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Essel Propack: Research meet extracts
Oct 6, 2005

We recently met the management of Essel Propack, the world’s largest laminated tube supplier in order to get a first hand understanding of the company’s long term strategy and an update on its latest acquisition in UK. Below are the key extracts of the same.

Company Background
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 the 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 acquire Telcon Packaging in April 2005, in order to increase its presence in the EU and UK.

Essel Propack on…
Telcon Packaging (Essel Propack UK Ltd): When Essel acquired this company in April ’05, capacity utilisation of Telcon was extremely low at around 40% and was a loss making entity (it continues to be so). Essel’s initiative is to increase utilisation, uptime and decrease scrap going forward. The company aims to increase the capacity utilisation to significantly by 3QCY06 and also upgrade the facility. As far as margins are concerned, currently they are 6% for this unit and Essel intends to bring this to 15% by 3QCY06.

Arista Tubes: As far as Arista tubes is concerned, it’s been a year since Essel acquired it. Going forward, the broader objectives of the company are similar to that of Telcon. However, it must be recalled that capacity utilisation at the time of acquisition was better than that of Telcon and the company’s immediate target is to increase volumes by 50% for CY05 (75% capacity utilisation). Further, the company will be expanding Arista’s capacity by the end of 1QCY06.

Domestic business: The company is in the process of reorgansing its client as well as product portfolio. Impetus is on developing customers other than from oral care industry, with special emphasis on pharma and food segment. Overall, as per the company, the overall FMCG industry has not shown any spectacular growth and the current growth is only a bounce back from FY04. Per capita consumption has not increased much due to the urban-centric focus of FMCG players. It must be noted that around 65% of Essel’s global (76% of turnover) and domestic revenues come from the oral care industry and that this segment has grown by only 4% on a low base of CY04 in India.

Raw material prices: Firm crude prices continue to be the daily breakfast table talk, which directly or in-directly affects all industries. In the case of Essel Propack, it is mainly affected by rise in prices of polyethylene. These are the key crude raw material inputs used for the manufacture of tubes. In certain special grades of polyethylene, prices rose by as much as 25% YoY in 2004, which were partially negated by increased prices of tubes. Nonetheless, it affected the PBIT by about 1.8%.

Competition: Essel Propack currently sells 1 out of every 3 laminated tubes worldwide (32% market share worldwide). As far as India is concerned, it does not want to take any kind of disruptive step in India, in its pursuit of growth. It will pursue only those business opportunities that would translate into better ‘quality’ earnings.

The global picture: : The company has recently expanded capacity in the US and it must be noted that Essel Propack manufactures P&G’s entire US requirements for laminated tubes. The company plans to further expand by 1QCY06. As far as markets are concerned, US will continue to deliver good topline growth for the next few years. As far as China is concerned, the company’s plant is currently working at near full capacity. The market will continue to grow in double digits for the next 3 years in China.

In general, across the globe, Essel’s aim is to increase the depth of market by targeting other segments like pharma. Also, plastic tubes is a new focus area for the company. The company has rolled out its plans for increasing its presence in this sector globally, as margins are much higher in this segment. It must be noted that Essel’s recent acquisition, Arista Tubes, has a significant presence in the plastic tubes segment in UK and has an established presence and goodwill in the European market.

Essel Propack has given the promoters a loan of Rs 600 m, which it was due to receive in CY04. However, the same has not been re-paid by the promoters and they have asked for an extension till June 2006 and the management says it will be cleared by the deadline.

Also, When Essel took over Propack, it provided goodwill to the tune of Rs 2.7 bn, which has not yet been written off and continues to remain a grey area. As per the management, this has been provided for a higher leverage to pursue global expansion and that they will think of writing it off sometime next year.

Capex: The company plans to spend about US$ 15 m (Rs 660 m) as capex and will be higher in 2QCY06 due to expansion.

What to expect?
The stock is currently trading at Rs 373, implying a price to earnings multiple of 9.4 times our estimated CY07 earnings and price to sales of almost 1.1 times. 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 (in the Us markets) 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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