Essel Propack: Eyeing the globe

Laminated tubes major, Essel Propack, had recently reported its consolidated numbers. The company's global sales stand at around 3 bn tubes, which is 25% of the global tubes market. In year 2002 (FY03), Essel reported over 13% topline growth, but profit growth was a marginal 5%.

(Rs m)	FY02	FY03	Change
Net sales	4,123	4,666	13.2%
Other Income	55	53	-3.6%
Expenditure	2,771	3,165	14.2%
Operating Profit (EBDIT)	1,352	1,501	11.0%
Operating Profit Margin (%)	32.8%	32.2%
Interest (net)	114	111	-2.6%
Depreciation	444	556	25.2%
Profit before Tax & extraordinary items	849	887	4.5%
Tax	179	241	34.6%
Minority interest	16	40	150.0%
Extraordinary items	-66	-35	-
Profit after Tax/(Loss)	620	651	5.0%
Net profit margin (%)	15.0%	14.0%
No. of Shares (eoy) (m)	31.1	31.2
Diluted Earnings per share*	19.9	20.9
Current P/e ratio		6.3
*(annualised)

The company over the years, has acquired a global status, with presence in China, Egypt, Colombia, Venezuela, Mexico, Germany, Nepal and SE Asia. Recently the company commissioned a plant in Virginia, USA, to cater solely to P&G's laminated tube needs in the US and Mexico. Overall, going forward Essel will cater to 55% of P&G's global tube requirements, including China. For the first time, India's contribution has gone below 50% of revenues. Looking at the company's global presence, we believe this is a continuing trend.

India business (including Nepal and Egypt) recorded a marginal dip in topline. Toothpaste market has been facing tough times 2002 and the trend seems likely to continue in 2003 as well. Infact, in the December quarter, Essel's revenues dipped by 11% YoY. The company is also phasing out of Nepal owing to political disturbances in that country. Higher operating margins (owing to cost efficiencies) saw Essel posting an 18% net profit growth in FY03.

China (including Philippines) now accounts for over 30% of the company's revenues. The company has upped its market share in the region from 43% in FY02 to 50% in FY03. China region reported a 12% revenue growth and a 15% growth at the operating profit level. Essel is targeting a 60% share of this 2 bn tube market and has identified the region as its growth engine.

Europe (mainly Germany) grew by 23% in revenues. However margins in the region are not very lucrative owing to high competition. The Americas region (Colombia, Mexico and Venezuela) saw a marginal 2% growth in revenues. Here too, profitability is lower. Going forward the supplies to P&G in the US and Mexico will spearhead revenue growth from this region. However, the company has not disclosed what number of laminating tubes they are to supply to P&G.

At the current market price of Rs 132 the stock trades at 6.3x FY03 earnings. The valuations are quite low compared to Essel's earning potential and growth strategy going forward. However, sentiment towards the counter has been marred due to pomoter concerns and the fact that margins beyond Indian shores are not very lucrative.