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Essel Propack: Input costs weigh down profits - Views on News from Equitymaster

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Essel Propack: Input costs weigh down profits
Oct 24, 2011

Essel Propack has announced its second quarter results for the financial year 2011-2012(2QFY12). The company has reported a 7.5% YoY growth in sales but a 32% YoY decline in net profits. Here is our analysis of the results.

Essel Propack: Input costs weigh down profits
  • Consolidated revenues for Essel Propack grew by 7.5% YoY during the quarter. For the half year ended September 2011 (1HFY12), net sales grew by 7.9% YoY.
  • Operating margins declined by 2.6% YoY to 15.9% as compared to the 18.5% seen during the same period last year. This was due to higher input costs (as a percentage of sales). For 1HFY12, operating margins declined to 16% as compared to 17.8% seen during the same period last year.
  • Net profit declined by 32% YoY during the quarter. This was largely on account of lower operating margins as well as the sharp decline in other income during the quarter. For 1HFY12, net profits declined by 16.7% YoY.

Consolidated financial performance snapshot
(Rs m) 2QFY11 2QFY12 % change 1HFY11 1HFY12 % change
Net sales 3,687 3,963 7.5% 7,010 7,563 7.9%
Expenditure 3,004 3,332 10.9% 5,763 6,356 10.3%
Operating profit (EBDITA) 683 631 -7.6% 1,246 1,207 -3.1%
EBDITA margin (%) 18.5% 15.9%   17.8% 16.0%  
Other income 7 3 -65.3% 17 10 -43.8%
Interest 155 140 -9.8% 295 284 -3.7%
Depreciation 269 273 1.8% 536 544 1.5%
Forex gains/(losses) (17) (33)   (34) (38)  
Profit before tax 250 188 -24.8% 398 351 -11.8%
Exceptional Items - -   - -  
Tax 116 99 -14.9% 175 167 -4.6%
Profit after tax/(loss) 134 89 -33.5% 223 184 -17.5%
Share of profits from associates 5 6   10 11  
Minority interest (4) (4)   (12) (10)  
PAT 135 92 -32.0% 221 184 -16.7%
Net profit margin (%) 3.7% 2.3%   3.2% 2.4%  
No. of shares (m)       157 157  
Diluted earnings per share (Rs)*         2.8  
P/E ratio (x)*         13.4  
*On a trailing 12 months basis

What has driven performance in 2QFY12?
  • Consolidated sales for the company clocked a growth of 7.5% YoY during the quarter. This was driven by volume growth for the tubes business across all the regions except for EAP (East Asia Pacific) region. Volumes for EAP declined due to a temporary reduction in off-take from one of the customer.

  • On a geographic basis, growth was driven by the 12.8% YoY growth from the AMESA (Africa, Middle East and South Asia) business. Sales from Europe and Americas increased by 8.4% YoY and 7.6% YoY during the quarter. However, sales from EAP witnessed a decline of 9.2% YoY during the quarter. This was on account of lower offtake by one of the customers in China. This was on account of some branding issues related to one of the variants. However, the management expects these issues to be resolved soon and the sales to resume from December onwards.

    Geographic breakup
    (Rs m) 2QFY11 2QFY12 % change
    AMESA* 1,684 1,900 12.8%
    EAP** 1,068 970 -9.2%
    Americas 855 920 7.6%
    Europe 349 379 8.4%
    * Africa, Middle East and South Asia, includes India, Nepal & Egypt
    ** East Asia Pacific includes China & Philippines

  • Operating margins for the company declined to 15.9% during the quarter from 18.5% seen during the same period last year. This was on account of higher raw material costs (as a percentage of sales). In addition to this, the margins were also negatively impacted by higher power costs in India.

  • The net profits declined by 32% YoY during the quarter. This was on account of lower operating margins as well as lower other income during the quarter. Net profits were also negatively impacted by the adverse movement in foreign exchange rates during the quarter.

What to expect?
At the current price of Rs 37, the stock is trading at a multiple of 13.4 times the trailing twelve monthsZ' earnings. The company has seen its operating margins come under pressure due to increasing prices of raw materials. At the same time, the slowdown in Europe has also had a negative impact on the company as it has been unable to pass through the increase in input prices to its customers. The management has reiterated that it plans to undertake cost saving measures to help boost margins in the future. We are in the process of reviewing our estimates on the company and will update our analysis shortly.

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