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Essel Propack: Interest cost dent profits

Aug 9, 2012

Essel Propack Limited has announced its first quarter financial results of 2012-2013 (1QFY13). The company has reported a 20% YoY growth in sales and 5% fall in profits. Here is our analysis of the results.

Performance summary
  • Essel Propack posted a 20% rise in topline on the back of double-digit growth in revenues of all its geographical markets
  • Operating margin remained flat at 16% as controlled other expenditure offset higher staff costs.
  • Earnings fell by 5% due to a steep rise in interest charges and tax outgo.

Consolidated picture
(Rs m) 1QFY12 1QFY13 % change
Revenues 3,600 4,307 19.6%
Expenditure 3,013 3,615 20.0%
Operating profit (EBDITA) 587 692 17.9%
EBDITA margin (%) 16.3% 16.1%  
Other income 41 39 -4.9%
Interest 191 251 31.4%
Depreciation 270 315 16.7%
Profit before tax 167 165 -1.2%
Exceptional Items - -  
Forex changes (5) 17  
Tax 68 94 38.2%
Profit after tax/(loss) 94 88 -6.4%
Share of profits from associates 5 7  
Minority interest (6) (7)  
Loss from discontinuing operations (after tax) - -  
PAT 93 88 -5.4%
Net profit margin (%) 2.6% 2.0%  
No. of shares (m)   157  
Diluted earnings per share (Rs)*   3.0  
Price to earnings ratio (x)*   10.9  
* On the basis of trailing 12 months earnings

What has driven performance in 1QFY13?
  • Essel Propack posted a 19.6% topline growth largely driven by price-hikes and rupee depreciation as volume growth remained a tepid 2.5% during the quarter. A slower 2% growth in offtake of laminated tubes particularly in China led to the sluggish growth. Regionwise, AMESA and European markets clocked volume growth of 11% and 44%, respectively. On the other hand, the American market reported flat growth whereas the EAP region consisting of China witnessed volume erosion of 19%. The Indian operations, that contribute around a third of consolidated revenues, posted 20.5% sales growth during the quarter.

    India operations
    (Rs m) 1QFY12 1QFY13 % change
    Net sales 1,142 1,376 20.5%
    Expenditure 934 1,110 18.8%
    Operating profit (EBDITA) 208 266 27.9%
    EBDITA margin (%) 18.2% 19.3%  
    Other income 70 93 32.9%
    Interest 132 168 27.3%
    Depreciation 66 81 22.7%
    Profit before tax 80 110 37.5%
    Exceptional Items - -  
    Forex changes (2) 48  
    Tax 23 44 91.3%
    Profit after tax/(loss) 55 114 107.3%
    Net profit margin (%) 4.8% 8.3%  

  • The company has barely managed to maintain its operating profitability at 16%. Regionwise, only America has improved EBIT margin by 3.4%. AMESA maintained its EBIT margin at around 11.8% with the Indian operations registering a 1% dip in EBIT margin as the India-centric flexible packaging business was adversely impacted by the rupee depreciation and higher LDPE prices.The EAP region saw its EBIT margin contract by 4.5% on account of capacity under-utilisation. However, the European region pared its EBIT loss to Rs 37 m from Rs 50 m in the year-ago quarter. Both Russia and Poland, which is the largest market for European operations, are making profits at the operating level.

    Regionwise margin performance 1QFY12 1QFY13 Change in basis points
    AMESA 11.9% 11.8% -13.23
    EAP 19.0% 14.5% -456.83
    Americas 0.6% 4.0% 335.19
    Europe -13.3% -6.2% 714.15

  • However despite a 17.9% increase in operating profit, earnings fell by 5.4% due to higher interest, depreciation and tax charges. The company's financing costs increased by 31.4% during the quarter on account of a combination of factors such as high interest rates in India, rupee depreciation and increase in borrowings to fund new projects. Depreciation was up by 16.7% as new capacities were commissioned in April and May. The tax outgo was higher by 38% as the year-ago quarter had tax benefits arising from brought forward losses and depreciation due to merger of two RAS subsidiaries with the company.

What to expect?
Essel Propack continues to face demand downturn in its China market. Even profit margin in the EAP region has witnessed the sharpest erosion due to capacity under-utilisation in China. The company expects the situation to improve over the next 2-3 quarters. As far as the loss-making European operations are concerned, the company expects business in Russia and Poland to break-even by FY13-end. Essel Propack's finance costs have risen as rupee depreciation resulted in higher translation of its offshore debt. Presently the company has a gross debt of Rs 9.9 bn which it expects to cut down by Rs 500 m annually.

At a price of Rs. 33, the stock is trading at 5 times its FY15 earnings. As long as there is no positive development on the earnings front, we continue to advise caution on the stock.

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