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Essel Propack: No relief in sight - Views on News from Equitymaster
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Essel Propack: No relief in sight
Jul 25, 2008

Performance summary
  • Consolidated topline grows by 2.2% YoY in 1HCY08, while the domestic topline grows by 7.8% YoY.
  • Operating margins decline by more than 4% each on a consolidated and standalone basis.
  • The company reports net losses of Rs 53 m in 1HCY08 on the back of a decline in operating profits, sharp reduction in other income and higher interest costs.


Consolidated picture
(Rs m) 2QCY07 2QCY08 % change 1HCY07 1HCY08 % change
Net sales 2,987 3,113 4.2% 5,812 5,942 2.2%
Expenditure 2,441 2,714 11.2% 4,710 5,075 7.8%
Operating profit (EBDITA) 546 398 -27.0% 1,102 866 -21.4%
EBDITA margin (%) 18.3% 12.8% 19.0% 14.6%
Other income 34 5 -84.7% 70 5 -92.6%
Interest 97 181 86.8% 185 310 67.7%
Depreciation 202 260 28.8% 436 493 13.1%
Profit before tax 281 (38) 551 68 -87.6%
Extraordinary item - - -
Tax 75 60 -20.4% 139 122 -12.4%
Profit after tax/(loss) 206 (97) 412 (53)
Net profit margin (%) 6.9% -3.1% 7.1% -0.9%
No. of shares (m) 156.5 156.5 156.5 156.5
Diluted earnings per share (Rs)* 1.18
Price to earnings ratio (x)* 22.9
* On a 12-month trailing basis

What has driven performance in 1HCY08?
  • Underperformance of its core operations and forex fluctuations led Essel Propack to report a 2.2% YoY growth in consolidated revenues in 1HCY08. The domestic markets grew by 7.8% YoY in the half year period. The domestic segment now contributes around 26% to overall sales. The international business reported flat growth in 1HCY08. The new facilities in US and Poland have yet not started contributing significantly. The company’s European operations witnessed muted performance on account of macro economic conditions and ramping up of the plants. While the speciality-packaging segment grew by 8% to 9% YoY, the medical devices reported a 12% YoY growth in the half-year period.

    India operations
    (Rs m) 2QCY07 2QCY08 % change 1HCY07 1HCY08 % change
    Net sales 733 784 6.9% 1,429 1,540 7.8%
    Expenditure 585 654 11.7% 1,105 1,260 14.0%
    Operating profit (EBDITA) 148 130 -12.0% 324 280 -13.5%
    EBDITA margin (%) 20.2% 16.6% 22.7% 18.2%
    Other income 92 86 -6.4% 95 86 -9.7%
    Interest 52 62 19.8% 89 114 28.4%
    Depreciation 49 50 1.4% 97 98 0.7%
    Profit before tax 139 104 -25.0% 233 154 -33.9%
    Tax 49 36 -26.3% 77 52 -32.3%
    Profit after tax/(loss) 90 68 -24.2% 156 102 -34.6%
    Net profit margin (%) 12.3% 8.7% 10.9% 6.6%

  • The consolidated operating margins witnessed pressure on account of higher raw material and staff costs in both the periods under consideration. With crude prices hitting new highs, the company’s raw material cost increased to 49% and 47% respectively in 2QCY08 and 1HCY08. The company lacks bargaining power and hence could not easily pass the hikes to the customers. On a standalone basis, the operating margins fell to 18% in 1HCY08 from 23% in 1HCY07. The margins are in line with our estimates.

  • Essel Propack reported losses for 2QCY08 and 1HCY08 on a consolidated basis led by lower margins, lower other income and higher interest costs. Interest expenditure was higher on account of hardening of global interest rates and higher levels of borrowing due to the new greenfield projects and acquisitions. The standalone profits were down 35% YoY in 1HCY08.

What to expect?
At the current price of Rs 27, the stock is trading at a price to earnings multiple of 4.1 times our estimated CY10 earnings. The performance of the company on the margin front continues to remain a cause for concern. Given the subdued topline performance and losses during the half-year, we will need to downgrade our numbers. Though the company has entered new segments like pharma, cosmetics and medical devices, the contribution from these segments is yet to flow in. The management has indicated prices hikes in the range of 9% to 11% in the coming quarter. However, higher raw material costs would continue to affect the company in the medium term. Also, there is over capacity in the markets in the packaging segment, which would keep the realisations caped.

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