Huhtamaki PPL : This MNC has an awesome story to tell

Introduction

As part of this blog, I share where I have invested my savings in the last quarter. Q3 FY2017–18 will end by this month. While researching for investment ideas in this bull run, I found one pretty cheaply priced and nice quality packaging multinational company’s stock, Huhtamaki PPL. Huhtamaki PPL is an Indian subsidiary of Huhtamaki Oyj, Finland. Huhtamaki Oyj is the specialist and one of the top manufacturer of packaging products globally.

Huhtamaki PPL’s history dates back to 1935. It started the production as “Paper Products Ltd.” In last 80 years, company expanded at multiple locations in India. Since 2011, the parent company is investing significant amount in packaging businesses in India in the form of inorganic growth. Huhtamaki PPL has 14 manufacturing plants in India. It also started new plants in this year in North-Eastern states of Sikkim and Assam. This makes pan-India presence for customers with flexible packaging materials.

Business model

Huhtamaki PPL provides aesthetic and sustainable packaging for FMCG and Pharmaceuticals companies across the country. It has many products in its portfolio. Looking at the portfolio of packaging solution, I strongly believe that Huhtamaki PPL touches lives of every Indian. That’s the reason, Huhtamaki PPL can be described as simple and awesome business.

This company derives most of the revenues (96–98%) from FMCG sector. The key clients include Britannia, Cadbury, Castrol, Coca Cola, Dabur, Emami, Eveready, GSK, Godrej, Hindustan Unilever, ITC, Marico, Nestle, Pepsi, Perfetti, P&G, Tata Tea, TTK-LIG, Wipro etc. 80% of the revenue is derived from domestic market while 20% is derived from exports. This company has presence across 4 continents (South Asia, Africa, Middle East and Central America) catering 50 clients.

Let’s do SWOT analysis for Huhtamaki PPL.

Strengths

1. Huhtamaki PPL enjoys a unique client base in FMCG sector. All these companies are doing really good in the market because of deep penetration of them. Hence, it is continuous stream of revenues for Huhtamaki PPL.
2. While FMCG sector has direct association with spending power of population of the country. Considering inflation cooling off since 2014, the increased spending power is set to rise. So, packaging industry is going to be stable for considerable amount of time.
3. Superior technology and strong parental support provides competitive advantage.

Weaknesses

1. Any slowdown in FMCG and pharmaceuticals industry will affect this company as the company is dependent on these two sectors for revenue.
2. Company has done expansions (organic and inorganic) in last few years. This may result into rise in debt.

Opportunities

1. Strategic acquisitions of Positive packaging : This company was a competitor to Huhtamaki PPL. This acquisition will push market penetration.
2. Capacity expansion in North-East areas is going to boost the revenue and profits.

Threats

1. 60% of revenue is generated from 10 clients only. The growth prospect can be hampered in case of untoward business incidences.
2. Competition from unorganized players may hamper profits.

Management quality

68.8% of the company is owned by its parent subsidiary. The management could grow this company to multi-billion dollar company over the period. I believe this management is hungry to make expansion in Indian market. It pays consistent dividend over last 5 years. The strong promoter’s holdings enhances confidence of minority shareholders. The management had a clear vision for the company. ( You can watch Video.)

Investment rationale

Given the huge size of India and improved standard of living of people, FMCG sector poised to make lot of money. To cater to such humongous demand, packaging businesses like Huhtamaki PPL are certainly going to thrive.

Additionally, major stake in this subsidiary is held by parent company. That means, this company can provide niche technology and lot of investment to its Indian subsidiary. This is going to augur well for the company in the long term. Management of the company is awesome, hungry for the expansion and shareholder friendly. Unique products and deep market penetration is going to help company make profits in the long run.

I bought shares at Rs. 243 on an average price. The share was trading at P/E < 20. It has moved ahead of Rs. 300 within 2 months. So, the company’s stock was cheap, company has debt under its control and making profits. I strongly believe that if an investor has long term holding period for this company, this company can give very good returns and dividends.

References

1. http://www.moneycontrol.com/
2. http://www.huhtamaki.com/web/flexible-packaging-india#/
3. Annual reports from 2012 through 2016.
4. Management’s presentations

Call to action

If you like the article, please share and comment. Next stock will be shared in the month of Feb-2018. So, please stay tuned. Happy New Year 2018 to all of you.

Disclaimer

Investment in equity market is subject to risk. Please analyze annual reports carefully. Views expressed in this article are personal. Views should not be treated as recommendations to buy or to sell stock.

Originally published in https://medium.com/@cpaithane/huhtamaki-ppl-this-mnc-has-an-awesome-story-to-tell-6cf725b8ff3f

Apollo tyres, an attractively valued bluechip stock

As part of this blog post, I have started publishing rationale behind my stock-picks in every quarter. In last blog post, I have explained how Karnataka bank can add value to your portfolio. While searching for quality picks, I found another blue chip company worth adding to my portfolio, Apollo Tyres !

Introduction

Apollo tyres is one of the biggest tyre manufacturing company which enjoys ~20% of market share in India. The company also has presence in European market (Netherlands and Hungary). It is 17th biggest tyre producer in the world.

Business

Apollo tyres has presence in commercial and personal vehicles segment. Company has made debut in the 2 wheeler market in 2016. The company sells under brand name “Apollo Tyres” and “Vredestein” in India and in European market respectively. Now, I am going to present SWOT analysis of the Apollo tyres.

SWOT analysis

Strengths

1. Apollo Tyres enjoy diversfied business presence in the market including India and Europe. The company has plan to expand in Middle east and US market.

2. Apollo Tyres provides tyres to commercial vehicles, passenger vehicles and 2 wheeler space. Hence, it is a full range player.

3. Apollo Tyres has acquired Germany based, retail tyre distributor, Reifencom GmbH. The purpose of this acquisition is to expand retail network in Europe.

4. Apollo Tyres is focuses on R&D through center in Germany.

Weaknesses

1. Company doesn’t have presence in European OEM market.

2. Still couldn’t cope up with cheap imports from China.

Opportunities

1. Company has a vision 2020, to be premier tyre company with a diversified and multinational presence.

2. Leader in Truck Bus Radial tyres in India.

3. Eyeing European market.

4. Expansion of plans through new Hungary plant. Initiatives to capture new markets like Mid-east, South east Asia.

5. Anti dumping duty imposed by Govt. Of India will help Indian tyre manufacturers.

6. GST to play major boost for auto and auto-ancillaries companies as consumption will increase after next couple of quarters

Threats

1. Dependency on natural rubber and crude oil and government’s interference in controlling taxes on them.

2. Cheap tyre imports from China.

3. Economic slowdown in India and Europe could be a threat to earnings.

4. Indian currency fluctuations could result in pressure on margins.

Quality of management

Apollo tyres is run by seasoned entrepreneur Onkar Kanwar. Even though challenging domestic and global business scenario, the company is profitable and distributing good dividends while keeping debt under check. The management has expansion plans across continents like Europe, Middle east and US. This management could scale the distributor network in pan-India. So, I have faith in the management.

Conclusion and investment rationale

Despite being strong blue chip company in tyre sector, valuation of Apollo tyres looks reasonable. It is trading at 239 as of today. Company provides 20%+ RoE with consistent EPS. Considering growth in auto sector, tyre sector poised for growth. Hence, their earnings will certainly improve. Well established companies like Apollo tyres will benefit from recent anti dumping duty. Apollo tyres is also expanding in 2 wheeler market in India. Additionally, distributor network expansion in Europe will be seen as unlocking upside potential. Company has less debt (0.22 debt-to-equity). That’s why, I bought shares of Apollo tyres.

References

1. http://www.moneycontrol.com/

2. https://www.apollotyres.com/en-in/car-suv-van/tyre-finder/

3. Annual reports of 2014–15, 2015–16, 2016–17.

Call to action

If you like the article, please share and comment. Next set of stocks will be shared in the month of Dec-2017. So, please stay tuned. Happy Diwali to all of you.

Disclaimer

Investment in equity market is subject to risk. Please analyze annual reports carefully. Views expressed in this article are personal. Views should not be treated as recommendations to buy or to sell stock.

Karnataka Bank — On the journey of transformation !

Introduction

Karnataka bank is decades old private sector bank whose business is primarily located in southern state of Karnataka with expansion plan across pan-India. The bank is well governed and complying with Reserve Bank of India’s (RBI) guidelines.

Business model

Karnataka bank has stakes in following business operations :

1. Treasury operations
2. Corporate / Wholesale Banking
3. Retail Banking
4. Other Banking Operations like stock trading in stock exchanges, insurance and mutual funds.

SWOT Analysis

Strengths

1. Government of India (GOI) is taking steps to resolve distressed assets.
2. Government of India has plans for financial inclusion.
3. The bank is conforming all the guidelines set by RBI.
4. The bank has taken initiatives to mitigate financial risks.
5. The bank is willing to take new customer centric initiatives.
6. Good market share in southern Indian market.

Weaknesses

1. Non Performing Assets (NPA) menace in the banking industry in India.
2. The bank is tied up with distributors to provide Non Banking Finance Company (NBFC) services like insurance and mutual funds. They have least presence in NBFC space.

Opportunities

1. Government’s focus on infrastructure spending and boost to manufacturing will enhance bank business. Also, Government’s agenda of financial inclusion augurs well for banking sector.
2. Aim to provide less cash economy provides ample opportunities to participate in the digital banking.
3. Karnataka bank has a vision 2020 to double the turnover by 2020.
4. Wide and growing distribution network in multiple states and union territories.
5. Bank aim to provide NBFC services like demat trading, Insurance and Mutual Funds. Bank has tied up with multiple institutions to provide the service.

Threats

1. Rising NPA is a problem for this company. Karnataka bank has slippages in earnings due to NPA. However, NPA is well contained as compared to other banks available in the market.

Quality of Management

Promising financial ratios maintained as per direction of RBI. Karnataka bank is paying continuous dividend. The management is hungry for sustainable growth. By 2020, they want to augment the turnover by twice.

Conclusion and investment rationale

I bought shares of Karnataka bank this quarter because stock is available at very cheap valuation at P/B of 0.7. Other banks in the market with this quality are available at 2X or 3X of book value. Significant check on NPAs (2–3%) is a sign of quality management. Government’s boost to resolve NPA issue will turn into favor of all banks. So, investing into a good bank early is necessary. If bank’s Vision 2020 plan plays out well, the book value of the bank should go up by 2X. Additionally, other indicators (like Return On Assets, consistent Return on Equity and EPS growth etc) for financial institutions look good. This will create great wealth for long term investors.

References

1. http://www.karnatakabank.com/ktk/Index.jsp
2. http://www.moneycontrol.com/
3. Annual reports of Karnataka bank from 2014 to 2017.

Call to action

If you like the article, please share and comment.

Disclaimer

Investment in equity market is subject to risk. Please analyze annual reports carefully. Views expressed in this article are personal. Views should not be treated as recommendations to buy or to sell stock.

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Originally published on medium : https://medium.com/@cpaithane/karnataka-bank-on-the-journey-of-transformation-23f4588a9cd2