Packaging Industry

The packaging industry will register strong earnings growth driven by buoyant end-user demand. If we take the historical data and compare the performance of Packaging stocks, we find them to have outperformed the S&P CNX Nifty over the past three and five years. The industry show a negative performance last year with negative 11% returns compared to the Nifty’s 17%, but going ahead it is expected that the strong end-user demand and easing input costs will help in restoring packaging industry’s earnings growth.

Indian packaging industry is currently over Rs 850 bn as of 2012. The strong growth expectation in the industry is likely to help the Indian packaging industry to reach Rs 1.3 trillion by 2014-15. The historical growth of 14% if continues, will help the industry reach over 1 trillion mark easily.

Classification based on the function or layers

• Primary packaging – Primary packaging is the first layer in which a product is packed. It is used for packaging of food products such as ready-to-eat foods, chocolates, snacks, etc. where paper or aluminum foil is used mainly.
• Secondary packaging – This is the outer layer of primary packaging. Apart from protecting, it acts as a mode of marketing and branding. E.g. carton board boxes used in packing food products, etc.
• Tertiary packaging – for bulk packaging commonly used in storing and transporting industrial products such as industrial chemicals, consumer durables, etc. E.g. corrugated boxes, steel drums

Reasons for the Booming Packaging Industry

The main reasons that have led to a boost in the Packaging Industry are:

i) Growth in end-user segments – The growth in the consumer products industries has led to an increase in the demand for packaging. Packaging industry has grown at 14% p.a, thanks to the high demand by the FMCG and pharmaceutical sectors which contributed nearly 60-70% of the sales of the packaging industry. It is expected to show strong performance as there is an expectation of demand increase from these segments and higher organized retail penetration.

ii) Polymer-based packaging – has led to a gain in market share. There is an increased used of polymer-based packaging by Industrial and consumer segments due to lower cost structure of the material. Also the ease of transport and convenience adds to the rising usage of the polymers. Thus with increased preference and growth in end-user industries, it is expected that the market share of polymer-based packaging products will increase.

Historically, polymer packaging has been gaining share from glass, metal and paper packaging. Thanks to its favorable properties such as light weight, low cost, corrosion resistance and versatility of use. One of the major transitions is replacement of glass bottles by PET bottles for non-alcoholic beverages. Also Fruit pulps which were earlier packed in tin cans are now being packed in PET bottles thus helping the share of polymer based packaging to grow significantly.

Valuation

If we compare the historical valuation, we find that the packaging companies are at a discount to their historical P/E multiples and thus companies are expected to demonstrate strong earnings growth in the near to medium term. Thus the fundamentals along with the valuation of the sector look pretty strong at this point.

Companies in Packaging Sector

Some of the companies included in the sector are Bilcare Ltd, Cosmo Films Ltd, Ess Dee Aluminium Ltd, Essel Propack Ltd, Ester Industries Ltd, Garware Polyester Ltd, H S I L Ltd, Hindustan Tin Works Ltd, Hindusthan National Glass & Industries Ltd, Hitech Plast Ltd, Jindal Poly Films Ltd, Kanpur Plastipack Ltd, Manjushree Technopack Ltd, S R F Ltd, Supreme Industries Ltd, Time Technoplast Ltd, Uflex Ltd etc.

Companies which can offer strong upside

• Emmbi Polyarns Ltd
• HSIL Ltd
• Kanpur Plastipack Ltd
• Time Technoplast Ltd
• The Supreme Industries Ltd.