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Essel Propack: Mixed results - Views on News from Equitymaster

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Essel Propack: Mixed results

Oct 19, 2006

Performance Summary
Laminated tubes major, Essel Propack has announced mixed results for the third quarter and nine months ended September 2006. Topline during both the periods has grown at a healthy double-digit pace. However, the operating margins have contracted sharply due to a considerable rise in staff costs and other expenditure. Despite higher other income the bottomline for both the periods has grown at much slower pace than the topline

Consolidated picture
(Rs m) 3QCY05 3QCY06 % change 9mCY05 9mCY06 % change
Net sales 2,095 2,769 32.2% 5,969 7,206 20.7%
Expenditure 1,531 2,115 38.1% 4,421 5,498 24.4%
Operating profit (EBDITA) 564 654 16.0% 1,548 1,708 10.3%
EBDITA margin (%) 26.9% 23.6%   25.9% 23.7%  
Other income 7 35 400.0% 35 62 77.1%
Interest 44 79 79.5% 102 196 92.2%
Depreciation 197 221 12.2% 569 641 12.7%
Profit before tax 330 389 17.9% 912 933 2.3%
Extraordinary item - 12     12  
Tax 97 110 13.4% 280 237 -15.4%
Profit after tax/(loss) 233 267 14.6% 632 684 8.2%
Net profit margin (%) 11.1% 9.6%   10.6% 9.5%  
No. of shares (m) 156.5 156.5   156.5 156.5  
Diluted earnings per share (Rs)*         6.12  
Price to earnings ratio (x)*         13.8  
* On a 12-month trailing basis

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, the US, Germany, India, Nepal, the 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 closely tracks the growth of the oral care industry, which again depends on economic growth. In early 2003, the company commissioned a plant in Virginia, US, 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. The company recently acquired an 85% stake in Tacpro Inc. (USA) and Avalon Medical Services (Singapore).

What has driven performance in 3QCY07?
India disappoints: Essel Propack’s domestic operations yet again registered decline in net profits. Though the topline grew by 9.3% YoY, the margins contracted by 640 basis points due to higher operating expenses. The company’s Indian operations contributed around 27% of consolidated revenues during 3QCY06 (33% in 3QCY05). The net profits (excluding the extraordinary item) fell by 15.7% YoY. Net profits also witnessed a decline in their contribution to consolidated bottomline (from 58% to 38% in 3QCY06). The management has indicated of better times for the Indian operations in the future. The company recently acquired Packaging India, a speciality packaging company. The deal will consolidate Essel Propack’s position as the leader in the domestic packaging industry. It is also focusing on the pharma sector, which will provide a huge opportunity.

India operations
(Rs m) 3QCY05 3QCY06 % change 9mCY05 9mCY06 % change
Net sales 681 744 9.3% 1,875 2,009 7.1%
Expenditure 447 536 19.9% 1278 1456 13.9%
Operating profit (EBDITA) 234 208 -11.1% 597 553 -7.4%
EBDITA margin (%) 34.4% 28.0%   31.8% 27.5%  
Other income 10 21 110.0% 51 67 31.4%
Interest -6 17   -18 35  
Depreciation 54 52 -3.7% 150 154 2.7%
Profit before tax 196 160 -18.4% 516 431 -16.5%
Extraordinary item - 12     12  
Tax 62 47 -24.2% 169 130 -23.1%
Profit after tax/(loss) 134 101 -24.6% 347 289 -16.7%
Net profit margin (%) 19.7% 13.6%   18.5% 14.4%  

Consolidated view: On the consolidated front, the company reported a 32% YoY increase in the topline for 3QCY06. This was mainly due to strong growth in the international operations, which grew by 43% YoY. The aim to be a manufacturer of every second laminated tube is very much visible from the company’s expansion plans. The company has divided its business revenues into four main geographical regions, namely Africa, Middle East and South Asia (AMESA), America, East Asia Pacific (EAP) and Europe. The company has also expanded its capacities in the international markets. Recently, EPL started its 25th plant in Poland to develop plastic tubes and will cater to the cosmetic division (Poland is the largest market in Eastern Europe). The management expects the international operations to grow much faster than the domestic front.

Consolidated cost break-up
As a % of net sales 3QCY05 3QCY06 9mCY05 9mCY06
Total Cost of goods 42.9% 42.4% 44.2% 41.6%
Staff Cost 16.2% 17.3% 15.9% 17.8%
Other Expenditure 14.0% 16.8% 13.9% 17.0%

Margins dented: As can be seen from the table above, though cost of goods has witnessed a decline during the quarter, higher staff costs, and other expenses has been the main factor in denting the operating margins during the periods under consideration. However, on the domestic front, due to lesser competition, the Indian operations margins are better than the group. In our view, as the new capacities gain scale, the cost heads will be spread over a wider base, resulting in operating margin expansion.

Bottomline picture: The bottomline for the consolidated entity grew by 14.6% YoY in 3QCY06. There is an extraordinary item to the tune of Rs 12 m. Excluding that the bottomline grew by 19.7%.

What to expect?
At the current price of Rs 84, the stock is trading at a price-earning multiple of 13.8 times its 12 months trailing earnings. We are enthused by the company's global initiatives and the long-term business plan. Given the increased visibility on the international side and the turnaround of acquisitions, we had given a BUY in August 2006 with a target price of Rs 110 over the next two to three years. We maintain our view.

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Mar 19, 2019 10:57 AM


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