Friday 28th May 2010

Tuesday 27, May 2008

NATSONS RESEARCH
Uflex Ltd.
Reasonable valuations, growth to be driven by volumes
BUY
Uflex Ltd is one of the largest packaging and packaging solution company in the India.
BSE code 500148 It manufactures polyester chips, Films (BOPET, BOPP and CPP-both in plain and
NSE code UFLEX metalized form), coated film, laminates, pouches, holographic films, gravure
Bloomberg code UFLX IN 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
Current price 115 flexible packaging materials. Uflex is currently expanding its capacities in India, Egypt
Target price 236 and Mexico enabling them to grow over the next few years.
MCap Rs bn 7.47
MCap US$ mn 159.0 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
52 wk H/L 130/67
couple of years. The per capita consumption of packaged food in India has moved up
Face value 10 significantly from 5 to 25%. However this is yet significantly lower than the developed
Financial Snapshot 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.
Rs Mn FY10 FY11E FY12E
Leadership position in flexible packaging in India: Uflex has a market share of around
Sales 24215 26854 33233
18-20 percent of the overall organised flexible packaging industries in India. It has a
% Ch 19 11 24 current capacity of 1,60,000 MT/annum to manufacture plastic films and 54,560
OPM 3398 4243 5350 MT/annum to convert film to packaged materials. It has also implemented its plan to
PAT 1917 2134 2820 enhance their capacities by putting up plants in Mexico and Egypt which make them
% Ch 2.7 11.3 32.1 market leaders not only in India but also in Asia.
EPS* 29.5 29.6 39.0
Expanding capacities: Uflex is currently implementing and announced its plans to
PER 3.9 3.9 2.9 enhance its global capacity to 3,41,960 MT pa of plastic film and plastic packaging
EV/EBIDTA 6.7 6.4 4.8 products. These capacities will get commissioned progressively over the next couple
* fully diluted EPS for FY11E & FY12E 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
Share holding pattern growth for its products.

Global operations: Apart from its manufacturing plants in India, Uflex has plants in
Promoter
Dubai and Mexico and is setting up one in Egypt. It has also started work on increasing
42.98 capacities in Mexico and has plans to expand Egypt in after the completion of phase 1.
others
56.63 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.
FII, 0.33
DII, 0.06
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
Sameer Dalal
companies like-HUL, Brittania, Nestle, Cadbury, P&G, Gillette, Dabur, Colgate, Godrej
91-22-4213-4444
Consumer, Castrol, Henkel, ITC, Pepsi, Coca cola etc. India's strong domestic
sameer@natverlal.com
consumption and investment drives will continue to support healthy rates of growth
over the next coming years.
Abhishek Burad
91-22-4213-4444
Valuations: With major expansion plans and strong demands from FMCG and Pharma
abhishek.burad@natverlal.com sectors we expect revenue to grow 18-20% in next couple of years we prefer the P/E
multiple 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%.

NATVERLAL & SONS

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Tel. : 4213 4444 Dealing Rm : 4213 4400 -05 2265 1121 Fax : 91-22-4213 4440 Email : research@natverlal.com
NATSONS RESEARCH Uflex Ltd

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&B
market 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.

Packaging Consumption Indian Packagaing Industry

15 Other
Pharma , 5%
Kg/Capita

10
, 10%
5 Food &
0 Beverage
s , 85%
EU
USA

Malaysia

Canada
RSA

India
Israel
Korae
Japan

UAE

Iran
Mexico
Australia

China

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.

Packaging material break up

Labels,
3%
Other, Flexible,
Caps, 6% 14% 22%
Glass,
10% Rigid,
18%
Printed, Metal,
17% 10%

Source : India Pack, Ufex & NSSPL

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NATSONS RESEARCH Uflex Ltd

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 material
manufacturers (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 overseas
manufacturing 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 have
the 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 & SONS

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NATSONS RESEARCH Uflex Ltd

with a capacity of 9600 and 6000 MT pa respectively. With the rise in packaged goods
demands in India, Uflex is expanding its packaging production at Jammu by 24,000
TPA. This will enhance the packaging capacity to 78,560 MT/annum. New capacity is
expected to get commissioned by April 2011, we expect there to be a gradual ramp up
in utilization and the full benefit of this will be felt in FY13.

Expansion at Middle East: Changing trends in demands of consumers in the Middle

East regions too brings opportunity to the packaging sector to grow in that region. In
line with this opportunity Uflex is in the process of setting up a 77000 MT/ pa
manufacturing facility in Egypt. The expansion will be in two phases, in the first phase
it will set up a35000 TPA of BOPP film. The first phase is expected to get commissioned
by September of 2010. In the second phase they will commission 30000 TPA of PET
film and 12000 TPA of CPP film. This is expected to get commissioned by mid of FY12E.

Expansion at Mexico: USA is the biggest consumer of packaged goods worldwide.

Seeing the opportunity Uflex has successfully commissioned a plant of PET film with a
capacity of producing 26400 MT of film in Mexico. It has undertaken to enhance this
capacity by another 26400 MT of PET films, doubling the current capacity. The
management has indicated they expect the plant to get commissioned by mid FY11E.
The full benefit of the same will be felt in FY12E.

Expansion plans
350000
300000
250000
200000
150000
100000
50000
0
FY07 FY08 FY09 FY10 FY11 FY12

Source: Uflex, Natverlal & Sons

Resilient in times of recession: Uflex sound business profile is driven by the growth in
FMCG, Pharma and Food and Processing Industry. All these industries are not as
severely affected during recession, as they produce and sell goods and services that
consumers use on a regular basis, regardless of their economic status or income level.
Uflex major revenues comes from companies like -HUL, Brittania, Nestle, Cadbury,
P&G, Gillette, Dabur, Colgate, Godrej Consumer, Castrol, Henkel, ITC, Pepsi, Coca cola
etc. hence its inherent growth story is based on the growth of these companies which
are not very much affected by the economy slowdowns.

Equity Dilution Likely to fund expansion: Although a large part of the expansions are
expected to get funded from internal accruals, we believe, to fund its expansion plans
Uflex will have to dilute some equity. With the current D/E at1.9X taking on more debt
may not be the way forward as that would add some strain on the balance sheet.

NATVERLAL & SONS

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NATSONS RESEARCH Uflex Ltd

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 commissioned
starting 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 & SONS

5
NATSONS RESEARCH Uflex Ltd

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. Given
the 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 a
performance 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 a
concern 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 and
2007 due to the lack of infrastructure for recycling, however action is being taken to
increase the level of recycling of polyester based products.

NATVERLAL & SONS

6
NATSONS RESEARCH Uflex Ltd

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 way
of 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

Promoter
42.98
others
56.63

FII, 0.33
DII, 0.06

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 NATSONS RESEARCH Uflex Ltd

Financials
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 20,587.6
EBIDTA 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 6,632.0
Fringe 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 0.8
Net change in cash (1,576.1) 316.2 (33.5) 1,701.9 EV/EBDITA (x) 7.6 6.7 6.4 4.8

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.
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