Focus on non-oral care business across regions
We met the management of Essel Propack (EPL) to get more of an insight
into its European, American & EAP regions performance (contributes
~14%, ~21% & ~22%, respectively, on consolidated topline). According
to the management, the operational issues in the European region
(Poland plant) have been fully resolved. The unit revenue witnessed 51%
growth YoY during FY14. The unit’s losses have shrunk 46% YoY while
the management has guided that with the full year benefit of the new
contract flowing in, the unit would become profitable from FY15 onwards.
The Americas business, wherein the US had seen heavy losses in the
past, witnessed a sharp recovery by lowering losses by 34% YoY and
improvement in operating margin by 200 bps YoY during FY14.
Asset light business model COCO to reduce capex
In addition, the company also increased its focus to replace plastic tubes
with specialised laminated tubes in the European and American regions.
The EAP region witnessed sluggish offtake from key customers during
FY14, resulting in lower operating leverage. To address the issue, EPL
entered the value-added non-oral category and won prestigious orders
from FMCG cosmetic brands in China. In order to tap the large cosmetic
industry in South East China, EPL has set up a new facility in the region,
which will start operations from Q2FY15 onwards. Besides, under a new
business model i.e. customer owned company operated (COCO) model,
Essel has won a long term contract for supply of oral care tubes to a large
FMCG player. The COCO model is an asset light one wherein maximum
capex is done by customers while Essel will provide materials and
expertise to manufacture tubes at their factory and take full responsibility
for technology, process efficiencies and supplies. We have modelled
revenue CAGR of 16%, 5%, 9% and 37.5% in FY14-16E for Amesa, EAP,
Americas and Europe, respectively.
Focus on non-oral care category to drive volume growth
Non-oral care categories, dominated by toiletries, skin care and shampoo
use plastic tubes as packing material. Contribution of non-oral care in
total revenue is expected to increase from 40.8% in FY13 to 50% by
FY16. Emerging markets would be key driver for oral and non-oral care
categories due to lower product penetration. Further, EPL is close to
signing a long term contract with HUL for its oral care products in India.
EPL, which has marquee oral clients in its portfolio like Colgate, Dabur
and Vicco in India, is looking to enter into an agreement with HUL to
supply plastic tubes for its leading brands Pepsodent and Close Up in
domestic market. Currently, other packaging majors like SRM, Betts and
Borker are key packaging products suppliers for HUL’s oral care
products.. The deal size would be nearly | 500 crore, benefiting EPL over
the long run. Also, EPL is focusing on emerging markets of Asia, Africa
and Latin America to drive revenue from non-oral care category.
Near term positives priced in; recommend HOLD
We have slightly tweaked our revenue estimate downward by ~5% YoY
for FY16E with a 20 bps YoY rise in EBITDA margin for the same period.
EPL is trading at an enterprise value of 5x and 4.2x its FY15E and FY16E
EBITDA, respectively, (which is ~23% discount to its peak multiple of
5.7x in 2003-07). We believe the recent rally captures the turnaround of
the European business where EBIT losses declined substantially. We
expect consolidated sales, earning CAGR of ~15%, ~33% in FY14-16E,
respectively. We maintain our target price with a HOLD rating on EPL.
��
We met the management of Essel Propack (EPL) to get more of an insight
into its European, American & EAP regions performance (contributes
~14%, ~21% & ~22%, respectively, on consolidated topline). According
to the management, the operational issues in the European region
(Poland plant) have been fully resolved. The unit revenue witnessed 51%
growth YoY during FY14. The unit’s losses have shrunk 46% YoY while
the management has guided that with the full year benefit of the new
contract flowing in, the unit would become profitable from FY15 onwards.
The Americas business, wherein the US had seen heavy losses in the
past, witnessed a sharp recovery by lowering losses by 34% YoY and
improvement in operating margin by 200 bps YoY during FY14.
Asset light business model COCO to reduce capex
In addition, the company also increased its focus to replace plastic tubes
with specialised laminated tubes in the European and American regions.
The EAP region witnessed sluggish offtake from key customers during
FY14, resulting in lower operating leverage. To address the issue, EPL
entered the value-added non-oral category and won prestigious orders
from FMCG cosmetic brands in China. In order to tap the large cosmetic
industry in South East China, EPL has set up a new facility in the region,
which will start operations from Q2FY15 onwards. Besides, under a new
business model i.e. customer owned company operated (COCO) model,
Essel has won a long term contract for supply of oral care tubes to a large
FMCG player. The COCO model is an asset light one wherein maximum
capex is done by customers while Essel will provide materials and
expertise to manufacture tubes at their factory and take full responsibility
for technology, process efficiencies and supplies. We have modelled
revenue CAGR of 16%, 5%, 9% and 37.5% in FY14-16E for Amesa, EAP,
Americas and Europe, respectively.
Focus on non-oral care category to drive volume growth
Non-oral care categories, dominated by toiletries, skin care and shampoo
use plastic tubes as packing material. Contribution of non-oral care in
total revenue is expected to increase from 40.8% in FY13 to 50% by
FY16. Emerging markets would be key driver for oral and non-oral care
categories due to lower product penetration. Further, EPL is close to
signing a long term contract with HUL for its oral care products in India.
EPL, which has marquee oral clients in its portfolio like Colgate, Dabur
and Vicco in India, is looking to enter into an agreement with HUL to
supply plastic tubes for its leading brands Pepsodent and Close Up in
domestic market. Currently, other packaging majors like SRM, Betts and
Borker are key packaging products suppliers for HUL’s oral care
products.. The deal size would be nearly | 500 crore, benefiting EPL over
the long run. Also, EPL is focusing on emerging markets of Asia, Africa
and Latin America to drive revenue from non-oral care category.
Near term positives priced in; recommend HOLD
We have slightly tweaked our revenue estimate downward by ~5% YoY
for FY16E with a 20 bps YoY rise in EBITDA margin for the same period.
EPL is trading at an enterprise value of 5x and 4.2x its FY15E and FY16E
EBITDA, respectively, (which is ~23% discount to its peak multiple of
5.7x in 2003-07). We believe the recent rally captures the turnaround of
the European business where EBIT losses declined substantially. We
expect consolidated sales, earning CAGR of ~15%, ~33% in FY14-16E,
respectively. We maintain our target price with a HOLD rating on EPL.
Link
http://content.icicidirect.com/mailimages/IDirect_EsselPropack_MgmtNote_Aug2014.pdf
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