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Essel: Global growth

Nov 2, 2004

Introduction to results
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)3QCY033QCY04Change9mCY039mCY04Change
Net Sales1,4771,76519.5%4,1814,74213.4%
Expenditure1,0311,22518.8%2,9263,34214.2%
Operating profit (EBDITA)44654021.1%1,2551,40011.6%
EBDITA margin (%)30.2%30.6% 30.0%29.5% 
Other income62-66.7%2523-8.0%
Interest (net)2421-12.5%5047-6.0%
Depreciation1701763.5%503497-1.2%
Profit before Tax25834533.7%72787920.9%
Extraordinary income/(expense)0 (20)-0 (20)-
Tax779928.6%21426825.2%
Profit after Tax/(Loss)18122624.9%51359115.2%
Net profit margin (%)12.3%12.8% 12.3%12.5% 
No. of Shares (m)31.231.3 31.231.3 
Diluted Earnings per share (Rs)*23.128.9 21.925.2 
Price to earnings ratio (x)    8.3 
*(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, 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?
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)3QCY033QCY04Change9mCY039mCY04Change
Net Sales617553-10.4%1,6251,621-0.2%
Expenditure377333-11.7%1,0081,000-0.8%
Operating profit (EBDITA)240220-8.3%6176210.6%
EBDITA margin (%)38.9%39.8% 38.0%38.3% 
Other income5740.0%142685.7%
Interest (net)6 (5)- (12) (15)-
Depreciation7056-20.0%206165-19.9%
Profit before Tax1691764.1%43749713.7%
Extraordinary income/(expense)0 (20)-0 (20)-
Tax6955-20.3%172162-5.8%
Profit after Tax/(Loss)1001011.0%26531518.9%
Net profit margin (%)16.2%18.3% 16.3%19.4% 
No. of Shares (m)31.231.3 31.231.3 
Diluted Earnings per share (Rs)*12.812.9 11.313.4 
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 sales3QCY033QCY049mCY039mCY04
Consumption of raw materials46.4%42.9%45.3%44.4%
Staff cost11.8%14.1%10.8%12.7%
Other expenditure11.6%12.5%13.8%13.5%
Total expenditure69.8%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
 3QCY034QCY031QCY042QCY043QCY04
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?
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.

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