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Essel Propack: Not a good year! - Views on News from Equitymaster

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Essel Propack: Not a good year!
Feb 13, 2008

Performance summary
  • Consolidated topline grows 17% YoY in CY07 led by the core tubing business registering around 18% YoY growth.
  • Margins for full year are at 16% down 5.8% YoY.

  • Lower operating margins and other income leads the bottomline to fall by 32% YoY excluding extraordinary item in CY07 on a consolidated basis.

  • On a standalone basis, topline grows by 10% YoY for the full year, while bottomline is down 11% YoY.

Consolidated picture
(Rs m) 4QCY06 4QCY07 % change CY06 CY07 % change
Net sales 2,893 2,830 -2.2% 10,092 11,783 16.8%
Expenditure 2,311 2,490 7.7% 7,886 9,890 25.4%
Operating profit (EBDITA) 582 340 -41.6% 2,206 1,893 -14.2%
EBDITA margin (%) 20.1% 12.0%   21.9% 16.1%  
Other income 163 37 -77.3% 160 152 -5.0%
Interest 83 106 27.7% 235 392 66.8%
Depreciation 296 116 -60.8% 865 785 -9.2%
Profit before tax 366 155 -57.7% 1,266 868 -31.4%
Extraordinary item - 61   - 72  
Tax 65 21 -67.7% 281 202 -28.1%
Profit after tax/(loss) 301 73 -75.7% 985 594 -39.7%
Net profit margin (%) 10.4% 2.6%   9.8% 5.0%  
No. of shares (m) 156.5 156.5   156.5 156.5  
Diluted earnings per share (Rs)*         3.80  
Price to earnings ratio (x)*         11.9  
* On a 12-month trailing basis

What has driven performance in CY07?
  • The consolidated revenue grew 17% YoY in CY07. The core tubing business grew by 18% YoY led by strong performance in EAP, Europe and Americas. The consolidated numbers are not strictly comparable with the previous period on account of the change in the business composition (acquisition of two new businesses viz. the medical devices and specialty packaging). These new businesses contributed 18% to the total revenues.

  • The new unit for specialty packaging in Uttranchal has come on stream. This will help the company balance its revenue stream and de-risk the business. EPL is planning to shift the Arista UK operations to the new plant in Poland. Poland has lower operating costs, which will result in the plastic tube operations in Europe becoming profitable. The Polish plant has started ramping up and is expected to reach near full operations by end April 2008. The revenue growth adjusting for the foreign currency impact has grown by 28% YoY. On the domestic front, the topline has grown by 10% YoY. It contributed 26% to the total revenues as compared to 28% in CY06. The revenues are in line with our expectations.

  • On a consolidated basis, the operating profits fell by 40% YoY for CY07. Higher expenses led to the decline in operating margins. For CY07, while staff costs (as percentage of sales) reduced, raw material prices were 47% of total sales, as compared to 40% in CY06. The margins for the full year were at 16% down 5.8% YoY. On the domestic front, margins fell by 270 basis points at 24% in CY07. With crude prices expected to remain high and the lack of bargaining power, margins will continue to face pressure. The margins are lower than our expectations.

    Consolidated cost break-up
    As a % of net sales 4QCY06 4QCY07 CY06 CY07
    Total Cost of goods 45.7% 48.5% 40.1% 46.8%
    Staff Cost 17.8% 19.9% 19.4% 18.5%
    Other Expenditure 16.4% 19.6% 18.6% 18.6%

  • Lower operating margins and other income led the bottomline to fall by 32% YoY excluding the extraordinary item (one-time expenses relating to closure of overseas units as part of company’s cost-restructuring initiative) in CY07 on a consolidated basis. To add to the woes, interest costs were higher by 67% YoY on account of hardening of global interest rates and the higher levels of borrowing entailed by the new greenfield and the acquisition projects. The depreciation was lower providing some relief (on account of aligning the method of depreciation followed by a subsidiary to the straight-line method). On the domestic front, the bottomline declined by 12% YoY excluding the extraordinary item.

What to expect?
At the current price of Rs 45, the stock is trading at a price to earnings multiple of 11.9 times its trailing 12 month earnings and 5.8 times our estimated CY09 earnings. Though on the topline front, the company has performed in line with our estimates, it has disappointed in terms of margins. Lack of bargaining power, higher raw material prices and ramp up of the facilities continue to pressurize the performance. However, its foray into overseas markets and acquisitions are expected to contribute positively in the coming years. Further, turnaround of the operations in Europe and USA is moving along as estimated.

Going forward, we believe that its four verticals namely, lamitubes, plastic tubes, specialty packaging and medical devices would drive the growth. Its transformation from single product to multi product would help it in the future. Though the company would face pressure on its margins front, once the new operations settle down, better times are expected.

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