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Essel: The road ahead

Jan 3, 2002

Essel Packaging had its share of limelight in the year FY01. The company merged with Propack and in effect became the largest company making laminated tubes, having a dominant presence both in India and China. We take a look at how the company fared in the recent past and what's the outlook going forward.

(Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
Net Sales 593 598 1.0% 1,107 1,130 2.1%
Other Income 13 20 50.4% 20 25 25.8%
Expenditure 365 373 2.3% 692 701 1.2%
Operating Profit (EBDIT) 228 225 -1.1% 415 430 3.6%
Operating Profit Margin (%) 38.4% 37.6% 37.5% 38.0%
Interest 1 21 - 4 44 -
Depreciation 69 74 7.1% 137 141 3.5%
Profit before Tax 171 150 -12.0% 294 270 -8.3%
Extraordinary items 0 -8 - 0 -12 -
Tax 45 42 -6.9% 75 72 -4.1%
Profit after Tax/(Loss) 126 100 -20.1% 219 186 -15.1%
Net profit margin (%) 21.2% 16.8% 19.8% 16.5%
No. of Shares 15.2 31.2 15.2 31.2
Diluted Earnings per share* 16.1 12.9 14.0 11.9
P/E Ratio 18.2 19.6

Essel's financials do not reflect the bouyancy of Propack merger. In the first half of the current year, the company's topline has grown by a mere 2% and the profits have declined 15% YoY due to a heavy interest burden. The company's performance reflects the downturn faced by the FMCG sector. However, the good thing is that Essel has managed to improve its operating margins even in this scenario.

Cost break-up
(Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
Material costs 241 240 -0.4% 438 442 0.9%
Staff costs 19 25 30.6% 43 52 21.3%
Other expenditure 105 108 3.2% 211 206 -2.0%
Total expenditure 365 373 2.3% 692 701 1.3%

The increase in interest cost is due to the additional debt taken for funding the acquisition of Propack's tubing operations and for funding equity contribution in the overseas ventures. The estimated dividends based on current profits, from these operations aggregating almost Rs 100 m have not been considered in the above results.

Due to the merger with Propack, Essel should be able to touch base volume of 3 bn tubes by 2002 and should cross 7 bn tubes in 2005. According to Mr. R. Chandrasekhar, Director, Essel Propack, by 2005, the company is looking at an 80% market share in both India and China and a 60% share of the global laminated tubes market.

Consolidated global numbers
(US$ m) 1QFY01 1QFY02 Change (%)
Total Revenue 13.1 21.3 62.3%
Operating profit 4.6 7.0 52.0%
PBT 2.8 3.9 40.6%
Net Profit 2.1 3.0 43.6%

None of the overseas operations have been consolidated in above results. According to the company release, Essel Propack's consolidated global revenues grew by 62% to US$ 21.3 m (approx: Rs 1,000 m) the first quarter of FY02. The net profit was up 44% to US$ 3 m (Rs 142 m) during the same period. The company is likely to consolidate its operations in the FY02 annual report.

At the current market price of Rs 234, the stock trades at 20x 1HFY02 annualised earnings (excluding overseas operations). As per our estimates, the stock is trading at a P/E of 11.5x anticipated global FY02 numbers. Given the benefits of consolidation in terms of balance sheet size, the stock is likely to see good times ahead. However, the promoter's integrity has been under a cloud over its other businesses. This may be a reason for the downside in valuations.

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