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Essel Propack: Mixed start to the year - Views on News from Equitymaster
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Essel Propack: Mixed start to the year
Apr 20, 2007

Performance summary
Laminated tubes major, Essel Propack, has announced mixed results for the first quarter ended March 2007 (December-ending fiscal). On a consolidated basis, while the topline has grown by 33% YoY on the back of strong growth of international operations, operating margins were under pressure due to raw material costs and other expenditure (as percentage of sales). While the bottomline has registered a 4.3% YoY growth, if one excludes the impact of the extraordinary item, the bottomline has grown by 10% YoY.

Consolidated picture
(Rs m) 1QCY06 1QCY07 % change
Net sales 2,121 2,825 33.2%
Expenditure 1,609 2,269 41.0%
Operating profit (EBDITA) 512 556 8.6%
EBDITA margin (%) 24.1% 19.7%  
Other income 1 36 3500.0%
Interest 46 88 91.3%
Depreciation 208 234 12.5%
Profit before tax 259 270 4.2%
Extraordinary item   11  
Tax 72 64 -11.1%
Profit after tax/(loss) 187 195 4.3%
Net profit margin (%) 8.8% 6.9%  
No. of shares (m) 156.5 156.5  
Diluted earnings per share (Rs)*   6.3  
Price to earnings ratio (x)*   11.5  
* On a 12-month trailing basis

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 per annum, 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, the US, Germany, India, Nepal, the 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 closely tracks the growth of the oral care industry, which again depends on economic growth. In early 2003, the company commissioned a plant in Virginia, US, to cater solely to P&G's laminated tube needs in the US and Mexico. In August 2004, Essel acquired Arista Tubes of UK and then went on to acquire Telcon Packaging in April 2005, in order to increase its presence in the EU and the UK. The company recently acquired an 85% stake in Tacpro Inc. (USA) and Avalon Medical Services (Singapore).

What has driven performance in 1QCY07?
International operations drive growth: The consolidated revenues of Essel Propack grew by 33% YoY led by the international operations which grew at a strong rate of 43% YoY during the first quarter. The international operations of the company have contributed 75% (up from 70% in 1QCY06) to the consolidated revenues, thus reflecting the trend of increasing overseas growth and consolidation.

Also, the composition of revenues is changing with the two new revenue streams namely medical devices and specialty packaging materials contributing increasingly to the revenues, which is expected to increase going forward.

During the quarter, the extruded tubes plant of Arista Tubes in Danville, USA, streamlined its production and will cater to new customers in the coming months. The laminated tube operations in the UK and Mexico have stabilized and have begun to contribute to the bottomline. The loss making unit of Arista, UK, has stabilized and is expected to further add to the bottom line in the coming quarters. The Arista Tubes plant in Poland, which is in the process of being set up, will be commissioned in August 2007. This plant will cater to the needs of European market going forward.

India operations
(Rs m) 1QCY06 1QCY07 % change
Net sales 636 696 9.4%
Expenditure 452 520 15.0%
Operating profit (EBDITA) 184 176 -4.3%
EBDITA margin (%) 28.9% 25.3%  
Other income 2 3 50.0%
Interest 3 37 1133.3%
Depreciation 50 48 -4.0%
Profit before tax 133 94 -29.3%
Tax 41 28 -31.7%
Profit after tax/(loss) 92 66 -28.3%
Net profit margin (%) 14.5% 9.5%  

Indian operations: Essel Propack has yet again registered a decline in its net profits from the Indian operations. The company’s Indian operations contributed around 25% to consolidated revenues during 1QCY07. Net profits also witnessed a decline in their contribution to consolidated bottomline (from 71% to 48% in 1QCY07). The rise in the raw materials and labour cost led to the decline in margins. However, the management is positive of the growth prospects of the Indian operations in the future. Also, Packaging India manufacturing specialty packaging material (which the company acquired last year) has performed steadily. The impetus to shuffle products and customer base to improve margins and increase penetration of tubes into pharmaceuticals sector would be given higher priority in the coming quarters.

Consolidated cost break-up
(% of sales) 1QCY06 1QCY07
Total cost of goods 42.5% 44.8%
Staff cost 17.0% 17.7%
Other expenditure 16.4% 17.8%

Dented margins: Raw material prices yet again continued to be volatile and unpredictable, which dented the operating margins during the quarter. The raw material costs increased to 45% of sales in 1QCY07 from 43% in 1QCY06. The rise in other expenses (as percentage of sales) further dented the margins, which fell by 4.4%. Also, the results for the current period include increased operating expenses for additional capacities created in USA, Europe and India and Rs 41 m towards a product development initiative, which in future would be beneficial to the company.

Bottomline picture: Lower operating margins and higher interest costs led to the bottomline growing at a much slower 4.3% YoY for the quarter. However, higher other income (includes share of profit/loss in associate companies and minority shareholders’ interest in profits of subsidiary companies) and lower tax outgo saved the day for the company. If one excludes the impact of the extraordinary item, the bottomline has grown by 10% YoY.

What to expect?
At the current price of Rs 73, the stock is trading at a price to earnings multiple of 11.5 times its 12 months trailing earnings. Although the first quarter results have not been very enthusing, going forward we expect the company to perform better. The company aims to garner 15% market share (plastic tubes) by 2010 and we believe that it is well positioned to achieve this goal. However, margin pressure will continue till its new acquisitions turn profitable. With increasing focus on international operations and higher value products, we maintain our positive view on the company.

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