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Essel Propack: Global soul! - Views on News from Equitymaster
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Essel Propack: Global soul!
Aug 4, 2005

Performance summary
Laminated tubes major Essel Propack (Research) has announced its results for the second quarter and half-year ending June 2005 (December ending fiscal). The company has reported an enticing topline growth and an unenthusing bottomline growth, mainly due to higher staff and interest costs. Had it not been for the higher other income component, the bottomline picture would have been further depressed.

(Rs m) 2QCY04 2QCY05 Change 1HCY04 1HCY05 Change
Net Sales 1,456 1,969 35.2% 2,977 3,874 30.1%
Expenditure 1,025 1,480 44.4% 2,117 2,890 36.5%
Operating profit (EBDITA) 431 489 13.5% 860 984 14.4%
EBDITA margin (%) 29.6% 24.8%   28.9% 25.4%  
Other income 9 22 144.4% 21 28 33.3%
Interest (net) 20 36 80.0% 26 58 123.1%
Depreciation 159 196 23.3% 321 372 15.9%
Profit before Tax 261 279 6.9% 534 582 9.0%
Tax 76 76 0.0% 169 183 8.3%
Profit after Tax/(Loss) 185 203 9.7% 365 399 9.3%
Net profit margin (%) 12.7% 10.3%   12.3% 10.3%  
No. of Shares (m) 31.2 31.3   31.2 31.3  
Diluted Earnings per share (Rs)* 23.6 25.9   23.3 25.5  
Price to earnings ratio (x)         13.5  
*(annualised), CY = Calendar Year

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, USA, Germany, India, Nepal, 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 is highly linked to the growth of oral care industry, which again depends on economic growth. In early 2003, the company commissioned a plant in Virginia, USA, 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 acquiring Telcon packaging in April 2005, in order to increase its presence in the EU and UK.

What has driven performance in 2QCY05?
International growth outpaces domestic:  The international business accounted for over 71% of total revenues during the quarter, up from 66% in 2QCY04. This has mainly been on account of higher penetration and increased presence across the globe. The Indian operations, however, continue to be under pressure. Essel’s operations in China have remained steady during the quarter and the efforts of cost reduction and efficiency improvement were visible in 2QCY05. However, one must note that Essel Propack has a 70% market share in the country and going forward, due to its two new offerings ‘Minitubes’ and ‘Co-extruded’ tubes, it can aim for a higher market share. Minitubes are used in the pharma industry, which is a replacement for aluminium tubes while, while co-extruded tubes are used in the cosmetic industry.

Cost break-up (consolidated)
as a % of net sales 2QCY04 2QCY05
Total Cost of goods 48.2% 42.9%
Staff Cost 7.5% 14.9%
Other Expenditure 14.5% 17.2%
Total expenditure 70.1% 74.9%
Staff costs dent margins:  Higher staff costs hit the operating margins of the company during both the periods. In fact, margins were hit badly both in the international markets as well as in India. As far as international operations are concerned, it must be noted that the company acquired Arista Tubes in UK, and also acquired Telcon packaging in April 2005, whose employees are now on Essel’s payroll (see spurt in staff expenses below). Also, it must be noted that the company’s Himachal Pradesh unit started production in July this year, whose benefits will take some time to factor in.

Back to the future!:  Volumes in the US are growing and the company is focusing on this market to develop new customers. Also, to meet the market demands, the company has embarked on an ambitious plan for expanding its capacities for laminated tubes and caps & closures, which is expected to be completed by October 2005. As far as the recent acquisitions are concerned, the contribution will start reflecting in the results only from 1QCY06 and hence currently eat into the company’s profits as these are working at only 25%-30% of their capacities. The company has also set up a new greenfield unit in Russia, which commenced commercial production a few months ago and is currently in a stabilization mode.

Investors should note that the increase in other income in the quarter is due to the share of profits from its Indonesian as well as Egyptian joint venture.

Over the last 5 quarters…
  2QCY04 3QCY04 4QCY04 1QCY05 2QCY05
Sales growth (YoY) -4.5% 19.5% 26.2% 25.2% 35.2%
OPM (%) 29.6% 30.6% 25.1% 26.0% 24.8%
Net profit growth (YoY) 9.5% 24.9% 18.0% 8.3% 9.7%

What to expect?
The stock is currently trading at Rs 345, implying a price to earnings multiple of 8.6 times our estimated CY07 earnings and price to sales of almost 1 time. We are enthused by Essel Propack’s performance on the revenue front and the company seems well on its way to manufacture every second laminated tube in the world. However, margin pressure will continue till its new acquisitions turn profitable. The company has increased its presence both in the local as well as international markets and is the sole tube supplier to the worlds largest FMCG company P&G. Its new plant in Dansville (US) which is closer to P&G’s largest manufacturing unit will soon be operational, which is a big positive. Going forward, we expect that margins will improve, both for its Indian as well as International operations.

Based on this, we continue to retain our November 2004 ‘Buy’ recommendation on the stock with a target price of Rs 435 with a two-year perspective. We shall soon update our research report on the company.

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