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Essel Propack: Raw material hurts - Views on News from Equitymaster

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Essel Propack: Raw material hurts

Apr 30, 2010

Essel Propack Limited has announced its FY10 results. The company has reported a 29% YoY growth in sales. Here is our analysis of the results.

Performance summary
  • Consolidated top-line for Essel Propack fell by 6.8% YoY during the quarter due to fall in revenue from the Americas. In December 2009, the company divested its non-core medical business. On a comparable basis, the sales improved by 9.5% YoY.
  • Consolidated operating (EBITDA) margins fell by 0.7% to 16.1% as a result of higher cost of raw material as a percentage of sales. The operating margin could have been lower but for fall in employee costs as a percentage of sales.
  • On a consolidated basis, the company reported profit of Rs. 87 m during the quarter compared with a loss of Rs. 51 m during 1QFY10 (March 2009). On a standalone basis the company registered a robust rise of 58.4% in net profits to Rs 36 m.
  • While the results of FY10 are not comparable to those of the previous year due to change in accounting year, the consolidated net profit for the year stood at Rs 588 m compared to a loss in CY08. On a standalone basis, the net profit for FY10 increased by 29% over CY08 on the back of higher operating income and higher other income, offset by higher interest costs.

Consolidated picture
(Rs m) 1QFY10 5QFY10** % change CY08 FY10** % change
Net sales 3,234 3,013 -6.8% 12,911 16,594 28.5%
Expenditure 2,692 2,526 -6.1% 11,190 13,754 22.9%
Operating profit (EBDITA) 542 486 -10.3% 1,721 2,840 65.0%
EBDITA margin (%) 16.8% 16.1%   13.3% 17.1%  
Other income 20 15 -24.5% 38 114 197.1%
Interest 180 132 -26.8% 619 847 36.8%
Depreciation 293 256 -12.5% 1,120 1,374 22.7%
Profit before tax 90 114 26.8% 21 733 3456.3%
Exceptional Items - -   12 305 2480.5%
Forex changes (54) 29   (517) (6)  
Tax 73 51 -30.6% 346 371 7.3%
Profit after tax/(loss) (37) 92   (831) 661  
Share of profits from associates 2 2 0.0% 8 6 -21.8%
Minority interest (16) (8) -53.4% (60) (68) 12.1%
PAT (51) 87   (883) 599  
Net profit margin (%) -1.6% 2.9%   -6.8% 3.6%  
No. of shares (m) 157 157   157 157  
Diluted earnings per share (Rs)*         3.8  
Price to earnings ratio (x)*         12.9  
* trailing twelve month earnings
** company is moving from a calendar year reporting to a financial year reporting

What has driven performance in 5QFY10?
  • Consolidated sales during the quarter were lower due to fall in YoY sales from Americas. Sale from Americas was lower by 44% YoY. This fall was a result of the economic slowdown. However, sales from Europe improved by 34% YoY, after falling for 2 consecutive quarters. This signals a recovery in the company’s European business after the restructuring exercise. AMESA and EAP regions grew by 10% YoY and 18% YoY respectively. The Indian operations of the company grew by 11% YoY during the quarter on the back of addition of new customers and product innovation.
    India operations
    (Rs m) 1QFY10 5QFY10* % change CY08 FY10* % change
    Net sales 786 873 11.0% 3,359 4,291 27.8%
    Expenditure 620 681 9.9% 2,637 3,358 27.4%
    Operating profit (EBDITA) 166 192 15.4% 723 934 29.2%
    EBDITA margin (%) 21.1% 21.9%   21.5% 21.8%  
    Other income - -   189 247 30.9%
    Interest 69 52 -24.6% 243 309 27.4%
    Depreciation 56 57 0.2% 207 288 39.2%
    Profit before tax 40 83 106.0% 462 584 26.4%
    Exceptional Items - -   12 (1)  
    Forex changes 1 36   90 123 37.2%
    Tax 17 11 -33.1% 113 111 -2.1%
    Profit after tax/(loss)* 23 36 58.4% 272 350 28.9%
    Net profit margin (%)* 2.9% 4.1%   8.1% 8.2%  
    *company is moving from a calendar year reporting to a financial year reporting

  • Consolidated operating profit fell by 10.3% YoY during the quarter. This was a result of cost of raw material and other expenditure increasing as a percentage of sales. While raw material increased by 3.5%, other expenditure increased by 0.7% as a percentage of sales. During the quarter, lower operating loss was recorded from European regions as a result of Russia and UK units ramping up volumes and breaking even in cash terms. The company also managed to curtail losses at its Poland unit. When adjusted for non-core medical business, the company’s consolidated operating profit improved by 26.7% during the quarter. On the domestic side, operating profit improved by 15.4% YoY.

    Consolidated cost break-up
    As a % of net sales 1QFY10 5QFY10* CY08 FY10*
    Total Cost of goods 43.2% 46.7% 45.0% 43.9%
    Staff Cost 20.0% 16.3% 19.6% 18.7%
    Other Expenditure 20.1% 20.8% 22.0% 20.3%
    *company is moving from a calendar year reporting to a financial year reporting

  • On a consolidated basis, the company reported a net profit of Rs 87 m compared to a loss of Rs 51 m in 1QFY10. This performance comes on the back of lower interest payment, lower depreciation expense and forex gains. Interest payments were lower during the quarter as the company lowered its debt by Rs 1.8 bn. Depreciation was lower during the quarter as the company wrote off some assets. For the quarter, the company reported a forex gain of Rs 29 m as opposed to a forex loss of Rs 57 m in 1QFY10.

What to expect?
At a price of Rs. 49, the stock is trading at 12 times our estimated CY11 earningsestimated CY11 earnings . The company’s consolidated topline has suffered due to disposal of the company’s medical devices business. The company has also faced problem as a result of slowdown in Americas and in Europe. However, things are looking up now with the company expecting growth across geographies and improvement in the profitability of its European business. Moreover, the company is changing its products mix and increasing focus on cosmetic, hair care and pharmaceutical segment. We shall soon revise our assumptions for the company.

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