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Essel Propack:Bad start

Apr 24, 2008

Performance summary
  • Consolidated topline remains flat on account of underperformance of its segments and strengthening of rupee against the US dollar.
  • Lower sales, along with higher staff and other expenses, causes the 270 basis points (2.7%) fall in the operating margins for 1QCY08.

  • Bottomline witnesses a 77% YoY decline on a consolidated basis, which is aggravated by lower other income and higher interest costs.

Consolidated picture
(Rs m) 1QCY07 1QCY08 % change
Net sales 2,825 2,829 0.1%
Expenditure 2,280 2,361 3.5%
Operating profit (EBDITA) 545 468 -14.1%
EBDITA margin (%) 19.3% 16.6%  
Other income 36 0 -100.0%
Interest 88 129 46.6%
Depreciation 234 233 -0.4%
Profit before tax 259 106 -59.0%
Tax 64 62 -3.1%
Profit after tax/(loss) 195 44 -77.3%
Net profit margin (%) 6.9% 1.6%  
No. of shares (m) 156.5 156.5  
Diluted earnings per share (Rs)*   2.83  
Price to earnings ratio (x)*   15.2  
* On a 12-month trailing basis

What has driven performance in 1QCY08?
  • Essel Propack’s consolidated revenues grew by 13% YoY in US dollar terms in 1QCY08. However due to sharp appreciation of the rupee against the US dollar, in rupee terms the sales have risen by merely 0.1% YoY. While the core tubing business registered about 14% YoY growth in dollar terms, the plastic tube business continued to under perform. As per the management, the laminate tube and medical device business performed up to their expectations in 1QCY08. Essel Propack invested in new capability and technology in the North American market for product offerings in the hair care, skin care and cosmetics segments. In the Indian markets the topline grew by 8.6% YoY contributing 27% to the total sales.

  • The newly commissioned plant for plastic tubes in Poland is still being ramped up and the company expects it to stabilise by the end of 1HFY08. Also, its plastic tube plant in Danville, USA is finding acceptance in the US markets, thereby raising the capacity utilisation to 30%. The management expects the plant to cross 70% utilisation and start generating cash by the end of July 2008. Further, it also recently acquired 'Catheter and Disposables Technology Inc.' (CDT) an American company based in Minneapolis through its subsidiary Tacpro Inc ., USA. It has acquired 100% equity of CDT in an all cash deal. CDT is a total solution provider from concept to finished packaged sterile products. The company expects better performance in the coming quarters, led by an improvement in the performance of its plants.

  • Higher growth in expenses in comparison to sales led to the 2.7% YoY dip in operating margins on a consolidated basis. On account of increased cost of ramping up new facilities at USA and Poland, the staff and other costs were higher. On a standalone basis, the margins declined by 5.4% YoY to touch 19.8% in 1QCY08. Again labour and other expenses were the culprits. The company recently had expanded its management bandwidth by inducting fresh talent to meet the challenges of its multi-national operations.

    Consolidated cost break-up
    As a % of net sales 1QCY07 1QCY08
    Total Cost of goods 44.8% 44.9%
    Staff Cost 17.7% 20.1%
    Other Expenditure 18.2% 18.4%

  • Interest expenditure was higher by 47% YoY on account of hardening of the global interest rates and the higher levels of borrowing due to the new greenfield and acquisition projects. This coupled with lower operating margins and other income led the net profits to fall by 77% YoY. The domestic profits which constitute 77% of the total profits (34% in 1QCY07) were down 15% YoY again on account of similar reasons.

What to expect?
At the current price of Rs 43, the stock is trading at a price to earnings multiple of 15.2 times its trailing 12 month earnings and 5.9 times our estimated CY10 earnings. Though Essel Propack has not got off to a good start in CY08, the management believes that all the building blocks are now in place and this would better its performance going forward. Further, the acquisition of CDT is in line with its strategic plan for the medical device business. CDT will expand its current footprint into new geographies and broaden the existing product lines. Further, its foray into overseas markets and acquisitions are expected to contribute positively in the coming years. With the turnaround of the operations in Europe and USA, better times are expected.

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Aug 7, 2020 09:37 AM


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