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Essel Propack: Decent show

Apr 20, 2005

Performance summary
Laminated tubes major, Essel Propack, reported a strong 25% topline growth for the March quarter. However, margin pressure continued, resulting in the company posting an 8% bottomline growth.

Consolidated global picture...
(Rs m) 1QCY04 1QCY05 Change CY04 Change
Net Sales 1,521 1,905 25.2% 6,689 15.9%
Expenditure 1,092 1,410 29.1% 4,801 15.8%
Operating profit (EBDITA) 429 495 15.4% 1,888.0 16.3%
EBDITA margin (%) 28.2% 26.0%   28.2%  
Other income 12 5 -58.3% 31 -60.8%
Interest (net) 6 22 266.7% 65 30.0%
Depreciation 162 176 8.6% 685 9.4%
Profit before Tax 273 302 10.6% 1,169 13.9%
Extraordinary income/(expense) - -   (20)  
Tax 93 107 15.1% 348 16.4%
Profit after Tax/(Loss) 180 195 8.3% 801 13.5%
Net profit margin (%) 11.8% 10.2%   12.0%  
No. of Shares (m) 31.2 31.3   31.3  
Diluted Earnings per share (Rs)* 23.0 24.9   25.6  
Price to earnings ratio (x)   11.9   11.6  
*(annualised),   CY = Calendar Year

What is the company's business?
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.

What has driven performance in 1QCY05?
All around revenue growth:  International operations of the company have contributed 67% (up from 63% in March 2004) of the consolidated revenues, thus reflecting the trend of increasing overseas growth and market penetration. The company's operations in China, which was under pressure for the greater part of 2004, has stabilized. In our view, profitability from this region has started to improve. India (33% of revenues) also grew by a much improved 10% in the quarter.

Indian operations
(Rs m) 1QCY04 1QCY05 Change CY04 Change
Net Sales 566 624 10.2% 2,273 -0.3%
Expenditure 358 423 18.2% 1,457 4.8%
Operating profit (EBDITA) 208 201 -3.4% 816 -8.3%
EBDITA margin (%) 36.7% 32.2%   35.9%  
Other income 12 16 33.3% 34 61.9%
Interest (net) (11) (8) - (27) -
Depreciation 57 46 -19.3% 224 -18.2%
Profit before Tax 174 179 2.9% 653 -0.6%
Extraordinary income/(expense) - - - (20) -
Tax 57 64 12.3% 219 -8.0%
Profit after Tax/(Loss) 117 115 -1.7% 414 4.0%
Net profit margin (%) 20.7% 18.4%   18.2%  
No. of Shares (m) 31.2 31.3   31.3  
Diluted Earnings per share (Rs)* 15.0 14.7   13.2  
Price to earnings ratio (x)         22.4
*(annualised),   CY = Calendar Year

Margin blues for India:  However, Essel's Indian operations saw bottomline dip by 2% despite the 10% revenue growth. We believe that the competitive pressure engulfing the FMCG industry in India seems to have forced the company to give away benefits to its key customers, which have reflected in the falling margins. With competition showing no signs of easing, Essel is likely to continue being pressured on the Indian side of its business. The new product, Minitube, which was launched in India has performed well and found increasing acceptability with customers. The Company is poised to replicate this technology in all the markets that it operates in so as to tap the potential of this technology.

What to expect?
At Rs 297, the stock trades at 9.4 times our expected CY05 consolidated earnings and market cap. to sales of 1.2x. Our projected earnings per share is Rs 30 for CY05 (much higher than annualised 1QCY05 EPS). Though we had anticipated a dip in India based margins, the dip has been sharper than that. Notwithstanding this, we believe that the company is well on its way to achieve its mission of making every second laminated tube globally.

Essel ecently acquired UK based Telcon Packaging. This acquisition is expected to spearhead the company's growth in the European market for laminated tubes. The company's second acquisition in Europe coming in quick succession, after the first one in August 2004, demonstrates its focus and is expected to trigger a phase of consolidation. This would strengthen the position of the company.

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. Please look forward to our updated Research Report of the company by this weekend.

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