Essel Propack Ltd - Company Report - Axis Direct - 05022014

8/12/2019 Essel Propack Ltd - Company Report - Axis Direct - 05022014

http://slidepdf.com/reader/full/essel-propack-ltd-company-report-axis-direct-05022014 1/27

Shareholding (%) Dec-13 QoQ chg

Stock Data

No. of shares :15.7 Cr

Market cap : Rs 760 Cr

52 week high/low : Rs 52/ Rs 30

Avg. daily vol. (6mth) : 71,220 shrsBloomberg code : ESEL IN

Reuters code : ESSL.NS

Ready to PACK a Punch …

Essel Propack LtdCMP: Rs 48

Target Price: Rs 65Potential Upside: 35%Absolute Rating: BUY

Financial Summary

Source: Company, Axis Securities Ltd.Source: Axis Securities Ltd, Bloomberg

Relative Performance

. .

FIIs : 9.35 0.14MFs / UTI : 3.09 (0.15)

Others : 28.62 0.01

Y/EMarch

Total Income(Rs Cr)

PAT(Rs Cr)

EPS(Rs.)

Change(YoY %)

P/E(x)

RoE(%)

RoCE(%)

DPS(Rs)

2012 1584 63 3.27 29% - 7.3 9.8 0.65

2013 1832 81 5.16 21% - 8.8 11.6 0.75

2014E 2070 101 6.41 31% 7.6 10.2 12.8 0.85

2015E 2329 128 8.14 28% 6.0 11.8 14.3 0.95

February 5, 2014jwal ShahChief [email protected] (+91 22 4325 3163)

60

90

120150

180

Feb-13 Jun-13 Oct-13 Feb-14

Essel Propack BSE_SENSEX



Long Standing customer relations Caters to elite global as well as domestic customers (both in oral and non-oral care categories)

Long standing relations to be utilized for cross selling of products

Turnaround of European operations in-sight Poland – largest operations in Europe(~70% of Euro region’s topline); to breakeven by Q4FY14E

Essel has bagged a 1+5 year contract from a leading MNC FMCG player for supply of lami-tubes which will contribute revenue of approx. Euro 15 mn p.a.

Essel has discontinued manufacturing operations in UK and its clients are serviced from Poland & German plants. This aids in reducingcosts & consolidating capacities in the EU region.

Essel is fully restructuring operations in Russia by undertaking measures such as change in Management, leaner employee structure andim rovin cost efficiencies. Co ex ects to successfull turnaround its Russian o erations and re ort EBITDA rofits in FY2015.

Investment Rationale

2

AMESA – “Opportunities Galore”

India has been the growth engine for Essel and has been consistently earning higher margins than consol business.

Essel is a market leader in India with share of 67% in laminated tubes and 38% in plastic tubes. India is fast becoming a sourcing basefor MNC & acts as an export hub to other Asian countries such as Sri-lanka & Bangladesh.

Flexible packaging business is a high growth low margin category for Essel, with steady revenue growth of @ 16 -18% and earnsgood RoCE as investments required is relatively less for this business.

EAP – The margin propeller Increased focus on cosmetics, pharma and niche non-oral care category’s for growth going forward.

Market Plastic Barrier Lami (PBL) tubes to existing customers (oral and non-oral). This strategy has paid off whereby 1 MNC customerhas awarded contract for PBL tubes to Essel for Chinese markets.

EAP earns over 20% EBIT margin as against Essel’s consol. EBIT margin of 11%. Essel is focusing on increasing revenue growth fromEAP region and this shift in revenue mix with higher contribution from EAP will drive margins in the medium term.



1408 15841832

2070 2329

17.6%16.8% 17.1% 18.0% 18.6%

3.5% 4.0% 4.2% 4.8% 5.5%

0%

4%

8%

12%

16%

20%

0

500

1000

1500

2000

2500

FY11 FY12 FY13 FY14E FY15E

Investment Rationale

Americas – Focus on Moving up the Value Chain Focus on value (as volumes have peaked) by improving

product mix in favor of high end non-oral care & cosmeticsproducts in US

Focus on increasing customer base and getting orders toimprove capacity utilization rate.

PBL Tubes – The Transition has Begun PBL tubes are gaining prominence as they provide similar

effects as that of plastic tubes at comparatively lower costs.

Essel intends to market PBL tubes via cross selling them toexisting client base (FMCG giants), target existing customers

Steady growth coupled with strong margins

(R

C

(

3


Total Income EBIT Margin PAT margin

.

Anticipate Consol Revenue and Adj. PAT CAGR of 13%and 30%, respectively Turnaround in European ops

Improvement in EBITDA margin to 18.6% in FY15E fromcurrent 17.1%. Comfortable Net Debt to Equity at .7x

Consistently rewarding shareholders with dividends since1991

RoE and RoCE to substantially improve to 11% and 14% inFY15E from 9% and 11% in FY13; lead by strong rebound inPolish op. coupled with improving productivity & better margins.

We initiate BUY with target price of Rs 65 based on 8xFY15E, providing potential upside of 35%

Source: Company, Axis Securities Ltd.

Non-oral care contribution: Management targets 50% in FY15

64.8% 59.2% 50%

35.2% 40.8% 50%

0%

20%

40%

60%

80%

100%

FY12 FY13 FY15 T

Oral Care segment Non-Oral Care segment



Business Overview

Incorporated in 1984, Essel Propack (Essel) is a leading manufacturer of laminated and plastic tubes globally and offers flexible

Revenue mix: 2005 Revenue mix: 2013

35%

24%

23%

18%

AMESA East Asia and Pacific (EAP) Americas Europe

47%

18%

22%

13%

AMESA East Asia and Pacific (EAP) Americas Europe

4

packaging solutions to the oral care, cosmetics, pharmaceutical, personal care, food and industrial sectors worldwide.

Essel has 24 manufacturing facilities spanning across12 countries to serve customers worldwide.

Essel is the world’s largest integrated laminated tube manufacturer with a market share of 33% globally.

The company has consistently focused on increasing contribution from high margin non-oral care category which currently accounts for40.8% in FY13 as compared to 35.2% in FY12.

The company operates in 4 key regions

AMESA:Africa, Middle East & South Asia (with operations in Egypt and India)

EAP: East Asia Pacific (with operations in China, Philippines & Indonesia)

Americas:(with operations in the USA, Mexico & Colombia)

Europe: (with operations in the UK, Germany, Poland & Russia).



Essel Propack’s (Essel) portfolio of packaging products consists of laminate (lami) tubes, plastic tubes, Caps andClosures & flexible packaging. The tubes find application in oral care, cosmetics, other personal care, pharmaceutical,food and industrial sectors. Flexible packaging business is operated under a wholly owned Indian subsidiary“Packaging India Pvt. Ltd”.

Laminated Tubes

Laminated Tubes are used for packaging by various sectors like oral care, food, cosmetics, Pharma and industrial applications. The oral care industry contributes to 70% production of lami tubes. Essel offers a range of customized laminated tubes like:-

- Aluminium Barrier Laminates: Used for pastes, ointments and over the counter pharmaceutical products.

- Plastic Barrier Laminates: Used for packaging products that needs to maintain their form and shape with high decoration and photo quality.

- Specialty and Custom Materials: Used to provide more value or unique look to the customer’s brand.

Product Profile

5

Plastic Tubes Plastic tubes are used to enhance the shelf-life of packaged goods & create a unique product identity.

Essel offers high-end decoration techniques and custom colored materials to fit the needs of the brand/products of each client.

Caps & Closures Essel manufactures caps and specialty closures for its products mainly in 3 markets; India, USA and India.

New Products IPR Protected products: Etain, Egnite, Titanium Oxeblock, Ishine, High Cloud, Dual Barrier Medi Tube, High Clear UV protected Tubes.

Etain is a fully recyclable plastic packaging tube which is highly customizable and ensures that the lifecycle of a product does notdestroy the source of the product or the environment.

Egnite is a high luster laminate which facilitates complex printing and novel color effects. The metallic finish makes the foil blockingprocess redundant and also offers advantages of striking product differentiation.



Domestic and Global Elite Customer list

Oral Care customers Non-oral care customers

6



Europe — At the Onset of Revival

Russian operations:Restructuring over,

focus on profitability

P l d t t

7

Germany out of thewoods; time to

consolidate

Poland to turnPAT +ve from

4QFY14E

European operations: (13% of FY13 consolidated revenue)

EU operations include operations in Poland, Russia & Germany. Essel offers both laminated tubes and plastic extruded tubes in EU.





Germany and Russia — Operations Back in Green

Germany – Restructuring pays off Essel holds 25% stake in Essel Deutschland; a JV formed to

target Germany’s market.

Manufactures laminated tubes with focus on niche segments.

Essel had to face lot of operational issues on top of thealarming attrition rates during 2009-2013.

However, Essel successfully resolved Management &operational issues and helped business turnaround. Thus,German operations have turned profitable and earn bettermargins than consolidated business.

Essel has discontinued manufacturing operations in UK andits clients are serviced from Poland & German plants. This

Russia – Winning long term contracts key toprofitability Entered the Russian market in 2004. Russia business is

dominated by non-oral care category focusing on Food &Beverages and Cosmetics Segment.

Suffered initial set back when a customer backed off afterplanning a long term contract with Essel. Moreover lack of anchor customers coupled with absence of any long termcontracts had impacted capacity utilization and profitability.

Russian business earns one of the highest realizations whencompared to other regions. However higher wastages, costinefficiencies and productivity issues affect margins.

9

aids in reducing costs & consolidating capacities in the EU

region. Plans to increase presence in the cosmetics sector which can

prove to be a huge growth driver going forward.


Essel fully restructured operations in Russia undertakingmeasures such as change in Management, leaner employeestructure and improving cost efficiencies.

Essel in Russia has struggled to find an anchor customer.Company currently is in advanced talks with an anchorcustomers which is encouraging.

Enhanced focus on gaining large contracts has paid dividendas the company recently won a new order which will beserviced from Jan 2014 and ramp up benefits will be seen inFY15E.

With the focus on making this unit profitable by improvingutilization rates; efforts are on to gain larger contracts goingforward. Essel currently is in advanced talks to get a few

large customers on board.

131172

237308

376

(16.8%)(14.7%)

(11.8%)

(2.0%)

4.0%

-20%

-10%

0%

10%

0

200

400


Europe EBIT Margin

Europe Revenue (Rs. Cr)



AMESA — “Opportunities Galore ”

Egypt:

Gateway to Middle East and Africa

India:

Flexible Packaging:

High volume low value game

India:

The mainstay of AMESA

AMESA operations: (47% of FY13 consol. Revenue) AMESA has been one the most prolific and consistent contributor for Essel over the past, and the trend looks likely to continue.



India – Focus on Consolidating its Leadership Position

Strong foothold in India- India accounts for over 65% of AMESA’s topline India has been the growth engine for Essel and has been consistently earning higher margins than consol business.

Over 65% of AMESA’s topline is contributed by India (excluding Flexible packaging).

Essel is market leader in India with share of 67% in laminated tubes and 38% in plastic tubes

India is fast becoming a sourcing base for MNC & acts as an export hub to other Asian countries such as Sri-lanka & Bangladesh In India, company deals with over 250 clients catering to both; local manufacturers (ITC, Dabur, Emami) as well as MNC’s (Unilever,

Colgate) which have India as one of their product sourcing base catering to Asia and SE Asia.

High margin non-oral category (contribution of approx 51%) benefited from increased penetration in pharma & cosmetics category.

K i

Key strategies

To further increase penetration in non-oral care category

Essel is also working towards developing solutions for fast growing food segment and pharma categories.

Introducing new business model of ‘Customer Owned – Company Operated’ long term contract.

Limited Competition:

Essel and Alcan together cater to nearly ~85% of lami - tubes market in India, with Essel being the market leader (67% market share).

Essel also is a leader in Plastic tubes market with a market share of 38% and top 3 players cover nearly 2/3rd of the entire market.

Competition is expected to remain muted due to high entry barriers (such as Technology, distribution network and time lag indeveloping client relationship amongst others).

Essel stands to further leverage its position from the growing middle class spend, heightened focus on domestic opportunities byFMCG giants amongst other macro drivers.Source: Company, Axis Securities Ltd.



Oral Care in India — Good Times to Continue

622561

374

277

137

0

100

200300

400

500

600

700

Brazil USA Philipines China India

Market size doublesif PCC reachesChina levels

75 78 79 80 84 87 90 91

38 42 43 46 4956 61 63

0

25

50

75

100

2005 2006 2007 2008 2009 2010 2011 2012

32.9 cr consumersdo not use Toothpaste

Toothpaste Penetration: Rural largely untapped PCC of toothpaste is extremely low as compared to other nations

2

Source: Source: Colgate presentation 2013, Company, Axis Securities

Per capita consumption of toothpaste (in gms)

2005 2006 2007 2008 2009 2010 2011 2012

Urban Rural

Macro drivers for Oral Care in India:

There remains 32.9 cr people (~10% of the urban population and ~37% of rural population) using conventional methods of oral care

In India, currently only 15% of population brush their teeth twice daily in contrast to developed markets where 87% of population

1 in 2 children in India suffer from cavities. 1 in 6 Indian people suffer from sensitivity. 1 in 3 Indian people suffer from gum problems

We believe, Indian Oral care market has a long way to go before it can reach the maturity stage. There are multiple factors (as mentioned above) which

will work in favor of oral care players in India. Consequently, the benefits will also flow down to allied industries like packaging and to its prominent

players like Essel. Essel is the leader in the Indian oral packaging market with 67% market share and we believe the company will continue to consolidate

its position going forward.

(Source: Colgate presentation 2013).



Non Oral Category (India) - Multi Sectors, Multi triggers

Pharma: A USD 200 bn incremental opportunityndia FMCG ( bn)

Nascent Categories Penetration - All India Skin Care Per Capita Consumption (€) Indian packaged food industry ( bn)

2850

872

50

FY10 FY15E FY20EBase Case Higher Case

0

500

1000

1500

CY06 CY11 CY16E

Global spending on medicines ( bn)

10% 8% 250

3

Source: Source: Colgate presentation 2013, Company, Axis Securities

Indian non-oral category is growing @ scorching pace with rising disposable income, exploding middle class, young population adopting new lifestyle

trends and significantly underpenetrated categories (be it health, food or FMCG). This kind of unperturbed growth has aided packaging companies like

Essel who is a leader in the non-oral care packaging category(Market share of 38%) in India. Going forward, this category is expected to not only drive

revenues but also act as margin booster for the company.

8%

6%5% 5%

0%

5%

10%

FaceWash

BodyLotions

HairCond.

LiquidSoaps

5.9%

3.2%

0.6%

0%

2%

4%

6%

8%

China Indonesia India

121

194

0

50

100

150

200

250

2012 2015E



Flexi a Stable Business and EGYPT an Emerging Destination

Egypt: Egypt was the company's’ first overseas venture which commenced operations in 1993. Essel primarily focuses on laminate tubes

catering to the oral care industry. Essel is the single largest tube manufacturer in Egypt.

Egypt has huge potential of developing cosmetic industry which is currently dependent on Europe for its needs. Moreover, Essel is also

actively targeting pharma manufacturers by offering laminated tubes as alternative to the aluminum tubes.

Egypt provides a location advantage as it can cater to emerging requirements from Middle East and African countries.

2 global FMCG giants have their filling stations positioned in Middle East and Essel intends to tap this opportunity from its

manufacturing base in Egypt.

4

.

Flexible packaging- Another growth lever

Flexible packaging is used in most common mass products such as biscuit wrappers, confectioners, sachets, etc.

Essel entered this segment through inorganic route by acquiring Packaging India Pvt. Ltd (PIPL) in 2006.

This segment is a high growth low margin segment for Essel, with revenue growth @ 16 -18% whereas the margins do not exceed 11-

12% range. However, it earns good RoCE as investments required is relatively less for this business.

The company is looking at further developing customers in food and pharma segment. It is also actively looking at developing export

market for its offerings and has set up a dedicated plant in South catering to Sri Lanka and African regions.

Essel is working on debottlenecking its plants which will open up capacities, limit capex and augment return ratios from this business.

With its leadership position in this region, we expect AMESA to register revenue CAGR of 13% over FY13-15E.



EAP – The Margin Propeller

Philippines: Attractivemargin

China: Reduce client concentration and

5

Indonesia: Ventured with a 30%stake in regional player

-

EAP operations (18% of FY13 consol. Revenue)

EAP earns EBIT margin of over 20% as against Essel’s consol. EBIT margin of 11%. Essel is focusing on increasing revenue growth from

EAP region and this shift in revenue mix with higher contribution from EAP will drive margins in the medium term.



China accounts for lion’s chunk of EAP business Essel has created a very strong presence in China with facilities in 4 locations; 1 in North, 1 in East and 2 in Southern China.

China has emerged as an important export hub and is being utilized to service SE Asian countries. Essel has already started catering

to Japan (one order in hand), Korea (LG amongst host of other clients) and Australia amongst others from its Chinese facilities.

Oral Care segment

Essel has been present in China since last 16 years and has emerged as a strong player in oral care category.

Last 2 years, Essel’s oral care volumes stagnated as demand from 2 of its prominent clients (2 of the largest oral care player in China)

faltered under intense competition (local as well as MNC’s) in China. However, its important to note they have not lost any market

China — Short Term Blip, Long Term Fillip

6

.

Non oral Care segment

Essel is increasingly focusing on non-oral category by focusing on pharma, cosmetics and F&B segments in China. Company has

already started manufacturing tubes for pharmaceutical segment and this is expected to fuel future growth.

Key strategies going forward

Oral Care: China’s oral care market is expected to maintain steady growth momentum with a constant value CAGR of 6% from 2012to 2017 (Source: Euromonitor International ). Essel plans to broaden its customer base by attracting local manufacturers. This will aid

in reducing revenue concentration and improve revenue visibility from its Chinese operations.

Non Oral Care: Essel is focusing on increasing its non-oral care pie by cross selling its non-oral care products to its oral care

customers (FMCG giants) for application in their other business vertical, extensive marketing (“I Shine” Program) to create its brand

presence and deepen penetration on the East China region with presence in Shanghai amongst other prominent cities.



Non-oral care in China: Exploding opportunity

Retail value of cosmetics (RMB bn)hina commands a lion’s share in terms of Purchase of Cosmetics in 2012 (%)

Skin Care market in China (RMB bn) China's Premium cosmetic market (RMB bn) Cosmetics Imports have grown @ CAGR of 33% over CY00-11

6

5

3

72

43

7

19

20

51

60

0 10 20 30 40 50 60 70 80

Other Overseas Countries

Japan/Korea

Europe

Mainland China

HongKong/Taiwan/Macao

2012 2009

18% 20%0 0 9 9% 10% 10% 10% 10% 10%

597 740 889 11031340

22%17% 17% 19% 17%

0%

10%

20%

30%

0

500

1000

1500

2008 2009 2010 2011 2012

Sales Value Growth

1200

7

The Chinese cosmetics market has more than doubled in size between 2008 and 2012 to $22.8 bn and is expected to continue to grow at blistering pace.

Average skincare product consumption level per capita of current China is 28 Yuan/year while it is 36-70 USD (about 300 Yuan) in developed countries. whichdepicts a huge gap between China and developed countries.

We believe, Chinese non-oral care category will be the next growth frontier for Essel to scale and the company is already readying itself (by foraying into newer

regions in China, marketing efforts amongst others) to tap this lucrative market.

30.535

4045 51

59

6718%

14% 14% 14% 14%

14%

14%

0%

4%

8%

12%

16%

20%

0.0

20.0

40.0

60.0

80.0

2011 2012E 2013E 2014E 2015E 2016E 2017E

8089

97107

118130

9.9% 10% 10% 10% 10% 10%

0%

2%

4%

6%

8%

10%

0

40

80

120

160

2012 2013E 2014E 2015E 2016E 2017E

45 48 44 79138

207264

355

567 604

804

1072

0

200

400

600

800

1000

1200

2 2 2 2 2 2 2 2 2 2 2 2



Philippines Essel is only one of the 2 players present in Philippines.

Characteristics of this market: Static growth for packaging industry (as MNC’s mainly import from Thailand, China amongst other

nations). Margins are pretty attractive for players like Essel who cater to mushrooming domestic industries in Philippines.

Indonesia

Essel is present in Indonesia via an investment (associate company) where 30% stake is held by Essel Propack.

Indonesia could add 90 mn new consumers by 2030 to become the world’s 7th largest economy. By 2016, the revenue from the

packaging sector is expected to double at a CAGR of more than 10% (Source: McKinsey Global Institute ).

Philippines – Domestic Thrust, Attractive Margins

8

Essel is upbeat about the prospects of this region and will continue to monitor it for future opportunities.

Key strategies for EAP

Increased focus on cosmetics, pharma and niche oral care categories for growth going forward.

Market Plastic Barrier Lami (PBL) tubes to existing customers (oral and non-oral). Company is already successful in this strategy whereby

one MNC customer has awarded contract for PBL tubes to Essel for Chinese markets. We believe, Essel has just scratched the surface

and has huge potential via cross-selling its products to its existing elite clientele base.

EAP earns EBIT margin of over 20% as against Essel’s consol. EBIT margin of 11%. So focus is on increasing revenue growth from

EAP region and this shift in revenue mix with higher contri. From EAP will drive margins going forward.

With demand resumption in Chinese oral care and increased thrust on non- oral care category, we expect high

margin EAP region to register revenue CAGR of 10%.

h l h



Americas – Focus on Moving up the Value Chain

Mexico: Restructuredoperations, time to reap benefits

US business: Thrust on non oralcare business

9

Columbia: Sourcing nation for otherLATAM markets

Americas operations: (22% of consol. Revenues)

The Americas operations is expected to provide several triggers in the medium term with the US market to improve margins, Mexico to

turnaround its operations and sustained strong growth from Columbian operations.

h l



US region: Transitioning from oral care to non oral care segments:-

Essel started operations in 2002 in the US and currently markets both lami-tubes and plastic tubes in this region.

The US has largely been a lami-tube market for Essel; primarily focusing on oral care category.

Company started operations with only 1 customer (Till date a customer) and within a decade has managed to increase its customer

base to over 22 prominent companies.

Oral Care: Essel already has 2 anchor clients of the largest 3 oral care players present in US. Considering the market is saturated,

tube volumes have been in-sync with the oral market growth rates of this region.

Plastic Tube: Essel is focusing on churning plastic portfolio and getting fresh orders in order to increase capacity utilization rates. Co.

US Region – Thrust on non-oral care

2

as a so restructure operat ons y manu actur ng rom ac ty n p ace o prev ous y w c ea to cost sav ngs o mn p.a.

Key strategies

Essel intends to focus on value (as volumes have peaked) by improving product mix in favor of high end oral and non - care products.

Focus on increasing customer base and getting orders to improve capacity utilization rate for Plastic tube business which will translate

in higher revenue and better margins going forward.

Increased thrust has been laid on non-oral care category such as cosmetics and pharma using PBL solutions. Company is reaping

benefits of revamped marketing and sales team coupled with portfolio churn as incremental orders have been received from cosmetic

and Pharma segment (non-oral). Moreover, cross selling of products to oral care customer is also bearing rich dividend as Essel has

already won a new order for Plastic tubes from an existing oral care client.

M i T i A d C l bi h LATAM M i



Mexico Turning Around, Columbia the LATAM Mainstay

Mexico: Operations restructured, time to reap benefits Essel entered Mexico in 2000 and is currently one of the

only 2 lami-tube manufacturer in this region.

Due to prevalent operational inefficiencies, Managementopted for restructuring exercise by changing the entireManagement Team, transferring Head Honchos (withproven track-records) to Mexico to drive growth and focus

on gaining new orders. Many US companies have turned to Mexico as their

sourcing nation under the prevailing free trade treaty. This isa huge business opportunity emerging for Essel which is yetuntapped.

Columbia: Sourcing nation for LATAM countries Essel is the only lami-tube manufacturer present in Columbia.

Essel serves the local players as well by providing decorationservices which aids in product marketing.

This facility acts as supply base for all other LATAM marketsand thus is a pivotal clog for Essel in its global plans.

Facility in Columbia currently operate at close to full capacityutilization rates.

Unlike Mexico and the US; this region also has a good mix of high margin non-oral care business. Approx. 45 – 50% of business is contributed from non-oral care category as against30% for the US and 10 – 20% for Mexico.

2

anagemen as ou ne e o ow ng grow r vers or

this region;- Thrust on business from US and non oral care business

- Focus on gaining orders and volumes

Essel’s Mexico unit has won a new contract in oral care in1QFY14 (ramp up in FY15) and one new contract in nonoral care in last few months of 2013. Thus, FY15 looksextremely promising and Management expects Mexico’soperations turning around from next quarter.

Essel has undertaken massive restructuring over past coupleof years and is poised to reap benefits over the next 2 years. We expect Mexico operations to break even in 2HFY14 and report profits in FY15 which will holisticallypropel consol margin from FY15E.


Columbian operations are expected to grow @ double digitswith margin improvement over next 2 years.

328358

404 424 445

1.0%

4.1%

6.5%

8.0% 8.0%

0%

2%

4%

6%

8%

10%

0

100

200

300

400

500


Americas EBIT Margin

Americas Revenue (Rs Cr)

PBL T b Th T i i h B



PBL Tubes – The Transition has Begun

Plastic barrier Laminated (PBL) Tubes: Product Profile An evolution from Aluminium – Tubes; PBL tubes are a good option for packaging that needs to maintain its form and shape. It presents

a more cosmetic look, is environmental friendly and prolongs the shelf life of the product. PBL consists of several plastic layers with anhigh oxygen barrier layer embedded between them to protect the product. This is a safe barrier for many common products related toindustrial, food, pharma and oral care.

PBL tubes: Cost advantage

Ad t f PBL T b t li t

Lami Tubes PBL tubes Plastic Tubes

Cost differentials x In the range of x – 3x 4x – 5x

22

Advantages of PBL Tubes to clients Gives similar effects as that of plastic tubes at lower costs. PBL tubes use less plastic compared to Plastic tubes and thus is preferred by MNC’s aiming to reduce their global carbon footprint.

Essel intends to market PBL tubes via Cross sel ling: Market PBL tubes to existing oral care clients (FMCG giants). Essel’s strong and long standing relations with these

clientele aids in cross selling products.

Target existing customers entering new markets: Essel intends to tap its clients who are expanding geographically into newer regions.(For instance, J&J and L’oreal are marquee customers of Essel. They were relatively late entrants in Chinese market. Essel now intendsto target them promoting PBL tubes for their products marketed in China).

Target new customers local and MNC’s : Target new customers (local as well as MNC’s) in all the regions marketing PBL tubes.

Essel has been one of the global pioneers responsible for substitution of aluminum tubes to the current use of lami - tubes. They havenow identified PBL tubes as a product which will on the long run substitute Plastic tubes. Globally plastic tube is a colossal market (Only

EU plastic tube market size is 2.5-3 bn tubes) and thus this transition is the next growth lever for Essel in the long run.

Fi i l E l ti



Financial Evaluation

World leader in Lami tube segment with strong ties with established global MNC companies.

We expect Sales CAGR of 13% over FY13-15E. Focus would be on non-oral care segment (Management targets 50% revenue mix in

FY15E from current 41%).

EBITDA Margin to expand by 150 bps over next 2 years driven by

Polish operations which will turn profitable at the end of FY14

Higher capacity utilization and improving product mix

PAT to grow at 30% CAGR over FY13-15E benefiting from operating leverage and several regions returning to profitability (Poland,

Mexico and Russia)

Stable net Debt to equity at .9x (FY11-13) despite continuous capex; expected to trend lower to 0.72x in FY15.

Improving return ratios with RoE and RoCE expected to scale 11% and 14% in FY15E from 9% and 12% in FY13.

23

Non-oral care contribution: Management targets 50% in FY15


With improving op. performance, return ratios are steadily improving

64.8% 59.2% 50%

35.2% 40.8% 50%

0%

20%

40%

60%

80%

100%

FY12 FY13 FY15 T

Oral Care segment Non-Oral Care segment

6.17.3 8.8

10.211.5

10.4 9.8

11.612.7

14.1

0.0

4.0

8.0

12.0

16.0


ROE (%) ROCE (%)

V l ti d Ri k F t



Valuation and Risk Factors

Valuation We expect Revenue CAGR of 13%, and PAT CAGR of 30% over

FY13-FY15E Scalable Business Model Improving return ratios Despite experiencing several business headwinds in sync with the

global economic downturns; Company has always been rewardingits shareholders by consistently paying dividend since 1991.

We value Essel Propack on PE basis to arrive at a Target price of Rs65 (8x FY15E EPS of Rs 8.14), giving potential upside of 35%.

Risk Factors Any further delays in Polish operations turnaround can severely

’

12mth fwd PE (x)

0

5

10

15

20

25

A

0

Ju0

Oc0

Ja

1

A

1

Ju1

Oc1

Ja

1

A

1

Ju1

Oc1

Ja

1

A

1

Ju1

Oc1

Ja

1

A

1

Ju1

Oc1

Ja

1

24

Slower than anticipated demand pick-up for PBL tubes will impactcompany’s growth plans going forward.

* All figures of Essel are in Rs cr and financial year ending is March whereas peers figures are in US mn & year ending is December. Source: Company, Bloomberg, Axis Securities Ltd.

Essel Propack 12m fwd P/E Mean +1 SD -1 SD

Peer comparison: Attractive valuation as compared to its peers

Sales PAT EPS P/E

CompanyFY13/CY12

FY14e/CY13e

FY15e/CY14e

FY13/CY12

FY14e/CY13e

FY15e/CY14e

FY13/CY12

FY14e/CY13e

FY15e/CY14e

FY13/CY12

FY14e/CY13e

FY15e/CY14e

Essel Propack * 1832 2070 2329 81 101 128 5.16 6.41 8.14 9.4 7.5 5.9

Aptargroup Inc 2331 2484 2592 163 185 207 2.45 2.75 3.09 28 25 22

Silgan Holdings 3588 3729 3960 151 182 199 2.18 2.80 3.16 22 17 15

Ball Corp 8736 8570 8766 404 462 494 2.61 3.15 3.50 20 17 15

Sonoco Products 4786 4838 4975 196 235 257 1.93 2.30 2.51 22 19 17

Bemis Co 5139 5032 5107 174 237 251 1.67 2.28 2.46 24 18 16

C Fi i l (C )



Profit & Loss (Rs cr) Key Ratios (%)

Company Financials (Conso)

Y/E March FY12 FY13 FY14E FY15E

Total income 1,584 1,832 2,071 2,329

Material Cost 762 887 996 1,127

Employee Cost 241 285 324 360

Other Manufacturing Cost 183 203 229 251Contribution (%) 25 25 25 26

Advt/Sales/Distrn O/H 131 143 148 156

Operating Profit 267 313 374 434


Sales growth 12.3 15.6 13.3 12.6

OPM 16.8 17.1 18.1 18.6

Oper. profit growth 7.3 17.4 19.3 16.0

COGS / Net sales 74.9 75.1 74.8 74.7Overheads/Net sales 8.3 7.8 7.2 6.7

Depreciation / G. block 5.9 5.9 6.2 6.4

Effective interest rate 9.6 9.6 9.9 9.8

25

Other income 20 30 20 20

PBIDT 286 343 394 453

Depreciation 117 126 143 158

Interest 84 91 97 97

Other Pre-tax 0 0 0 4

Pre-tax profit 85 126 154 195

Tax provision 22 44 52 66

(-) Minority Interests 3 3 3 3

Associates 2 2 2 2

Adjusted PAT 63 81 101 128

E/o income/(Exp)/Land sale (11) 5 0 0

Reported PAT 51 86 101 128

Net wkg.cap / Net sales 0.3 0.3 0.3 0.3

Net sales / Gr block (x) 0.9 0.9 0.9 1.0

RoCE 9.8 11.6 12.8 14.3

Debt / equity (x) 1.0 1.0 1.0 0.9

Effective tax rate 26.2 35.2 34.0 34.0

RoE 7.3 8.8 10.2 11.8

EPS (Rs.) 3.27 5.16 6.41 8.14

EPS Growth 28.8 28.9 24.4 26.9

CEPS (Rs.) 11.5 13.2 15.5 18.2

DPS (Rs.) 0.65 0.75 0.86 0.95Source: Company, Axis Securities Ltd.




Balance Sheet (Rs cr) Cash Flow (Rs cr)


Total assets 1,852 1,933 2,043 2,151

Gross block 1,991 2,149 2,308 2,468

Net Block 762 771 787 789

CWIP 39 49 40 30

Investments 45 46 46 46


Sources 205 217 248 259

Cash profit 230 278 348 390

(-) Dividends 16 21 24 27

Retained earnings 214 257 324 363

Issue of equity 0 0 0 0


26

. .

Cash / Bank balance 91 94 70 86

Others/Def tax assets 429 417 417 417

Capital employed 1,852 1,933 2,043 2,151

Equity capital 31 31 31 31

Reserves 860 919 996 1,097

Borrowings 935 960 988 988

Others 25 23 28 35

Others (95) (43) (104) (105)

Applications 205 217 248 259

Capital expenditure 157 122 150 150

Investments 0 0 0 0

Net current assets 18 91 123 92

Change in cash 30 4 (25) 16




Documents

Essel Propack Ltd - Company Report - Axis Direct - 05022014