Aluminum Can Entry And Premium Packaging Mix Will Drive Strong Long Term Upside

Catalysts

About AGI Greenpac

AGI Greenpac manufactures premium glass and aluminum packaging solutions for beverages, cosmetics, pharmaceuticals and other consumer industries.

What are the underlying business or industry changes driving this perspective?

• Execution of large brownfield debottlenecking in container and specialty glass, adding incremental tonnage with limited downtime, is expected to enhance operating leverage and support EBITDA margins and absolute earnings over the next 18 to 24 months.
• Entry into aluminum beverage cans with a phased capacity ramp from 950 million to 1.6 billion cans positions the company in a large and sustainable packaging category, with the potential to support revenue growth and return on capital once utilization crosses the 60 to 70 percent range.
• Rising preference of global and domestic brands for premium, differentiated packaging in cosmetics, perfumery and premium beverages supports mix upgradation, which can translate into stronger realizations, gross margins and net profit performance.
• Increased use of cullet and ongoing energy efficiency initiatives at already industry leading levels reduce fuel intensity per tonne, helping to mitigate volatility in power and fuel costs and supporting stable or expanding EBITDA margins even in a high energy cost environment.
• Disciplined balance sheet management, including term loan prepayments and the ability to fund a multi year CapEx plan through internal accruals and calibrated debt, lowers financial risk and creates capacity to grow earnings as new assets ramp without significant equity dilution.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming AGI Greenpac's revenue will grow by 18.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.3% today to 15.0% in 3 years time.
• Analysts expect earnings to reach ₹6.7 billion (and earnings per share of ₹103.02) by about December 2028, up from ₹3.5 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 21.1x on those 2028 earnings, up from 13.3x today. This future PE is greater than the current PE for the IN Packaging industry at 16.3x.
• Analysts expect the number of shares outstanding to decline by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.76%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The aggressive multi year CapEx plan for the Madhya Pradesh greenfield plant and the aluminum can facility could face delays, cost overruns or slower than expected ramp up, leading to higher peak debt than envisaged and depressing return on capital and net earnings over an extended period.
• The entry into aluminum beverage cans and the significant glass capacity additions are predicated on sustained high demand growth in beer, liquor and beverages, so any prolonged slowdown in consumption, regulatory changes, or increased competition could leave the company with underutilized assets and weaker revenue growth.
• The business model remains structurally exposed to volatile fuel and raw material costs despite efficiency gains and higher cullet usage, so a sustained upcycle in energy prices without commensurate pricing power in contracts could compress EBITDA margins and net profit.
• Rising dependence on premium and specialty glass, including international customers, exposes the company to global macro, tariff and geopolitical risks that could limit its ability to scale exports as planned and result in lower than expected realizations, impacting gross margins and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₹1520.0 for AGI Greenpac based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ₹44.4 billion, earnings will come to ₹6.7 billion, and it would be trading on a PE ratio of 21.1x, assuming you use a discount rate of 12.8%.
  
• Given the current share price of ₹722.7, the analyst price target of ₹1520.0 is 52.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.