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What lies ahead for Ess Dee Aluminium? - Views on News from Equitymaster
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What lies ahead for Ess Dee Aluminium?
Mar 25, 2010

Ess Dee Aluminium Ltd. (EDAL), founded in 1994, is a leading supplier of customised aluminium foil-based flexible packaging solutions. The company has an installed capacity of 18,000 MT and a 4,200 MT PVC manufacturing plant. Its clients include big names in pharma and FMCG sectors like Cipla, Pfizer, Lupin, Glenmark Pharma, ITC, Pidilite, HUL, Johnson & Johnson and Wrigley India among others. The company acquired 90% stake in India Foils Ltd. (IFL) in FY09 for Rs 1.15 bn. IFL is one of the largest producers of Aluminium foils in Asia. We herein do a SWOT analysis of EDALís business and analyse what potential and risks lie ahead for the company. Strengths
IFL merger benefits: The acquisition of IFL which was a sick unit is expected to benefit EDAL in a number of ways. Firstly, the manufacturing capacity of the company is expected to double with the addition of IFLís manufacturing capacity. Besides this, three of IFLís manufacturing units are located in West Bengal and have ample front end conversion capacity. This would give EDAL enough flexibility to offer value added products, saving time and cost involved in Greenfield expansion. Secondly, EDAL will get access to IFLís clients and garner an improved international presence as IFL exports to 35 countries. Thirdly, EDAL will be able to use IFLís accumulate losses to reduce its tax liabilities.

Foray in FMCG space: EDALís revenue is highly dependent on the pharma segment. However, to de-risk its revenue, the company forayed in to FMCG space in FY08. The domestic FMCG sector is slated to grow at an annual growth rate of 7% between 2008 and 2015 giving the company plenty of head room to grow.

Weakness
Dependence on single supplier for key raw material: EDAL sources all its raw material i.e. aluminium sheets from a single supplier. In case of any disruption in the supplierís business or strained relations between the supplier and EDAL there can be a negative effect on the companyís business.

Lack of bargaining power: With EDAL being dependent on only one supplier and supplying packaging to big names in pharma and FMCG, the company lacks bargaining power with both suppliers and customers. This results in pressure on the companyís margins as well a higher requirement of working capital as a result of extension of credit to its customers.

Structural deficiencies: EDALís business is largely volume driven and constantly requires investment in capacity to increase sales. In case of a slowdown, problems like cost of investment, interest payment on debt for expansion and under utilization of capacity come to the fore front and start affecting the companyís bottom line.

Opportunities
Sector growth: Strong growth in Indian pharma, FMCG, food and retail sector has led to strong demand for packaging. In turn, demand for better quality packaging has led to companies switching to aluminium packaging. EDAL is active in the pharma and FMCG space. The scope of growth for the company can be judged from the fact that global pharmaceutical packaging demand is slated to grow at 6% annually until 2011 while the domestic demand is expected to growth at 12% annually till 2015. In fact domestically the scope for growth in pharma packaging is much larger since 50% of the products are imported and 25% of the products are supplied by players in the unorganized market. Moreover, the US pharma companies shifting from glass and plastic containers to unitized packs by 2012 is also expected to lead to huge demand for aluminium packaging. FMCG market in India is expected to grow at an annual rate of 7% giving further scope for growth to the company.

Threats
Exposure to aluminium prices: EDALís primary raw material is aluminium. This made up 67% of sales in FY09 (63% in FY08). Volatility in aluminium prices are expected to impact the company as it lacks bargaining power to pass on cost increases.

What lies ahead...
At a current market price of Rs 400, the stock of EDAL is trading at 6.8 times our estimated FY12 earnings. With ample scope for growth in both the sectors (pharma and FMCG) the company is operational in, we see a lot of scope for investors to gain from this stock in the long term.

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