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Essel Propack: India disappoints… - Views on News from Equitymaster
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Essel Propack: India disappoints…
Jan 31, 2006

Introduction to results
Laminated tubes major, Essel Propack, announced results for the fourth quarter and full year (January-December fiscal) late yesterday. On a consolidated basis, while topline witnessed a robust growth during the quarter, the stronger growth in bottomline was mainly due to lower tax outgo. Barring this, bottomline has actually lagged topline growth, which is evident from the PBT growth of 6% YoY.

Consolidated global picture…
(Rs m) 4QCY04 4QCY05 Change CY04 CY05 Change
Net Sales 1,947 2,261 16.1% 6,699 8,230 22.9%
Expenditure 1,515 1,758 16.0% 4,883 6,204 27.1%
Operating profit (EBDITA) 432 503 16.4% 1,816 2,026 11.6%
EBDITA margin (%) 22.2% 22.2%   27.1% 24.6%  
Other income 64 66 3.1% 80 126 57.5%
Interest (net) 18 43 138.9% 60 145 141.7%
Depreciation 188 219 16.5% 641 788 22.9%
Profit before Tax 290 307 5.9% 1,195 1,219 2.0%
Extraordinary income/(expense) - -   20 - -
Tax 80 34 -57.5% 366 314 -14.2%
Profit after Tax/(Loss) 210 273 30.0% 809 905 11.9%
Net profit margin (%) 10.8% 12.1%   12.1% 11.0%  
Effective tax rate % 27.6% 11.1%   30.6% 25.8%  
No. of Shares (m) 31.2 31.3   31.2 31.3  
Diluted Earnings per share (Rs)*         28.9  
Price to earnings ratio (x)         12.3  
*(annualised), CY = Calendar Year            

What is the company’s business?
Essel Propack is the largest laminated tubes supplier in the world. The company's global sales stand at around 4.5 bn tubes per annum, which is 30% of the global laminated tubes market. Over the years, Essel has acquired a global status, with presence in China, Egypt, Colombia, Venezuela, Mexico, the US, Germany, India, Nepal, the Philippines and Indonesia. A large part of this global stature has been possible due to the merger with Propack in 2001. The demand for its products is highly linked to growth of the oral care industry, which again depends on economic growth. In early 2003, the company commissioned a plant in Virginia, US, to cater solely to P&G's laminated tube needs in the US and Mexico. In August 2004, Essel acquired Arista Tubes of UK and then went on to acquire Telcon Packaging in April 2005, in order to increase its presence in the EU and UK.

What has driven performance in 4QCY05?
India fails to score: The company reported dismal revenue growth in its Indian operations. Also, margins of the Indian operations declined by 170 basis points, resulting in a 6% YoY decline in operating profits during the quarter. However, higher other income and lower tax outgo arising from tax savings from Baddi, a tax haven, improved the picture as bottomline grew by a decent 15% YoY. India accounted for close to 29% of consolidated revenues as compared to around 34% in the same quarter of previous year. However, it must be noted that domestic margins are much higher as compared to international operations, as competitive pressures are lesser in India.

India operations
(Rs m) 4QCY04 4QCY05 Change CY04 CY05 Change
Net Sales 652 653 0.2% 2,268 2,528 11.5%
Expenditure 457 469 2.6% 1,448 1,747 20.6%
Operating profit (EBDITA) 195 184 -5.6% 820 781 -4.8%
EBDITA margin (%) 29.9% 28.2%   36.2% 30.9%  
Other income 8 42 425.0% 29 93 220.7%
Interest (net) (12) (3) -75.0% (27) (21) -22.2%
Depreciation 59 61 3.4% 225 211 -6.2%
Profit before Tax 156 168 7.7% 651 684 5.1%
Extraordinary income/(expense) - - - 20 - -
Tax 57 54 -5.3% 222 223 0.5%
Profit after Tax/(Loss) 99 114 15.2% 409 461 12.7%
Net profit margin (%) 15.2% 17.5%   18.0% 18.2%  
Effective tax rate 36.5% 32.1%   34.1% 32.6%  
No. of Shares (m) 31.3 31.3   31.3 31.3  
Diluted Earnings per share (Rs)*         14.7  
Price to earnings ratio (x) 33.5% 28.9%     24.1  
*(trailing 12 months)            

Staff costs continue dent margins: Higher staff costs (see table below) affected the company’s operating margins during the year. As far as international operations are concerned, it must be noted that the company acquired Arista Tubes (UK) and also acquired Telcon Packaging (UK) in April 2005, whose employees are now on Essel’s payroll. Also, it must be noted that the company’s Himachal Pradesh unit started production in July this year, the benefits of which will take some time to factor in.

Cost break-up
as a % of net sales 4QCY04 4QCY05 CY04 CY05
Consumption of raw materials 42.9% 41.8% 42.1% 43.5%
Staff cost 14.9% 16.2% 13.1% 16.0%
Other expenditure 20.0% 19.7% 17.7% 15.8%
Total expenditure 77.8% 77.8% 72.9% 75.4%

International push: As far as the global operations were concerned, China witnessed consistent volume sales and the company continued its efforts at cost cutting and efficiency improvements. It must be noted that Essel Propack has a 70% market share in China and going forward, due to its two new offerings, ‘Minitubes’ and ‘Co-extruded’ tubes, this figure could go up. In Germany, the laminated tube volumes remained stable during the year 2005.

As far as it’s two UK subsidiaries –Arista Tubes and Telcon Packaging – are concerned, Essel Propack’s current aim is to improve efficiencies and reduce costs. The company is also targeting new big-ticket customers in the region. However, these two companies continue to be a drag on the bottomline currently. As per the company, these will start contributing to profits by 2QCY06. Further, the company’s Russian operations, which commenced commercial production a few months ago, have stabilized and expansion plans for this unit are already on the cards, as there is huge demand. The US, another country where the company is in expansion phase, also showed good growth during the quarter. The company is tapping new customers for its invisible seam tubes, a new technology currently available only in the US. It must be noted that Essel is P&G’s (US) sole laminated tube supplier, which is mainly used in the oral care industry.

Over the past few quarters…
  4QCY04 1QCY05 2QCY05 3QCY05 4QCY05
Sales growth (YoY) 26.2% 25.2% 35.2% 18.7% 16.1%
OPM (%) 25.1% 26.0% 24.8% 26.9% 22.2%
Net profit growth (YoY) 18.0% 8.3% 9.7% 3.1% 15.2%

What to expect?
At the current price of Rs 355, the stock trades at a price to earnings multiple of 9 times our estimated CY07 earnings and price to sales of almost 1.1 times. We are enthused by Essel Propack’s performance on the revenue front and the company seems well on its way to manufacture every second laminated tube in the world. However, margin pressure will continue till its new acquisitions turn profitable. The company has increased its presence both in the local as well as international markets and is the sole tube supplier to the world’s largest FMCG company, P&G.

The results are inline with our estimates and based on this, we continue to retain our November 2005 ‘HOLD’ recommendation on the stock with a target price of Rs 517 with a two-year perspective. We shall soon update our research report on the company.

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