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Essel Propack: Top up bottom down… - Views on News from Equitymaster
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Essel Propack: Top up bottom down…
Oct 22, 2005

Introduction to results
Laminated tubes major, Essel Propack announced its results for the third quarter ended September 2005 (January-December fiscal) on Saturday. On a consolidated basis, while topline witnessed a robust growth during the quarter, margin contraction due to higher staff costs and higher interest and depreciation costs led to bottomline growing at a snail’s pace. If we take out a Rs 20 m extraordinary expense in the same quarter previous year, bottomline has actually dipped by 5% YoY during 3QCY05..

Consolidated global picture…
(Rs m) 3QCY04 3QCY05 Change 9mCY04 9mCY05 Change
Net Sales 1,765 2,095 18.7% 4,742 5,969 25.9%
Expenditure 1,225 1,531 25.0% 3,342 4,421 32.3%
Operating profit (EBDITA) 540 564 4.4% 1,400 1,548 10.6%
EBDITA margin (%) 30.6% 26.9%   29.5% 25.9%  
Other income 2 7 250.0% 23 35 52.2%
Interest (net) 21 44 109.5% 47 102 117.0%
Depreciation 176 197 11.9% 497 569 14.5%
Profit before Tax 345 330 -4.3% 879 912 3.8%
Extraordinary income/(expense) (20) - - (20) - -
Tax 99 97 -2.0% 268 280 4.5%
Profit after Tax/(Loss) 226 233 3.1% 591 632 6.9%
Net profit margin (%) 12.8% 11.1%   12.5% 10.6%  
No. of Shares (m) 31.2 31.3   31.2 31.3  
Diluted Earnings per share (Rs)* 28.9 29.8   25.2 26.9  
Price to earnings ratio (x)         12.8  
*(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, 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 is highly linked to 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.

What has driver performance in 3QCY05?
India outpaces international operations: Although global operations have been consistent, strong performance of the domestic operations due to revival in volumes and special emphasis on pharmaceutical (mini-tubes) and cosmetics (co-extruded tubes) resulted in both topline and bottomline of the latter (domestic operations) outpacing that of the company’s consolidated worldwide performance. India accounted for close to 33% of consolidated revenues as compared to 31% in the same quarter of previous year. It must be noted that domestic margins are much higher as compared to international operations as competitive pressures are lesser in India.

Indian operations
(Rs m) 3QCY04 3QCY05 Change 9mCY04 9mCY05 Change
Net Sales 553 681 23.1% 1,621 1,875 15.7%
Expenditure 333 447 34.2% 1,000 1,278 27.8%
Operating profit (EBDITA) 220 234 6.4% 621 597 -3.9%
EBDITA margin (%) 39.8% 34.4%   38.3% 31.8%  
Other income 7 10 42.9% 26 51 96.2%
Interest (net) (5) (6) 20.0% (15) (18) 20.0%
Depreciation 56 54 -3.6% 165 150 -9.1%
Profit before Tax 176 196 11.4% 497 516 3.8%
Extraordinary income/(expense) (20) - - (20) - -
Tax 55 62 12.7% 162 169 4.3%
Profit after Tax/(Loss) 101 134 32.7% 315 347 10.2%
Net profit margin (%) 18.3% 19.7%   19.4% 18.5%  
No. of Shares (m) 31.3 31.3   31.3 31.3  
Diluted Earnings per share (Rs)* 12.9 17.1   13.4 14.8  
Price to earnings ratio (x)         22.9  
*(annualised), CY = Calendar Year            

Staff costs continue to leap: Higher staff costs hit the operating margins of the company during both the periods. 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.

Cost break-up (Global operations)
as a % of net sales 3QCY04 3QCY05 9mCY04 9mCY05
Consumption of raw materials 42.9% 42.9% 44.4% 44.2%
Staff cost 14.1% 16.2% 12.7% 15.9%
Other expenditure 12.5% 14.0% 13.5% 13.9%
Total expenditure 69.4% 73.1% 70.5% 74.1%

International focus: As far as global operations are concerned, China witnessed steady volumes and the company continued its efforts at cost cutting and efficiency improvement. 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, this figure could go up. The Philippines is witnessing steady growth and it must be recollected that the company had expanded capacity a while ago to handle the growing volumes in the country.

As far as it’s two UK subsidiaries –Arista Tubes and Telcon Packaging – are concerned, Essel Propack’s current aim is to improve efficiencies and reduce costs and the company is also targeting new big-ticket customers in the region. However, these two companies continue to be a drag on the bottomline and barring these, Essel’s international operations bottomline has actually grown by 17% YoY. As per the company, these will start contributing to profits by 2QCY06. Further, the company’s Russian operations, which commenced commercial production a few months ago have stabilized and expansion plans for this unit are already on the cards, as there is huge demand. The US, another country where the company is in expansion phase also showed good growth during the quarter. The company is tapping new customers for its invisible seam tubes, a new technology currently available only in the US. It must be noted that Essel is P&G’s (US) sole laminated tube supplier, mainly used in the oral care industry.

Over the past few quarters…
  3QCY04 4QCY04 1QCY05 2QCY05 3QCY05
Sales growth (YoY) 19.5% 26.2% 25.2% 35.2% 18.7%
OPM (%) 30.6% 25.1% 26.0% 24.8% 26.9%
Net profit growth (YoY) 24.9% 18.0% 8.3% 9.7% 3.1%

What to expect?
The stock is currently trading at Rs 345, implying a price to earnings multiple of 8.7 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 world’s largest FMCG company P&G. Going forward, we expect margins to 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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