Uflex Limited - Natsons Research 28-05-2010

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NATVERLAL & SONSRegd. Off.: Fairy Manor, 5th Floor, 13 Rustom Sidhwa Marg, Fort, Mumbai - 400 001.

Tel. : 4213 4444 Dealing Rm : 4213 4400 -05 2265 1121 Fax : 91-22-4213 4440 Email : [email protected]

Tuesday 27, May 2008

NATSONS RESEARCH

Friday 28th May 2010

Uflex Ltd.

Reasonable valuations, growth to be driven by volumes

Uflex Ltd is one of the largest packaging and packaging solution company in the India.

It manufactures polyester chips, Films (BOPET, BOPP and CPP-both in plain and

metalized form), coated film, laminates, pouches, holographic films, gravure

cylinders, inks and adhesives for all types of packaging & printing machines, offering

total flexible packaging solutions. It has a capacity to produce 2,14,560 MT/annum of

flexible packaging materials. Uflex is currently expanding its capacities in India, Egypt

and Mexico enabling them to grow over the next few years.

Increasing demands for packaged goods: Indian packaging market is growing at an

annual rate of 12 to 15% and this is expected to grow at a quicker pace over the next

couple of years. The per capita consumption of packaged food in India has moved up

significantly from 5 to 25%. However this is yet significantly lower than the developed

markets which have it above 80% leaving large opportunity for growth. New entry of

FMCG companies in India will enhance demands for flexible packaging going forward.

Leadership position in flexible packaging in India: Uflex has a market share of around

18-20 percent of the overall organised flexible packaging industries in India. It has a

current capacity of 1,60,000 MT/annum to manufacture plastic films and 54,560

MT/annum to convert film to packaged materials. It has also implemented its plan to

enhance their capacities by putting up plants in Mexico and Egypt which make them

market leaders not only in India but also in Asia.

Expanding capacities: Uflex is currently implementing and announced its plans to

enhance its global capacity to 3,41,960 MT pa of plastic film and plastic packagingproducts. These capacities will get commissioned progressively over the next couple

of years. Uflex has consistently enjoyed high capacity utilisation at around 80 - 85% we

believe they would be able to maintain this utilization rate looking at the demand

growth for its products.

Global operations: Apart from its manufacturing plants in India, Uflex has plants in

Dubai and Mexico and is setting up one in Egypt. It has also started work on increasing

capacities in Mexico and has plans to expand Egypt in after the completion of phase 1.

The Dubai and Egypt plants cater to the growing demands of Middle East, African and

Southern European markets, while the Mexico plant looks at the Americas. Uflex

exports its goods to more than 100 countries giving them a global presence.

Strong execution track: Uflex products cater to the FMCG sector; this enables them to

be resilient to a large extent to global slowdowns. This can be seen as it was not

severely affected by the global slowdown in FY08-09.It offers packaging solutions to

companies like-HUL, Brittania, Nestle, Cadbury, P&G, Gillette, Dabur, Colgate, Godrej

Consumer, Castrol, Henkel, ITC, Pepsi, Coca cola etc. India's strong domestic

consumption and investment drives will continue to support healthy rates of growth

over the next coming years.

Valuations:With major expansion plans and strong demands from FMCG and Pharma

sectors we expect revenue to grow 18-20% in next couple of years we prefer the P/Emultiple of 8x for FY11E/ Taking these we arrive at a price target of 236 and such we

recommend a Buy on Uflex Ltd. with an upside potential of 105%.

BUY

Financial Snapshot

Share holding pattern

Sameer [email protected]

Abhishek [email protected]

BSE code 500148

NSE code UFLEX

Bloomberg code UFLX IN

Current price 115

Target price 236

MCap Rs bn 7.47

MCap US$ mn 159.0

52 wk H/L 130/67

Face value 10

Rs Mn FY10 FY11E FY12E

Sales 24215 26854 33233

% Ch 19 11 24

OPM 3398 4243 5350

PAT 1917 2134 2820

% Ch 2.7 11.3 32.1

EPS* 29.5 29.6 39.0

PER 3.9 3.9 2.9

EV/EBIDTA 6.7 6.4 4.8

* fully diluted EPS for FY11E & FY12E

Promoter42.98

FII, 0.33DII, 0.06

others56.63



NATVERLAL & SONS

NATSONS RESEARCH

2

Investment Rationale

Growing demand for packaged goods: The packaging industry in India has been

growing at 15%, however we expect this rate to increase to over 20% over the next few

years. The market volume of the Indian packaging industry amounts to about

Rs.775bn. The largest demand for packaging and the associated equipment come

from the food and beverages (F&B) and the pharmaceutical industry. The Indian F&Bmarket is expanding rapidly, with the rising income of the Indian consumer. This is

projected to grow at a CAGR of 9% during 2009-13. In addition to this with more

nuclear families in India we will see more demand for packaged goods for the F&B

sector. The pharmaceutical industry is expected to average an annual growth of 16%

till Fy13.

Source: India Pack, Ufex & NSSPL

Low per capita consumption a good opportunity: In-spite of the rapid growth

achieved by the Indian packaging industry in the past few years, the per capita

consumption of packaging paper/board and plastics packaging in India is still low at US$15-$20 against the world average of around US$100. It provides the real opportunity

factor available in the Indian market

The Packaging industries can broadly be classified into 2 sub categories viz are rigid

and flexible packaging. Rigid packaging represents the oldest and most conventional

form of packaging in India with a share of nearly 80% of the total packaging used.

Although plastic is increasingly replacing conventional rigid materials, rigid packaging

would continue to dominate over the next few years. Although we believe there will

be an increased in the weight age of the flexible packaging industry going forward.

Source : India Pack, Ufex & NSSPL

Uflex Ltd

0

5

10

15

J a p a n

A u s t r a l i a

U S A

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U A E

K o r a e

M a l a y s i a

R S A

C a n a d a

I s r a e l

C h i n a

M e x i c o

I r a n

I n d i a

K g / C a

p i t a

Packaging Consumption

Pharma

, 10%

Other

, 5%

Food &

Beverage

s , 85%

Indian Packagaing Industry

Flexible,

22%

Rigid,

18%Metal,

10%

Printed,

17%

Glass,

10%

Caps, 6%

Labels,

3%Other,

14%

Packaging material break up



NATSONS RESEARCHNATSONS RESEARCH

Flexible packaging consists of multi-layer laminated sheets that allow printability and

ensure moisture resistance, aroma retention and gloss. The product in flexible

packaging includes overwraps, multi-layered/co-extruded films, laminated products

and polysacks. On account of recent changes in consumption trends and spurt in

branded products, flexible packaging has emerged as a major fast growing segment in

India. The flexible packaging industry has two major operators, the Raw materialmanufacturers (RMM) and converters

Raw Material Manufacturers (RMM): Aluminium foil manufacturers and

manufacturers of plastic films such as Polyester films, Low density polyethylene

(LDPE) films, High density Polyethylene (HDPE) films and biaxially oriented

polypropylene (BOPP) films cater to the flexible packaging segment. Many of the raw

material manufacturing companies are present in the organized sector on account of

high capital costs required for setting up a unit. These raw materials are used by the

converters to convert it into packaging material used by FMCG, Pharma and various

other industries. Uflex has a large capacity both in India as well as overseas to produce

raw materials such as plastic films, hologram sheets , inks and adhesives and various

other application used by converters to make packaged goods.

Converters: Converters are engaged in the processing of packaging material into

packaging products and they act as the link between the customer and the raw

material manufacturer. Nearly 60% of BOPP films and around 100% of polyester films

are used only after conversion. In the flexible packaging sector, conversion involves

the coating, lamination, metalizing and printing of films. Conversion provides a value

addition of around 35%-40% on the basic raw materials. Uflex has large domestic

converting capacities for making range of packing products.

Strong hold in Indian Packaging sector: Uflex manufactures and markets flexible

plastic films and materials for packaging and for other film applications. It also

manufactures packaging machines, rotogravure cylinders various other direct

products used for packaging in the flexible packaging industry. In India Uflex has a

market share of near 20% of the organized sector. With new domestic capacity

expansions and a proven track record of quality goods, we believe they would be able

to maintain their market share going forward.

Increasing Capacities: Uflex currently has manufacturing capacities in India, Dubai

and Mexico. The total installed capacity is 2,14,560 MT/annum for films and packaging

divisions. Uflex has commenced work to expand both its Indian and overseasmanufacturing operations. Post the expansion the capacities of their overall plastic

film and packaging goods will raise to 3,41,960 MT/annum. These expansions are

expected to get commissioned gradually starting FY11 and will be fully operational by

the end of Fy12.

Domestic Expansion: Uflex manufactures various products which are directly used

for packaging and packaging material. It has current combined capacity of 1,62,960

MT pa to produce films and packaging materials. It also has capacity to manufacture

47,000 numbers of rotogravure cylinder and shims , it can produce 700 lac sheets of

hologram sticker sheets pa, they can manufacture 1570 numbers of packaging and

converting machines in a year which are used in flexible packaging industry, they havethe capacity to produce 72,000 MT pa of PET chips which is used as a raw material to

produce plastic films, besides that they also manufacture printing inks and adhesives

NATVERLAL & SONS3

Uflex Ltd



NATSONS RESEARCH

with a ca acity of and MT p respectiv l . With the r in ackagedgo dsp 9600 6000 a e y ise p o

demands in Ind , Uflex is expan ing i s p c agin prod ction at Jamm by 24,000ia d t a k g u u

T . T is will enhanc the ackag g ca acity o 78, MT/ann m. N w cap c t isPA h e p in p t 560 u e a i y

e p ct d o get c mmissio ed by Apr l we expect he to be ag adu l ramp px e e t o n i 2011, t re r a u

in utilization and the full benefit f this will be felt FY13.o in

Expan io at Mid le as :s n d E t Ch nging tr nds in dema ds of c nsu e s the M dlea e n o m r in idEas regions o rin s opportuni y to the pack ging s ctor t row in th t reg on. Int t o b g t a e o g a i

line with is op ortunity U le is the p ocess of se tin up a 77000 T/ path p f x in r t g M

manufactu ingfaci in g t. he e p nsion w ll e twop ases, in e firs p aser lity E yp T x a i b in h th t h

it wil set p a35000 T of B PPfilm. The irstp ase is xpected to get commissionedl u PA O f h e

by Sep emb r f 2010. n th sec nd has hey ill commi si n 30000 TP of PEt e o I e o p e t w s o A T

fi and 1200 TP o CPP ilm. This e p ct d to e co mission d by mid ofFY12E.lm 0 A f f is x e e g t m e

Expan io at exics n M o: U is the bigges co sumer f pa kaged go ds worl w e.SA t n o c o d id

Seeing he pp rtun t flex as su c ssf lly co mission d a pl nt of PE f m wi at o o i y U h c e u m e a T il th

capacity of roducin 26400 M of ilm in Mex o. t ha u dertaken t nha ce thisp g T f ic I s n o e n

capacity by ano he 26400 T of PET film , d ub ng the current apacity Thet r M s o li c .mana e e t has ind cated hey expec the p nt to get co mission d by id F 11E.g m n i t t la m e m Y

The full ene it f e sa e w ll b fe t in FY .b f o th m i e l 12E

Sou ce: Uflex, Natverlal & S nsr o

Resil ent in times o rec io :i f ess n Uflex sou d b siness profile is driven by the growt inn u h

FMCG, Pha ma an Fo d and Proce g nd st y. ll th se industries are no asr d o ssin I u r A e t

seve ely a fe ted dur ng recessio , a they pro uce and se l goods an ervices th tr f c i n s d l d s a

consu ers use n a regu r basis, regar less of th ir econo ic statu r incom level.m o la d e m s o e

U le ajor reve ues c mes f om c mpanies like -HUL, Brittania, Nestl , Cadb ry,f x m n o r o e u

P&G Gi ette, Dabur, Co te Godrej Consumer, Cast l, nkel, IT , ep i C ca cola, ll lga , ro He C P s , o

et . enc its in ere t rowth st ry is based on e growth o these com anie whi hc h e h n g o th f p s c

ar no ve y muchaf ct d by the econo y slow owns.e t r fe e m d

E u ty Dilution L kely to fund expansion:q i i Althou h large p rt of the expansio s ag a a n re

expe te to get fu ded f m internal accruals, we believe to fund its ex an n p nsc d n ro , p sio la

U le will have t ilute some e uity. Withth c rrent D/ at1.9X taking n mo e debtf x o d q e u E o r

ma no be hew y fo ward as th t would a d s me strain o the ba nce sheet.y t t a r a d o n la

NATVERLAL & SONS4

Uflex Ltd

0

50000

100000

150000

200000

250000

300000

350000

FY07 FY08 FY09 FY10 FY11 FY12

Expansion plans



NATSONS RESEARCH

Valuations:

With an accelerated growth led by strong demand for the Indian flexible packaging

product industry, we expect Uflex to maintain its strong growth story in future. We

expect the revenues to grow at a CAGR of over 12% over the new few years, while the

profit will grow at 8% over the same period. At the current price of 115 the stock is

trading at a P/E of 3.9x for FY11E. The new capacities of Uflex will get commissionedstarting end FY11E, this would lead to an accelerated profit growth in FY12E and

FY13E.

At current price, we feel that stock is undervalued and looks very attractive. We

believe a P/E of 8x is justifiable given the current earnings. We have chosen to take a

low multiple of 8X as we believe there could be an equity dilution going forward. At 8X

we arrive at a price target of RS 236. We recommend a BUY on Uflex with an upside

potential of105% from its current level.

NATVERLAL & SONS5

Uflex Ltd



NATSONS RESEARCH

Risks

Rise in Input costs

The largest component of cost involved in making flexible packaging films and

products is attributed to raw materials. The PET chips used to make films as well as the

polymers that go into producing packaging films are derived from petroleum. Giventhe volatile trend in crude oil and demands for polymers for other applications the

pressure on the input cost is expected to fluctuate. Flexible films manufacturer and

converters have been able to pass on these costs in the change in raw materials. We

believe they would be able to do this going forward

Increase in competition

The competition is increasing with the addition of new capacities and emergence of

new global players especially from China. Entry barriers in flexible packaging is not

very high given the easy nature of business, however to complete the huge orders

from FMCG and Food processing industries one need to have large capacity base and aperformance track record. Continuous innovation in terms of design, pattern, style

and most importantly the quality of packaging have always plays a crucial role in

Indian flexible packaging market.

Higher equity dilution at low prices

Given the European problem overhang raising of funds through equity at fair

valuations may be difficult. Uflex might have to dilute equity at a low price if markets

don't rebound over the next year as they might need funds for their expansion plans.

Equity Dilution at lower levels could affect our EPS target and in turn lead us to

lowering our estimates and target price. However we do not see this as too much of aconcern as the funds required may not be too large and could be for the short term

funded through debt.

Change in government policies

Uflex has started implementing plans to put manufacturing capacity in Egypt. Most of

the raw materials for packaging industry in Egypt are heavily dependent on imports,

any change in government policy can have direct impact on the manufacturing cost of

the company. Environmentalists and the government are concerned about the

increasing amount of waste in Mexico and the lack of space for its management and

disposal of plastic waste. For example, PET bottles posed a problem over 2006 and2007 due to the lack of infrastructure for recycling, however action is being taken to

increase the level of recycling of polyester based products.

NATVERLAL & SONS6

Uflex Ltd



NATSONS RESEARCH

Company background

Uflex is one the largest manufacturer and converter of plastic film and packaged

material respectively. It is one of the only companies which provide each and every

aspect of packaging components for flexible packaging industry in India. It has huge

manufacturing base at India, Dubai and Mexico, in addition to this new manufacturing

capacity is getting commissioned in Egypt. Uflex also has its presence globally by wayof sale of its products in more than 90 countries.

Uflex is currently promoted by Mr. Ashok Chaturvedi who is also Chairman and

Managing Director of the company. Under Mr. Chaturvedi's guidance the company

has shown tremendous growth over past few years.

Uflex has following subsidiaries domestic and internationally: Mauritius & UTech

Developers Limited, India, Flex America Inc., USA, Flex Middle East FZE, UAE, Flex

Europe Pvt. Ltd., UK, Uflex Packaging Inc., USA & UPET Holdings Ltd

Share Holding pattern

NATVERLAL & SONS7

Uflex Ltd

Promoter

42.98

FII, 0.33DII, 0.06

others

56.63



NATSONS RESEARCH

NATVERLAL & SONS

Financials

Disclaimer

The information provided in the document is from publicly available data and other sources, which we believe are reliable. It also includes analysis and views

expressed by our research team.

The report is purely for information purposes and does not construe to be investment recommendation/advice. Investors should not solely rely on the

information contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position.

Efforts are made to try and ensure accuracy of data however, Natverlal & Sons Stockbrokers Pvt Ltd. And / or any of its affiliates and / or employees shall not

be liable for loss or damage that may arise from any error in this document. Natverlal & Sons Stockbrokers Pvt Ltd and / or any of its affiliates and / or

employees may or may not hold positions in any of the securities mentioned in the document.

This document is not for public distribution and should not be reproduced or redistributed without prior permission.

Natverlal & Sons Stockbrokers Pvt Ltd. Fairy Manor, 13 Rustom Sidhwa Marg Fort Mumbai 400001 Tel 91-22-22658737 Email [email protected]

Uflex Ltd

Profit & Loss Balance Sheet

In Rs million FY09 FY010E FY011E FY12E In Rs million FY09 FY010E FY011E FY12E

Net sales 20,421.0 24,215.5 26,854.1 33,232.6 Equity capital 828.8 828.8 722.2 722.2

YoY (%) 24.6 18.6 10.9 23.8 Reserves 7,965.9 8,145.0 11,063.4 13,545.4

Net worth 8,794.7 8,973.7 11,785.6 14,267.6

Total expenses 17,782.4 20,817.9 22,611.2 27,882.2 Total borrowings 13,782.3 16,782.3 20,587.6 20,587.6EBIDTA 2,638.6 3,397.6 4,243.0 5,350.5 Deferred tax 877.7 877.7 1,116.8 1,432.8

YoY (%) 37.8 28.8 24.9 26.1 Total liabilities 23,454.7 26,633.7 33,490.0 36,288.0

EBIDTA (%) 12.9 14.0 15.8 16.1

Other income 1,215.6 1,254.4 1,391.0 1,721.5 Net block 14,518.0 13,916.4 18,603.9 21,365.8

PBIDT 3,854.2 4,651.9 5,634.0 7,071.9 CWIP 592.4 2,250.0 3,755.0 200.0

Depreciation 1,002.9 1,194.0 1,275.0 1,638.1 Investments 973.7 973.7 973.7 973.7

PBIT 2,851.3 3,457.9 4,359.0 5,433.8

Interest 1,048.7 1,245.9 1,487.8 1,640.0 Current assets 12,412.9 15,396.8 16,569.2 21,655.1

PBT 1,802.6 2,212.0 2,871.2 3,793.8 Inventories 2,237.6 2,653.4 2,942.5 3,641.4

(-) Tax 335.4 338.3 737.0 973.9 Debtors 3,950.4 5,970.9 6,621.6 8,194.3

Current Tax 105.7 338.3 488.1 645.0 Cash 1,189.9 1,482.4 1,449.0 3,150.8

Deferred Tax 214.3 0.0 239.2 316.0 Loans and advances 5,012.8 5,263.5 5,526.6 6,632.0Fringe benefir tax 13.8 0.0 9.8 12.9

Wealth Tax 1.6 0.0 0.0 0.0

Tax/ PBT 18.6 15.3 25.7 25.7 Current liabilities 4,536.3 5,310.6 5,768.1 7,112.7

PAT 1,467.1 1,873.7 2,134.2 2,819.9 Provisions 506.6 593.1 644.2 794.4

Extra-ordinary expenses 400.0 43.1 0.0 0.0 Net current assets 7,370.0 9,493.1 10,156.9 13,748.0

Net Profit 1,867.1 1,916.8 2,134.2 2,819.9 Misc expenses 0.5 0.5 0.5 0.5

YoY (%) 67.7 2.7 11.3 32.1 Total assets 23,454.7 26,633.7 33,490.0 36,288.0

Cash Flow Key Ratios

In Rs million FY09 FY010E FY011E FY12E FY06 FY010E FY011E FY12E

Net profit 1,867.1 1,916.8 2,134.2 2,819.9 EPS (Rs) 28.7 29.5 29.6 39.0

Depn and w/o 1,002.9 1,194.0 1,275.0 1,638.1 CEPS (Rs) 47.5 47.9 50.5 66.1

Deferred tax 214.3 0.0 239.2 316.0 Book value (Rs) 135.4 138.1 163.2 197.6

Change in wrkg cap (2,212.6) (1,830.5) (697.3) (1,889.2) DPS (Rs) 4.0 4.0 4.0 4.0

Other income (1,176.1) (1,210.8) (1,342.7) (1,661.6) Debt-equity (x) 1.6 1.9 1.7 1.4

Operating cash flow 2,047.7 2,491.1 4,293.8 4,546.5 ROCE 12.7 14.4 15.0 16.2

Other income (1,176.1) (1,210.8) (1,342.7) (1,661.6) ROE 22.6 21.6 20.6 21.6

Capex (2,891.1) (2,250.0) (7,467.5) (845.0)

Investments 1,935.1 0.0 0.0 0.0 Valuations

Investing cash flow (2,132.1) (3,460.8) (8,810.2) (2,506.6) PE (x) 4.0 3.9 3.9 2.9

Dividend (304.2) (304.1) (338.0) (338.0) Cash PE (x) 2.4 2.4 2.3 1.7

Equity 0.0 0.0 1,194.7 0.0 Price/book value (x) 0.8 0.8 0.7 0.6

Debt (800.9) 3,000.0 3,805.3 0.0 Dividend yield 3.5 3.5 3.5 3.5

Financing cash flow (1,105.1) 2,695.9 4,662.0 (338.0) Market cap/sales 0.4 0.3 0.3 0.2

Others (386.6) (1,410.1) (179.1) 0.1 EV/sales (x) 1.0 0.9 1.0 0.8Net change in cash (1,576.1) 316.2 (33.5) 1,701.9 EV/EBDITA (x) 7.6 6.7 6.4 4.8

Uflex Limited - Natsons Research 28-05-2010

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