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Essel Propack: Back in the green - Views on News from Equitymaster
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Essel Propack: Back in the green
Jul 29, 2009

Performance summary
  • The consolidated topline reports a growth of 7% YoY led by strong growth in the East Asia Pacific (EAP) and the US region. The domestic operations grow by 3% YoY.
  • The consolidated operating margins improve by 6.5% YoY during 2QFY09 led by lower operating expenses as a percent of sales. For the half year period the margins are higher by 3.5% YoY.
  • On a consolidated basis, the company reports profits of Rs 52 m during the quarter as compared to a net loss of Rs 97 m in 2QCY08.


Consolidated picture
(Rs m) 2QCY08 2QCY09 % change 1HCY08 1HCY09 % change
Net sales 3,113 3,337 7.2% 5,942 6,571 10.6%
Expenditure 2,758 2,740 -0.7% 5,118 5,431 6.1%
Operating profit (EBDITA) 355 597 68.3% 824 1,140 38.2%
EBDITA margin (%) 11.4% 17.9%   13.9% 17.3%  
Other income 104 21 -79.8% 106 41 -60.9%
Interest 138 200 45.2% 267 380 42.5%
Depreciation 260 281 7.9% 493 574 16.3%
Profit before tax 61 137 127.1% 170 227 33.5%
Forex changes 85 (43)   78 11 -86.0%
Tax 60 112 87.8% 122 185 51.9%
Profit after tax/(loss) (84) 68   (30) 31 -203.7%
Share of profits from associates 2 2 20.0% 4 4 5.7%
minority interest 15 17 15.3% 26 33 29.5%
PAT (97) 52   (52) 1  
Net profit margin (%) -2.7% 2.0%   -0.5% 0.5%  
No. of shares (m) 156.5 156.5   156.5 156.5  

What has driven performance in 2QCY09?
  • Essel Propack witnessed a topline growth of 7% YoY during 2QCY09. The domestic operations grew by 3% YoY, while the subsidiaries reported a 9% YoY growth. The domestic performance was lower due to price cuts taken by the company and higher sales of mini-tubes which have lower realizations. While the European region saw a decline in sales, America and East Asia Pacific (EAP) reported a growth of more than 20% YoY during the quarter. The core laminated tubing business registered a growth of around 6% YoY. For 1HCY09, the sales increased by 11% YoY. The company’s performance so far has been in line with our estimates.

    India operations
    (Rs m) 2QCY08 2QCY09 % change 1HCY08 1HCY09 % change
    Net sales 784 808 3.0% 1,540 1,594 3.5%
    Expenditure 627 625 -0.3% 1,215 1,244 2.4%
    Operating profit (EBDITA) 157 183 16.4% 325 350 7.7%
    EBDITA margin (%) 20.0% 22.6%   21.1% 21.9%  
    Other income 86 96 11.4% 86 94 8.9%
    Interest 55 77 40.4% 105 146 38.1%
    Depreciation 50 58 16.9% 98 115 17.0%
    Profit before tax 138 143 3.5% 208 184 -11.6%
    Forex changes (34) (12)   (53) (13)  
    Tax 36 37 2.8% 52 54 3.7%
    Profit after tax/(loss) 68 94 37.8% 102 117 14.3%
    Net profit margin (%) 8.7% 11.6%   6.6% 7.3%  

  • The consolidated operating margins improved by 6.5% YoY during 2QCY09. For the half year period, the margins were higher by 3.5% YoY. All operating expenses declined (as a percent of sales) as the company went for cost reduction across geographies. The plastic tubes business in Poland saw an improvement in margins to the tune of 700 basis points on account of scrap reduction, improved quality and downsizing of operations. The company has downsized the capacity from 10 m tubes to 6.6 m tubes in Poland. Also, a manpower rationalization programme was completed with involved reducing headcount headcount by 15%. This led to annualized savings of US$ 5 m. On the domestic front, the operating margins were marginally higher mainly due to a decline in crude oil prices.

    Consolidated cost break-up
    As a % of net sales 2QCY08 2QCY09 1HCY08 1HCY09
    Total Cost of goods 47.0% 42.3% 45.0% 42.7%
    Staff Cost 20.1% 19.4% 20.1% 19.7%
    Other Expenditure 21.5% 20.4% 21.1% 20.2%

  • On a consolidated basis, the company reported profits of Rs 52 m during the quarter as compared to a net loss of Rs 97 m in 2QCY08. Higher operating margins led to the turnaround. Further, turnaround in the European business was another key factor that helped in recovery. On the standalone front, the net profits improved by 38% YoY and 13% YoY respectively for both the periods under consideration. The interest costs rose sharply due to the hardening of global interest rates and higher levels of borrowing to finance the working capital needs of new projects started towards the end of 2008. The company has restructured its debt profile by replacing short term loans with long term ones which will reduce the interest costs going forward. The company has underperformed our estimates at the net profit level.

What to expect?
At the current price of Rs 28, the stock is trading at a price to earnings multiple of 9.0 times our estimated CY11 earnings. Essel Propack has done well this quarter to generate profits as compared to losses last year. The restructuring activities will further benefit the company. While losses would continue in its Poland plant for the current year, it would be lower than before. Also, lower raw material prices and pickup in demand would aid its growth. It has capex plans to the tune of Rs 8 m during the current year. The management is hopeful of the scenario getting better and the company enjoying margins in the range of 20% in the next few quarters. While the quarter has been good, considering Essel Propack’s risky business modeland low bargaining power, we would advise investors to be cautious while investing in the stock.

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