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Essel Propack: Margin woes continue - Views on News from Equitymaster

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Essel Propack: Margin woes continue

Apr 1, 2009

Performance summary
  • Consolidated and standalone topline grows by 8% YoY during CY08. Except Europe where revenues declined, other regions reported decent performance.
  • Both on standalone and consolidated basis, the operating margins decline by 2% YoY. Material costs were impacted on account of sharp rise in polymer prices.
  • Excluding the extraordinary items, the net profit for the domestic operations decline by 31% YoY. On the consolidated basis, the company reports losses to the extent of Rs 895 m (excluding the extraordinary item).
  • The board declares a dividend of Rs 0.3 per share (face value of Rs 2); dividend yield of 2.3%.

Consolidated picture
(Rs m) CY07 CY08 % change
Net sales 11,938 12,911 8.2%
Expenditure 10,110 11,190 10.7%
Operating profit (EBDITA) 1,828 1,721 -5.8%
EBDITA margin (%) 15.3% 13.3%
Other income 149 38 -74.3%
Forex gain/loss 95 (517)
Interest 489 619 26.6%
Depreciation 667 1,120 67.8%
Profit before tax 915 (497)
Extraordinary item (71) 12
Tax 205 346 68.7%
Profit after tax/(loss) 638 (831)
Share of profit from associate company 13 8 -40.0%
Less: Minority interest (44) (60)
Net profit/loss 608 (883)
Net profit margin (%) 5.3% -6.4%
No. of shares (m) 156.5 156.5

What has driven performance in CY08?
  • Essel Propack reported a standalone topline growth of 8% YoY during CY08. On a consolidated basis, the topline growth of 8% YoY was nearly 4% higher than our estimates. While till 9mCY08, the topline grew by 4% YoY, the company seems to have caught up in the last quarter. This was mainly on account of the lag effect of the price hike undertaken by the company to pass the higher input prices.

    Segmental breakup
    Regions (Rs m) CY07 CY08 % change
    AMESA 4,547 5,005 10.1%
    % of total revenues 38.1% 38.8%
    EAP 1980 2146 8.4%
    % of total revenues 16.6% 16.6%
    Americas 3249 4198 29.2%
    % of total revenues 27.2% 32.5%
    Europe 2162 1557.1 -28.0%
    % of total revenues 18.1% 12.1%
    Unallocated - 5
    % of total revenues 0.0%
    Total 11,938 12,911 8.2%

  • The global operations also witnessed an 8% YoY growth. AMESA (Africa, Middle East and South Asia) and East Asia Pacific (China, Phillipines, Indonesia) regions reported decent growth. The US performed well with a 29% YoY growth. The company however, continues to face some problems in the plastic tube business in the US. The European region proved to be the laggard and witnessed a 28% YoY decline in revenues. In case of Poland, problems on account of low machine productivity, high scrap levels, poor production reliability and quality and delayed delivery claims continue to hamper performance. Though the company is taking steps to rectify the same, it believes that the turnaround will still take time.

    PBIT margin trend…
    Regions (Rs m) CY07 CY08 % change
    Amesa 872 841 -3.5%
    % of segmental revenues 19.2% 16.8%
    EAP 627 740 18.0%
    % of segmental revenues 31.7% 34.5%
    Americas 2 132 8143.8%
    % of segmental revenues 0.0% 3.1%
    Europe (174) (925) 430.2%
    % of segmental revenues -8.1% -59.4%
    Unallocated 619 578 -6.7%
    % of segmental revenues 11791.8%
    Total 1,945 1,366 -29.8%

  • Essel Propack’s input costs were impacted on account of sharp rise in polymer prices with crude touching record highs in the first half of the fiscal. Further, with the company not having the bargaining power, there was a lag effect in passing the price hike. The company, however, reported better margins for the full year as compared to 9mCY08 (11.3%) performance on account of decline in crude prices in the last quarter. As compare to our estimates of 11.5%, Essel Propack has earned 13.3% margins in CY08. On the regional PBIT front, while AMESA witnessed decline in margins, Europe continues to report losses.

  • Excluding the extraordinary items, the net profit for the domestic operations declined by 31% YoY. Lower operating margins, higher interest costs and forex losses on account of devaluation of the rupee against other currencies led to the bad performance. On the consolidated basis, the company reported losses to the extent of Rs 895 m (excluding the extraordinary item). The global operations as compared to profits of Rs 235 m in CY07 , witnessed losses of Rs 1.2 bn during CY08.

What to expect?
At the current price of Rs 13, the stock is trading at a price to earnings multiple of 7.6 times our estimated CY10 earnings. The company continues to face problems due to higher input prices and forex losses. Further the global operations particularly the plastic tube segment is also a drag on its performance. Though the lower crude prices have bought in some relief, any rise would once again pressurise its margins. We expect tough times to continue for the company in the medium term.

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