Packaged growth Ess Dee Aluminium:: IIFL

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Packaged growth
Ess Dee Aluminium is India’s leading provider of aluminium packaging solutions. It sells 85% of
its volumes to pharma companies, and the rest to foods and FMCG players. The aluminium
packaging industry is set for sustained growth, driven by strong volume growth in user
industries. Ess Dee’s volumes have grown eight-fold over FY06-10, and its business model is
such that its margins are relatively unaffected by fluctuations in aluminium prices. We forecast
earnings CAGR of 33% over FY10-13ii, driven primarily by volume growth. We initiate coverage
with a BUY and a target price of Rs668 (11x FY12ii EPS).



Strong volume growth; Ess Dee well-placed to capitalise: Over 55% of aluminium packaging used in
India is imported, and a further 35% is sold by small-scale unorganised producers. Ess Dee’s has ~10%
share of the market. Its share of this growing industry is set to increase further, with customer
accreditations in place, ready facilities, and financial wherewithal to make upfront investments. We estimate
Ess Dee’s volumes will grow at 30% annually over FY10-13ii.

High earnings visibility, volume-driven growth: Ess Dee’s business model is de-risked, as cost of its
key raw material, aluminium, is a pass-through item. Low variation in demand from user industries and
relatively little pricing pressure lends high visibility to Ess Dee’s earnings. We expect the company’s EBIDTA
margin to remain stable in the years ahead, and earnings will be primarily driven by volumes.
A multi-year growth story, attractive valuations: We believe the aluminium packaging industry is in a
secular growth phase, driven by estimated 16% volume growth in the Indian pharma industry. Further, the
increasing popularity of penetration of packaged foods is likely to aid to the growth. These factors would
drive volume growth beyond FY13. At a PER of 10.2x on FY11ii and 8.0 on FY12ii, the stock’s valuation is
attractive in view of the 33% earnings CAGR over FY10-13ii. We initiate with BUY and target price of Rs668.