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Essel Propack: Realisations propel margins
Nov 12, 2012

Essel Propack Limited has announced its second quarter financial results of 2012-2013 (2QFY13). The company has reported a 20% YoY growth in sales and 43.5% fall in profits. Here is our analysis of the results.

Performance summary
  • Essel Propack recorded a 20% increase in revenues on a 8% blended volume growth during the quarter. For the 1HFY13, the topline was up by 20%.
  • Operating margin expanded by 200 basis points backed by lower other expenses and input costs (as a proportion of sales). For 1HFY13, the operating margin increased by 90 basis points.
  • Earnings surged by 155% backed by a 35% rise in operating profit coupled with forex exchange gain during the quarter. During 1HFY13, net profit grew by 74%.

Consolidated picture
(Rs m) 2QFY12 2QFY13 % change 1HFY12 1HFY13 % change
Revenues 3,963 4,766 20.3% 7,563 9,073 20.0%
Expenditure 3,318 3,893 17.3% 6,331 7,508 18.6%
Operating profit (EBDITA) 645 873 35.3% 1,232 1,565 27.0%
EBDITA margin (%) 16.3% 18.3%   16.3% 17.2%  
Other income 46 44 -4.3% 87 83 -4.6%
Interest 197 239 21.3% 388 490 26.3%
Depreciation 273 326 19.4% 543 641 18.0%
Profit before tax 221 352 59.3% 388 517 33.2%
Exceptional Items - -   - -  
Forex changes (33) 3   (38) 20 -152.6%
Tax 99 125 26.3% 167 219 31.1%
Profit after tax/(loss) 89 230 158.4% 183 318 73.8%
Share of profits from associates 6 7   11 14 27.3%
Minority interest (4) (5)   (10) (12)  
Loss from discontinuing operations (after tax) - -   - -  
PAT 91 232 154.9% 184 320 73.9%
Net profit margin (%) 2.3% 4.9%   2.4% 3.5%  
No. of shares (m)         157  
Diluted earnings per share (Rs)*         4.1  
Price to earnings ratio (x)*         9.8  
* On a 12-month trailing basis

What has driven performance in 2QFY13?
  • Essel Propack clocked a 20% growth in topline largely driven by higher realizations on price-hikes taken in 3QFY12 and forex gains. At constant currency rates, the turnover has grown by a mere 10%. The volume growth continued to remain subdued at around 8%. All the four regions reported double-digit growth of over 15% during the quarter. Europe reported the steepest growth of 58% on the back of robust performance in Russia, Poland and Germany. The AMESA region posted a 16% rise in turnover driven by 20% growth in the Indian operations. The EAP region consisting of China that was witnessing sales erosion recovered by 17% largely driven by realization and currency translation gains. Even America registered a 21% sales growth during the quarter.

    India operations
    (Rs m) 2QFY12 2QFY13 % change
    Net sales 1,251 1,504 20.2%
    Expenditure 1,009 1,173 16.3%
    Operating profit (EBDITA) 242 331 36.8%
    EBDITA margin (%) 19.3% 22.0%  
    Other income 81 69 -14.8%
    Interest 137 144 5.1%
    Depreciation 70 85 21.4%
    Profit before tax 116 171 47.4%
    Exceptional Items - -  
    Forex changes 11 (10)  
    Tax 35 29 -17.1%
    Profit after tax/(loss) 92 132 43.5%
    Net profit margin (%) 7.4% 8.8%  

  • Better realisations have enabled the company to optimise costs and improve operating profitability. Other expenditure and cost of goods (as a proportion of sales) fell by 175 basis points and 47 basis points, respectively. This has offset a marginal rise in staff cost to sales ratio translating in a 200 basis points improvement in the operating profit margin. Barring, the loss-making European region, all the other regions have reported incremental margins. However, the European region pared its EBIT loss to Rs 45 m from Rs 64 m in the year-ago quarter with Russia reaching break-even.

    Region-wise margin performance 2QFY12 2QFY13 Change in basis points
    AMESA 12.9% 13.9% 90.37
    EAP 18.1% 19.3% 113.38
    Americas 3.6% 7.1% 349.19
    Europe -16.9% -7.7%

    At the net level, profits surged by 155% on the back of 35% rise in operating profit coupled with forex gains. At constant rates, PAT has grown by a mere 56%. During the quarter, the company posted translation gains of Rs 3 m compared to a loss of Rs 33 m in the year-ago quarter. Even interest and depreciation charges increased at a modest pace of 19-21% during the quarter.

What to expect?
Essel Propack continues to be hit by slower offtake. Most of the improvement in the financial performance in the current quarter is on account of price-hikes taken earlier as well as favourable currency movements. This casts a cloud over the sustainability of its future growth momentum. Essel Propack has said it wants to focus on value growth even at the cost of volumes. The company wants to concentrate on the high-margin non-oral care segment and wants to raise the share of non-oral care tube sales from 35% to 50% by FY15. To achieve this target, the company is rationalising its customer portfolio and is even prepared to shift capacities. As these initiatives appear overtly ambitious, we continue to maintain a cautious view on the stock performance in future.

At a price of Rs. 40, the stock is trading at 6 times its FY15 earnings. Until the company's future growth strategy yield positive results, we would continue to advise our investors to exercise caution.

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