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Essel Propack: Topline up, bottom down! - Views on News from Equitymaster
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Essel Propack: Topline up, bottom down!
Jul 20, 2007

Performance summary
  • Consolidated topline grows by 29%YoY, driven by strong growth of its US and European operations for 2CY06
  • Indian operations contribution to the total sales for 2QFY07 fell to 26% from 29% in 2QCY06.
  • Substantially higher raw material costs and other expenditure pressurise operating margins that contract to 18.3%
  • Lower operating income, combined with higher tax rates led to the bottomline decline by 10% YoY.

Consolidated picture
(Rs m) 2QCY06 2QCY07 % change 1HCY06 1HCY07 % change
Net sales 2,316 2,987 29.0% 4,437 5,812 31.0%
Expenditure 1,774 2,441 37.6% 3,383 4,710 39.2%
Operating profit (EBDITA) 542 546 0.7% 1,054 1,102 4.6%
EBDITA margin (%) 23.4% 18.3%   23.8% 19.0%  
Other income 26 34 30.8% 27 70 159.3%
Interest 71 97 36.6% 117 185 58.1%
Depreciation 212 202 -4.7% 420 436 3.8%
Profit before tax 285 281 -1.4% 544 551 1.3%
Extraordinary item - -   - 11  
Tax 55 75 36.4% 127 139 9.4%
Profit after tax/(loss) 230 206 -10.4% 417 401 -3.8%
Net profit margin (%) 9.9% 6.9%   9.4% 6.9%  
No. of shares (m) 156.5 156.5   156.5 156.5  
Diluted earnings per share (Rs)*         6.19  
Price to earnings ratio (x)* 19.3% 26.7%     10.19  
* On a 12-month trailing basis

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 2QCY07?
International operations driven growth: On a consolidated basis, Essel Propack reported a 29% YoY increase in the topline in 2QCY07. International operations in US and Europe were the main growth drivers. While Mexico and Columbia performed well, there was a time lag in Arista’s US plants due to expansion. Arista’s operations in the UK have turned EBIDTA positive, while its Russia business will breakeven at the end of this year. Overseas operations for Essel Propack now contribute 66% of its net sales. On half yearly basis, the topline grew by 31% YoY. However, adjusted for the rupee appreciation versus the US dollar over the year, the sales growth will be higher at 39% YoY. In order to de risk its business model, the company had entered the medical devices and the specialty-packaging arena, which already constitute 19% of its total sales. The company also is reducing its dependence on the oral care sector and venturing into newer consumer care sectors like hair care segment. The topline is in line with our estimates.

India operations
(Rs m) 2QCY06 2QCY07 % change 1HCY06 1HCY07 % change
Net sales 663 768 15.8% 1,299 1,464 12.7%
Expenditure 469 584 24.5% 921 1,104 19.9%
Operating profit (EBDITA) 194 184 -5.2% 378 360 -4.8%
EBDITA margin (%) 29.3% 24.0%   29.1% 24.6%  
Other income 10 57 470.0% 12 60 400.0%
Interest 14 52 271.4% 17 89 423.5% 
Depreciation 51 49 -3.9% 101 97 -4.0%
Profit before tax 139 140 0.7% 272 234 -14.0%
Tax 42 49 16.7% 83 77 -7.2%
Profit after tax/(loss) 97 91 -6.2% 189 157 -16.9%
Net profit margin (%) 14.6% 11.8%   14.5% 10.7%  

On the domestic front, the company’s topline is up by 15.8% YoY. However, it contribution to the total sales has fallen from 29% in 2CY06 to 26% in 2CY07. The international operations (grew by 34% YoY) is also growing at a faster rate as compared to the domestic operations thus reflecting the trend of increasing overseas growth and consolidation. However, the management expects the domestic business to do well going forward and has recently developed a strategic plan for its flagship tubes business. The second plant for its specialty packaging will come up by the end of CY08, thereby increasing its volumes. With the domestic specialty packaging industry growing at 10% per annum and the growth in the domestic processed food industry expected to accelerate further due to the impending retail boom, we expect Essel Propack to benefit going forward.

Consolidated cost break-up
As a % of net sales 2QCY06 2QCY07 1HCY06 1HCY07
Total Cost of goods 39.8% 45.6% 41.1% 45.2%
Staff Cost 19.1% 17.9% 18.1% 17.8%
Other Expenditure 17.7% 18.2% 17.1% 18.0%

Margin pressure continues: As can be seen from the table above, though staff cost has witnessed a decline during the quarter, higher raw material costs and other expenses has been the main factor in denting the operating margins during the periods under consideration. The raw material costs (as a percentage of sales) increased from 40% to 46% in this quarter. Further, the margins have been constrained due to the customer development and capacity costs attributable to the new plant and additional capacities in the US.

On the domestic front too, the company’s margins declined by 5.3%. This was again due to higher raw material costs. Further, the labour cost too increased from 10% as a percentage of sales in 2CY06 to 11.6% in this quarter. The margins are below our CY07E estimates.

Bottomline blues: Essel Propack’s bottomline on a consolidated basis fell by 10% YoY in 2QCY07. Lower operating income combined with higher interest cost led to the fall in the bottomline. Interest costs were higher due to the higher interest rates in India as also due to the increase in debt taken for acquisitions. Higher tax rates (up from 19% to 27%) did not help the matters too. The performance in 1HCY07, however, was a bit better. A relatively lower fall in the operating margins combined with higher other income led to the bottomline fall of 1.2% YoY (excluding an extraordinary item). On the standalone basis, the bottomline fell by 6% YoY and 17% YoY for 2CY07 and 1HCY07 respectively. Low operating income combined by higher interest cost and higher tax rates were the culprits again.

What to expect?
At the current price of Rs 67, the stock is trading at a price to earnings multiple of 10.2 times its 12 months trailing earnings and 5.9 times our estimated CY09E earnings. Essel Propack for a long time had been known as a single-product company. However, now it is transforming into multi product company. Its future growth would be driven by its four verticals namely lamitubes, plastic tubes, specialty packaging and medical devices. Acquisitions and capacity expansions have further aided its foothold in the packaging segment. With new opportunities in the pharma packaging and food retailing segments, we remain positive on the stock from a long-term view.

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