Essel Propack Q3FY11 Result Update; Only Hiccups, BUY; Target: Rs 72: Emkay

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Essel Propack

Only Hiccups, Target Intact, Maintain BUY

BUY

CMP: Rs 56                                        Target Price: Rs 72

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n     Essel Propack (EPL) achieves revenue (Rs3.6 bn, up 19.2% yoy) and APAT (Rs156 mn, up 152% yoy) estimates, but misses Ebidta expectations – records 210 bps qoq decline

n     Capacity constraints in China and India resulting in outsourcing, whereas Europe and Americas remain impacted by low utilization translating into lower growth and Ebit loss

n     Outlook for FY12E- (1) 12-13% revenue growth (2) 20% Ebidta margin and (3) higher utilization in Europe and Americas

n     Revise earnings by -12.3% for FY11E and -2.3% for FY12E - Maintain BUY with revised target price of Rs72/Share

EPL’s Q3FY11 performance is mixed bag, achieves revenue and APAT

but misses Ebidta expectations

Q3FY11 performance was mixed bag, achieves revenue and APAT but misses Ebidta

expectations. EPL reported 19.2% yoy growth in revenue to Rs3.6 bn and 151.6% yoy

jump in APAT to Rs156 mn. The reported APAT was ahead of EMKAY estimates of

Rs145 mn. However, Ebidta at Rs601 mn was below our expectation, impacted by

reduction in gross contribution and inventory write-offs in international business. The

Ebidta margins improved 10 bps yoy and decline 210 bps qoq to 16.5%.

Capacity constraints in China and India, whereas Europe and Americas

remain impacted by low utilization

Anomalies were seen across geographies, China and India witnessed capacity

constraints whereas Europe and Americas remain impacted by low utilization.

Consequently, Amesa registered revenue growth of 23.2% yoy to Rs1.8 bn and EAP

registered revenue growth of 6.8% yoy to Rs757 mn. But, experienced capacity

constraints and higher outsourcing leading to decline in Ebit margins. Whereas, Europe

registered revenue growth of 3.3% yoy to Rs298 mn and Americas registered revenue

growth of 5.2% yoy to Rs826 mn. Europe reported increase in Ebit loss to Rs107 mn

and Americas reported Ebit of Rs10 mn.

Shares outlook for FY12E- foresee (1) improvement in Americas (2)

tapping efficiencies in operations combined with 12-13% revenue growth

Management gave outlook for FY12E, key highlights are (1) forecasts revenue growth of

12-13% in FY12E- with continuation of growth momentum in China and India and

improvement in Americas and Europe (2) thrust lies on developing markets like India,

China, Middle East and Russia (3) gain from efficiency improvement in business

operations (4) drive utilizations in Americas and Europe business (5) eyeing Ebidta

margins of 20% in 2HFY12E.

Revised earnings by -12.3% for FY11E and -2.9% for FY12E to Rs3.3/Share

and Rs6.0/Share respectively

We have fine-tuned our assumptions to factor the FY12E outlook given by management in

the conference call. Consequently, we upgraded revenue by 1.9% for FY11E and 0.6% for

FY12E. But, Ebidta margins not meeting assumptions - lowered Ebidta margins by 160 bps

for FY11E and FY12E. Consequently, we have revised earnings by -12.3% for FY11E and -

2.9% for FY12E to Rs3.3/Share and Rs6.0/Share respectively.

Maintain ‘BUY’ rating with target price of Rs72/Share

Turnaround has gathered pace, 9MFY11 performance indicates the same. EPL is marching

towards achieving the Rs1 bn net profit in FY12E – revisiting the CY06-levels. Alongside,

strong earnings performance – we expect the valuations to retrace to CY06 levels- fill up

the gap created by the turmoil of CY06-08 period. We maintain positive bias with BUY

rating with revised price target of Rs72/Share.