Piramal Glass: Going beyond glass ceiling - Elara

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Piramal Glass:Going beyond glass ceiling


Giant inroads into C&P business
Piramal Glass is strategizing to shift from the commoditized glass
packaging business of pharma sector to the high end segment of
Cosmetics and Perfumery (C&P) business that offers superior
realization rates and stable revenues. The C&P segment derives
average realization rate of ~INR79,000 per tonne, i.e. a sizeable 100%
over pharma and specialty segment. In order to keep pace with the
growing demand from the premium segment, it plans to shift 75 TPD
of pharma capacity to C&P and upgrade a 65 TPD C&P to 95 by
Q1FY12E. Subsequently, we expect top-line CAGR of 12% over FY10-
12E, led by spike in average realization rates.
Improving realizations to prop up bottom line manifold
The premium C&P segment is expected to grow from 47% of the
overall C&P in Q1FY11 to about 65% by FY12E. Realization rates in this
segment are over 5-7times in comparison to the mass segment.
Additionally, the company plans to shift its C&P production from the
US to the low cost producing base in India. We have factored a
conservative 6% reduction in staff costs over the next two fiscals,
which would save nearly INR130mn. Thus, we expect the company to
enhance EBITDA margin by 496bps overFY10-12E led by an improving
revenue mix and shifting US base.
Cleaner balance sheet in the next two years
Piramal Glass targets to reduce debt equity to less than 2x over the
next two years from the current 3.5x. This implies a repayment of
nearly INR1.5bn over the next two years. The company will generate
approximately INR5.3bn operating cash flows over FY11-12E and will
incur a capex of nearly INR1.6bn. This should give the company
sufficient leeway for repayments. Additionally, the company has
turned FCF positive in FY10, and we expect it to scale up ROCE to 15%
in FY12E from the current 12%.
Valuation
Piramal Glass is well poised for a sharp re-rating and a premium
valuation. The changing revenue mix is expected to improve return
ratios and garner low earnings beta. Led by a high gestation
period to break into the premium segment of C&P and sticky client
base, the company faces limited competitive threat and
subsequently strong earning visibility. Global peers in the premium
C&P space are commanding P/E of over 11x and EV/EBITDA of 6x
on FY12E earnings, despite reducing market share. We assign a 7.0x
multiple to FY12E EBITDA of INR3211mn, deriving a target price of
INR186 per share. We initiate the coverage with a ‘Buy’ rating and
an upside of 41% from the CMP of INR132.