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Essel Propack: Disappointing start!
Apr 27, 2006

Introduction to results
Laminated tubes major, Essel Propack, announced results for the first quarter ended March 2006 (December-ending fiscal) late yesterday. On a standalone basis, while the topline grew marginally, bottomline dipped on the back of margin contraction to the tune of 310 basis points, clubbed with lower other income and higher depreciation charges.

Consolidated global picture…
(Rs m) 1QCY05 1QCY06 Change
Net Sales 1,905 2,121 11.3%
Expenditure 1,404 1,610 14.6%
Operating profit (EBDITA) 501 511 2.1%
EBDITA margin (%) 26.3% 24.1%  
Other income 0 1  
Interest (net) 22 46 110.4%
Depreciation 176 208 18.3%
Profit before Tax 303 258 -14.8%
Extraordinary income/(expense) - - -
Tax 107 72 -33.1%
Profit after Tax/(Loss) 196 187 -4.8%
Net profit margin (%) 10.3% 8.8%  
Effective tax rate 35.3% 27.7%  
No. of Shares (m) 31.3 31.3  
Diluted Earnings per share (Rs)*   28.6  
Price to earnings ratio (x)   15.4  
*(trailing 12 months)      

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 UK. The company recently acquired an 85% stake in Tacpro Inc. (USA) and Avalon Medical Services (Singapore).

What has driven performance in 1QCY06?
Indian operations disappoint yet again: The company registered dismal revenue growth in its Indian operations. Also, margins of the Indian operations declined by 310 basis points, resulting in an 8% YoY decline in operating profits for the quarter. This along with lower other income, worsened the bottomline picture (down 20% YoY). Had it not been for the tax savings, net profits would have declined further. India accounted for 30% of company’s consolidated revenues as compared to around 33% in the same quarter previous year. However, it must be noted that domestic margins are much higher as compared to international operations, as competitive pressures are lesser in India. As per the management, the domestic performance was in-line with their internal projections and expects Indian operations to grow by 4% in the current calendar.

Indian operations
(Rs m) 1QCY05 1QCY06 Change
Net Sales 624 636 1.9%
Expenditure 423 451 6.5%
Operating profit (EBDITA) 201 185 -8.0%
EBDITA margin (%) 32.2% 29.1%  
Other income 16 2 -87.2%
Interest (net) (8) 4  
Depreciation 46 50 8.7%
Profit before Tax 179 133 -25.6%
Tax 64 41 -35.7%
Profit after Tax/(Loss) 115 92 -19.9%
Net profit margin (%) 18.4% 14.4%  
Effective tax rate % 35.9% 31.0%  
No. of Shares (m) 31.2 31.3  
Diluted Earnings per share (Rs)   2.9  

Staff costs and other expenditure dent margins: Higher staff costs and other expenditure (see table below) affected the company’s operating margins during the quarter under review. It must be noted that the company had acquired Telcon Packaging (UK) in April 2005, whose employees are now on Essel’s payroll. Further, the company’s Himachal Pradesh unit started production in July 2005, the benefits of which will take some time to reflect in the company’s performance.

as a % of net sales 1QCY05 1QCY06
Consumption of raw materials 45.4% 42.5%
Staff cost 15.0% 17.0%
Other expenditure 13.3% 16.4%
Total expenditure 73.7% 75.9%

International business saves the day: As far as the global operations were concerned, China witnessed consistent volume sales and the company continued its efforts at cost cutting and efficiency improvements. It must be noted that Essel Propack has a 70% market share in China and going forward, due to its two new offerings, ‘Minitubes’ and ‘Co-extruded’ tubes, this figure could go up. Also, the company’s USA and European subsidiaries performed well.

As far as it’s two UK subsidiaries – Arista Tubes and Telcon Packaging – are concerned, Essel Propack’s current aim of improving efficiencies and reducing costs is on schedule. The company is also targeting new big-ticket customers in the region. However, these two companies continue to be a drag on the bottomline currently. As per the company, these will start contributing to profits by the end of 2QCY06. Further, the company’s Russian operations, which commenced commercial production a few months ago, have stabilized and expansion plans for this unit are already on the cards, as there is huge demand. However, this along with its Mexican subsidiary continues to be a drag on Essel’s balance sheet.

Over the past few quarters
  4QCY04 1QCY05 2QCY05 3QCY05 4QCY05
Sales growth (YoY) 26.2% 25.2% 35.2% 18.7% 11.3%
OPM (%) 25.1% 26.0% 24.8% 26.9% 24.1%
Net profit growth (YoY) 18.0% 8.3% 9.7% 3.1% -4.8%

What to expect?
At the current price of Rs 440, the stock trades at a price to earnings multiple of 11.2 times our estimated CY07 earnings and price to sales of almost 1.3 times. Although the first quarter results have not been very enthusing, going forward we expect the company to perform better. The aim to be the manufacturer of every second laminated tube in the world seems to be on top of the management’s agenda. However, margin pressure will continue till its new acquisitions turn profitable. The company has increased its presence both in the local as well as international markets and is the sole tube supplier to the world’s largest FMCG company, P&G.

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