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Essel Propack: Great expectations

Apr 29, 2002

Laminated tubes major, Essel Propack has shown strong growth in its consolidated earnings and topline growth. The company's topline has shot up by 75% during the March quarter (1QFY03) largely due to the Propack acquisition in April 2001. Therefore the figures are not strictly comparable on a like to like basis.

Essel Propack consolidated numbers
(Rs m) 1QFY02 1QFY03 Change
Net Sales 651 1,138 74.8%
Other Income 29 16 -46.2%
Expenditure 438 770 75.8%
Operating Profit (EBDIT) 213 367 72.9%
Operating Profit Margin (%) 32.7% 32.3%
Interest (net) 9 30 234.7%
Depreciation 89 141 58.2%
Profit before Tax 144 212 47.8%
Tax 52 59 12.8%
Minority Interest -5 -10 -
Profit after Tax/(Loss) 87 143 64.7%
Net profit margin (%) 13.3% 12.6%
No. of Shares 24.3 31.2
Diluted Earnings per share* 11.1 18.3
P/E Ratio 17.9

The consolidated entity's operating margins took a slight dip reflecting a difficult market. Higher interest and depreciation outgo caused profits to grow by a lower 65%. Net margins too were adversely affected. The increase in interest cost is due to the additional debt taken for funding the acquisition of Propack's tubing operations and for funding equity contribution in the overseas ventures.

Due to the merger with Propack, Essel has touched base volume of 3 bn tubes and should cross 7 bn tubes in 2005. According to Mr. R. Chandrasekhar, Director, Essel Propack, by 2005, the company is looking at an 80% market share in both India and China and a 60% share of the global laminated tubes market.

Now let's look at Essel's India operations. Its India operations also include Nepal. During the March quarter the company's sales were up by merely 2% but bottomline growth was up over 15% YoY. Strict control on material costs (down 18% YoY) saw operating margins improve significantly to 38%. As a % of sales material costs stood at 37.8% (46.8% in 1QFY02). A higher interest burden also reflected in the Indian operations. Had it not been for lower taxes due to deferred tax write back the company would have recorded a marginal 4% growth in profits.

India (and Nepal) operations
(Rs m) 1QFY02 1QFY03 Change FY02*
Net Sales 578 590 2.1% 1,702
Other Income 57 17 -70.0% 39
Expenditure 416 372 -10.6% 1,062
Operating Profit (EBDIT) 162 218 35.0% 640
Operating Profit Margin (%) 28.0% 37.0% 37.6%
Interest (net) 3 11 243.8% 60
Depreciation 69 72 4.2% 215
Profit before Tax 146 152 4.2% 404
Extraordinary expenses 0 0 -19
Tax 51 43 -16.7% 93
Profit after Tax/(Loss) 95 109 15.4% 292
Net profit margin (%) 16.4% 18.5% 17.2%
No. of Shares 24.3 31.2 31.2
Diluted Earnings per share* 12.1 14.0 9.4
P/E Ratio 23.4 35.0
*FY02 results are for nine months ending December 31, 2001

The India numbers give us an insight to the difficult market conditions that the company is facing. A downturn in FMCG sales has hindered Essel's growth. The FMCG sector is the major user of Essel's laminated tubes.

India (and Nepal) operations cost break-up
(Rs m) 1QFY02 1QFY03 Change
Material costs 271 223 -17.6%
Staff costs 32 32 -1.1%
Other expenditure 113 117 3.4%
Total expenditure 416 372 -10.6%

At the current price of Rs 328, the stock trades at 23x its 1QFY03 annualised earnings (India operations). The stock has run up by nearly 40% in the last six months. At these valuations the stock looks evenly valued. However, if we consider the consolidated entity numbers then the valuation stands at 18x 1QFY03 numbers. Since Essel's growth is directly related to the growth in FMCG sector, any upside is likely to come from a growth in FMCG demand. However, the management expects strong growth from China in the coming years. The stock may see a short trigger as the management has indicated that it will record dividends of Rs 180 m from subsidiaries in 2QFY03.

The company has recently entered into a five year contract with Procter & Gamble (P&G) to meet the entire tube requirements of its North American operations. For this purpose, Essel Propack will be investing US$ 15 m for setting up a manufacturing facility in North Carolina, USA. The plant is expected to go on stream in the first quarter of 2003. Essel is the global leader in laminated tubes and is able to charge high margins for its products. The company's growth prospects are attractive. However, the company's chief promoter has had his name embroiled in the stock market scam. Thus there are concerns about management credibility.

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