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Essel Propack: Tacpro acquisition demystified - Views on News from Equitymaster

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Essel Propack: Tacpro acquisition demystified
Apr 3, 2006

Essel Propack, the world’s largest manufacturer of laminated tubes, recently acquired an 85% stake in Tacpro Inc. (USA) and Avalon Medical Services (Singapore). The company had arranged an analyst meet for the same, which we attended and here are the takeaways. About Essel Propack
Essel Propack is the largest laminated tubes supplier in the world. The company's global sales stand at around 4.5 bn tubes, which is 30% of the global laminated tubes market. Over the years Essel has acquired a global status, with presence in China, Egypt, Colombia, Venezuela, Mexico, USA, Germany, India, Nepal, Philippines and Indonesia. A large part of this global stature has been possible due to the merger with Propack in 2001. The demand for its products is highly linked to the growth of oral care industry, which again depends on economic growth. In early 2003, the company commissioned a plant in Virginia, USA, to cater solely to P&G's laminated tube needs in the US and Mexico. Going forward, Essel will cater to 55% of P&G's global tube requirements, including China. In 2004, 34% of Essel's revenues came from India and the rest from across the globe including China, US and the UK. In August 2004, Essel acquired Arista Tubes - UK, a plastic tubes company.

About Tacpro & Avalon Medical Services
Tacpro is a provider of innovative medical device designs. It specialises in catheters and delivery systems on the West coast of USA. Today, the company is the world leader in OEM balloon catheters, with a vertically integrated quality system. All in all, the company is a single source solution company.

Avalon Medical Services is based in Singapore and is owned by Tacpro Inc. It is a manufacturing company with capabilities including that of engineering services, product development, stent delivery systems and manufacturing solutions.

What does the acquisition mean?
As can be seen from their profiles, the acquired company is present in the non-surgical medical devices area, which is used by all faculties of medical practitioners. However, the company’s focus is primarily on the cardio–vascular segment. This is a recession proof industry with a high growth rate and a business where there is ‘no pinching pennies’. The acquired companies have high asset turnover, low capital intensity and is B2B in nature.

The catheter market alone is valued at US$ 5.7 bn, out, of which, US accounts for over 40% of demand. Growth rate in the industry is around 10%. From what we understand, Tacpro’s inability to service a larger set of customers has been limiting growth, which Essel Propack can reverse. As far as Asia is concerned, the market is thickly populated, but medical devices are not developed here. What more, the company has over 100 years of collective experience in the medical device history.

Essel Propack will be able to leverage its knowledge of polymers and polymers processing, adding a new dimension to the business and is thus, the acquisition is a good fit into Essel’s business.

How the numbers of Tacpro stack up?
(Rs m) CY06E as a % of EPL
Revenues 540 6.6%
Expenditure 405 6.5%
Operating Profit 135 6.7%
EBDITA margins (%) 25.0% 24.6%
Profit after Tax 108 11.9%
PAT margins % 20.0% 11.0%
ROCE 26.0% 6.90%
1 US$ = Rs 45

What to expect?
At the current price of Rs 438, the stock is trading at a price to earnings multiple of 11.1 times our CY07 earnings estimates. In our view, the current acquisition is a positive for Essel, although the benefits will take some time to seep in. With EPL’s global presence across 13 countries, it will be able to market Tacpro’s products there. Also, margins of Tacpro are inline with that of Essel’s.

The CY05 results of Essel Propack were inline with our estimates and based on this, we continue to retain our November 2005 ‘HOLD’ recommendation on the stock with a target price of Rs 517 with a two-year perspective (without taking into account the recent acquisition). We shall update our research report on the company soon.

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