Essel Propack – 2QFY2011 Result Update Angel Broking

Visit http://indiaer.blogspot.com/ for complete details �� ��

  Essel Propack – 2QFY2011 Result Update

Angel Broking maintains a Buy on Essel Propack with a Target Price of Rs75.

For 2QFY2011, Essel Propack’s (EPP) results were marginally ahead of our

expectations, primarily due to higher sales. EPP continued to be profitable on the

back of its stringent cost-cutting initiatives, increasing contribution from

high-margin products and a better production mix at its various geographies.

We maintain Buy on the stock.

Steady performance continues: EPP’s 2QFY2011 sales grew by 5% to `369cr

(`351cr in 3QFY2010). However, excluding its medical business, total revenue

grew by 20% yoy. EBITDA margin (excl. medical business) improved by 70bp yoy

to 18.5% (17.9%). Segmental underperformance was visible in Americas and

Europe, where the company posted losses on PBIT level on account of

rationalisation of production, product mix and under-utilisation of capacity.

Outlook and valuation: EPP’s 2QFY2011 performance was marginally ahead of

our expectations. The company’s European operations pruned losses to a great

extent in 2QFY2011. The Poland plant broke-even on the EBITDA front, though

not on the PAT front, which is likely to happen in 4QFY2011. We have revised

our estimates upwards to account for higher-than-estimated sales in 2QFY2011.

At current valuations of 0.9x FY2012E P/BV, the stock is attractively valued.

We believe the worst is over for the company and, hence, maintain Buy on the

stock with a revised Target Price of `75 (`57).

Investment arguments

Global leader, substantial market share to help garner more business: EPP is a

global leader in the tubes packaging business, with an estimated current market

share of 32%. Around 38% of the market is controlled by small regional players.

As economic recovery gets underway, further consolidation cannot be ruled out.

New business offers good opportunity: EPP is present in speciality packaging,

offering a solution to the food processing industry, which is recession-proof in

nature. Speciality packaging is a high-need requirement of consumers.

The domestic food processing industry is still at a nascent stage, but it is fast

gaining momentum. The market size of this segment is huge and offers the

company a chance to diversify its existing revenue mix, which is heavily dominated

by lamitubes.

Stabilisation in operations at subsidiary level: In CY2008, EPP posted losses on a

consolidated basis, due to deterioration in the performance of its key subsidiaries.

This was on account of the drying-up of orders, shifting of operations by one of the

company's key clients and teething problems at the new plant. We believe EPP has

been able to tackle most of the problems at its various plants and its operations

are now stable and profitable.

Outlook and valuation

We have revised our estimates upwards to account for higher-than-estimated sales

in 2QFY2011, capex to be incurred in FY2011 and higher guidance on the tax

outflow front.

EPP’s European operations reduced losses to `4cr in 2QFY2011, as against `35cr

in 3QCY2008, an improvement of 88%. Currently, operations are almost

EBITDA-neutral, and we expect them to turn profitable by 4QFY2011. The

company has been aggressively adding new customers from the cosmetic and

pharma sectors, which is likely to result in a changed revenue mix. The current

revenue mix is dominated by lamitubes, while the cosmetic and pharma industries

consume plastic tubes, which have higher margins.

At current levels, the stock is trading at attractive valuation of 0.7x FY2012E

EV/Sales and 0.9x FY2012E P/BV. We believe the worst is over for the company

and, hence, we are revising our target P/B multiple from 1x to 1.25x. We have

arrived at a revised Target Price of `75 (`57) and, hence, continue to maintain Buy

on the stock.