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Huhtamaki Vs Paper Products: A perspective - Views on News from Equitymaster

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Huhtamaki Vs Paper Products: A perspective
Apr 10, 2006

The FMCG sector has witnessed improving times in the past few quarters, backed by resurgence in demand in both the rural and urban areas. As a consequence of this, FMCG ancillary companies have also been high on the growth radar. Paper Products is one such company, catering to the packaging requirements of FMCG players. In this article, we compare the company with its parent, Huhtamaki, for whom the Indian subsidiary is one of its favored ones.

About Huhtamaki
The Huhtamaki Group is the world leader in thin-walled plastic and paper packaging and caters to the need of three sectors – fast-moving consumer goods, food service and fresh foods. Its products include plastic and paper cups for McDonald's and other food service customers, packaging for dairy products, frozen meals, fresh produce, and disposable tableware. The company has 70 manufacturing facilities in more than 30 countries across the globe.

Huhtamaki in a nutshell…
(Rs m) CY02 CY03 CY04 CY05 CAGR
Net Sales 105,588 119,084 128,426 121,176 4.7%
EBITDA 25,317 18,869 18,126 10,271 -26.0%
Operating margin % 24.0% 15.8% 14.1% 8.5%  
Net profit after Tax(Loss) 4,163 2,052 3,141 508 -50.4%
Net profit margin % 3.9% 1.7% 2.4% 0.4%  
EPS 40.6 20.0 30.6 4.1  
P/E ratio (x)       183.2  
US$ 1 = Rs 45          

About Paper Products
Paper Products Limited (PPL) is India's leading manufacturer of primary consumer packaging and labelling materials. The company has a history of over seven decades in the packaging field and its product folio includes flexible packaging, labelling technologies and specialised cartons. It has three fully integrated manufacturing units at Thane, Silvassa and Hyderabad. The company's client list includes HLL, Nestle, Cadbury, Britannia, Glaxo Smithkline, Coca Cola, Perfetti, Dabur, Marico and P&G. Exports constitute around 14% of total revenues and the company's international division services large multinationals like Nestle, Unilever, Cadbury and Colgate Palmolive across 4 continents. In 1999, the company became a subsidiary of Huhtamaki, a global leader in consumer packaging, who holds a 59% stake in the company.

Paper products in a nutshell…
(Rs m) CY02 CY03 CY04 CY05 CAGR
Net Sales 3,222 3,826 3,940 4,329 10.3%
EBITDA 561 563 508 547 -0.8%
Operating margin % 17.4% 14.7% 12.9% 12.6%  
Net profit after Tax(Loss) 251 279 241 277 3.2%
Net profit margin % 7.8% 7.3% 6.1% 6.4%  
EPS 20.1 22.3 19.2 22.1  
P/E ratio (x)       19.0  

  PPL as a % of
Huhtamaki (CY05)
Net Sales 3.57%
EBITDA 5.32%
Net profit after Tax(Loss) 54.5%
As can be seen from the table alongside, Paper Products is almost half the size of Huhtamaki, as far as the bottomline is concerned. However, it must be noted that Huhtamaki is currently undergoing a restructuring for which it had incurred heavy costs in CY05. Huhtamaki’s first stage of restructuring is over, and the second stage is likely to be completed by the end of CY06. As far as revenue growth is concerned, the parent besides India mostly operates in highly competitive and saturated markets like the US and Europe. Also, unlike India (laminates 84%), the parent’s portfolio is divided into two segments, food (34%) and consumer products (66%). These segments are relatively low margin businesses.

What to expect?
The consumption of flexible packaging films in India is currently low relative to international markets. According to PCI Films Consulting Limited - Polyester Films quarterly business report (3Q02), India's per capita annual consumption of flexible packaging of approximately US$ 4 compares poorly in related to South East Asian countries like Taiwan and South Korea (US$ 27). This highlights the potential for future growth. The demand for Biaxial Oriented Polyethylene Terephtlate (BOPET) films in India is expected to grow at an annual average growth rate of approximately 14.3% from 2003-2008. Growth in consumption of western-style snack products, confectionery, baked goods combined with increasing hygiene consciousness amongst the population will result in even traditional food manufacturers using flexible packaging.

More importantly, as per Huhtamaki, consumer packaging is a stable and relatively non-cyclical business characterized by good cash flow as well as relatively stable profit margins. Consumer packaging displays a long-term growth rate slightly above GDP growth. Business cycles do not significantly affect overall demand, but upswings tend to shift demand to higher value added packaging, while the opposite is true in downswings.

PPL, being the largest organised player in the consumer packaging and labelling segment, is not easily dispensable, considering the importance of its packaging material for FMCG companies. Going forward, as the FMCG sector is able to corner a higher share of the consumer's wallet, we expect the company to benefit. With PPL's new capacity likely to come on-stream by 3QCY06, we believe that the company will in a better position to grow its topline at a faster pace.

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