>UFLEX: Packaging profits (ELARA CAPITAL)

■ Strong foothold in packaging market
Uflex is the largest flexible packaging company as well as the lowest cost producer of packaging products in India with a 19% share of the organized market. The company operates as a converter of packaging products with a presence in both the plastic film and flexible packaging business. The unique strength of Uflex is its vertically integrated operations, offering ‘end to end’ packaging solutions to marquee FMCG companies like Unilever, Nestle, P&G, Britannia and Fritolay among others. Thus it captures margins across the value chain – from plastic film production to flexi-pack conversion and to the final packing of a variety of FMCG products.

■ Ambitious expansion plans to become a global player
The company is planning to aggressively grow over FY10-12E with an investment of over USD250mn. Uflex will setup plastic film plants in Egypt, Mexico and Dubai and a flexi-pack plant in the state of J&K. This would enable it to increase capacity by nearly 65% in the plastic business and over 50% in the flexi-pack vertical. We expect the top line and the bottom-line to grow at a CAGR of 22% and 27% respectively, over FY10-13E. The company plans to raise INR2bn by way of right issue in the current year and over INR8bn of debt. We expect net debt
levels to reduce to 0.5x by FY13E from current 1.2x.

■ Steep cost efficiencies, changing business mix to widen margins
The company’s cost efficient raw material conversion play has been the biggest differentiator vis-à-vis peers. It’s conversion price, after attaching profit margins, remains the conversion cost of other global peers. Considering an equal EBITDA margin, Uflex price per kg is nearly 25% lower than international peers, leaving a significant headroom for it to attract large global clients. The company strategy to hike the contribution from flexi-packs to total revenues and to tap the
high margin world markets will play a key role in augmenting EBITDA margins by about 100bps.

Valuation
At the CMP, Uflex trades at a P/E of 4.5x and 3.5x FY11E and FY12E earnings respectively. We believe the stock will undergo a significant P/E expansion on account of its strong foothold in the
packaging market, aggressive growth plans and expectation of improving margins. We have assigned Uflex a target multiple of 6x on its FY12E earnings of INR31.6 per share that derives a per share value of INR190. We initiate the coverage with a BUY rating and a target price of INR190 per share, providing an upside potential of 73% from the current market price.

To read the full report: UFLEX