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Essel Propack: Is the worst over?
Mar 17, 2010

Essel Propack Limited (EPL), promoted by Essel group is the world's largest speciality packaging company. The company's operations span over 13 countries with 25 manufacturing plants. The company's global sales stand at around 4.5 bn tubes, which is 32% of the global laminated tubes market. Over the years Essel has acquired a global status, with presence in USA, Mexico, Colombia, United Kingdom, Poland, Germany, Egypt, Russia, China, Philippines, Singapore, Indonesia and India. The company caters to the oral care, cosmetics, personal care, pharmaceutical, food and industrial sectors. The company had sales of Rs 13.6 bn on a TTM basis. We herein do a SWOT analysis of EPL's business and analyse what potential and risks lie ahead for the company. Strengths

Global leader: EPL is the global leader in its business and has a long-standing relationship with Unilever, P&G and Colgate. The company's strength lies in the fact that it has global size operating and high level of backward integration enabling it to enjoy high economies of scale. Furthermore, the company's plants are situated at favourable locations enabling it to become the lowest cost producer of laminated tubes in the world.

Dependence on consumer goods: EPL derives a large part of its revenue supplying to FMCG, pharmaceutical and food companies. This ensures that even in a slow down the company's sales remain intact. Moreover, the company supplies to companies who are rivals in business eg, HUL and P&G. This ensures that in case of a price war between the rivals, the company's sales volumes remain intact.

Weakness

Exposure to foreign currency: Approximately 74% of EPL's revenue is derived from the overseas market. This exposes the company to vagrancies of the foreign currency. In CY08, the company had a forex loss of Rs 517 m or about Rs 3.3 per share.

High levels of debt: EPL is highly leveraged with a debt to equity ratio of 1.5 times. This is not a good sign as servicing a large debt can put severe pressure on the company's bottom line in times of a slowdown.

Goodwill on books: As a result of acquisitions, the company had Rs 4.3 bn as goodwill on its books as of CY08. This translated into 0.63 times the book value as of CY08. EPL still has to write off this goodwill and it is a matter of concern.

Opportunity

Growing markets: EPL has its manufacturing plants in countries like Mexico, Colombia, Poland, Egypt, Russia, China, Philippines, Indonesia and India. These are fast growing markets with increment demand expected from them.

Consolidated industry: Besides EPL, the other major players in the laminated tubes sector with a global presence are Cebal Pechiney (not a core area of focus for Alcan, the parent major) and Betts (has been incurring losses for the last five years). Such a consolidated industry structure combined with EPL's manufacturing facilities in cost competitive locations is a big positive for the company.

Threats

Competition: While ERL is the global market leader and there are no companies capable of competing with EPL on a global basis, there are several smaller regional companies which EPL has to contend with.

Global slowdown: EPL's business is spread across the world which helps ensure that the company's sales are not affected in case of a slowdown in a particular region. However, in case of a global slowdown, the company's business is affected as it is exposed to all the regions which are affected by the slowdown, negating the sales growth the company could have from economies which are still growing.

What lies ahead...

With the pickup in the global economy, we are seeing EPL's net margins improve from 8.1% in CY08 to 9.2% on a TTM basis (the company is switching from a December year ending to March year ending). This is an indication of better times for the company. However, we are concerned about the high leverage of the company. The valuation of the stock has run up recently and we advise investors to practice caution while investing in the stock.

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