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Ess Dee Aluminium: Packaging giant in the making?

Apr 2, 2009

Started in 1994, Ess Dee Aluminium (EDAL) is a leading supplier of customised aluminium foil-based flexible packaging solutions in India. It provides primary packaging solutions to the pharmaceutical, food and FMCG sectors. It cold rolls aluminium foil stock to aluminium foil, which is further converted into printers stock through the process of lamination for making packaging products. It caters to the needs of big names in pharma and FMCG space namely Cipla, Pfizer, Lupin, Glenmark Pharma, ITC, Pidilite, HUL, Johnson & Johnson and Wrigley India among others. Scope
The growing demand for pharmaceutical products justifies the higher demand for pharma packaging. Forecasts indicate that the global pharmaceutical packaging demand will increase at 6% annually to over US$ 34 bn by 2011. Further, according to McKinsey, the Indian pharma market is set to grow from US$ 7.6 bn in FY08 to US$ 20 bn by 2015 as India moves up the value chain (bulk to generics to formulations). In India, 50% of the packaging products are imported and 25% are manufactured by unorganised players. This provides huge opportunity to large and integrated players like EDAL. The company is now also increasing its offerings to the FMCG segment which is estimated to be around US$ 17 bn and is set to double to US$ 33.4 billion by 2015. To put things in perspective, packaging forming around 6% to 8% of sales of FMCG products and hence the scope is huge.

While initially, packaging was merely a medium to carry a product, discovery of aluminium foil changed the scope of packaging. Increasing health consciousness, urbanisation, strong growth of modern trade, changing eating habits and adoption of stricter regulations and standards governing the production, storage, distribution and labelling of pharmaceuticals has increased the demand for quality packaging. It not only serves the purpose of protection, prevention and presentation, but also serves as a good advertising tool.

Further, it is also observed that a mere 20% of the population in India consumes 80% of the packaged production whereas the remaining 80% of the population have an access to only 20% of the packaged production. There exists an exceptional gap in India between the necessary and actual demand for packaging of essential commodities and hence demand for packaging is expected to be strong.

Additional capacity on its way
EDALís currently has a total installed capacity of 18,000 MT and a 4,200 MT PVC manufacturing plant along with its wholly owned subsidiary, Flex Art Foil Private Limited (FAFPL). In order to meet the growing demand, EDAL has entered into an agreement with MALCO (the erstwhile owner of India Foils (IFL) and a Vedanta Group company) to work towards the revival of IFL through a rehabilitation scheme. EDAL along with MALCO have infused Rs 2.6 bn in IFL in the form of equity and preference shares As per the scheme of arrangement, EDAL has paid Rs 1.2 bn towards making IFL its subsidiary (90% ownership). When fully integrated, the IFL-EDAL combine will have a capacity of 36,000 tonnes, twice the level of EDALís present capacity, making it the largest pharmaceutical foil manufacturing company. This would also help the company overcome the risk involved with the long gestation period in setting up a new plant.

Well thought out hub and spoke model
EDAL operates on a 'Hub and Spoke' business model. Its Daman unit acts as a hub and receives the aluminium foil stock from the supplier. Daman also acts as spoke with main aluminium foil rolling and converting process is done from where printers stock is supplied to its five facilities in Daman, Goa, Baddi, and Vasai. These units are located close to the pharmaceutical manufacturing hubs, which helps EDAL in meeting the location-specific customer requirements and just-in-time supply to its customers. It also minimises the companyís logistical costs and gives it an edge over its competitors.

Hub and spoke model
EDAL's unit Client locations
Daman Daman, Silvassa, Gujarat, Chennai, Indore
Vasa Maharashtra
Goa Goa, Bangalore, Hyderabad
Baddi Himachal, Jammu, Uttaranchal

Ess Dee Aluminium :Operating ratios Between FY05 and FY08, the company has reported a topline CAGR of more than 230%. Aluminium packaging products earn nearly 80% of the revenues. Capacity expansions and higher volume sales aided the company to outpace the industry growth rates in terms of both revenues and profitability. The net profits have witnessed a robust growth of 848% per annum over the period of three years. Lower base and improvement in the operating margins led to the huge jump. EDALís operating margins have improved from 9% in FY05 to 28% in FY08 mainly on account of lower other expenses. However, the raw material prices have increased as a percentage of sales from 59% in FY05 to 63% in FY08 with increase in aluminium prices. Going forward we expect a decent topline performance on account of the new capacities and strong demand. However margins may taper in the medium term on account of higher raw material costs and other expenses due to acquisition of India Foils.

We shall provide further details on the financials in the next article.

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