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Essel Propack: Telcon deal unraveled - Views on News from Equitymaster
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Essel Propack: Telcon deal unraveled
Apr 13, 2005

Essel Propack acquired a 100% stake in Telcon Packaging, UK. As per the companyís release, Telcon Packaging is one of the two large manufacturers of laminated tubes in UK. The acquisition has been made through Lamitube Technologies Limited, Mauritius, a wholly owned subsidiary of Essel Propack. We take a look at what the deal adds to Essel.

Background
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.

Telcon Packaging, which was established in 1993, manufactures laminated tubes for oral care, cosmetics, personal care, food and pharmaceutical segments. The company supplies laminated tubes to blue chip customers in UK, mainland Europe and Israel. The manufacturing plant of Telcon Packaging is located at Swanley - Kent, near London. Telcon Packaging employs an alternative technology for manufacturing laminated tubes and has in-house capabilities such as injection moulding, printing, repro, tube making, laboratory facilities, as well as warehousing and distribution.

What does the acquisition mean?
With this acquisition, Essel Propack will now possess knowledge of the two prevalent technologies for making laminated tubes. Moreover, Essel Propack will take advantage of its strong global relationships with major customers to optimize the utilization of the spare production capacity of Telcon Packaging. Telcon has an installed capacity of 200 m tubes annually. However only 30% of the capacity is utilised. The acquisition will take Esselís lamitube making capacity closer to 5 bn tubes annually.

Telcon has a 12% market share in the UK and is also one of Europeís leading focused laminated tube suppliers. The acquisition will strengthen Essel Propackís position for winning major contracts in UK and Europe. It must be remembered that Esselís last acquisition in August 2004 was also made in the UK (Arista Tubes). Having presence both in lamitubes, as well as plastic tubes in the UK region is likely to add to its overall proposition to customers. It also means that UK as a geography will also become a key participant in the companyís growth plans. However, the company has not stated how much consideration it has paid to Telcon promoters to acquire 100% stake.

Essel Propack manufactures every third tube sold in the world and has a stated vision to make every second tube in the world. Its strategy is to achieve this both organically and inorganically. The management has clearly stated that it is looking at more acquisitions.

What to expect?
At Rs 324, the stock trades at 9.7 times our expected CY06 consolidated earnings and market cap. to sales of 1.2x. Based on this, we continue to retain our November 2004 BUY rating on the stock with a target price of Rs 435 with a two year perspective.

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