) (480) (480) Current ratio (x) 5.0 5.1 5.3 5.4 Sources of funds 43,199 48,327 51,654 55,649 Adjusted debt/Equity (x) 0.2 0.2 0.2 0.2 Net Block 22,145 22,766 24,280 23,666 Net Debt/Equity (x) (0.1) (0.2) (0.2) (0.3) Total Fixed Assets 22,226 22,856 24,370 23,756 Interest coverage (x) 9.1 11.2 12.5 16.0 Good-will 2 2 2 2 Non current investments 31 31 31 31 Operating ratios (x) other non current assets 792 800 800 800 Year to March FY18 FY19E FY20E FY21E Investments 9 10 10 10 Total asset turnover 0.9 1.0 0.9 1.0 Cash and cash equivalents 12,809 16,928 18,342 21,615 Fixed asset turnover 1.6 2.0 2.0 2.3 Inventories 5,665 6,269 6,438 7,501 Equity turnover 1.0 1.2 1.1 1.2 Sundry debtors 5,497 6,074 6,381 7,460 Loans and advances 148 150 150 150 Valuation parameters Other Current Assets 1,007 1,275 1,209 1,403 Year to March FY18 FY19E FY20E FY21E Total current assets (ex cash) 12,316 13,767 14,178 16,514 Adjusted Diluted EPS (INR) 49.9 90.8 97.1 113.7 Trade payable 2,675 3,245 3,181 3,706 Y-o-Y growth (%) (11.9) 82.1 7.0 17.0 Other Current Liab. & ST Prov. 2,313 2,822 2,898 3,373 Adjusted Cash EPS (INR) 107.7 157.4 167.1 195.4 Total Current Liabilities & Prov. 4,987 6,067 6,079 7,080 Diluted P/E (x) 9.9 5.4 5.1 4.3 Net Current Assets (ex cash) 7,329 7,700 8,099 9,434 P/BV (x) 0.6 0.6 0.5 0.5 Uses of funds 43,199 48,327 51,654 55,649 EV/Sales (x) 0.6 0.5 0.4 0.4 Book Value per share (INR) 797 846 898 960 EV/EBITDA (x) 3.8 2.9 2.5 2.2 Dividend Yield (%) 8.1 7.4 7.9 9.3 Free cash flow Year to March FY17 FY18 FY19E FY20E FY21E Reported Profit 2,841 5,007 5,356 6,267 Add: Depreciation 1,850 2,128 2,236 2,614 Interest 357 388 408 369 Add:Others 275 (1,123) (715) (819) Gross cash flow 5,323 6,400 7,285 8,430 Less: Changes in working cap. (2,253) (350) (399) (1,335) Operating cash flow 3,071 6,050 6,886 7,095 Less: Capex 1,369 2,750 3,750 2,000 Free cash flow 1,702 3,300 3,136 5,095
Cash flow metrics Year to March FY17 FY18 FY19E FY20E FY21E Operating cash flow 3,071 6,050 6,886 7,095 Investing cash flow (1,263) (1,725) (3,124) (1,271) Financing cash flow (418) (332) (2,498) (2,701) Net cash flow 1,389 3,992 1,264 3,123 Capex (1,369) (2,750) (3,750) (2,000) Dividends paid (285) (1,336) (1,429) (1,672)
57 Edelweiss Securities Limited Plastic Films
Additional Data
Directors Data Mr.Sanjiv Saraf Chairperson, non-executive director, Promoter-director Ms.Pooja Haldea Non-executive Director Mr.Pranay Kothari Executive Director Mr.Ranjit Singh Non-executive Director Mr.Jitender Balakrishnan Non-executive Director Mr.Brij Kishore Soni Non-executive Director Mr.Sanjiv Chadha Non-Executive Director, Promoter-director
Auditors - S S Kothari Mehta & Co. *as per last available data
Holding - Top 10 Perc. Holding Perc. Holding IL&FS Trust Co Ltd 7.99 AXA SA 0.19 Reliance Capital Trustee Co Ltd 4.59 State of Wisconsin Investment Boar 0.04 Finquest Securities Pvt Ltd 1.06 New York Life Insurance Co 0.03 Dimensional Fund Advisors LP 0.78 Manulife Financial Corp 0.02 INVESTOR EDUCATION & PROTECTN FD 0.66 Nomura Holdings Inc 0.01 *as per last available data
Bulk Deals Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades Reporting Data Acquired / Seller B/S Qty Traded
No Data Available
*in last one year
58 Edelweiss Securities Limited s
p INITIATING COVERAGE a
c d i
M UFLEX
a i
d Moving up the value chain
n I
India Equity Research| Plastic Films
Uflex Corporation (Uflex) is the fifth-largest BOPET films player globally EDELWEISS RATINGS (61% of FY19E overall sales) and India’s leading flexible packaging Absolute Rating BUY producer with a ~25% share of the organised market. We believe the Investment Characteristics Growth company is primed for profitable growth due to: i) a climb-up in value
chain towards high-margin packaging, currently only 61% utilised; ii) potentially greater profitability in BOPET films led by strong cyclical MARKET DATA (R: UFLX.BO, B: UFLX IN) tailwinds; and iii) strong capex of INR19bn incurred over FY16-18 CMP : INR 215 including about INR5.3bn in the high-potential Asepto packaging. Given Target Price : INR 326 strong demand drivers across films and packaging, we expect Uflex to 52-week range (INR) : 354 / 181 clock an EPS CAGR of 18% over FY19–21E and expansion in pre-tax RoCE Share in issue (mn) : 72.2 M cap (INR bn/USD mn) : 16 / 226 of 286bps to 13.1% over FY19–21E. We are initiating with ‘BUY’ and TP of Avg. Daily Vol. BSE/NSE (‘000) : 142.5 INR326, implying upside potential of 52%.
SHARE HOLDING PATTERN (%) Forward integration into profitable packaging Current Q3FY19 Q2FY19 Uflex commands a strong share of ~25% in the USD5.5bn organised flexible packaging Promoters * 44.0 44.0 44.0 industry. With an uptick in utilisation from ~61% to 75% over FY19–21E, the company MF's, FI's & BKs 1.9 1.9 2.0 is well placed to capture the structural uptick. Furthermore, it has entered aseptic FII's 6.5 8.0 8.7 packaging, which is a growing segment with high margins (18–20%) and only one Others 47.6 46.1 45.3 player in India, i.e. Tetra Pak. We expect Uflex to clock INR5bn in sales in asepto in * Promoters pledged shares : NIL FY21E, which should lead to an overall packaging sales CAGR of 17% over FY19–21E. (% of share in issue)
With profitability in packaging being 2x films’, an improvement in the sales mix towards flexible packaging by 470bps (including asepto) to 43.9% would lend stability RELATIVE PERFORMANCE (%) Stock over to profit and generate an EBITDA CAGR of 20% in packaging over FY19–21E. Sensex Stock Sensex
Fifth-largest player globally in BOPET Films 1 month (4.1) (11.1) (7.0) 3 months 4.2 9.4 5.2 Being the fifth-largest player in BOPET globally, Uflex is well placed to capture the 12 months 5.0 (27.2) (32.2) uptick in BOPET cycle driven by its international operations, which would drive up its
contribution from INR65.5/kg to INR69.8/kg over FY19 to FY21. As a result, we expect
an EBITDA CAGR of 9% over FY19–21E in films. Furthermore, with a 15% rise in
capacity over FY21–22E, Uflex will reap the benefits of increased volumes.
Outlook and valuation: Flexible packaging gains; initiate with ‘BUY’
We have valued the packaging business and the films business at 6x and 3.3x Q2FY21E EV/EBITDA, respectively. The stock is trading at FY21 PE of 3.4x and EV/EBITDA of 2.3x. We are initiating with a “BUY” and target price of INR326 on an SoTP basis. Financials INRmn (INR Mn) FY18 FY19E FY20E FY21E Revenues (INR mn) 66,974 80,514 84,876 98,016 EBITDA (INR mn) 8,794 9,953 10,828 12,936 Shradha Sheth Adjusted Profit (INR mn) 3,105 3,254 3,665 4,502 +91 22 6623 3308 Adjusted Diluted EPS (INR) 43.0 45.1 50.8 62.3 [email protected] Diluted P/E (x) 5.0 4.8 4.2 3.4
EV/EBITDA (x) 3.4 3.0 2.7 2.3 ROAE (%) 8.1 8.0 8.6 9.9 May 13, 2019 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Plastic Films
Investment summary
We are initiating coverage on Uflex with a ‘BUY’ and target price of INR326, implying upside potential of 52%. The company has a transnational asset and resource base and is the fifth-largest BOPET player globally with about 256,000MT of capacity and largest in organised packaging in India with capacity of 135,000MT. The company’s sales expanded at a CAGR of ~16% over the past decade. Uflex is further strengthening its presence in packaging market with forward integration into asepto packaging. Uflex is well poised to capitalize on the shift towards plastic packaging with capacity utilisation of ~61%. While “We at Uflex always work towards films stands at ~92% utilisation, it will benefit from capacity addition by 15% in FY21-22E. enhancing the experience and value Going forward with a favourable cycle in films and increasing utilisation in packaging, we proposition for our clients by adding expect strong growth of ~18% CAGR in EPS over FY19-21E. A well integrated business substantive value at every level of model makes Uflex well positioned to benefit from the healthy structural as well as the packaging supply chain.” cyclical demand drivers.
Investment highlights
Mr. Ashok Chatturvedi Uflex is well positioned to deliver notable top-line and bottom-line growth on the back of: Chairman integration and a diversified product portfolio;
ramp-up of the high-margin flexible packaging business;
improving supply-demand dynamics in the BOPET film industry aided by its diversified geographical presence;
product line extension following its entry into liquid packaging; and
a strong history of innovative solutions.
Uflex Corporation (Uflex) has a strong positioning being the fifth- largest BOPET films player globally and India’s leading flexible packaging producer with a ~25% share of the organised market
60 Edelweiss Securities Limited Uflex
Fig. 1: Investment thesis Global capacity utilisation is expected to increase from 76% in 2018 to 84% in 2021, leading to improvement in gross profit/kg.
Being the fifth-largest player in BOPET films globally, Uflex is likely to benefit from improving industry dynamics given spare capacity in global markets.
Improving BOPET films industry Well-integrated with The Indian liquid packaging presence in packaging films market is about 10bn packets as well as flexible packaging and is growing ~20% products, lending it resilience A large during downturns Well- Tetra Pak is a monopoly with a integrated global Entering player in market share of 90%; the rest is By product, 39% of sales with a liquid imports diversified packaging come from the packaging films and product packaging market business and balance 61% mix Uflex has entered the market from films; within packaging, business with an investment of INR5.3bn 19% (7% of overall sales) (3.5bn packs) and signed up over comes from holography 30 customers
Scale-up
of
packaging business
Uflex has a presence in the relatively high- margin flexible packaging business (which boasts higher stickiness) with a market share of ~25% in organised space in India.
Uflex is focusing on increasing the revenue share from packaging (about 2x profitability of films), which would improve returns ratios.
Uflex is well integrated with global I) Well integrated and diversified across products and geographies production capacity of 3,37,000TPA In the entire value chain of flexible packaging solutions, Uflex is well-integrated with a in films and 135,000TPA in packaging presence in packaging films and forward-integrated in flexible packaging products. The in India integration underpins it resilience to vagaries of the films industry.
Packaging films (61% of sales by value) – Uflex is the world’s fifith-largest supplier of BOPET films for flexible packaging applications. It also manufactures CPP and BOPP films. The company has an overall global films production capacity of 3,37,000TPA with facilities in India, Dubai, Mexico, Egypt, Poland and the US. Overall, films constitute about 71% of total installed capacity with BOPET accounting for 54%, PP 14% and CPP 3%.
Flexible packaging products (39% of sales by value) – Uflex is the largest flexible packaging company in India in the organised market with installed capacity of 135,000TPA
61 Edelweiss Securities Limited Plastic Films
(about 29% of total installed capacity). The company boasts technologically superior flexible packaging solutions for the packaged food, personal care and pharmaceutical industries. The company is also engaged in providing value-added holography (anti- counterfeiting) solutions, which helps distinguish products from look-alikes. The capacity is 8,600MT. Within packaging, the company derives 19% of sales (7% of overall sales) from the high-margin holography business.
Liquid Asepto packaging – Uflex recently forayed into liquid packaging at an investment Within films, 27% of sales come of INR5.3bn. Its current installed capacity is 3.5bn units per year, which will be expanded from high-growth Indian market to 7bn units per year at an additional investment of INR500mn. and 73% from high-margin overseas markets Geographic diversification: The company’s installed capacity is geographically diversified with exposure to India (29% in flexible packaging and 19% in packaging films), Dubai (packaging films, 11%), Mexico (packaging films, 13%), Egypt (packaging films, 16%), Poland (packaging films, 6%) and the US (packaging films, 6%). It thus caters to all major markets globally and benefits from better profitability as international markets are more profitable than domestic operations. Furthermore, proximity to customers ensures quick deliveries and better service to customers.
Table 1: Total capacity – Forward integrated Products India Dubai Mexico Egypt Poland USA Total I) Main Products Laminates/Pouches/Tubes/ 135,000 135,000 Big bags (TPA) Liquid packs (million packs) 3,500 3,500 Total flexible packaging 135,000 0 0 0 0 0 135,000 products PET Film (TPA) 54,000 52,000 60,000 30,000 30,000 30,000 256,000 PP Film (TPA) 30,000 35,000 65,000 CPP Film (TPA) 4,000 12,000 16,000 Total packaging films 88,000 52,000 60,000 77,000 30,000 30,000 337,000
II) Intermediary Products Poly Film (TPA) 6,000 6,000 Metalization (TPA) 33,600 4,800 15,600 18,000 10,800 10,800 93,600 Holography (TPA) 8,600 8,600 Inks & Adhesives (TPA) 41,000 41,000 Rotogravure Cylinders (Nos) 89,000 89,000 Packaging and Converting 1,570 1,570 Equipment (Nos) Source: Company
Uflex’s business is modelled for resilience to downturns given its presence in both film and flexible packaging
62 Edelweiss Securities Limited Uflex
Capacity diversified geographically
Chart 1: Overall sales value by region Overall capacity breakdown by region Africa RoW Films Poland USA Film Middle Films 1% Film 6% East Films 4% 6% 8% India India Flexible Europe Packaging Packaging Films 39% Egypt Film 29% 16% 16%
Mexico Film 13% Americas India Film Films 19% 16% India Films Dubai Film 16% 11% Source: Company, Edelweiss research
II) Moving up value chain with focus on high-margin packaging business Uflex is India’s largest flexible packaging company with a market share of ~25% in the domestic organised space, and is a supplies to all major multi-national and Indian companies. The company has three manufacturing facilities in the country with aggregate installed capacity of 135,000MTPA. We believe Uflex is well-positioned to capture the structural uptick, and expect its utilisation to rise from 61% to 75% over FY19-21E.
The flexible packaging business boasts superior realisation (~2.5x of films’) and Share of higher-margin packaging is margins (~2x profitability of films). The business also has higher customer expected to move up from 39% to stickiness given its solutions are bespoke. In fact, Uflex has been constantly 44% of sales over FY19–21E adopting an innovative approach, and is creating a niche for itself.
63 Edelweiss Securities Limited Plastic Films
Chart 2: Improving sales mix Flexible Liquid Hologram packaging packaging 7% (non- 0% hologram) Others 32% 39% FY19E sales mix Films 61% Others 68% Others Others 93% 100%
FY19E realisation INR363/kg INR728/kg INR169/kg NA
FY19E gross profit INR111/kg INR347/kg INR66/kg NA
Liquid Flexible Hologram packaging packaging 8% 5% 31% Others FYFY21E21E Sales sales Mix mix 44% Films 56% Others Others 69% 92% Others 95%
FY21E Realization FY21E realisation INR359/kg INR719/kg INR171/kg INR2/unit
INR118/kg INR361/kg INR70/kg 44.0% FY21E gross profit Source: Company, Edelweiss research
Furthermore, unlike films, profitability of the packaging business is relatively less cyclical; as a result, Uflex recorded lower erosion in core profit over FY11–14 than Polyplex Corporation (PCL).
III) Diversified geographical presence aids BOPET prospects
Uflex is a key player in BOPET films and is likely to benefit from improving industry dynamics. The company is operating at utilisation of about 92% and is expanding overall films (BOPET) capacity by 15% by setting up a 40,000MT plant in Hungary by FY21–22.
By films, end sales are diversified geographically with high-growth India making up 27% and high-margin overseas markets accounting for the remaining 73% (45% of overall sales).
64 Edelweiss Securities Limited Uflex
Fig. 2: Strategic advantages of plant locations
India Poland Dubai and Egypt Mexico
• Low cost of production • Low cost of production • Proximity to raw material • Low cost of production sources • One of the fastest growing • Gateway to European • Gateway to Mexico and the markets markets • Gateway to the Middle US markets East, African and Russian markets
Source: Company, Edelweiss research
We believe given healthy demand growth, the company can operate at full utilisation and capture the cyclical uptick. We estimate a volume CAGR of ~5% over FY19–21E. Given the ongoing upcycle, we Furthermore, with improved utilisation in BOPET films, we expect gross profit/kg to estimate the films division would improve from INR65.5 in FY19 (versus INR54 in FY18) to INR69.8 in FY21, implying a record an EBITDA CAGR of 9% over CAGR of 3% over FY19–21E. We estimate the division would clock an EBITDA CAGR FY19–21 of 9% over FY19–21.
Chart 3: Uflex’s film sales value by region Africa Films RoW Films 6% 2% India Films 26% Middle East Films 13%
Europe Films 26% Americas Films 27%
Source: Company IV) Aseptic liquid packaging – Duopoly to boost top line and margins Uflex is further strengthening its presence in the packaging market with forward integration into asepto packaging. Aseptic liquid packaging optimises the shelf life of products such as juices, non-aerated alcoholic beverages and highly perishable liquid consumables such as milk and other dairy products.
Globally, the market size is about 300bn units with Tetra Pak holding a market share of 63%. The market for high-margin aseptic packaging (EBITDA margin of 18–20%) in India is about 10bn packets and is growing about 20%. Tetra Pak has had a monopoly hitherto, with a market share of 90%. The rest of the demand is met through imports, mainly from China.
In India, the key end-user industries for asepto packaging include beverages (50%), alcohol (30%) and dairy (20%).
65 Edelweiss Securities Limited Plastic Films
Chart 4: Global and Indian Asepto market Global market size - 300bn India market size - 10bn units India market size - 10bn units units
Others Imports 30% 10% Dairy 20%
Bevera ges Tetra 50% Pak 63% Greatvi Alcohol ew Tetra 30% Aseptic pack 7% 90%
Source: Edelweiss research
Capacity in place Uflex has set up a 3.5bn-pack facility at Sanand, Gujarat, at an investment of INR5.3bn. The capacity can be doubled in the second phase at an investment of INR500mn. The company has already commissioned its first phase and is undertaking pilot production.
Uflex has set up a 3.5bn-pack It is also combining its rich experience in the packaging industry and offering value- asepto facility at an investment of added products such as holography, which makes the product much more attractive INR5.3bn, which can be doubled in and improves customer branding. Uflex’s competitors do not offer holography in the second phase at a relatively aseptic packaging. moderate investment of INR500mn Positioned as a reliable second source of supply While Uflex manufacturers the Aseptic packaging machines, its packaging materials can be used on any machine. Given Tetra Pak’s monopoly in the space, end customers do not have much pricing power. Hence, Uflex is positioning itself as a second source of supply and, therefore, does not get into a price war. We believe Uflex’s pricing strategy would help it build an enduring position in the space.
Customer acquisition on track; scale-up to drive growth The company has signed up with about 32 customers and trial runs are going on with another 67 customers. Customers are spread across the beverage (60% of customers), dairy (15%) and alcohol (25%) industries. Aseptic revenue is expected to flow in from FY20. We expect the company to report FY20E and FY21E revenue of INR3bn and INR5bn, and an EBITDA margin of 12% and 14%, respectively.
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Chart 5: Asepto packaging sales to pick up in FY20E 6,000 6.0
4,800 5.0 4.0 3,600
3.0 (%) 2,400 (INR mn)(INR 2.0
1,200 1.0
0 0.0 FY20E FY21E Sales, INRmn EBITDA. INRmn % Sales contribution % EBITDA Contribution Source: Company, Edelweiss estimates
V) Track record of launching innovative solutions makes it preferred vendor Uflex has the technical ability and innovative skills to design structures and barrier properties. We outline its key innovations below.
Pin-hole free soft-tempered foil for packaging: Conventionally, pharma companies use 30- and 40-micron soft-tempered strip foil pack laminates. Uflex has developed a 20-micron pin-hole free soft-tempered foil. It generates 36% more yield than the Pin-hole free soft-tempered foil popular laminate used in the industry with comparable barrier properties, and, therefore, cost savings for pharmaceuticals companies. The estimated global market size is USD20bn, and the company is targeting 2–3% (about USD500mn) over the next five–six years.
Uflex engineered Easy-Scoop-Lock-Tight Pitcher Bag for multinational food brands. The Easy-Scoop-Lock-Tight Pitcher Bag effortlessly dispenses controlled portions of food.
Uflex developed a retortable spouted stand-up pouch for cold beverages. Jo’s Snacks has partnered Uflex to launch a retortable spouted stand-up pouch for cold beverages such as milk, iced coffee and juices. The product has a six-month shelf The estimated global market size is life at room temperature without any need for cold chain storage. USD20bn, and the company is targeting 2-3% (about USD500mn) The company has launched the all-new high-barrier metallised polyster film: over the next five-six years. FLEXMETPROTECT F-HMB is either untreated or corona-treated on the other surface while metallisation is carried out on the specially treated composite surface that imparts metal adhesion or bond strength of >1,200 grams of force/inch.
Biodegradable plastics: Uflex is working towards the addressing the issue of waste plastic that does not get collected and ends up in landfill and ocean. Environment friendly biodegradable plastic, which is eaten by bacteria in coming in contact with soil, will be a substitute to multi-layer packaging. The leftover will be converted into bio-mass and good quality of fertilizers, which will further improve the productivity of soil.
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Fig. 3:Uflex’s key innovations
FLEXMETPROTECT F-HMB Easy-Scoop-Lock-Tight Pitcher Bag Retortable spouted stand-up pouch
Product innovation, quality enhancement at competitive price, and just-in-time deliveries make Uflex a preferred vendor for a range of companies worldwide.
Fig. 4: Uflex’s key customers
Product innovation, quality enhancement at competitive price, and just in time deliveries makes Uflex a preferred vendor
Source:Company
68 Edelweiss Securities Limited Uflex
Financial analysis
Sales-driven by spare capacity in packaging and higher realisation in films With the cycle turning favourable, we expect overall net sales to grow 20% YoY in FY19E (30% in We estimate an overall net sales packaging films and 8% in packaging, including Aseptic) and clock a CAGR of 10% over FY19–21E CAGR of 10% over FY19–21E driven (6% in packaging films and 17% in flexible packaging, including Aseptic). by CAGRs of 17% in packaging (including asepto) and 6% in Films – Volume growth to be driven by capacity addition in FY21: With utilisation of about packaging films 92% in films, the company is likely to capture the uptick in the films segment to the extent of only a 5% volume CAGR over FY19–21E. However, it plans to expand capacity by 15% by setting up a 40,000MT plant in Hungary by FY21–22, which would drive volume growth.
Packaging – capacities in place to capitalise the uptick: At utilisation of about 61%, there is room for strong volume growth over the next three years. The company targets to increase the share of revenue from the packaging business, which would improve margin and returns ratios. We expect sales CAGRs of 17% in packaging including asepto and 10% excluding asepto.
Chart 6: Overall sales growth: Value and volume CAGR in films and packaging 4,00,000 500 3,43,780 401 397 3,11,493 3,24,872 385 3,20,000 400
2,40,000 300 (MT) 1,60,000 /kg) (INR 200 165 158 168 1,00,759 82,302 89,795 1% CAGR 80,000 100
0 0 FY19E FY20E FY21E FY19E FY20E FY21E Film volume Packaging volume Film Realization Packaging realization
70,000 1,50,000
60,000 57,589 1,20,000 98,016 51,303 51,280 50,000 45,046 90,000 80,514 84,876
37,596 (INR mn)(INR 40,000 mn)(INR 60,000 33,004
30,000 30,000
20,000 0 FY19E FY20E FY21E FY19E FY20E FY21E Films Sales Packaging Sales Overall sales
Source: Company, Edeweiss estimates
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Improving cycle in BOPET and utilisation in packaging to lift margins With improved international sales of BOPET films, we expect gross profit/kg to improve from INR65.5 in FY19 (versus INR54 in FY18) to INR69.8 in FY21, implying a CAGR of 3% over We expect overall EBITDA CAGR of FY19–21E. As a result, we expect the films division’s EBITDA to expand at a CAGR of 9% over 14% over FY19–21E driven by a 20% FY19–21E. CAGR in packaging and 9% CAGR in packaging films We estimate overall EBITDA to increase at a CAGR of 14% over FY19–21E driven by an uptick in utilisation of the higher-margin packaging as well as asepto sales (EBITDA CAGR of 20% in packaging).
Chart 7: Overall EBITDA to rise at a healthy 15% CAGR over FY19–21E 9,500 14,500
8,200 13,000
6,900 11,500 (INR mn)(INR
5,600 mn)(INR 10,000
4,300 8,500
3,000 7,000 FY19E FY20E FY21E FY19E FY20E FY21E Packaging Films Overall EBITDA
RoCE to rise as utilisation ramps up With increasing utilisation in the In FY19, Uflex’s pre-tax RoCE was 10.3%, a reduction from 14% in FY12 following heavy packaging (61%) and asepto capex during FY11–13 in Mexico, Egypt, Poland and Kentucky. Furthermore, over the past segments, wherein INR5.3bn has three years, the company has incurred capex of INR6.8bn in the high-margin packaging been deployed, we estimate pre-tax business. Therefore, with increasing utilisation in the Asepto business and a higher asset RoCE to rise 286bps to 13.1% over turn across businesses (up from 1.3x to 1.5x), we estimate pre-tax RoCE would spring FY19–21E 286bps to 13.1% over FY19–21E.
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Chart 8: RoCE on an uptrend
Drags over FY12–18… …and likely to trend up over FY19–21E 11,000 14.5 5,000 14.5 14.1
9,000 13.0 4,000 13.1 13.0
7,000 11.5 3,000 11.5
11.0 (%) 10.5 (%) 10.3 10.2 10.3
(INR mn)(INR 5,000 10.0 (INR mn)(INR 2,000 10.0 9.5 9.2 9.4
3,000 8.5 1,000 8.5
1,973
9,974 5,307 1,429 4,367 7,259 7,133
2,000 4,000 4,000 1,000 7.0 0 7.0 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Capex RoCE Capex RoCE
Source: Company, Edelweiss research
Pre-tax RoCE is likely to inch up to Excise, corporate tax exemption benefits 11% in FY20E and spring to 13.1% in Uflex pays a MAT of 18.5% in India. It pays a tax of 25% in the US, 28% in Mexico, and 20% in FY21E compared with 9.5% in FY18 Egypt. In Dubai, it is subject to zero tax. Poland is exempted from tax for the next three years. The net effective tax rate will range between 18% and 20% over FY19–21E.
Chart 9: Tax rate to gradually increase 24.0
20.8 20.0 19.0 17.6 18.0
17.0 (%) 14.4
11.9 11.2 11.1
8.0 FY16 FY17 FY18 FY19E FY20E FY21E Tax rate
Source:Company, Edelweiss estimates
71 Edelweiss Securities Limited Plastic Films
Valuation
Strong earnings growth with reasonable valuation We are initiating coverage on Uflex with a ‘BUY’ and target price of INR326, implying potential upside of 52%. We estimate an EPS CAGR of ~18% over FY19–21E (versus 7% over FY15–18), and believe this would lead to a re‐rating of the stock, which is trading at FY21 PE of 3.4x and EV/EBITDA of 2.3x (FY20E P/E of 4.2x and EV/EBITDA of 2.7x).
Despite cyclicality of its business, Uflex has delivered CAGRs of 16% in sales and 7% in earnings over the past decade on the back of growth in packaging globally.
Outlook The favourable situation in the BOPET film industry is likely to sustain and industry capacity utilisation is likely to move up to 84% by 2021. For Uflex’s film business, we have factored in sales CAGR of 6% and EBITDA CAGR of 9% over FY19–21E.
The packaging business forward-integrates into the films business, wherein Uflex is one of leading players in India. It also benefits from higher realisation (2.5x films’) as well as margins (2x that of films). Being a customised product, packaging provides stability to the overall business and would help to reduce cyclicality of the films business in the long run.
Aseptic Liquid Packaging, a new venture wherein Uflex has infused capital of INR5.3bn, is another niche offering and would boost the company’s growth and profitability. We expect increased sales and EBIDTA contribution of 5% each from Asepto in FY21. For packaging as a whole (including aseptic), we expect Uflex to record CAGRs of 17% in sales and 20% in EBITDA over FY19–21E.
Overall, we expect the company’s top line and PAT to post a CAGR of 10% and 18%, respectively, over FY19–21E. RoE is expected to improve steadily by 196bps from 8.0% to 9.9%, and RoCE to rise by 286bps from 10.3% to 13.1%.
We have valued the company on an SoTP methodology as the packaging business warrants a higher multiple than the more cyclical films business. We have valued the packaging business at an EV/EBITDA of 6x and the films business at 3.3x on Q2FY21E, which yields a target price of INR326, implying potential upside of 52%. This works out to a consolidated FY21E EV/EBITDA of 2.9x.
We are ascribing the films segment value in line with its average EV/EBITDA for the past five years. Initiating with a “BUY”.
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Table 2: SoTP-based methodology Particulars Valuation methodology INR mn Value/Share (INR) Films business 3.3x Q2 FY21 EV/EBITDA 26,573 368 Packaging business 6x Q2 FY21 EV/EBITDA 31,205 432 Target EV 57,778 800 Less: Group company 35% 280 discount Less: Debt (INR mn) 18,600 258 Add: Cash (INR mn) 4,734 66 Less: Minority Interest (INR mn) 152 2 Target Equity Value (INR mn) 23,537 Number of shares (mn) 72 Target Price (INR/share) 326 Source: Edelweiss estimates
73 Edelweiss Securities Limited Plastic Films
Key Risks
Capital deployed in Aseptic: A bad or unenthusiastic reception for Uflex’s Aseptic product against the well-established Tetra Pak would adversely affect its return ratios as the company has infused INR5.3bn in this segment.
Historical issues: In 2010, promoter was convicted by the CBI in a case pertaining to allotment of land by the Noida authority for corporate group housing scheme for Uflex’s employees. The differential price had already been paid by the promoter. However, the appeal proceedings are pending with the high court concerned. The above case was filed against the promoter in his personal capacity and does not have any bearing on the company, or its operations and financial position.
Pricing power: Pass-through in packaging happens with a lag owing to intense competition. The industry also lacks stickiness as customers have many options given numerous industry players. These factors could have negative impact on margins.
Currency fluctuations: Overseas markets make up 43% of top line and therefore expose Uflex to foreign currency risk on account of both transactions and translation. The company’s overseas capacity is spread across Dubai, Poland, Mexico, USA and Egypt. Any adverse movement in the exchange rate can dent profitability.
74 Edelweiss Securities Limited Uflex
Company background
Uflex is headquartered in Noida, India, and is engaged in providing end-to-end flexible packaging solutions to customers, viz., packaging design and colour scheme, packaging structure, packaging products (value-added anti-counterfeiting solutions to prevent look- alikes from eroding brand equity of clients) and filling machines.
Operations are integrated via its presence in key verticals of the flexible packaging value chain, including manufacture of plastic films. It is the largest flexible packaging company in India and an emerging player in the global market. It has packaging films plants in India, Dubai, Mexico, Egypt, Poland and the US (aggregating 337,000TPA) and packaging products plants at multiple locations in India (aggregating 135,000TPA) accredited by ISO/BRC/HACCP.
The company’s clientele includes Perfetti, Nestle, P&G, Britannia, Frito-Lay, Tata, and Cadbury. Uflex has a strong global sales and distribution network with customers in about 140 countries, and employs about 8,000 trained and skilled persons globally.
Fig. 5: Milestones
1994 1997 2005 2009 2011 2013 Commissioned Commissioned Commissioned Commissioned Commissioned Commissioned 1st Line of 3rd BOPET line first BOPET first BOPET second BOPET Film BOPET and BOPET Film in at Noida, India Film and Film and in Mexico Metaliser Film Noida, India Metaliser Line Metaliser Line Commissioned first in USA in Dubai in Mexico CPP and BOPET Line in Egypt
1996 2001 2007 2010 2012 2018 Commissioned Commissioned Commissioned Commissioned Commissioned Commissioned 2nd Line of 2nd BOPP line second BOPET first BOPP Line BOPET and Asepto BOPET Film & in Noida, India Film in Dubai in Egypt Metaliser film packaging 1st BOPP Film line in Poland plant in Line in Noida, Sanand, India India
Source: Company
75 Edelweiss Securities Limited Plastic Films
Table 3: Uflex – Key management personnel Ashok Chaturvedi Chairman and Managing Director Mr. Ashok Chaturvedi is a first-generation entrepreneur and founder promoter of Uflex Group. He paved the way and captured the leadership position in the flexible packaging industry with his vision, dynamism, and passion for developing innovative packaging solutions over the last 35 years. He is revered as the ‘Father of the Flexible Packaging Industry in Rajesh Bhatia Group President (Finance & Mr.India’. Rajesh Bhatia is a commerce graduate and an associate Accounts); Global CFO member of The Institute of Chartered Accountants of India (ICAI). He has a rich 30-year experience in the fields of finance, accounts, taxation, administration, commercial and business development. In his last assignment, Mr. Bhatia served as the CFO and CEO of Jindal Steel & Power Limited –Global Business. He has had successful leadership stints in reputed organisations such as Dalmia Cement (Bharat) Limited, DCM Shriram Industries Limited (DCM Group), Starcon India Limited and Reliance Industries Limited. Amitava Ray Whole Time Director Mr. Amitava Ray is an honours graduate in Economics and Mathematics from Presidency College, Kolkata, and holds a PGDM from University of Calcutta. He has been associated with Uflex Group for over 17 years. At Uflex, he manages the packaging and allied businesses, including development of new and innovative packaging products. Prior to Uflex, Mr. Ray was Managing Director & CEO at India Foils Limited. He has also served as Executive Director of Bata India Limited and President of Indian Aluminum Company. Anantshree Chaturvedi Vice Chairman & CEO, Flex Films Mr. Anantshree Chaturvedi holds a graduate degree from International Babson College with a triple major in Finance, Global Strategic Management and Economics. He learned the trade of flexible packaging both domestically and internationally with hands-on experience as a trainee and apprentice in India, Mexico, Poland, Egypt, UAE and the USA and subsequently spearheaded the expansion of Uflex in the United States of America. He is currently serving as Vice Chairman Flex Films and is heading the overseas business. Mr. Chaturvedi is additionally vested with the responsibility of Global Product Stability, R&D and HR Protocols and also dons the hat of Chief Cultural Officer at Apoorvshree Chaturvedi Director – EU Operations & Mr.Uflex. Apoorvshree Chaturvedi is Director of European Union Sustainability Operations and Head of Corporate Sustainability Actions on ESG and growth-related ventures at Uflex Group. Mr. Chaturvedi is a Bachelor of History with a minor in Economics & Photography from The College of Arts & Sciences, New York University. He began his journey at Uflex in 2012 as a management trainee in the Middle East Ashwani Sharma President – New Business Mr. Ashwani Sharma, an MBA and graduate in Math and Initiatives Chemistry, has been driving large organisations globally. He has a rich experience of 28 years. His last assignment was with Asia Pulp & Paper, a USD25bn company based out of Jakarta, where he served as Managing Director. At Uflex, his responsibilities primarily involve steering the Big Bags & Tube verticals and the forthcoming project of Liquid Packaging as part of new business initiatives.
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Table 3: Uflex – Key management personnel (contd.) P L Sirsamkar President Technical & New Mr. P L Sirsamkar is an instrumentation and electronics Product Development (Films engineer and has been with the group for over 26 years. Prior to Business) joionng Uflex, he worked with several reputed organisations such as Garware and Polyplex. He has a rich experience of over 37 years in the packaging films business.
Chandan Chattaraj President – Human Resources Mr. Chandan Chattaraj is a postgraduate in industrial (India & Global) relationships & personnel management from XISS, Ranchi. Prior to Uflex, he worked at several reputed organisations such as Aircel and The Oberoi Group. Mr. Chattaraj has an strong 30- year experience in Human Resources. At Uflex, he heads the Human Resources function (India & Global). Ajay Tandon President - Engineering & New Mr. Ajay Tandon is a mechanical engineer and has been Product Development associated with Uflex Group for more than 19 years. He is a seasoned professional with total experience of over 42 years, particularly in the field of materials management, production, engineering and chemicals. At Uflex, he is responsible for engineering and new product development. Dinesh Jain President – Legal & Corporate Mr. Dinesh Jain is a gold-medalist postgraduate in management Affairs and law from the Agra university. He has been associated with Uflex Group for over 28 years. At Uflex, he is responsible for Legal and Corporate Affairs.
G.P. Pathak Vice President – Operations & Mr. G P Pathak is a postgraduate in science with an invaluable New Product Development experience of 31 years. He has been associated with Uflex Group (Holography Business) for the last 14 years. He is the founding member of Uflex Holography Business and has been managing its operations. Rajesh Bhasin Joint President – Chemicals Mr. Rajesh Bhasin has 29 years of experience in handling challenging and complex marketing assignments. Prior to Uflex, Mr. Bhasin held leadership positions at Pidilite, Jubilant Organosys and Essel Propack. At Uflex, he looks after the Chemicals business.
Source:Company
77 Edelweiss Securities Limited Plastic Films Financial Statements
Key Assumptions Income statement (INR mn) Year to March FY18 FY19E FY20E FY21E Year to March FY18 FY19E FY20E FY21E MACRO ASSUMPTIONS Net revenues 66,974 80,514 84,876 98,016 Raw material costs 40,359 49,849 51,500 58,794 GDP(Y-o-Y %) 6.7 7.1 7.1 7.3 Gross profit 26,614 30,664 33,376 39,222 Inflation (Avg) 3.6 3.7 4.0 4.5 Employee expenses 5,888 6,374 6,899 7,520 Repo rate (exit rate) 6.00 6.25 5.75 5.75 Other expenses 11,932 14,337 15,649 18,766 USD/INR (Avg) 64.5 70.0 72.0 72.0 Operating expenses 17,820 20,711 22,548 26,286 SECTOR ASSUMPTIONS Total expenditure 58,180 70,560 74,049 85,080 Crude price (Brent) 56.4 69.0 65.0 75.0 EBITDA 8,794 9,953 10,828 12,936 Y-o-Y rise % in Crude 15.1% 22.3% -5.8% 15.4% Depreciation & amortisation 3,516 3,905 4,116 4,754 FINANCIAL ASSUMPTIONS EBIT 5,278 6,048 6,711 8,183 Less: Interest Expense 1,971 2,335 2,461 2,842 Capacity Packaging Films (TPA) 337,000 337,000 343,000 347,000 Add: Other income 200 237 257 269 Capacity Packaging (TPA) 135,000 135,000 135,000 135,000 Add: Exceptional items 0 0 0 0 % increase in capacity of films 0% 0% 2% 1% Profit Before Tax 3,507 3,950 4,507 5,609 % increase in capacity of packaging 0% 0% 0% Less: Provision for Tax 417 711 856 1,122 Volume growth - Films (%) 7% 6% 4% 6% Reported Profit 3,090 3,239 3,650 4,487 Volume growth - Packaging ex Asepto (%)11% 6% 9% 12% Less: Except. Items (Net of Tax) 0 0 0 0 Realisation growth - Films (%) 1.0 22.0 -4.2 6.1 Minority interest (17) (17) (17) (17) Share of aasociates 32 32 32 32 Realisation growth - Packaging (%) 0.4 1.9 -3.9 3.2 Adjusted Profit 3,105 3,254 3,665 4,502 Revenue growth - Films (%) 8% 30% 0% 12% Equity paid up capital 722.1 722.1 722.1 722.1 Revenue growth - Packaging ex Asepto (%)12% 8% 5% 16% No. of Shares outstanding (mn) 72.2 72.2 72.2 72.2 Revenues in Asepto (INR mn) 0 3,000 5,000 Adjusted Basic EPS 43.0 45.1 50.8 62.3 Revenue growth - Packaging inc Asepto 12%(%) 8% 14% 20% No. of Dil. Sh.outstanding (mn) 72.2 72.2 72.2 72.2 Capacity utilisation - Films (%) 87% 92% 95% 99% Adjusted Diluted EPS 43.0 45.1 50.8 62.3 Capacity utilisation - Packaging (%) 57 61 67 75 Adjusted Cash EPS 91.7 99.1 107.8 128.2 EBIDTA - Films (INR/kg) Dividend per share (DPS) 2.0 4.0 4.0 4.0 Dividend Payout Ratio (%) 4.7 8.9 7.9 6.4 EBIDTA - Packaging (INR/kg) 55 48 48 50 EBIDTA per kg - Films growth (%) Common size metrics (% net revenues) EBIDTA per kg - Packaging growth (%) -22 -13 0 3 Year to March FY18 FY19E FY20E FY21E Gross margin 39.7 38.1 39.3 40.0 BALANCE SHEET ASSUMPTIONS Staff costs 8.8 7.9 8.1 7.7 Capex (INR mn) 7,133 2,000 4,000 4,000 SG&A expenses 17.8 17.8 18.4 19.1 Inventory (days) 67 64 69 66 Depreciation 5.2 4.9 4.9 4.9 Receivables (days) 98 94 95 89 Interest 2.9 2.9 2.9 2.9 EBITDA margins 13.1 12.4 12.8 13.2 Payable (days) 97 89 89 84 Net profit margin 4.6 4.0 4.3 4.6
-1.1 -0.8 0.4 0.4 Growth metrics (%) Year to March FY18 FY19E FY20E FY21E Revenues 8.8 20.2 5.4 15.5 Gross Profit 2.3 15.2 8.8 17.5 EBITDA 0.6 13.2 8.8 19.5 PBT (11.1) 12.6 14.1 24.5 Adjusted Profit (10.9) 4.8 12.6 22.8 EPS (10.9) 4.8 12.6 22.8
78 Edelweiss Securities Limited Uflex
Balance sheet (INR mn) Profitability ratios 2.86 As on 31st March FY18 FY19E FY20E FY21E Year to March FY18 FY19E FY20E FY21E Share capital 722 722 722 722 RoACE (%) 9.5 10.3 11.0 13.1 Reserves & surplus 38,922 40,874 43,073 45,774 RoAE (%) 8.1 8.0 8.6 9.9 Shareholder equity 39,644 41,596 43,795 46,496 Inventory (days) 66.7 64.2 68.9 65.7 Minority interest 152 152 152 152 Receivables (days) 98.0 94.0 94.9 88.6 Long term borrowings 10,550 11,600 11,350 11,100 Payables (days) 97.4 88.8 88.6 84.4 Short term borrowings 6,987 7,000 6,000 5,500 Cash conversion cycle (days) 67.4 69.3 75.3 69.9 Total Borrowings 17,536 18,600 17,350 16,600 Current ratio (x) 2.0 2.2 2.3 2.3 Long Term Liabilities & Provisions 298 221 228 231 Quick ratio 1.4 1.5 1.5 1.5 Deferred Tax Liability (net) 1,282 1,282 1,282 1,282 Cash ratio 0.2 0.2 0.3 0.2 Sources of funds 58,912 61,852 62,807 64,762 Receivable turnover (x) 3.7 3.9 3.8 4.1 Gross block 62,917 64,917 68,917 72,917 Inventory turnover (x) 5.5 5.7 5.3 5.6 Net Block 37,220 35,315 35,199 34,445 Payables turnover (x) 3.7 4.1 4.1 4.3 Capital work in progress 1,872 1,872 1,872 1,872 Gross Debt/EBITDA (x) 2.0 1.9 1.6 1.3 Intangible assets 87 87 87 87 Gross Debt/Equity (x) 0.4 0.4 0.4 0.4 Total Fixed Assets 39,178 37,273 37,157 36,403 Adjusted debt/Equity (x) 0.4 0.4 0.4 0.4 Non current investments 1,291 1,291 1,291 1,291 Net Debt/Equity (x) 0.4 0.3 0.3 0.2 Cash and cash equivalents 3,155 4,734 5,551 5,199 Interest coverage (x) 2.7 2.6 2.7 2.9 Inventories 7,968 9,560 9,877 11,276 Sundry debtors 19,390 22,059 22,091 25,511 Operating ratios (x) Loans and advances 2,232 2,232 2,232 2,232 Year to March FY18 FY19E FY20E FY21E Other Current Assets 3,667 3,667 3,667 3,667 Total asset turnover 1.2 1.3 1.4 1.5 Total current assets (ex cash) 33,258 37,518 37,867 42,686 Fixed asset turnover 1.9 2.2 2.4 2.8 Trade payable 11,964 12,292 12,699 14,497 Equity turnover 1.8 2.0 2.0 2.2 Other Current Liab. & ST Prov. 6,006 6,673 6,360 6,320 Total Current Liabilities & Prov. 17,970 18,964 19,059 20,817 Valuation parameters Net Current Assets (ex cash) 15,288 18,554 18,809 21,869 Year to March FY18 FY19E FY20E FY21E Uses of funds 58,912 61,852 62,807 64,762 Adjusted Diluted EPS (INR) 43.0 45.1 50.8 62.3 Book Value per share (INR) 549 576 606 644 Y-o-Y growth (%) (10.9) 4.8 12.6 22.8 Adjusted Cash EPS (INR) 91.7 99.1 107.8 128.2 Free cash flow (INR mn) Diluted P/E (x) 5.0 4.8 4.2 3.4 Year to March FY18 FY19E FY20E FY21E P/BV (x) 0.4 0.4 0.4 0.3 Reported Profit 3,090 3,239 3,650 4,487 EV/Sales (x) 0.4 0.4 0.3 0.3 Add: Depreciation 3,516 3,905 4,116 4,754 EV/EBITDA (x) 3.4 3.0 2.7 2.3 Interest 1,737 1,915 1,994 2,274 Dividend Yield (%) 0.9 1.9 1.9 1.9 Add:Others 249 435 482 583 Less: Changes in working cap. (2,365) (3,342) (249) (3,057) Operating cash flow 6,226 6,152 9,995 9,042 Less: Capex 7,133 2,000 4,000 4,000 Free cash flow (907) 4,152 5,995 5,042
Cash flow metrics (INR mn) Year to March FY18 FY19E FY20E FY21E Operating cash flow 6,226 6,152 9,995 9,042 Investing cash flow (4,224) (2,000) (4,000) (4,000) Financing cash flow (2,870) (2,573) (5,178) (5,393) Net cash flow (868) 1,579 817 (352) Capex (7,133) (2,000) (4,000) (4,000) Dividends paid (621) (1,302) (1,466) (1,801)
79 Edelweiss Securities Limited Plastic Films
Additional Data
Directors Data Mr. Ashook Chaturvedi Chairman and Managing Director Mr Achintya Karati Non-executive Director Mr. Amitava Ray Wholetime Director Lieutenant General (Dr.) Arvind mahajan (Retd.) Non-executive Director Mrs. Indu Liberhan Non-executive Director Mr. Pradeep Poddar Additional Director Mr. Tara Sankar Sudhir Bhattacharya Non-executive Director Mr. V Anish Babu Non-executive Director
Auditors - M/s KAAP & Associates
*as per last available data
Holding - Top 10 Perc. Holding Perc. Holding IL&FS Trust Co Ltd 4.61 Lazard Ltd 0.23 Montage Enterprises Pvt Ltd 4.11 WisdomTree Investments Inc 0.21 Dimensional Fund Advisors LP 1.97 AXA SA 0.19 Life Insurance Corp of India 1.5 State of California 0.16 Principal Financial Group Inc 0.23 Van Eck Associates Corp 0.15 *as per last available data
Bulk Deals Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades Reporting Data Acquired / Seller B/S Qty Traded
No Data Available
*in last one year
80 Edelweiss Securities Limited s
p COMPANY UPDATE
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ESSEL PROPACK a i
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n I India Equity Research| Plastic Films
While Essel Propack (EPL) is targeting 15% uptick in FY20 revenue on top EDELWEISS RATINGS of 12% in FY19, we believe 10% is more realistic as: a) growth in India Absolute Rating HOLD lacks visibility; and b) growth in Americas/Europe is yet to normalise. Investment Characteristics None With performance expected to remain similar to past trend, we expect
EPL to continue to trade close to its long-term average one-year forward MARKET DATA (R: ESSL.BO, B: ESEL IN) EV/EBITDA average of 7.5x. Moreover, Blackstone’s announcement that it will acquire 51% stake in EPL from promoters and then launch an open CMP : INR 133 Target Price : INR 140 offer for an additional 26% at INR139/share will cap the stock’s upside over the medium term. Hence, given the limited upside, maintain ‘HOLD’. 52-week range (INR) : 138 / 85 Our target multiple of 8x H1FY21E EV/EBITDA is in line with EPL’s long- Share in issue (mn) : 315.3 term average and yields TP of INR140. M cap (INR bn/USD mn) : 42 / 590 Avg. Daily Vol. BSE/NSE (‘000) : 204.4
Europe revives; India remains volatile SHARE HOLDING PATTERN (%) The India business posted muted sales growth of 4.3% in FY18 in the wake of the GST Current Q3FY19 Q2FY19 rollout. After a bounce back in Q3FY19, sales turned negative again in Q4FY19 – down Promoters * 57.0 57.0 57.1 1% YoY – impacted by customer uptake issues. Europe, being the largest tube market, MF's, FI's & BKs 3.5 3.5 4.1 continues to be EPL’s focus. It turned in a good revenue performance – up 15% YoY in FII's 16.3 16.3 15.9 FY19 – driven by oral and non-oral categories. FY19 marks a revival in Europe. Others 23.2 23.2 22.8
* Promoters pledged shares : NIL PE major Blackstone to acquire majority stake; triggers open offer (% of share in issue)
Blackstone has announced it would acquire a 51 % stake from EPL promoters at PRICE PERFORMANCE (%) INR134/share. The transaction has triggered a mandatory open offer for purchase of BSE Midcap Stock over an additional 26%, whose price has been fixed at INR139.19/share. Besides, the CEO Stock Index Index Mr. Ashok Goel will step down and be declassified as promoter. The private equity firm 1 month (6.3) 13.6 19.9 plans to accelerate growth in end-categories such as beauty, cosmetics and 3 months 0.4 21.9 21.4 pharmaceuticals, leveraging industry growth in laminated tubes and EPL's leadership 12 months (11.6) 2.9 14.5 in oral care.
Outlook and valuation: Limited upside; maintain ‘HOLD’
With performance expected to remain similar to past trends, we expect EPL to
continue to trade close to its long-term average one-year forward EV/EBITDA of 7.5x. Given the limited upside, we maintain ‘HOLD’ with a TP of INR140. The open offer price of INR139 is likely to cap the stock in the short-to-medium term.
Financials (INR mn) Year to March FY18 FY19 FY20E FY21E Net Revenues 24,239 27,069 29,770 32,510 EBITDA 4,649 4,991 5,719 6,283 Shradha Sheth Adjusted Profit 1,749 1,905 2,479 2,787 +91 22 6623 3308 Diluted EPS (INR)* 5.6 6.0 7.9 8.8 [email protected] Diluted P/E (x) 23.9 22.0 16.9 15.0 EV/EBITDA (x) 10.0 9.3 8.1 7.4
ROAE (%) 15.4 14.6 16.9 16.8 *Adjusted for bonus issue May 13, 2019 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL
Plastic Films
Key growth driver: Scaling up non-oral care The market for tubes is huge at about 36bn units in the countries EPL operates in. Out of this, oral care tubes account for 14bn, beauty & cosmetics 12bn and pharma & others 10bn. Beauty & cosmetics applications predominantly pertain to extruded plastic tubes and bottles, and pharma applications to aluminum tubes.
Chart 1: Tube market size by volume Overall tube market - 36bn units
Pharma & Others Oral care 28% 39%
Beauty & Cosmetics 33%
The company has established global leadership in the oral care category via its laminated tubes. Globally, oral care is growing 3–4% in terms of tonnage. The growth rate varies from 1–6% across geographies. The non-oral care tube market is much larger by value, three times or more as much as the oral care tube market, which the company is keenly eying. We believe the non-oral care category globally holds good growth potential over the next few years as new- generation laminated tubes are replacing aluminum tubes and bottles. Non-oral care category clocked a strong 23% CAGR over FY16-19, thereby increasing its contribution to overall sales from 29% to 42% over the period. However, on a high base in FY19, we estimate the category to grow at 4% over FY19–21 and its contribution to overall sales to moderate to 38% in FY21. Chart 2: Sales growth: Oral versus non-oral care
25,000
21,000
17,000
(INRmn) 13,000
9,000
5,000 FY16 FY17 FY18 FY19E FY20E FY21E Oral care revenues (INR mn) Non-Oral care revenues (INR mn)
Source: Company
82 Edelweiss Securities Limited Essel Propack
Chart 3: Revenue breakdown by category: Non-oral likely to rise from 29% in FY16 to 38% in FY21 Non-oral FY16 FY21 care revenues Non-oral 29% care revenues 38%
Oral care revenues Oral care 62% revenues 71%
Source: Company
Growth driver by geography After a muted FY18 marked by sales Africa, Middle East & South Asia (AMESA; 34% of sales; 40% of profitability) growth of 4.3%, FY19 is stabilising in The region is serviced by the company’s five units across India and Egypt. India with growth likely to be driven by the stabilising pharma segment While sales growth in India was muted at 4.3% in FY18 in the wake of the GST rollout, EPL continued its new customer and product development efforts, particularly targeting the pharma and cosmetics categories:
o Pharma: It is already making a comeback as the impact of new regulations has AMESA, driven by opportunities in stabilised. In fact, EPL is now the leading solution provider in India as aluminum tubes the cosmetics and pharmaceuticals used in pharmaceuticals are being increasingly replaced with laminated tubes. categories, is expected to clock o The ramp-up at the new unit (capacity of 220mn tubes, currently running at CAGRs of 10% in sales and 13% in 15mn/month) in Assam, which came on stream in July. EBITDA over FY19–21E The subsidiary in Egypt continues to sustain strong growth with the share of non-oral care in revenue increasing by 6pp to 41%.
AMESA continues to promise significant growth opportunities especially in the cosmetics & pharma categories, wherein growing population, low per capita consumption, changing aspirations and increasing disposable income are seen to drive consumption in a big way. We estimate the region would clock CAGRs of 10% in sales and 13% in EBITDA over FY19–21E.
83 Edelweiss Securities Limited Plastic Films
Chart 4: Sales and EBITDA contribution of AMESA region FY19 Sales Mix FY19 EBITDA Mix
AMESA 34% AMESA 40%
RoW RoW 60% 66%
Source: Company
Americas (21% of sales; 21% of profitability) While the extruded plastic tube unit has been closed in the US, the laminated plastic With Colombian operations tube unit is actively marketing new-generation laminated tubes to non-oral care stabilising and higher non oral care customers. category sales in the US and Mexico Mexico has a relatively high contribution from the non-oral category (about 35%). The units, the region is poised for strong new plant in Colombia is fast stabilising and the company is looking at exports from the 9% sales CAGR and 8% EBITDA unit to drive sales. CAGR over FY19-21E The region turned in sales CAGR of 8% over FY16–19. With Colombian operations improving further and higher non-oral care category sales in the US and Mexico units, the region is poised for an improved performance. Hence, we estimate the region would clock strong sales CAGR of 9% and EBTIDA CAGR of 8% over FY19–21E.
Chart 5: Sales and EBITDA contribution of Americas region FY19 EBITDA Mix FY19 Sales Mix AMERICAS 21% AMERICAS 21%
RoW 79% RoW 79% Source: Company
84 Edelweiss Securities Limited Essel Propack
Europe (21% of sales; 12% of profitability) The company sells both laminated tubes and extruded plastic tubes in Europe. It has manufacturing plants in Poland, Russia and Germany.
Relocation of its Russian unit to a nearby location to upgrade its Pharma offerings, is complete and operations have commenced.
Germany – Soon after the acquisition of EDG (increased stake in JV from 26% to 51%) in October 2016, the company faced customer attrition on account of servicing issues. Post the relocation of Russia, However, a number of initiatives helped to stabilise unit’s operations and efficiencies stabilization of Germany post EDG began to flow in by June 2017. acquisition, debottlenecking of Being the largest tube market, Europe continues to be EPL’s focus. Its small market Poland and Russia we estimate the share currently can get a boost from new product and business development in a region to clock sales and EBITDA structured way backed by its new generation laminated tubes and advanced CAGR of 9% each over FY19-21E capabilities in decoration. The Poland unit is also in the process of de-bottlenecking its extruded plastic tube capacity to address the changing customer specifications. New customers are being developed in Russia to drive top line and bring it back to profit while capacity de-bottlenecking and facility improvements are under way for the next financial year. After a sales CAGR of 19% over FY16–19, Europe would clock CAGRs of 9% in sales and 9% in EBITDA over FY19–21E.
Chart 6: Sales and EBITDA contribution of Europe region FY19 EBITDA Mix FY19 Sales Mix Europe Europe 21% 12%
RoW 79% RoW 88% Source: Company
East Asia Pacific (24% of sales; 28% of profitability) Manufacturing presence in the region in China and the Philippines. With the Philippines largely non-oral For long, China has been a large and successful operation in the oral care category. But driven and growth in the China in recent years, the off-take by key customers in this category has decreased, even business likely to be restored, the though wallet share has been maintained. With a view to restoring growth, the China region is well poised to clock CAGRs subsidiary has been steadily expanding its innovation and technical capabilities for of 11% in sales and 12% in EBITDA manufacture of high-value new-generation laminated tubes catering to the cosmetics, over FY19–21E pharmaceuticals, foods and niche premium oral care categories. The increase in wages is a cause for concern. However, EPL is countering this through greater investments in automation.
85 Edelweiss Securities Limited Plastic Films
With the Philippines making up a large part of the sales and profitability in the non-oral care category and growth in China likely to be restored, the region is well poised to grow in the non-oral care category. We estimate the region would clock sales CAGR of 11% and EBITDA CAGR of 12% over FY19–21E.
Chart 7: Sales and EBITDA contribution of East Asia Pacific region FY19 Sales Mix FY19 EBITDA Mix EAP 24% EAP 28%
RoW RoW 76% 72%
Source: Company
86 Edelweiss Securities Limited Essel Propack
Company Description EPL, earlier known as Essel Packaging, was incorporated in 1982 and is part of the Essel Group. The company is one of the largest specialty packaging players globally manufacturing laminated plastic tubes, extruded plastic tubes, caps & closures and flexible laminates. Its products are extensively used in packaging of oral care products, cosmetics, food and pharmaceuticals. EPL sells over 6bn tubes to over 400 clients globally. The company’s clientele includes the world’s biggest oral and non-oral care players such as Colgate, Unilever, P&G and GSK. It has manufacturing operations at 25 facilities in 12 countries across the world.
Investment Theme Innovation DNA spurring market share gains: The packaging industry has been innovation-driven. EPL has enhanced its laminated tubes market share from ~28% in CY02 to ~34% currently, a feat it accomplished owing to sizeable investments in innovation. R&D and innovation have been the company’s unequivocal hallmarks, enabling it to pioneer the paradigm shift in packaging and thereby redefining the market and unlocking growth potential.
RoE kickers: Non-oral care focus, turnaround in subsidiaries To propel growth, EPL has set sight on the global 22bn tubes non-oral market. We expect strong growth in non-oral revenue, riding conversions in the US and Europe and growth in cosmetics, foods & pharma in China and India. Oral care is expected to remain the cash cow and log stable revenue growth. Earlier, losses in the Americas and Europe had hammered EPL’s performance. However, these subsidiaries are now turning around.
Key Risks Sustained uptick in crude prices EPL’s raw materials are crude oil-based polymers, which are highly correlated to the movement in crude prices (r=0.78). Though its contracts generally include a pass-through clause, the pass-through happens with a lag. In the past too, a significant increase in crude/polymer prices had dented margins.
Pace of adoption/conversion to laminated packaging in non-oral segments Growth is likely be driven by the non-oral segment, particularly in China and India. Though the overall non-oral market (food, cosmetics and pharma) is expected to grow at 8%-plus, EPL’s higher growth hinges on the increase in penetration/adoption of laminated packaging.
87 Edelweiss Securities Limited Plastic Films
Financial Statements
Key Assumptions Income statement (INR mn) Year to March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E Macro Net revenue 24,239 27,069 29,770 32,510 GDP(Y-o-Y %) 6.7 7.1 7.1 7.3 Materials costs 10,366 11,648 12,679 13,874 Inflation (Avg) 3.6 3.7 4.0 4.5 Gross profit 13,873 15,421 17,091 18,636 Repo rate (exit rate) 6.0 6.3 5.8 5.8 Employee costs 4,338 5,006 5,406 5,839 USD/INR (Avg) 64.5 70.0 72.0 72.0 Other Expenses 4,886 5,424 5,966 6,515 Company EBITDA 4,649 4,991 5,719 6,283 Rev. growth - AMESA (%) (4.7) 2.7 10.3 9.1 Depreciation 1,671 1,861 1,894 2,025 Revenue growth - EAP (%) 3.9 16.2 10.9 10.2 EBIT 2,978 3,130 3,825 4,258 Rev. growth -Americas(%) 1.2 20.6 9.0 8.7 Less: Interest Expense 550 613 524 501 Rev. growth - Europe (%) 17.1 14.8 9.4 8.8 Add: Other income 263.7 285.1 346.21 343.57 EBIT margins - AMESA (%) 15.1 13.3 14.3 15.1 Profit Before Tax 2,642 2,833 3,647 4,101 EBIT margins - EAP (%) 15.8 15.7 16.2 16.5 Less: Provision for Tax 889 932 1,131 1,271 EBIT margins-Americas(%) 12.5 13.9 13.9 14.0 Less: Minority Interest 26 29 37 43 EBIT margins -Europe(%) 2.4 3.1 3.9 4.3 Add: Exceptional items (50) 31 - - Capex (INR mn) 1,405 2,970 2,421 2,587 Associate profit share (10) 53 - - Debtor days 63 64 63 63 Reported Profit 1,716 1,925 2,479 2,787 Inventory days 75 77 78 78 Exceptional Items (33) 20 - - Payable days 59 62 62 62 Adjusted Profit 1,749 1,905 2,479 2,787 Shares o /s (mn) 315 315 315 315 Adjusted Basic EPS 5.6 6.0 7.9 8.8 Diluted shares o/s (mn) 315 315 315 315 Adjusted Diluted EPS 5.6 6.0 7.9 8.8 Adjusted Cash EPS 10.8 12.4 14.4 15.9 Dividend per share (DPS) 2.6 1.4 1.9 2.3 Dividend Payout Ratio(%) 23.4 23.4 24.6 25.7
Common size metrics Year to March FY18 FY19 FY20E FY21E Materials costs 42.8 43.0 42.6 42.7 Staff costs 17.9 18.5 18.2 18.0 S G & A expenses 20.2 20.0 20.0 20.0 Operating expenses 80.8 81.6 80.8 80.7 Depreciation 6.9 6.9 6.4 6.2 Interest Expense 2.3 2.3 1.8 1.5 EBITDA margins 19.2 18.4 19.2 19.3 Net Profit margins 7.3 7.1 8.5 8.7
Growth ratios (%) Year to March FY18 FY19 FY20E FY21E Revenues 5.3 11.7 10.0 9.2 EBITDA 10.2 7.4 14.6 9.9 PBT (3.3) 7.2 28.7 12.5 Adjusted Profit (2.4) 8.9 30.1 12.4 EPS (2.4) 8.6 30.1 12.4
88 Edelweiss Securities Limited Essel Propack
Balance sheet (INR mn) Cash flow metrics As on 31st March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E Share capital 315 631 631 631 Operating cash flow 3,437 5,098 3,796 4,629 Reserves & Surplus 12,191 13,249 15,119 17,189 Financing cash flow (1,540) (2,585) (1,120) (1,104) Shareholders' funds 12,506 13,880 15,750 17,819 Investing cash flow (1,560) (2,717) (2,074) (2,244) Minority Interest 43 52 89 132 Net cash Flow 337 (204) 601 1,281 Long term borrowings 4,492 4,693 4,600 4,600 Capex (1,405) (2,966) (2,421) (2,587) Short term borrowings 2,848 1,126 1,232 1,346 Dividend paid (478) (451) (609) (717) Total Borrowings 7,340 5,819 5,832 5,946
Long Term Liabilities 367 327 327 327 Profitability and efficiency ratios Def. Tax Liability (net) 302 436 601 787 Year to March FY18 FY19 FY20E FY21E Sources of funds 20,558 20,513 22,599 25,011 ROAE (%) 15.4 14.6 16.9 16.8 Gross Block 16,981 19,950 22,371 24,958 ROACE (%) 16.9 17.2 20.1 20.2 Net Block 11,234 12,532 13,058 13,621 Inventory Days 75 77 78 78 Capital work in progress 321 306 306 306 Debtors Days 63 64 63 63 Intangible Assets 703 649 649 649 Payable Days 59 62 62 62 Total Fixed Assets 12,258 13,486 14,012 14,575 Cash Conversion Cycle 79 79 79 79 Non current investments 131 168 168 168 Current Ratio 3.1 2.5 2.7 2.9 Cash and Equivalents 1,735 1,344 1,945 3,227 Gross Debt/EBITDA 1.6 1.2 1.0 0.9 Inventories 2,864 3,234 3,543 3,877 Gross Debt/Equity 0.6 0.4 0.4 0.3 Sundry Debtors 4,590 4,934 5,383 5,879 Adjusted Debt/Equity 0.6 0.5 0.4 0.4 Loans & Advances 1,128 238 400 400 Net Debt/Equity 0.4 0.3 0.2 0.2 Other Current Assets 1,661 1,723 2,191 2,393 Interest Coverage Ratio 5.4 5.1 7.3 8.5 Total current assets 10,243 10,129 11,517 12,548
Trade payable 1,884 2,065 2,248 2,460 Operating ratios Other Current Liab 1,924 2,549 2,796 3,047 Year to March FY18 FY19 FY20E FY21E Total Current Liab 3,808 4,614 5,044 5,507 Total Asset Turnover 1.2 1.3 1.4 1.4 Net current assets 6,435 5,515 6,473 7,042 Fixed Asset Turnover 2.0 2.2 2.2 2.3 Uses of funds 20,558 20,513 22,599 25,011 Equity Turnover 1.7 1.6 1.4 1.4 BVPS (INR) 39.8 44.0 50.0 56.5
Contingent Liability 782.6 782.6 782.6 782.6 Valuation parameters Year to March FY18 FY19 FY20E FY21E
Free cash flow (INR mn) Adj. Diluted EPS (INR) 5.6 6.0 7.9 8.8 Year to March FY18 FY19 FY20E FY21E Y-o-Y growth (%) (2.4) 8.6 30.1 12.4 Reported Profit 1,716 1,925 2,479 2,787 Adjusted Cash EPS (INR) 10.8 12.4 14.4 15.9 Add: Depreciation 1,671 1,861 1,894 2,025 Diluted P/E (x) 23.7 21.8 16.9 15.0 Interest (Net of Tax) 365 411 362 345 P/B (x) 3.3 3.0 2.6 2.3 Others (315) 900 (939) (528) EV / Sales (x) 2.0 1.7 1.5 1.4 Less: Changes in WC 489 (880) 958 568 EV / EBITDA (x) 10.1 9.2 8.1 7.4 Operating cash flow 3,437 5,098 3,796 4,629 Dividend Yield (%) 1.9 1.1 1.5 1.7
Less: Capex 1,405 2,966 2,421 2,587 Free Cash Flow 1,543 3,012 417 1,473
89 Edelweiss Securities Limited Miscellaneous
Additional Data Directors Data Dr. Subhash Chandra Non- Executive Chairman Ashok Goel Vice Chairman & MD Atul Goel Director Boman Moradian Independent Director Mukund Chitale Independent Director Radhika Pereira Independent Director
Auditors - MGB & Co LLP *as per last available data
Holding – Top10 Perc. Holding Perc. Holding Goel ashok kumar 56.67 Ntasian discovery ma 5.31 Fil limited 3.67 Clareville cap opp m 3.04 Gagandeep credit cap 2.21 Norges bank 1.75 Government pension f 1.75 Dimensional fund adv 1.4 Shamyak invest 1.32 Veena investments pv 1.2
*as per last available data
Bulk Deals Data Acquired / Seller B/S Qty Traded Price
No Data Available
*as per last available data
Insider Trades Reporting Data Acquired / Seller B/S Qty Traded
No Data Available
*as per last available data
90 Edelweiss Securities Limited Essel Propack
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400, Email: [email protected]
Aditya Narain Head of Research [email protected]
Coverage group(s) of stocks by primary analyst(s): Miscellaneous AIA Engineering, Apar Industries Ltd, Balkrishna Industries, CCL Products India, Essel Propack, Orient Refractories, Sheela Foam Ltd, Vesuvius India, VIP Industries ` Recent Research Date Company Title Price (INR) Recos 07 -May-19 VIP Volumes on a roll; sharpening 430 Buy Industries margin focus; Result Update 02-May-19 Vesuvius Banking on domestic boost; 1,129 Buy India Visit Note 05-Apr-19 Vesuvius Domestic and technology 1,143 Buy India leadership boost; Company Update
Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation
Buy Hold Reduce Total Rating Expected to Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period * 1stocks under review Hold appreciate up to 15% over a 12-month period > 50bn Between 10bn and 50 bn < 10bn Reduce depreciate more than 5% over a 12-month period Market Cap (INR) 156 62 11
91 Edelweiss Securities Limited
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92 Edelweiss Securities Limited Essel Propack
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