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Essel Propack: No respite - Views on News from Equitymaster

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Essel Propack: No respite
Oct 23, 2008

Performance summary
  • Consolidated topline grows by 4% YoY in 9mCY08, while the domestic topline grows by 12% YoY.

  • Sharp increase in raw material prices and ramping up costs leads to consolidated operating margins decline of 7.4% and 6.0% during 3QCY08 and 9mCY08 respectively.

  • Reports losses for 3QCY08 and 9mCY08 on a consolidated basis led by lower margins, lower other income and higher interest costs.



Consolidated picture
(Rs m) 3QCY07 3QCY08 % change 9mCY07 9mCY08 % change
Net sales 3,141 3,365 7.1% 8,953 9,307 4.0%
Expenditure 2,696 3,138 16.4% 7,406 8,256 11.5%
Operating profit (EBDITA) 445 228 -48.9% 1,547 1,051 -32.0%
EBDITA margin (%) 14.2% 6.8%   17.3% 11.3%  
Other income 45 -   115 6 -94.4%
Interest 94 171 82.0% 279 438 56.9%
Depreciation 233 274 17.5% 669 767 14.6%
Profit before tax 163 (217)   714 (147)  
Extraordinary item - 12   (11) 12  
Tax 42 8 -80.2% 181 130 -28.2%
Profit after tax/(loss) 121 (214)   522 (265)  
Net profit margin (%) 3.9% -6.4%   5.8% -2.8%  
No. of shares (m) 156.5 156.5   156.5 156.5  

What has driven performance in 9mCY08?
  • The consolidated topline grew by 7% YoY during 3QCY08 and 4% YoY during 9mCY08. Underperformance of its core operations and forex fluctuations continues to hamper its topline performance. The domestic business reported a 22% YoY growth during 3QCY08. It contributed around 27% to the consolidated revenues in the quarter (24% in 3QCY07).

    India operations
    (Rs m) 3QCY07 3QCY08 % change 9mCY07 9mCY08 % change
    Net sales 747 908 21.6% 2,173 2,434 12.0%
    Expenditure 572 748 30.8% 1,672 1,993 19.2%
    Operating profit (EBDITA) 174 160 -8.4% 501 441 -12.1%
    EBDITA margin (%) 23.4% 17.6% 23.1% 18.1%
    Other income 81 2 -97.8% 168 88 -47.6%
    Interest 48 68 42.2% 131 161 23.1%
    Depreciation 52 54 4.8% 149 152 1.9%
    Profit before tax 156 40 -74.5% 389 215 -44.6%
    Extraordinary item   12     12  
    Tax 51 1 -97.9% 129 53 -58.8%
    Profit after tax/(loss) 105 50 -51.8% 260 150 -42.2%
    Net profit margin (%) 14.0% 5.6%   12.0% 6.2%  

  • The laminated tube business performed well across all the regions during this quarter, with sales growing by 10% YoY. For 9mCY07, the sales have grown by 4.6% YoY, led by strong recovery in Asia-Africa and the EAP regions after a subdued first half year. The speciality packaging business, which is an India centric business, witnessed a 9% YoY volume growth due to capacity expansion. Medical devices reported 31% YoY jump. The plastic tubes division however continues to cause trouble. In case of the US plastic tube operations which commenced since year 2007, the problems are more external in nature. The company has encountered fair amount of issues in winning new customers in the face of extended plant certification and product trial requirements of customers. In case of Poland, problems on account of low machine productivity, high scrap levels, poor production reliability and quality issues, quality and delayed delivery claims continues to hamper performance. Though the company is taking steps, the turnaround will still take time.

  • Sharp increase in raw material prices and ramping up costs for plastic tubes in USA and Poland led to the operating margins decline by 7.4% and 6% during 3QCY08 and 9mCY08 respectively. The consolidated EBITDA for 9mCY07 impacted by significant losses in the new plastic tube business in Europe and US to the tune of US$ 14.8 m, stands at US$ 26 m. On the domestic front, the company’s margins declined by 5% mainly due to higher polymer prices and depreciation of the rupee against the dollar, impacting margins to the tune of 3% of sales. Even higher labour and other expenses (as a percent of sales) added to the woes.

  • Essel Propack reported losses for 3QCY08 and 9mCY08 on a consolidated basis led by lower margins, lower other income and higher interest costs. Interest expenditure was higher on account of hardening of global interest rates and higher levels of borrowing due to the new greenfield projects and acquisitions. The standalone profits were down 52% YoY and 42% YoY during 3QCY08 and 9mCY08.

    What to expect?
    At the current price of Rs 17, the stock is trading at a price to earnings multiple of 4.9 times our estimated CY10 earnings. The company has under performed than our CY08 estimates not only on the margin front, but also the topline performance continues to worry. Its international business is also not performing well. The company is taking steps to solve the problems in its US and Poland plants. However, the turnaround is not foreseen in near future. Further, on account of lack of bargaining power, the company only stands to lose. We will revisit our estimates for the company.

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