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Essel Propack: Research meeting extracts - Views on News from Equitymaster
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Essel Propack: Research meeting extracts
May 19, 2005

We recently met with the management of Essel Propack in order to get a first-hand perspective of the company’s performance in 1QCY05 and what lies in the future. Here are the extracts of the meeting.

Company Background
Essel Propack is the largest laminated tubes supplier in the world. Over the years Essel has acquired a global status, with presence in China, Egypt, Colombia, Venezuela, Mexico, USA, Germany, India, Nepal, Philippines and Indonesia. A large part of this global stature has been possible due to the merger with Propack in 2001. In early 2003, the company commissioned a plant in Virginia, USA, to cater solely to P&G's laminated tube needs in the US and Mexico. In August 2004, Essel acquired Arista Tubes - UK, a plastic tubes company and Telcon Packaging in CY05, which manufactures laminated tubes for oral care, cosmetics, personal care, food and pharmaceutical segments.

Extracts of the meeting
View on the industry: The demand for its products is highly linked to the growth of oral care and cosmetic industry, which again depends on economic growth. Globally, the total packaging tubes market is estimated at 34 bn units, out of which around 12 bn are laminated tubes and another 6 – 6.5 bn are Plastic tubes.

Sales break-up: Oral care currently accounts for around 65% of the company’s global revenues, while Cosmetics accounts a major chunk of the rest. Laminated tubes are largely used in the oral care industry, but usefulness of the same is being witnessed in food related packaging, OTC ointments packaging, while Plastic tubes are mostly used for aesthetic reasons (look and feel) by the cosmetic majors globally. Plastic tubes realisations are over twice that of laminated tubes. However, tube making input cost is more or less the same for both versions of the packaging tube (excluding the cap making costs).

Potential: In the foods industry, plastic tubes are used in packaging of cheese spreads, sauces, children’s jam and milkmaid. Essel’s entry into plastic tubes has been recent with the acquisition of Arista, which has a capacity of 200 – 300 m tubes, and considering the world market size for this product, there is a huge potential to grow. As per the management, in the pharma industry, currently around 40% pharma ointments in India are counterfeit. Lamitubes a better option as they cannot be duplicated easily, hence there lies a lot of potential in pharma (ointments) industry.

Raw material prices: Tubes are ethylene and other speciality chemicals (resins) based and therefore are highly dependent on crude oil. These products are not a commodity and hence, as per the management, there is no substitute for these ingredients. Raw material prices are foreseen to be stable in the future but availability might be an issue. Raw material costs account for 45% of sales.

Growth triggers: USA (18% of revenues) is expected to register the fastest growth in the coming quarters followed by China, which accounts for 28% of the company’s total revenues. The management has said that it has made China its base for exports of laminates, and the main reason for the same is due to port congestion in India. In China, all 3 major MNC’s are growing at a fast pace.

Plastic tubes are a huge growth area and margins are much higher and in the next 3-5 years, the management foresees growth in this business. ‘Mini tubes’ is a proprietary technology with Essel and the company hopes of migrating ‘Sachets’ to mini tubes globally.

India is expected to grow at around 4% - 5% in the next couple of years. However, in our view, this could change. Colgate has plans to make India its export hub to several counties for toothpastes. If this happens, Essel will benefit to a great extent.

Revenue dependence: Essel’s top 5 clients, which include Unilever, P&G, Colgate account for 60% of the company’s revenues. The company meets 67% of P&G’s global requirements and has recently invested an additional US$ 15 m at its existing plant near P&G’s factory in Danville US, towards upgradation. In India, HLL is currently 15% of Indian revenues (down from 40% a few years back), and has downplayed its growth, making it less dependent on a single client.

Capacity utilisation: Currently, almost all plants of Essel are running at 85% capacity utilisation except Telcon, which it recently acquired but will reach the same levels as the other plants by the second half 2006. When Essel acquired Telcon, its utilisation was 30%-35%.

Our view
At Rs 300, the stock trades at 8.9 times our expected CY06 consolidated earnings and market cap. to sales of 1x. We believe that the company is well on its way to achieve its mission of making every second laminated tube globally.

Based on this, we continue to retain our November 2004 BUY rating on the stock with a target price of Rs 435 with a two-year perspective. Currently, we are working on the new numbers for CY07 and we believe there is likely to be an upgrade even to this target.

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