>PAREKH ALUMINEX LIMITED: Demand drivers

Q3FY12 & 9MFY12 Results:
During Q3FY12, net profit surged by 42.3% to `22.2 crore (`15.6 crore) on 50.0% higher sales of `345.0 crore (`230.0 crore). OP and NP margin stood at 18.0% and 6.4% as against 18.2% and 6.8% respectively in Q3FY11. (YoY)


During 9MFY12, net profit advanced by 24.7% to `60.0 crore on 43.2% higher sales of `953.2 crore. OP and NP margin stood at 17.9% and 6.3% Vs 17.5% and 7.2% respectively in 9MFY11. 9MFY12 EPS works out to `46.5 Vs `37.3 in 9MFY11.


Tie-up with Hindalco
PAL has an exclusive tie-up with Hindalco, the only container grade raw material manufacturer in the country, for supply of Raw material. In this context, the Company also benefits from the almost ‘zero’ inward freight cost due to being in close proximity to Hindalco.


Clients
Major Airlines viz. Indian Airlines , Air India, Jet Airways etc. All the sectors of Indian Railway Catering and Tourism Corporation [IRCTC], entire Indian Railways viz. Western, Southern, South Central, Northern, Eastern and South Eastern and Railway Contractors; Flight Kitchens such as Sky Gourmet, Taj Air Caterers – Mumbai, Chennai, Delhi, Ambassador Flight Kitchen, Oberoi Flight Service etc. Bakers and confectioners such as Monginis,


Ambassador’s Croissants, Taj Birdys etc. Retailers such as Pantaloon Retail (Food Bazaar) and Reliance Retail (Reliance Fresh), P.S.U.s such as N.T.P.C., Rihand Nagar, Terminal Ballistic Research Laboratory, Chandigarh (Ministry of Defence), Many leading Hotels, Restaurants of Mumbai, Delhi, Kolkatta, Chennai, Hyderabad, Bangalore, Baroda, Pune etc.


Global clients include B.E. International, U.K. (Danone Group company), SOP International, U.K. (Major in Food packaging industry), Majors in Food and catering supplies in U.K. such as J.K. Foods Ltd Spiral Packaging, General catering supplies, Indus Foods Limited, Gafbros Limited, Wallace Packaging, Topmark Cash and Carry, Ethnic Foods, Seewoo, Kavis Ltd., Perk-up amongst others;


Alupack Gmbh and Devpack from Germany, USA, Kari-Out, Abaline, Universal, Pioneer etc. Major airlines such as Emirates Airlines, Singapore Airlines, Thai Airways, Gulf Air, Etihad Airways, Air Asthana, Srilankan Airlines, and International flight kitchens like Emirates Flight Catering Co., CIAS Flight Kitchen, and World Aviation Services.


Financial
Tiny equity capital of `12.9 crore is supported by huge book value of the share of `286. PAL’s gross block increased 160% to `572.7 crore from `220 crore in FY10 owing to its expanded capacity becoming operational. Debt equity ratio as at FY12 works out to 1.5:1.


The above both expansion was financed through internal accruals, debt and issue of preferential warrants converted at a various price of `260, `225, `115 and `105 from time to time. With its two manufacturing facilities situated strategically in the tax haven of the Union Territory of Dadra and Nagar Haveli, India, the tax outgo is rather minimal.


Prospects
Packaging accounts for around 11% of aluminium usage in India as compared to a global share of around 20%. Given the rising middle-class and with an increasing disposable income, health awareness and the preference for eco-friendly packaging and serving solutions, the demand for AFCs is set to increase at a rapid pace. As the Indian economy matures, this share is expected to move towards the global level of 20%.


The industry in which PAL operates is at a very nascent stage in India as the usage is largely restricted to airlines and railways. However with increased awareness for health and hygiene the demand for AFCs and AFRs is expected to pick up over the next couple of years in a big way.


Moreover, AFCs and AFRs are slowly and steadily replacing other packaging substitutes like plastic, porcelain and glass containers as AFC’s offer various advantages; Aluminum Foil has amazing properties. It is light weight, aesthetic, attractive, resistant to odour, water, air, light, gas, oil and grease and possesses high thermal and electrical conductivity features. All this adds up to a highly versatile product that can be used in myriad applications from the traditional food industry to the hi-tech electronics and telecommunications industry.


 DEMAND DRIVERS
 Railways: Indian Railways is the world’s fourth-largest railway network, transporting more than 18 million passengers daily. It runs more than 17,000 trains a day. Even a marginal change in aluminium packaging consumption by the Indian Railways can potentially increase demand for such products in a significant way. The Railways announced the addition of 56 trains in Budget 2011-12, and the construction of four lines. This is expected to translate into increased demand for aluminium packaging products.


Food processing industry: The Indian food processing sector is the fifth largest in the country in terms of production, consumption and export. The US$100 billion Indian food processing market is estimated to grow 13 percent annually.


Food retail industry: India’s food retail turnover is expected to grow from `3, 39,365 crore in 
2009-10 to `7, 27,212 crore by 2025, enhancing the demand for aluminium packaging solutions. This is expected to translate into an increased consumption of aluminium foil containers, lids and foil rolls. Besides, the Indian fast food industry is expected to grow at a CAGR of 30-35% during 2010-2013, which is expected to increase downstream foil packaging applications.


Growing urban population: India's urban population is growing and the proportion of urban Indians is expected to rise from around 30% to 40% in a decade. This is likely to translate into an increased consumption of aluminium foil containers, lids and rolls.


Airports: The size of, India’s aviation market trebled in five years, according to the latest report by the International Air Transport Association (IATA). India is currently the world’s ninth-largest aviation market; domestic passenger traffic is estimated to reach 150–180 million by 2020. The Indian commercial aerospace market is estimated to absorb about 1,100 commercial jets worth US$130 billion over the next 20 years, widening the market for aluminium packaging products.


Growing working population: In 2010, half of India’s population was younger than 25 years old and 781 million individuals comprised the working-age population of 15-64. These numbers are expected to increase sharply over the next two decades. By 2020, the country’s working-age population is expected to reach 916 million and by 2030, India’s working-age population should reach an impressive 1.02 billion.


Valuation & Recommendation
PAL enjoys healthy position in the international market. Quality of the products is best and comparable to any other products of World Class suppliers. The expansion shall enable to capture the export market and the ever expanding retail market. Considering all these factors PAL is very much optimistic about times to come. The installed capacities have increased three times from the existing capacities with a wide range of product mix, which shall result in higher turnover & profitability going forward.


India is the world’s eleventh largest packaging consumer, with a market size of US$550-billion that is expected to grow 18-20% (presently 15%). Evidently, it is projected that increased incomes will translate into higher industry growth.


The large manufacturing base, long term supply contracts with leading clients, almost zero inward freight cost, zero excise, octroi and sales tax benefits, strong brand, huge replacement market, the potentially large addressable market coupled with major expansion give strong revenue & profitability visibility for PAL going forward.


At the CMP of `314, the share of PAL is trading at a P/E of 5.1 on FY12E. We recommend 
BUY with a target price of `390 at which the share will trade at a P/E of 6.5.
RISH TRADER