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Essel Propack: New engines of growth! - Views on News from Equitymaster
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Essel Propack: New engines of growth!
Jan 31, 2007

Performance summary
Laminated tubes major, Essel Propack announced its results for the fourth quarter and full year ended December 2006 yesterday. Topline during both the periods has grown at a healthy double-digit pace. Higher raw material cost and labour costs have dented the margins for both the periods under consideration. Despite higher other income, the bottomline for both the periods has grown at much slower pace than the topline.

Consolidated picture
(Rs m) 4QCY05 4QCY06 % change CY05 CY06 % change
Net sales 2,261 2,893 28.0% 8,166 10,099 23.7%
Expenditure 1,763 2,312 31.1% 6,229 7,810 25.4%
Operating profit (EBDITA) 498 581 16.7% 1,937 2,289 18.2%
EBDITA margin (%) 22.0% 20.1%   23.7% 22.7%  
Other income 71 163 129.6% 171 225 31.6%
Interest 43 83 93.0% 132 279 111.4%
Depreciation 219 296 35.2% 766 937 22.3%
Profit before tax 307 365 19.0% 1,210 1,298 7.3%
Extraordinary item -       12  
Tax 34 65 91.2% 308 302 -1.9%
Profit after tax/(loss) 273 300 10.0% 902 984 9.1%
Net profit margin (%) 12.1% 10.4%   11.0% 9.7%  
No. of shares (m) 156.5 156.5   156.5 156.5  
Diluted earnings per share (Rs)*         6.29  
Price to earnings ratio (x)*         12.2  
* On a 12-month trailing basis            

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 closely tracks the 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. The company recently acquired an 85% stake in Tacpro Inc. (USA) and Avalon Medical Services (Singapore).

What has driven performance in CY06?
On a consolidated basis, the company’s sales have registered a growth of 24 % YoY for CY06. Along with the traditional Laminated Tube business, the company now has new engines of growth in Plastic Tube, Medical Devices and Speciality packaging materials business.

Division performance: The tube business now constitutes 89% of the total revenue base for the year as compared to 100% in CY05. The margins have been steady as compared to the previous year due to the turnaround of loss making units in Mexico, UK and Russia. The laminated business in Mexico and UK also broke even in the third quarter. EPL acquired the medical devices operations of two companies in April 2006. It acquired 85% equity stake in Tacpro Inc USA and Avalon Medical Services Pte Ltd, Singapore (both under the same management). This division constituted 7% of the revenues in 2006 with operating margins at 20%. The medical device business opened up a new frontier, leveraging on EPL’s core competencies of plastic processing and complementing the design & prototyping capabilities.

The company acquired the Speciality business in August 2006, which constituted 4% of revenues for 2006. It is an India centric business with operating margins of 13%. EPL has successfully integrated the business in a short span of time and would be in a position to start rolling out products for high end pharma and food applications. With these acquisitions, the company saw shifts in the revenue base for CY06 and will be able to improve revenue growth at a faster pace in the coming years.

India operations
(Rs m) 4QCY05 4QCY06 % change CY05 CY06 % change
Net sales 653 810 24.0% 2,529 2,819 11.5%
Expenditure 469 600 27.9% 1745 2055 17.8%
Operating profit (EBDITA) 184 210 14.1% 784 764 -2.6%
EBDITA margin (%) 28.2% 25.9%   31.0% 27.1%  
Other income 42 48 14.3% 88 115 30.7%
Interest -3 22   -21 57  
Depreciation 61 57 -6.6% 210 211 0.5%
Profit before tax 168 179 6.5% 683 611 -10.5%
Extraordinary item -       12  
Tax 54 58 7.4% 223 188 -15.7%
Profit after tax/(loss) 114 121 6.1% 460 411 -10.7%
Net profit margin (%) 17.5% 14.9%   18.2% 14.6%  

India operations: Essel Propack’s domestic operations registered an 11.5% YoY growth in the sales for the full year. However, the margins contracted by 390 basis points due to higher operating expenses. The company’s Indian operations contributed around 28% of consolidated revenues during CY06 as compared to 31% in CY05. The net profits (excluding the extraordinary item) fell by 8% YoY. Net profits also witnessed a decline in their contribution to consolidated bottomline (from 51% to 42% inCY06). The company had acquired Packaging India, a speciality packaging company in CY06, which enabled it to consolidate its position as the leader in the domestic packaging industry. With India becoming the world-manufacturing hub for prescription drugs and also taking into account the current retail boom, the need for convenience packaging is only going to increase. Furthermore, the pharma sector is going to be a key growth driver. The management has indicated better times ahead for the Indian operations.

International revenues: The international operations of the company have contributed 72% (up from 69% in the year 2005) of the consolidated revenue, thus reflecting the trend of increasing overseas growth and consolidation. While the revenues grew by 29% YoY for the full year, the net profits were up 30% YoY. Turnaround of the acquired businesses in UK and the start-ups in Mexico and Russia helped drive the strong growth. The year 2006 saw additions of new customers from the skin and hair care segments in US. Going forward, the international business will grow faster than the domestic operations

Consolidated cost break-up
As a % of net sales 4QCY05 4QCY06 CY05 CY06
Total Cost of goods 45.2% 47.7% 56.5% 59.9%
Staff Cost 17.5% 18.6% 22.4% 24.9%
Other Expenditure 21.5% 17.2% 25.5% 23.5%

Margins under pressure: Raw material prices continued to be volatile and unpredictable, which dented the operating margins during the year. Also, the turn around of loss making business took much longer than anticipated by the management and this impacted the margins further. The staff costs also increased to 22% in CY06 from 20.8% in CY05 due to the impact of new acquisitions and capacity expansions in the high wage economies of Europe and USA. However, the company is taking steps to improve the overall operating margin scenario.

Net profits grew at a slower pace: The bottomline for the consolidated entity grew by 9.1% YoY in CY06. There is an extraordinary item to the tune of Rs 12 m. Excluding the same, the bottomline grows by 10.5% YoY. The interest expenditure witnessed a sharp increase of more than 100% YoY due to the continued global hardening of interest rates and as a result, the company’s borrowings overseas and in India faced a trend of increasing costs.

What to expect?
At the current price of Rs 77, the stock is trading at a price-earning multiple of 9.4 times its CY08E earnings. According to the management, EPL will continue to focus on moving the revenue platforms to higher value products, complete the turnaround of units, and improve the margins. Along with expanding its tube business in newer geographies, the company has identified newer growth areas of medical devices and speciality packaging. Given the increased visibility on the international side and the turnaround of acquisitions, we had given a BUY in August 2006 with a target price of Rs 110 over the next two to three years. We maintain our view.

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