Essel: Global growth

Introduction to results

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Laminated tubes packaging major, Essel Propack, reported a strong 20% topline growth in the September quarter. Buoyant Europe and US performance, as well as the acquisition of Arista Tubes UK (in August 2004) led the growth. This and a marginal improvement in operating margins resulted in a 25% bottomline growth during the quarter. The company finished the nine month period ended September quarter with over 13% topline and 15% bottomline growth.

Consolidated global picture...

(Rs m)	3QCY03	3QCY04	Change	9mCY03	9mCY04	Change
Net Sales	1,477	1,765	19.5%	4,181	4,742	13.4%
Expenditure	1,031	1,225	18.8%	2,926	3,342	14.2%
Operating profit (EBDITA)	446	540	21.1%	1,255	1,400	11.6%
EBDITA margin (%)	30.2%	30.6%		30.0%	29.5%
Other income	6	2	-66.7%	25	23	-8.0%
Interest (net)	24	21	-12.5%	50	47	-6.0%
Depreciation	170	176	3.5%	503	497	-1.2%
Profit before Tax	258	345	33.7%	727	879	20.9%
Extraordinary income/(expense)	0	(20)	-	0	(20)	-
Tax	77	99	28.6%	214	268	25.2%
Profit after Tax/(Loss)	181	226	24.9%	513	591	15.2%
Net profit margin (%)	12.3%	12.8%		12.3%	12.5%
No. of Shares (m)	31.2	31.3		31.2	31.3
Diluted Earnings per share (Rs)*	23.1	28.9		21.9	25.2
Price to earnings ratio (x)					8.3
*(annualised), CY = Calendar Year

What is the company’s business?

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Essel Propack is the largest laminated tubes supplier in the world. The company's global sales stand at around 4.5 bn tubes, 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 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. Going forward, Essel will cater to 55% of P&G's global tube requirements, including China. In 2003, 40% of Essel's revenues came from India, 28% from China and 16% from the US.

What has driven performance in 3QCY04?

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Sales:  While growth was sluggish in the June quarter (revenues down 4.5% YoY), this quarter picked up largely owing to buoyant performance in US and Europe region. The acquisition of Arista Tubes - UK also helped prop up the revenue growth during the quarter. The company is currently upgrading its Philippines capacity to make it the export hub for the ASEAN region. Also, the company's Mexico plant has received a firm commitment for three years from an MNC customer.

India operations

(Rs m)	3QCY03	3QCY04	Change	9mCY03	9mCY04	Change
Net Sales	617	553	-10.4%	1,625	1,621	-0.2%
Expenditure	377	333	-11.7%	1,008	1,000	-0.8%
Operating profit (EBDITA)	240	220	-8.3%	617	621	0.6%
EBDITA margin (%)	38.9%	39.8%		38.0%	38.3%
Other income	5	7	40.0%	14	26	85.7%
Interest (net)	6	(5)	-	(12)	(15)	-
Depreciation	70	56	-20.0%	206	165	-19.9%
Profit before Tax	169	176	4.1%	437	497	13.7%
Extraordinary income/(expense)	0	(20)	-	0	(20)	-
Tax	69	55	-20.3%	172	162	-5.8%
Profit after Tax/(Loss)	100	101	1.0%	265	315	18.9%
Net profit margin (%)	16.2%	18.3%		16.3%	19.4%
No. of Shares (m)	31.2	31.3		31.2	31.3
Diluted Earnings per share (Rs)*	12.8	12.9		11.3	13.4
Price to earnings ratio (x)					15.7
*(annualised), CY = Calendar Year

However, the company's India operations (nearly 34% of 9mCY04 revenues) continued to be under pressure. Essel recorded over 10% dip in Indian revenues in September quarter (10% revenue dip in June quarter as well). We believe that the competitive pressure engulfing the FMCG industry in India seems to have forced the company to give away benefits to its key customers, which have reflected in the sales (in value terms). With competition showing no signs of easing, Essel is likely to continue being pressured on the Indian side of its business.

Cost break-up (Global operations)

as a % of net sales	3QCY03	3QCY04	9mCY03	9mCY04
Consumption of raw materials	46.4%	42.9%	45.3%	44.4%
Staff cost	11.8%	14.1%	10.8%	12.7%
Other expenditure	11.6%	12.5%	13.8%	13.5%
Total expenditure	69.8%	69.4%	70.0%	70.5%

Profitability:  The company has seen a marginal rise in 3QCY04 consolidated margins, led by drop in raw material consumption as percentage of sales during the quarter. However, on a nine month basis, the margins have actually fallen marginally. Buoyant sales growth in September quarter has resulted in the company reporting a 25% profit growth during the quarter. As a result, the nine month performance too has improved (net profit up over 15% YoY). It should be noted that Essel's India operations are able to command higher margins, as compared to its other regions. Extra ordinary expense for the September quarter is towards the payment of disputed Sales Tax liabilities under Amnesty Scheme 2004 of Government of Maharashtra, which extinguishes the company's contingent liabilities significantly

Over the last five quarters

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	3QCY03	4QCY03	1QCY04	2QCY04	3QCY04
Sales growth (YoY)	14.7%	37.8%	28.9%	-4.5%	19.5%
OPM (%)	29.6%	29.9%	28.2%	29.6%	30.6%
Net profit growth (YoY)	-14.6%	29.9%	10.4%	9.5%	24.9%

What to expect?

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At Rs 210, the stock trades at 8.3x 9mCY04 consolidated annualised earnings, market cap. to sales of 1x. Valuations are at the lower end of the FMCG spectrum. Essel has set itself an ambitious target to up its share in the global laminated industry to 50% in the next few years. It is also looking at growing by making 'caps' for tubes for the global FMCG players.

However, among the key concerns, the company has still to receive over Rs 600 m from the promoters, which was given as a loan to them. Also, when the company took over Propack, it provided for goodwill to the tune of Rs 2.7 bn (over 40% of 2003 networth). The company has still to write off this amount.