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Essel Propack: Strong growth on volumes - Views on News from Equitymaster

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Essel Propack: Strong growth on volumes
Jul 30, 2010

Essel Propack Limited has announced its 1QFY11 results. The company has reported a 0.4% YoY and 64.4% fall in sales and growth in profits respectively. Here is our analysis of the results

Performance summary
  • Consolidated top-line for Essel Propack was flat during the quarter. In December 2009, the company divested its non-core medical business. When adjusted for this, the sales of the continuing business improved by 15% YoY. This growth is entirely volume based.
  • Consolidated operating (EBITDA) margins fell by 1% to 16.9% 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 and lower other expenditure (both as a percentage of sales).
  • On a consolidated basis, the company’s net profit grew by a robust 64% YoY. On a standalone basis the company registered a strong rise of 30% in net profits to Rs 36 m.


Consolidated picture
(Rs m) 2QFY10 1QFY11 % change
Net sales 3,337 3,323 -0.4%
Expenditure 2,740 2,760 0.7%
Operating profit (EBDITA) 597 563 -5.8%
EBDITA margin (%) 17.9% 16.9%  
Other income 21 10 -53.6%
Interest 200 140 -29.8%
Depreciation 281 267 -5.0%
Profit before tax 137 165 20.3%
Exceptional Items (12) -  
Forex changes 54 (17)  
Tax 112 59 -47.4%
Profit after tax/(loss) 68 89  
Share of profits from associates 2 6 210.5%
Minority interest 17 9 -50.9%
PAT 53 86 64.4%
Net profit margin (%) 1.6% 2.6%  
No. of shares (m) 157 157  
Diluted earnings per share (Rs)*   4.0  
Price to earnings ratio (x)*   11.9  
* trailing twelve month earnings

What has driven performance in 1QFY11?
  • Consolidated sales during the quarter were flat as the financials of the medical devices are not included for this quarter. Sales from Europe improved by 25% YoY, on better performance of the company in UK, Russia and Germany. AMESA and EAP regions grew by 23% YoY and 6% YoY respectively. The Indian operations of the company grew by 19% YoY during the quarter on the back of addition of new customers and product innovation. Sales in US however fell by 33% YoY. This is because medical devices business made a large portion of the US sales. When excluding the medical devices sales, sales of Americas remained flat.
    India operations
    (Rs m) 2QFY10 1QFY11 % change
    Net sales 808 964 19.4%
    Expenditure 625 729 16.6%
    Operating profit (EBDITA) 183 236 28.9%
    EBDITA margin (%) 22.6% 24.4%  
    Other income 96 53  
    Interest 77 48 -37.6%
    Depreciation 58 59 1.2%
    Profit before tax 143 182 26.9%
    Exceptional Items - -  
    Forex changes (12) (8)  
    Tax 37 51 38.4%
    Profit after tax/(loss)* 94 122 30.2%
    Net profit margin (%)* 11.6% 12.7%  

  • Consolidated operating profit fell by 5.8% YoY during the quarter. This was a result of higher cost of raw material as a percentage of sales. Raw material costs increased by 5.1% to stand at 47.4% of sales. This was due to higher polyester prices ruling during the quarter. 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 10% YoY during the quarter. On the domestic side, operating profit improved by 29% YoY.

    Consolidated cost break-up
    As a % of net sales 2QFY10 1QFY11
    Total Cost of goods 42.3% 47.4%
    Staff Cost 19.4% 16.3%
    Other Expenditure 20.4% 19.4%

  • On a consolidated basis, the company’s profits grew by 64%. This performance comes on the back of lower interest payment, lower depreciation expense and lower effective tax rates. 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. The growth would have been higher but for lower other income and a forex loss recorded this quarter compared to a forex gain recorded in 1QFY10. When adjusting for sale of the medical device business, the company’s net profit grew by over 2,000%.

What to expect?
At a price of Rs. 48, the stock is trading at 6.4 times our estimated FY13 earnings (RPro subscribers click here). 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 remain bullish on the company’s growth.

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