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Ess Dee Aluminium: Acquisition blues - Views on News from Equitymaster
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Ess Dee Aluminium: Acquisition blues
Jul 31, 2009

Performance summary
  • The results are not fully comparable to the previous quarter/ year as it includes financials of India Foils Ltd (IFL).
  • Largely aided by additional revenue from IFL, the consolidated topline grows by 22% YoY during 1QFY10.
  • Faster growth in expenses than sales leads to the operating margin decline from 28% to 25% during 1QFY10.
  • For the quarter, the profits decrease by 18% YoY.


Consolidated financial picture
Rs m 1QFY09 1QFY10 Change
Net sales 1,068 1,304 22.1%
Expenditure 772 977 26.7%
Operating profit 297 327 10.1%
Operating margins (%) 27.8% 25.0%  
Other Income 2 6 160.9%
Interest (net) 23 52 127.1%
Depreciation 11 43 276.1%
Profit before Tax 265 238 -10.0%
Extraordinary item - -  
Tax 51 63 24.2%
Minority interest - 1  
Profit after Tax/(Loss) 214 177 -17.6%
Net profit margin (%) 20.1% 13.5%  
No. of Shares (m) 27.8 27.8  

What has driven performance in 1QFY10?
  • Ess Dee Aluminium reported a consolidated topline growth of 22% YoY during 1QFY10. This is largely aided by additional revenue from IFL. The standalone sales were higher by 8% YoY during the quarter. It now contributes 79% to the revenues (89% during 1QFY09). On account of economic slowdown, the exports of bulk drug were lower, while more of outsourcing was done domestically. This led to higher sales for Ess Dee’s products. While still the contribution from the FMCG segment is miniscule, the company expects to earn 25% revenues from FMCG in the coming years.

    Cost break-up…
    (Rs m) 1QFY09 1QFY10 Change
    Raw materials 718 847 17.9%
    % sales 67.3% 65.0%  
    Staff cost 22 57 160.3%
    % sales 2.1% 4.4%  
    Other expenditure 31 73 134.6%
    % sales 2.9% 5.6%  

  • Faster growth in expenses than sales led to the operating margins decline from 28% to 25% during 1QFY10. The main reason for the contraction was the higher staff and other expenses (as a percent of sales) due to the IFL acquisition. The lower input costs due to fall in aluminium prices however, restricted the fall.

  • Lower operating income coupled with higher interest and depreciation costs (due to IFL acquisition) led to the consolidated net profits decline of 18% YoY. On the standalone front, the bottomline was down 12% YoY. .

What to expect?
At Rs 288, the stock is trading at a price to earnings multiple of 9.0 times our FY11 estimates. Strong growth in both pharma and FMCG sector would continue to benefit the company. Further, on account of its IFL acquisition, the packaging major stands to gain from a long-term perspective. While the integration would hamper its performance for some quarters, the company would stand to gain on the new capacities and tax front. The management expects IFL to breakeven in FY11. Going forward, we expect a decent topline performance on account of the new capacities and strong demand. However, margins may remain tepid on account of acquisition of India Foils. We had recommended the stock in February 2009 at the price of Rs 135 with a target of Rs 223. The stock has crossed our target price. We will soon update our financials.

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