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Essel Propack: Turning the corner - Views on News from Equitymaster

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Essel Propack: Turning the corner
Nov 3, 2010

Essel Propack Limited has announced its 2QFY11 results. The company has reported a 19.8% YoY and 159.8% YoY growth in sales and profits respectively. Here is our analysis of the results.

Performance summary
  • Consolidated top-line for Essel Propack grew by 20% during the quarter. This growth is volume led.
  • Consolidated operating (EBITDA) margins improved by 0.6% to 18.5% as a result of fall in staff costs and lower other expenditure (both as a percentage of sales). The operating margin could have been higher but for increase in costs of goods as a percentage of sales.
  • On a consolidated basis, the company's net profit grew by a robust 160% YoY. On a standalone basis the company registered a strong rise of 20% in net profits to Rs 36 m.
  • For 1HFY10, on consolidated basis, net profit grew by 51% YoY while net profit margins grew by 1.1% to 3.2%. This performance comes on the back of fall in interest costs and lower depreciation. On a standalone basis, net profit grew by 25.4% YoY while net profit margins improved by 0.9% to stand at 12.9%. This growth was aided by a strong operating income growth.


Consolidated picture
(Rs m) 2QFY10 2QFY11 % change 1HFY10 1HFY11 % change
Net sales 3,078 3,687 19.8% 6,846 7,010 2.4%
Expenditure 2,528 3,004 18.8% 5,613 5,763 2.7%
Operating profit (EBDITA)    550    683 24.3% 1,233 1,246 1.1%
EBDITA margin (%) 17.9% 18.5%   18.0% 17.8%  
Other income 19 7 -61.7% 42  17 -59.5%
Interest    170    155 -8.8%    373    295 -20.8%
Depreciation    270    269 -0.5%    561    536 -4.6%
Profit before tax    129    267 107.7%    340    432 27.0%
Exceptional Items                     -                       -                     (13)                -    
Forex changes                 (19)                 (17)                      35    (34)  
Tax                    52    116 123.2%    187    175 -6.2%
Profit after tax/(loss)                    57    134 132.9%    176    223 26.5%
Share of profits from associates                      1                      5 800.0%                      2  10 352.2%
Minority interest                    (6)                    (4) -41.0%                 (32)    (12) -62.2%
PAT                    52    135 159.8%    146    221 51.1%
Net profit margin (%) 1.7% 3.7%   2.1% 3.2%  
No. of shares (m)    157    157      157    157  
Diluted earnings per share (Rs)*             4.3  
Price to earnings ratio (x)*          12.7  
* trailing twelve month earnings

What has driven performance in 2QFY11?
  • Consolidated sales during the quarter were up for this quarter on the back of strong demand in India and China. Sales from Europe improved by 13% YoY, on better performance of the company in UK, Russia and Germany. AMESA and EAP regions grew by 17% YoY and 43% YoY respectively. The Indian operations of the company grew by 15% YoY during the quarter on the back of addition of new customers and product innovation. Sales in US also grew by 9% YoY.

    India operations
    (Rs m) 2QFY10 2QFY11 % change 1HFY10 1HFY11 % change
    Net sales 884   1,015 14.9%   1,692         1,979 17.0%
    Expenditure 706 792 12.3%   1,331         1,521 14.3%
    Operating profit (EBDITA) 178 223 25.2% 361 459 27.0%
    EBDITA margin (%) 20.2% 22.0%   21.3% 23.2%  
    Other income 104     74   200 128  
    Interest     52     44 -14.9% 129    92 -28.5%
    Depreciation     58     59 1.7% 116 118 1.5%
    Profit before tax 172 194 12.8% 315 376 19.2%
    Exceptional Items      -        -         (1)      -    
    Forex changes (41)     (5)   (53) (13)  
    Tax     21     57 165.9%     58 108 85.1%
    Profit after tax/(loss) 110 132 20.2% 203 255 25.4%
    Net profit margin (%) 12.4% 13.0%   12.0% 12.9%  

  • Consolidated operating profit fell by 24.3% YoY during the quarter. This was a result of fall in staff costs and lower other expenditure (both as a percentage of sales). Raw material costs increased by 23.2% to stand at 47.4% of sales. This was due to higher polyester prices ruling during the quarter. During the quarter, lower operating loss was recorded from European regions as a result of Russia and UK units ramping up volumes and breaking even in cash terms. The company also managed to curtail losses at its Poland unit. On the domestic side, operating profit improved by 25% YoY.

    Consolidated cost break-up
    As a % of net sales 2QFY10 2QFY11 1HFY10 1HFY11
    Total Cost of goods 46.0% 47.4% 42.8% 47.4%
    Staff Cost 15.5% 14.7% 19.0% 15.5%
    Other Expenditure 20.6% 19.4% 20.3% 19.4%

  • On a consolidated basis, the company's profits grew by 160% YoY. This performance comes on the back of higher operating income, fall in interest payment as well as fall in depreciation expense. Interest payments were lower during the quarter as the company lowered its debt by Rs 2.2 bn. Depreciation was lower during the quarter as the company wrote off some assets. The growth would have been higher but for lower other income and higher effective tax rates.

What to expect?
At a price of Rs. 54.5, the stock is trading at 7.3 times our estimated FY13 earnings (RPro subscribers click here). The company has faced problem as a result of slowdown in Americas and in Europe. However, things are looking up now with the company expecting growth across geographies and improvement in the profitability of its European business The China and India boost has helped the company grow its top line this quarter. Moreover, the company is changing its product mix and increasing focus on cosmetic, hair care and pharmaceutical segment. We remain bullish on the company's growth.

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