Management Discussion & Analysis 2006

8/3/2019 Management Discussion & Analysis 2006

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MANAGEMENT DISCUSSION & ANALYSIS

Your Directors are pleased to present the Management Discussionand Analysis Report for the year ended December 31, 2006.

Your Company's global revenues increased by 23 per cent to Rs.

10,286 million, Operating Revenues (EBIDTA) by 14 per cent to

Rs. 2,401 million and Profit After Tax by 9 per cent to Rs. 985million. Besides expanding and enriching its market shares in

existing geographies, your Company ventured into new

geographies, new markets and most importantly towards new

horizons.

Today your Company, which had been predominantly in

laminated tubes manufacturing, has three revenue streams

namely Laminated Tubes / Extruded Plastic Tubes,

Specialty Packaging Materials and Medical Devices. All

the businesses have a common thread, which leverages on the

Companys core competence in polymers and polymerprocessing.

Essel Propack an Overview

The growth story of Essel Propack is one of organized,

planned and calculated growth. The Company grew in a phased

manner, with each phase moving the Company from strength

to strength.

Essel Propack began manufacturing laminated tubes in India

during the year 1984, to cater to the packaging needs of oralcare industry. Initially, the efforts were focused on converting

all the aluminium tube users into laminated tubes. Once the

conversion efforts began to succeed, with each oral care company

converting from aluminium to laminated tubes, the Company

began to focus on other industries such as cosmetics, toiletries,

industrial products etc. Here again the Company succeeded by

providing the right laminated tube packaging solutions to these

industries. While the Company continued to expand its

products and services portfolio in diverse industries, the

Company launched the next phase of its growth plan Going

Global.

Starting with Egypt in 1992, the Company has established itself

in 5 continents, in all the key markets, in about two decades.

Multiple approaches were adopted such as Greenfield, JVs and

Acquisitions, to drive growth. Today the Company has an

estimated 32% global market share in laminated tubes,

manufacturing one out of three tubes, catering to diverse

industries such as oral care, toiletries, pharma, food, industrial

products etc.

In 2004, the Company began concerted efforts to broaden its

product offerings with an aim to grow beyond laminated tubes.

During the same year, Essel Propack acquired Arista Tubes, thelargest manufacturer of extruded plastic tubes in UK. With

this step began Essel Propacks third phase of calculated growth,

to grow globally in extruded plastic tubes under the brand

name Arista Tubes. In December 2006, Arista Tubes plant was

set up in Danville, Virginia, USA, to meet the needs of the

market in USA. Another Plastic Tubes plant is being set up at

Poland to cater to the needs of the European market. The

Polish plant is expected to begin commercial production during

the third quarter of 2007.

Once the growth plans for Plastic Tubes were set rolling, Essel

Propack began scouting for other avenues for broadening its

business base and move up the value chain. On introspection,the

Company identified that its core competence lies in its

knowledge of polymers & polymer processing and

conducting business in an OEM environment. Medical Devices

was the area first targeted. This led to the acquisition in 2006 of

Tacpro Inc., USA, and Avalon Medical Services, Singapore,

manufacturing Cardio-vascular Medical Devices such as Catheters,

balloons etc.

In 2006, the Company further broadened its business base

by acquiring Packaging India Private Limited, a leading

Specialty Packaging Material Company of South India, catering

to the packaging needs of the Personal Care and Food

Industries.

Today the Company has three revenue streams across the

globe based on 23 plants spanning 12 countries across five

continents.

Industry Structure and DevelopmentsPackaging

With increasing competition between products and brands

worldover, the differentiation between products and brands in

the same market segment has become minimal. In such a

scenario, packaging has become a significant differentiator for

the consumers worldover. All the product manufacturers and


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brand promoters are focusing on packaging for recognition

and recall for realising higher sales apart from offering

convenience and safety of the product. Every Company is

focusing on enhancing their packaging in terms of aesthetics,

designs, shape, ideas, logistics in terms of manufacturing to

consumer and user-friendly dispensation. Packaging has become

a significant strategic tool for creating perceived brand value

that would lead to value-selling. Today, the global packaging

industry is estimated to be US$ 580 billion, growing at around 5

per cent per annum.

Polymers play a significant role in modern packaging. This is

primarily because polymers offer a wide array of values such

as cost effectiveness including logistic cost, lower weight,

superior convenience, low wastage, greater compatibility with

emerging designs and aesthetic solutions, recyclability andmanufacturing hygiene. Polymers are increasingly replacing

all other packaging options such as glass, jute, paper, metals

and wood. This trend which evolved in developed countries,

has now begun to sweep the developing and emerging

economies. At present, packaging accounts for about 25% of

total international polymer demand.

Tubes as a form of packaging

Tubes are a specialised form of packaging. Three types of tubes are

used for packaging namely aluminium, laminate and plastic.Worldover the tube sector services the packaging needs of Oral

care, Healthcare, Cosmetics & Toiletries, Haircare, Pharmaceutical,

Food and Industrial products.

It is estimated that 36 billion* tubes per annum are manufactured

globally. The industry breakup is as follows :

Aluminium tubes 15 Billion*

Laminated tubes 14 Billion*

Extruded plastic tubes 7 Billion*

* - Company estimates

Tubes as a form of packaging began with aluminium tubes

all over the world. Since the advent of laminated and extruded

plastic tubes in the packaging arena as new packaging form

two decades ago, these tubes systematically began replacing

aluminium tubes worldover. By adopting extruded plastic

tubes, Cosmetics & Toiletries were the first industry in every

market to convert. Subsequently, Oral care products i.e.

toothpaste, began conversion to laminated tubes. Today, in

most of the world markets, oral care products are packed in

laminated tubes. With technological advancement, more and

more Toiletries, Haircare, Pharmaceuticals, Food and

Industrial products have converted to laminated tubes while

extruded plastic tubes remain the preferred form for cosmetic

products.

Aluminium tubes continue to dominate certain markets such as

Pharmaceutical products and Industrial products as the packaging

form. This offers a large conversion potential for laminated tubes

and extruded plastic tubes.

Extruded plastic tubes are the preferred form of packaging for the

Cosmetics industry. Use of extruded plastic tubes is mainly

concentrated in the Americas and Western Europe. With

globalization resulting in seamless flow of products and brands,

including cosmetic products, across geographies, the use of

extruded plastic tubes is steadily penetrating the developing

countries and emerging economies. This has greatly increased the

market potential for extruded plastic tubes in developing and

emerging economies.

Specialty Packaging Materials

Specialty Packaging Materials find application in varied industries

such as Pharmaceuticals, Food, Beverages, Confectionery,

Cosmetics, Soaps & Detergents and Pest Control / Insecticides.

At the lower end and middle end of the value chain, one finds

increased applications of flexible packaging in snack food,

confectionery, personal products and a host of sundry packaging

usage. At the higher end of the value chain, superior barrier

properties are needed for applications in processed food, Pharma

and electronic industries.

The packaging market in India is at about Rs. 110 billion. Of this

domestic Specialty Packaging market is estimated to be Rs. 25

billion, growing at over 15% per annum. The Specialty Pharma

Packaging market size is Rs. 4.6 billion (2005) and is estimated to

touch Rs. 8.1 billion in 2009.

Packaging India Private Limited (PIPL), Pondicherry, is the third

largest producer of Specialty Packaging Material in India, offering


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innovative packaging solutions to companies in the FMCG sector.

PIPL enjoys a leading market position in southern India with

substantial product breadth, state-of-the art technology,

unmatched product development expertise, and strong

relationships with a highly diversified, blue chip customer base.

PIPLs manufacturing facilities at Pondicherry are state-of-the-art with latest equipment from leading international machinery

manufacturers and comparable with any reputed Specialty

Packaging facility across the world. The Company also has a

strong R&D division which constantly creates and innovates

new laminate structures, in addition to EPs own advanced C&I

facilities.

PIPL, being strategically located, enjoys significant logistic advantage

with just-in-time supply of packaging materials. PIPL counts

among its customers most MNC and Indian brand leaders. The

Company offers packaging solutions to a variety of product

categories in food, pharma and personal care segments. PIPL has

also forayed into the export market and is well equipped to meet

customer requirements across the sub-continent with state-of-

the-art infrastructure.

The core synergies between PIPL and Essel Propack are :

High-end lamination technology

Knowledge of Barrier Properties

OEM business model

Highest standards of quality and manufacturing systems

Expanded product portfolio to a common customer profile

Leveraging relationships to service customers

Tapping the global customer base of Essel Propack to expand

PIPLs customer base

The growth in this packaging form is being fuelled by the FMCG

sector and Pharma sector. There is a growing demand for innovative

packaging and the export potential is immense. Packaging

attractiveness will be a key driver of the branding strategy in these

sectors.

At present Indian Pharma industry is moving up the value

chain bulk togeneric toformulations. Also there is a renewed

focus on Food Processing Industry in India coupled with retail

boom which is generating demand for convenience packaging.

These developments have opened the doors to a demanding and

growing Pharma and Food Packaging segment.

The size of Indian Pharma industry is US$ 6 billion while the

global market size is of US$ 552 billion. The Indian market ispresently growing at the rate of 8-10%. The exports from India

stands at US$ 2 billion. This is a fragmented industry with over

20,000 units with imminent industry consolidation.

The environment is rapidly changing with increased thrust on

acquisitions, increased R&D and international tie-ups. The Indian

Pharma market is fast becoming a global pharma outsourcing

hub. At the same time the domestic market is also undergoing sea

change. The per capita expenditure on health care in India and the

penetration of modern medicine is poised to increase. A growing

affluent class has opened up the market for lifestyle drugs. Theopening up of health insurance sector has made healthcare more

affordable.

Food industry will be another major contributor to the growth

of Specialty Packaging Materials. Although India is the second

largest producer of fruits and vegetables, today only 2% of the

produce is processed. India also has the largest livestock

population but only 1% of meat production is converted to

value added products. This situation is rapidly changing with

semi-processed and ready-to-eat packaged food industry

reflecting a growth of over 33% per annum. This change isprimarily because of the fast growing consumerism and retail

boom.

The expectations of Pharma and Food industry from the Indian

Specialty Packaging industry has risen as a result of the changing

market dynamics. Clean Room Production Centres, guaranteed

quality, on-demand supply, Drug Master File (DMF) / Food grade

approved materials and conformity of the product to various

climatic conditions are the need of the time. Product features such

as anti-counterfeit, child resistant, tamper evident, senior citizen

friendly and convenience are the need of the day. On process front,

the market demands state-of-the-art extrusion laminated structures

and solvent-less processes with multilayered heat & pressure

lamination.

Essel Propack and PIPL possess the knowledge, infrastructure

and process capabilities to meet the demanding needs of the

market.



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Medical Devices

Medical Devices are used in almost all specialized branches of

medicine either during surgery or to internally administer medicine.

A few examples of Medical Devices are cardio-vascular catheters,

angioplasty balloons, urinary catheters etc. This is a growingopportunity with a very high market potential.

With advancement in medical field, surgical techniques are moving

to less invasive techniques. This trend has thrown open vast growth

opportunities for Medical Devices globally. Before long, the less

invasive approach will become the norm for surgeries and for

administering internal medicines.

The global market for Medical Devices is estimated to be

US$ 172.6 billion (2003). Of this the OEM market size is

US$ 16.7 billion. The Catheter market globally is $ 5.7 billion

of which USA alone contributes US $ 2.3 billion. The growth

rate for Medical Devices, by different estimates, range between

7% - 10%.

Tacpro Inc., USA, is a provider of innovative medical device designs,

converting ideas into medical device solutions. They are

pioneers as the first full-service provider of high quality medical

devices, specializing in catheters and delivery systems on the West

Coast of USA. Serving a worldwide marketplace, the Company is

located in the heart of Silicon Valley, the center of engineering

ideas. The Company is the world leader in OEM balloon catheters.Tacpro is an ISO certified Company equipped with a vertically

integrated quality system. The Companys USA operations are

focused on design, engineering services and rapid prototyping.

They have also established a superior manufacturing base, Avalon

Medical Services, in Singapore. The range of capabilities includes

engineering services, product development, stent delivery systems

and manufacturing solutions. To put it in a nut shell, Tacpro is a

single source solution Company. Some of the offerings are:

Coronary, peripheral, aortic and intracranial angioplasty catheters

and guidewires; valvuloplasty; metallic and non-metallic stentdelivery system; drug and radioisotope delivery; laser energy

delivery; electrophysiology, thrombectomy, fertility/infertility

devices and intravascular sheaths.

The synergies between Essel Propack and Tacpro are :

Knowledge of Polymers and Polymer processing

OEM model

Global delivery / Presence

Embedded quality processes

The Medical Devices industry offers tremendous growth

opportunities. This is a recession-proof industry. Moreover, this

industry is not yet developed in Asia, which is a highly populated

geography. Globally, it is a fragmented industry with fragmented

buyers. Also there are high entry barriers such as capabilities for

Design & Prototyping and FDA approvals which makes it difficult

for companies to enter with ease. Contracts and contacts with

customer, which takes considerable time to develop, play a

significant role in growth in this industry. By the very nature of the

products and the industry, there is a need for high level of

innovation.

Essel Propack and Tacpro have the requisite knowledge andcompetence to drive the Medical Devices business on a higher

trajectory of growth. The management of Tacpro at the time of

acquisition continues to lead the business.

Strengths

Strengths of Essel Propack

Knowledge

Over the years Essel Propack has acquired a huge knowledge

base in diverse aspects such as polymers, polymer processing,manufacturing systems, markets and logistics and sourcing.

This knowledge will be the backbone for driving its growth

engines along the three revenue streams namely Laminated

Tubes/Extruded Plastic Tubes, Specialty Packaging Materials

and Medical Devices. All the knowledge is documented and

there is an efficient system for transfer of knowledge between

the units across the world.

Creativity & Innovation

Creativity & Innovation play a critical role in keeping theCompany ahead of competition and to drive continuous

growth. All the three revenue streams, although with different

business environments, have a strong base in Creativity &

Innovation. This aspect has not only led to creating new

products, but also in identifying new product applications

or discovering new business categories. This has also led to

identifying new raw material mix, improvising on existing



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products, bettering existing technology, discovering new

technology and enhancing processes. This approach has made

your Company the recognized industry benchmark.

Leadership

Being a global Company present in all major geographies,

the Company understands cultural sensitivities of any

geography. Leadership is well versed in leading a culturally

and ethnically diverse workforce comprising over 20

nationalities, towards the organisational goal.

Three revenue streams - Laminated Tubes / Extruded

Plastic Tubes, Medical Devices and Specialty Packaging

Materials

The Company today has three revenue streams namely

Laminated Tubes / Extruded Plastic Tubes, Medical Devices

and Specialty Packaging Materials. Earlier the Company had

only tubes business. To dilute the market risk, the Company

forayed into Medical Devices and Specialty Packaging Materials

which have perfect synergy with the Companys tube business

and also has great growth potential.

Shared Vision across the Value Chain

Your Company always firmly believed in a shared vision,

be it with the customers, employees, vendors,shareholders or society at large. This has resulted in a

close and intense partnership between the Company and

all its stakeholders.

Strength in Process Technology & Efficient

Manufacturing Systems

One of the key strengths of the Company is in the use of

state-of-the-art process technology. The technology is

continually evaluated and upgraded to keep the Company

ahead of the competition. The Company deploys time testedand efficient manufacturing systems and processes such as

Six Sigma, HMP (Harmonised Manufacturing Policy) and

GMP (Good Manufacturing Practices).

Global Footprint and Relationships

The Company is present in all the major geographies of

the world. This was the outcome of the Companys

philosophy Go and Grow with the Customer. This

resulted in mutual trust and respect with all its customers

globally. By sharing its vision, the Company has developed

close long-term partnership with the customers and

vendors. This has helped your Company leverage its

relationships to the optimum, leading to growth in diverse

geographies.

Dedicated and Passionate People

The Company has a strong team of knowledgeable,

dedicated, focused and object driven workforce. This Human

Capital is the foundation on which the Company has been

built. The workforce is continually nurtured, motivated,

trained and developed.

Product specific strengths

Laminated Tubes

Largest manufacturer of Laminated Tubes globally

Global market share 32%

Manufacturing facilities in 12 countries through 19 plants

Integrated Process Technology

Customer profile include all reputed brands in every

market multi-national, national, regional and local

brands

New Application opportunities in Hair Care, Food and

Pharma

Minitubes a proprietary technology for making small

size laminated tubes

Inviseam technology, a breakthrough in laminated tubes

Extruded Plastic Tubes

Currently manufacturing in 3 countries UK, Indiaand USA with a unit in Poland to be commissioned in

Q3 / 2007

Expanding into new geographies such as the USA and

Poland

Strong customer base in the UK and Europe through

Arista Tubes, UK



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Deploying state-of-the-art technologies

Vision to establish itself as a leading player in extruded

plastic tubes across all geographies by 2010

Strengths - Specialty Packaging Materials

State-of-the-art technology, unmatched product development

expertise

Strong relationships with a highly diversified, blue chip

customer base

Currently focused on Food and Personal Care

Specific plans to move up the value chain - Pharma and

convenience packaging

Leverage on Essel Propacks knowledge of polymers andpolymer processing including co-extrusion and blown film

knowledge

Strengths - Medical Devices

Two state-of-the-art facilities USA and Singapore

Provider of innovative medical device designs, converting

ideas into medical device solutions

First full-service provider of high quality medical devices

specializing in catheters and delivery systems on the West

Coast of USA

World leader in OEM balloon catheters

Focused on design, engineering services and rapid

prototyping

Customer lock-in

State-of-the-art manufacturing base in Singapore

A single source solution Company

Opportunities

Expansion of the tube capabilities into higher value

segments

The thrust was on rapidly expanding our capabilities and

footprint with co-extruded plastic tubes. The existing capacity

of the UK plant was expanded. A new green field plant in

USA went on stream in December 2006. The expansion and

the green field are based on new state-of-the-art technologies,

which give better operational flexibilities and competitive

operating costs.

The Laminated Tube business has been Oral Care centric.

The year 2006 saw additions of new customers from the

skin and hair care segments in USA. These segments offer an

increased value proposition and are complementary to our

thrust in extruded plastic tubes.

Setting the stage for broad-basing the business with

addition of new product lines, for sustainable &

improving revenue and profit growth in the coming

years

The new initiatives such as Medical Devices and Specialty

Packaging Material business in 2006 were a step in this

direction.

The Medical Device business opens up a new frontier,

leveraging on Essel Propack's core competencies of polymer

processing and complementing with the design & prototyping

capabilities. We see robust growth opportunities here, which

will take the present product line (catheters) beyond cardiac

applications to other areas.

Specialty Packaging Materials is an India-centric

business. The business is well posit ioned to ride on

the increasing need for packaging solutions, fuelled by

factors such as India becoming the world

manufacturing hub for prescription drugs and the retail

boom. There are further value propositions to up the

value chain in Pharma and exports, which can be easily

tapped into leveraging on Essel Propacks capabilities

of extrusion lamination.

Turnaround of the acquired businesses in UK and the

start-ups in Mexico and Russia

The organisation continued to focus on turn around of loss

making businesses. By the end of 2006, we were successful

in turning around the laminated tube business in UK and

Mexico. The extruded plastic tube business in UK has reached

breakeven levels by the end of 2006. We aim to sustain these



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for a take-off by Q2/2007. Russia continues to make small

losses. The Russian market is still evolving and has a good

potential. We will continue to pursue our turnaround plan

in the year 2007.

Opening up new segments in Pharma and Samplesegment with Minitube Technology

Our success with the new technology continues.

Minitube technology has found wide acceptance in

Pharma and Oral Care. In Oral Care, it has opened up

new price points for customers.

Shuffling the Product and Customer base

This was a part of our strategy to improve our margins.

Our new thrusts into higher value segments such as skin

and hair care had been mentioned earlier. In certain markets,

we made similar adjustments by exiting low margin

businesses. The churning of product and customer

portfolios to some extent did yield results, especially in the

laminated tube segment.

Reorganisation of Manufacturing Facilities

Essel Propacks efforts are aimed at giving the best value

proposition to all its stakeholders. Whether it is setting

up a new unit, expanding a unit, downsizing a unit or

relocating a unit, the approach had been to rationalize

and optimize our resources. In line with the above

approach, during 2006, the Nepal plant was closed down.

The one-time exit cost was Rs.12 million which has been

written off in our books for the year ending December

2006.

Similarly, the Company has decided to close down its

operations in Venezuela. The demand of the Venezuelan

customers will be met by our other units in the region, which

have been geared up to meet this additional demand. Theentire process and system is in place to meet the demand of

Venezuelan market.

New Organisation structure

Taking into consideration the pressing need of the time, the

organisation has been recast with changes in the Sales and

Marketing organisational structure. The primary business

objective is to make the organisation more agile and

responsive to the market needs.

Threats Raw material prices continued to be volatile and

unpredictable. While we could get price increase to neutralisethe same, we were frequently in a catch-up mode. This, to

some extent, did impact the margins during the year 2006.

The raw material supply situation is expected to improve

with an increase in ethylene capacities projected for mid-2008.

Right through 2006, the interest cost, both for US$ and

Rupee borrowings, continued to harden.

Risk Management ReportThis report sets out the risk management activities of the Company.

The risks outlined below are not exhaustive and are for information

only. Some statements given here are forward looking, and are

therefore subject to uncertainties. The Board of Directors and the

Audit Committee of the Board regularly review the risk-return-

response scenario. The Leadership Team led by the Managing

Director is responsible for implementing risk mitigation measures

and for driving implementation of such measures to line managers

and their teams.

Business Risks :

Risk : Investment in New Projects

The Companys business is capital intensive and involves

investments in diverse geographies and markets. This in itself

poses risk while investing.

Response :

A detailed Project Report with analysis of all the performance

indicators and the potential risks is always tabled before the

Board prior to seeking approval for any project.

Risk : Input Costs including Oil Prices

The global price rise of oil was paralleled by polymer prices,

which are the essential raw materials for laminated and

extruded plastic tubes. Although the crude price has

stabilized, the shortage of capacities of ethylene has resulted

in continued higher prices of polymers. This situation will

continue till mid-2008 when the increase in ethylene capacities

are expected to come on stream.



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Response :

Your Company has restructured its buying patterns to

counter the price fluctuations. But, uncertainty will prevail

during the immediate future. The rise in tube cost could be

passed on to customers, but in a few instances it has been adelayed pass-through.

Risk : One Product Company

The major portion of the revenue of your Company is

derived from the manufacture and sale of laminated tubes.

This has the potential risk of a substitute appearing on the

horizon.

Response :

Your Company has taken a three-pronged approach to riseabove this situation. With your Companys foray into

extruded plastic tubes, Medical Devices and Specialty

Packaging Materials, three new revenue streams have been

created. Thus, the initial step has been taken to reduce

dependence on Laminated Tubes business. At the same time,

in extruded plastic tubes, your Company has invested in

state-of-the-art decoration and printing technology to offer

superior graphics for differentiation. Thirdly, to sustain the

margins, efforts such as Creativity & Innovation initiatives

to develop new laminate structures, enhancement ofmanufacturing efficiencies including optimal asset utilization

and increased agility in our response to market needs have

been taken.

Risk : Oral care Industry, the prime buyer of laminated

tubes

Oral care industry has remained the major user of laminated

tubes. Any fluctuation in the buying pattern of oral care

industry can make an impact on the performance of the

Company. The dominance of a few global players in the oralcare industry has led to the buying power.

Response :

To counter the above, new cost-effective laminate structures

are consistently evolved. Supplementing these efforts,

manufacturing systems are also continuously upgraded

enhancing the efficiencies and to raise the output levels. Your


Company has renewed its focus on innovation and

continuous improvement.

As a parallel effort, with mini-tube technology, your

Company has set its eyes on Pharma industry for growth.

Simultaneously, the Company is pursuing growthopportunities in hair care and cream markets. These

efforts have broadened the customer base of the

Company.

Competition Risks :

Risk : Competition

The competition in some product sectors and application

sectors have made supply unviable to those sectors.

Response :This situation has been countered by constant upgradation

of technology and by enhancing the efficiency of operations

to effect cost competitiveness. Another major factor for your

Companys success, as compared to its peers, is by nurturing

the systems in such a way that the Company has a Lean

Management structure. To retain the Lean Management,

your Company continues to invest sufficient efforts, to retain

this edge.

Risk : Commoditisation of Tube Business

Customer consolidation and intense competition has led to

a commoditisation of the market, leading to lower realisation

in certain product and application sectors.

Response :

Being creative and innovative has given your Company the

edge to be ahead of competition by introducing value add-

ons and distinct differentiation in the products. The

Company has succeeded in changing the requirement patterns

of the market by its innovative products. These includedevelopment of innovative polymer structures to preserve

content, creation of tubes with in-built security features and

making tubes with superior look and feel. These steps have

also helped the Company to diversify the customer profile

with new product and application groups. The Company

always strives to position Essel Propack as the best value

supplier.


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Operations Risk:

Risk: Multinational Company

Being a multinational Company, your Company is exposed

to dynamic economic and market conditions of its operating

terrain. Aspects such as changes in consumption pattern,

increase in production capacities and regulatory changes in

policies relating to imports, tariffs and tax, are unpredictable

and hence, are beyond control.

Response :

Your Company continuously monitors the external

environment in all the operating locations and assesses the

risk profiles. Effective remedial steps are taken to mitigate

the same. Exiting Nepal is one such instance.

Political Risks :

Risk: Instability and potential closure of business

Due to the changing market dynamics, operating units

sometimes become unviable.

Response :

Your Company closely and continuously monitors the

situation in every location. Whenever a location become

unviable, the assets at that location is recalled / relocated as

the situation demands. e.g. Nepal and Venezuela.

Financial Risks :

Risk: Foreign Exchange Fluctuation

Due to the global scale of operations of Company, it is

exposed to multiple currencies. The Companys performance

and future could be affected by fluctuations in exchange rates.

Since a major portion of our transactions are either Dollar-

denominated or based on Dollar prices, our exposure to adevaluation of the currencies of the countries in which we

operate is limited to a significant extent.

Response:

Appropriate coverage clauses have been woven into the

contracts with the buyers to offset the impact of currency

fluctuations. Further, with the help of non-speculative

forward contracts, the Company hedges its exposure.

Moreover, the Company continues to insure its assets

through country specific policies. Also, Forex Risk Exposure

Policy is in place which provides the guidelines for decision

making.

Risk : Hardening interest rates globally

The interest expenses during the year 2006 was higher due to

the global hardening of interest rates and increased

borrowings by your Company to finance expansions as well

as the new business initiatives.

Response :

Your Company has taken steps to mitigate the effects by an

optimum mix of fixed / floating rate borrowings and hedge

instruments wherever possible.

Internal Control Systems and theirAdequacy

The Company believes in formulating adequate and effective

internal control systems and implementing the same to ensure

that assets and interests of the Company are safeguarded and

reliability of accounting data and its accuracy are ensured with

proper checks and balances.

The Company has a strong internal audit which covers its global

operations to examine and evaluate the adequacy and

effectiveness of Internal Control Systems. The internal audit

ensures that the systems designed and implemented provides

adequate internal control, commensurate with the size and

operations of the Company. The Management Information

System (MIS) forms an integral part of the Companys control

mechanism. All operating parameters are monitored and

controlled. An effective budgetary control on all capital

expenditure ensures that actual spending is in line with Capital

Budget. A world class ERP system has been implemented in

some locations and is in the process of implementation across

other locations of the Company, which will serve as its

information backbone.

The Audit Committee of the Board, Statutory Auditors and the

top management are regularly apprised of internal audit finding.

The Audit Committee of the Company consisting of non-



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executive independent directors periodically reviews and commends

the quarterly, half yearly and annual financial statements of the

Company. A detailed note on the functioning of the audit

committee forms part of the section on Corporate Governance in

this Annual Report.

Financial and OperationalPerformance

The Company operated in four geographical zones: Americas,

Europe, AMESA (Africa, Middle East and South Asia including

India) and East Asia Pacific.

The contribution of the geographies to the revenues is highlighted

as follows :

Consolidated global results

(Rs. in million)

Year ended Year ended

31.12.2006 31.12.2005

Total Revenue 10,286 8,332

Operating Profit (EBIDT) 2,401 2,103

Profit Before Tax 1,300 1,217

Profit After Tax &

Minority Adjustment 985 902

Your Companys Revenues have increased by 23.4%, and PAT has

increased by 9.2% over the previous year. Operating profits

(EBIDT) have increased by 14% during 2006.

Regionwise Performance

The highlights of your Companys business in each of these

regions are as under :

Americas

The Operating Units in this region include Tube business and

Medical Devices business.

USA 3 units

Mexico - 1 unit

Colombia 1 unit

Tube business :

The capacities in the USA plant have been enhanced to meet the

requirements of the new customers who have been tapped. The

volumes are expected to grow faster in the US market as the

necessary capacities are in place. The US market holds great promise

for the Company. During the year 2006 your Company has started

manufacturing operations of extruded plastic tubes in USA. This

is our third manufacturing unit for extruded plastic tubes apart

from Arista, UK, and Wada, India. Mexican operations are on

turnaround path, firmly supported by a contract from a MNC

Company. The volumes from Colombian operations have

increased substantially. The Venezuelan capacities are in the process

of being relocated to other units in the Region.


Revenue 2006

Revenue 2005

AMESA 34%

EAP 18%

Americas 29%

Europe 18%

AMESA 35%

Europe 18%

Americas 22%

EAP 24%


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Medical Devices :

Performance of the newly acquired Medical Devices business in

2006 has exceeded our expectations. The business is currently

specializing in all areas of catheter based devices & components

such as high quality customs extrusions, all types of balloons

and catheters, initiating from concept stage to design to

production.

Avalon Medical Devices, Singapore, largely caters to the American

market.

Europe

The Operating Units in this region consists of tube business.

Germany 1 unit

UK 2 units

Russia 1 unit

Essel Propack UK Ltd. (erstwhile Telcon Packaging Ltd.) has

improved its capacity utilization and manufacturing efficiencies

during 2006. This unit is one of the focused manufacturers

of laminated tubes in UK. To further consolidate our presence

in Europe, Arista Tubes Ltd. is currently being restructured

to align its vision with the Companys vision to consolidate

and grow as a major global player in extruded plastic tubes.

At the two UK subsidiaries, the emphasis is on improvementof efficiencies, cost reduction, expansion of customer base

and targeting new major customer accounts. The Company

expects a positive impact on its profitability during the current

year.

In Germany, the laminated tube volumes have improved

substantially during the year. The new laminated tubes plant near

Moscow, in Russia, is also going through a stabilisation phase.

Plans are on to increase capacity utilization, since the market is very

large and promising.

Africa, Middle-East and South Asia (AMESA)

The Operating Units in this region include Tube business and

Specialty Packaging Materials.

India 7 units

Egypt 2 units


Tube business :

Indian Operations are reflecting a growth of volumes. This is due

to the special emphasis placed on pharmaceutical segment with

mini-tubes and cosmetics segment with extruded plastic tubes. In

India, there has been an increase in total revenue by 12%. TheNalagarh plant at Himachal Pradesh, which was commissioned in

July 2005, has stabilized, and is currently in capacity expansion

mode.

Your Company has shut its operations in Nepal due to concerns

for law and order. Your Companys Board, during the year under

review, has approved a reduction in the equity share capital of its

wholly owned subsidiary in Nepal from the current NPR 128

million to NPR 32 million.

Operations in Egypt have reported improved business volumes.To capitalize the growth opportunities in this market, the Company

has invested resources in capacity expansion. With Egypt becoming

a hub for MNCs in this geography, the growth in that market is

quite promising.

Specialty Packaging Materials :

The newly acquired Specialty Packaging Material business

through Packaging India Pvt. Ltd. is performing better than

our initial estimates. The business is currently focused on

packaging for food, personal care and confectionary sectors.Our efforts are on to increase capacity utilisation, enhance

capacities at the current site, set up a green-field plant in North

India, and optimize product / customer portfolios and move

up the value chain.

East Asia Pacific (EAP)

The Operating Units in this region include Tube business.

China 3 units

Philippines 1 unit

Indonesia 1 unit

The capacities of Guangzhou Propack Limited, China, (GPC)

have been relocated during the year to other EP sites, following

the completion of a MNC customer contract.

China has posted a consistent performance during the year. The

key factor which has enhanced the performance is the continuation


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of the vertical integration process for blown film. This is an effective

strategy that has contributed to the improved efficiencies.

Human Capital

All through the years, your Company has remained a progressive

organisation, continuously monitoring and anticipating the

changing market trends and evolving market dynamics. This aspect

has kept your Company at the forefront of competition, always

leading the change in its industry, to be termed as industry

benchmark. Human capital of the Company has always remained

the constant appreciating asset, which has propelled the Company

to its present global status.

Today, your Company has three revenue streams namely Laminated

Tubes / Extruded Plastic Tubes, Medical Devices and Specialty

Packaging Materials. The Company aims to post a consistent andhealthy growth in all the three revenue streams simultaneously.

With such a vision, the need was felt to realign the organisational

goals and aspirations, to instill multi-dimensional organisational

growth.

To realign and transform the organisation, it was felt imperative

to align the aspirations, goals, structure, capabilities, processes and

people with the organisation. It was decided to undertake an

indepth Diagnostic and Climate study of the organisation, the

results of which, in turn, would form the frame of reference for all

the changes. The services of an international respected specialistwas availed to facilitate these efforts. The entire exercise was to be

followed by development of Human Capital strategy and various

Human Capital initiatives for implementation across the

organisation.

The realignment efforts were rolled out with the diagnosis of

internal organisational environment vis--vis external environment

such as market realities and expectations. Various critical factors

such as business challenges (current and future with implications),

future focused business imperatives, assessment / implication of

organisation structure, diagnostic of organisation culture & climate

and their implications, cultural sensitivity, criticality of top teams

and their impact on the Company, detailed roadmap on

implementing the recommendations in a phased manner etc. were

considered and studied. The findings of this exercise formed the

base for identifying the path forward.

To arrive at the path for achieving the organisational goals, a Strategy

Decode exercise was conducted with the participation of the entire

top management. The decode exercise resulted in the identification

of Must Win Battles (MWBs) for the different revenue streams,

critical success factors (CSF) for each MWB and top team

accountabilities.

Based on the findings of the study, Human Capital strategy was

formulated. The strategy was subsequently rolled out systematically,

step by step. It began with the announcement of new organisation

structure with role clarity. Job Evaluation was conducted to bring

about role and responsibility parity across the global organisation.

Following Job Evaluation, Capability Development was

undertaken which involved development of frameworks for critical

activities such as developing competencies within the organisation,

Career Development and Succession Planning, Performance

Management System (PMS) etc. Finally, mapping of all HumanCapital processes were conducted to develop frames of reference

for future and for benchmarking.

All these efforts had positive impact on the organisation, both

at organisational level as well as at the individual level. At the

organisational level, there was clarity and common

understanding of organisation goals, Must Win Battles

(MWB), key stakeholder expectations and cultural / climate

related enablers and barriers. The key objective is to build the

organisation and people capability with top team feedback and

coaching, strengthening corporate image in externalenvironment and creating a burning desire to be the market

leader in revenue and management practices.

At the employee level, the efforts provided clarity on what an

individual is expected to do, the interdependencies and

interfaces, responsibilities of an individual in the organisational

structure, the requisite capabilities and the behaviour to be

demonstrated.

The entire exercise, right from Diagnostic study to Human Capital

strategy formulation, was completed in 12 months. Thenimplementation began with different aspects of the strategy being

rolled out in phases. During the last nine months, many of the

activities, processes and systems have been streamlined. The

implementation of many more aspects of the strategy are in

progress. To name a few, Job Evaluation has been performed.

The new Performance Management System (PMS) has been rolled

out globally. PMS for the year 2007 will be conducted as per the


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new process. Similarly, Career Development and Succession

Planning has already been rolled out. All the systems, processes

and activities specified in Human Capital strategy will be operational

by the end of 2007.

Talent Identification

The Companys Talent Identification process is aimed at identifying

the employees who have the aptitude, capabilities and qualities

necessary to undertake the work involving greater responsibility

and skill level. Another aspect of the Talent Identification is to

create a Talent Pool by identifying individuals with leadership

qualities and nurture them as future leaders. During the year 2006,

this process was rolled out globally. A proactive and an effective

succession management is in place to nurture the talent pool.

Individual development plans have been drawn detailing the career

steps of the individual.

Training & Development

Training & Development is another area that has been focused

on at your Company for continually developing and honing the

skill sets and competencies. The efforts are aimed at the

development of an individual as well as the development of

Team Skills and competencies. Your Company firmly believes

that well trained people and teams at every level provide the true

competitive edge in its business and hence, continues to invest

resources in training.

Your Company is a global organisation with 1971 employees of

over 20 nationalities as at December 31, 2006. The cross-culturalfactors turn out to be an important aspect in managing the business

in a global environment. During the year 2006, your Company

retained its focus and efforts in training its employees on cultural

sensitivity. Your Company conducted many programmes to

sensitize employees in different dimensions of culture, managing

change, working with employees from different cultural background

and cultural diversity.

The total training man days for the year ending December 31,

2006, were 3390. The major focus in Training & Development was

on cultural sensitivity.

Cautionary Statement

Statements in this Report describing the Companys objectives,

expectations or predictions may be forward looking within

the meaning of applicable laws and regulations. The actual

results may differ material ly from those expressed in this

statement.

Documents

Management Discussion & Analysis 2006