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Essel Propack: Volumes remain lacklustre - Views on News from Equitymaster

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Essel Propack: Volumes remain lacklustre

Feb 12, 2013

Essel Propack Limited has announced its third quarter financial results of 2012-2013 (3QFY13). The company has reported a 8% YoY growth in sales and 62% surge in profits. Here is our analysis of the results.

Performance summary
  • Essel Propack posted an 8% rise in topline backed by business growth in all regions. For 9mFY13, revenues grew by 15.7% led by double-digit growth in all geographies.
  • Operating margin expanded by 150 basis points (1.5%) aided by controlled raw material costs and other expenses. During 9mFY13, operating margin increased by 110 basis points (1.1%).
  • Profits surged by 62% on the back of lower interest costs and modest rise in tax charges. For 9mFY13, earnings registered a 68% jump.

Consolidated picture
(Rs m) 3QFY12 3QFY13 % change 9mFY12 9mFY13 % change
Revenues 4,148 4,479 8.0% 11,711 13,552 15.7%
Expenditure 3,458 3,669 6.1% 9,788 11,177 14.2%
Operating profit (EBDITA) 690 811 17.5% 1,923 2,375 23.5%
EBDITA margin (%) 16.6% 18.1%   16.4% 17.5%  
Other income 42 49 15.4% 129 132 2.7%
Interest 214 210 -1.6% 601 700 16.5%
Depreciation 289 332 14.8% 833 973 16.9%
Profit before tax 229 317 38.4% 618 834 35.0%
Exceptional Items - -   - -  
Forex changes (5) 1   (43) 21  
Tax 87 96 10.3% 254 314 23.7%
Profit after tax/(loss) 137 223 62.4% 321 541 68.5%
Share of profits from associates 4 5   16 19 21.4%
Minority interest (6) (7)   (16) (19)  
Loss from discontinuing operations (after tax) - -   - -  
PAT 136 221 62.3% 321 541 68.4%
Net profit margin (%) 3.3% 4.9%   2.7% 4.0%  
No. of shares (m)         157  
Diluted earnings per share (Rs)*         3.8  
Price to earnings ratio (x)*         10.5  
* On a trailing 12-months basis

What has driven performance in 3QFY13?
  • Essel Propack witnessed a subdued 8% rise in sales on a slower offtake as realizations were up by a mere 1%-2%. Barring Europe, all the other regions reported single-digit growth in turnover during the quarter. The largest geographical segment, the AMESA (Africa, Middle East and South Asia) region saw a 7.6% rise in revenues driven by 12% increase in sales from its Indian operations. The company's subsidiary in Poland has won a long term contract from a multinational FMCG company for the supply of tubes in Europe. On full ramp-up, the contract is expected to contribute Euro 15 m per annum to revenues. Essel Propack is also implementing a project in the EAP (East Asia Pacific) region for the supply of cosmetic tubes under a long term supply agreement.

    India operations
    (Rs m) 3QFY12 3QFY13 % change
    Revenues 1,326 1,486 12.1%
    Expenditure 1,057 1,179 11.6%
    Operating profit (EBDITA) 269 307 14.2%
    EBDITA margin (%) 20.3% 20.7%  
    Other income 78 56 -28.3%
    Interest 148 108 -27.0%
    Depreciation 73 93 26.5%
    Profit before tax 125 162 29.4%
    Exceptional Items - -  
    Forex changes 17 2  
    Tax 40 50 25.6%
    Profit after tax/(loss) 102 115 12.0%
    Net profit margin (%) 7.7% 7.7%  

  • Aided by lower scraps and improved product-mix, the company continued to improve its operating performance during the quarter. As a proportion of sales, cost of goods sold and other expenses declined by 141 basis points and 95 basis points respectively. However, these cost savings have been partially offset by a 90 basis points increase in staff costs to sales ratio. Barring, the loss-making European region, all the other regions have reported higher margins. The European region continued to incur losses in the wake of the ramp-up for the recently bagged project that is expected to be completed by September 2013.

    Region-wise margin performance
      3QFY12 3QFY13 Change in basis points
    AMESA 12.6% 13.6% 90.87
    EAP 20.7% 20.7% 5.41
    Americas 4.5% 8.2% 374.70
    Europe -12.9% -11.9%  

  • Earnings registered a 62% jump on a 17.5% rise in operating profit coupled with a 1.6% fall in interest costs as a result of conversion of a substantial portion of the rupee debt into dollar debt. Even the tax charges have grown by a modest 10%. The tax incidence fell to 30% from 38% in the year-ago quarter.

What to expect?
At a price of Rs. 40, the stock is trading at 6 times our estimated FY15 earnings. Essel Propack has seen no respite from sluggish offtake. A significant part of the sales growth during 9mFY13 has been on account of price-hikes taken in 3QFY12 whose impact has diminished in December 2012 quarter. The company continues to re-iterate its focus on value-led sales growth as opposed to volume driven sales growth. Essel Propack wants to concentrate on non-oral care segment which is the future growth driver and offers higher margins. The company has plans to raise the share of non-oral care sales from 39% to 50% by FY15. While this strategy appears to be value accretive in the long run, its feasibility can be factored in only after reasonable certainty about its successful implementation. Therefore, we continue to maintain Sell view on the stock. Until the company's changed business strategy delivers profits, we would advise our investors to refrain from buying the stock.

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