52-WEEK FLOP: ESS DEE ALUMINIUM:Business Line

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Buy Ess Dee Aluminium Limited (EDAL) : : Escorts Securities

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Indian Foils Limited (IFL) Story
EDAL had acquired 90% stake in India Foils Limited (IFL),
from Madras Aluminium Ltd (MALCO) a Vedanta Group
Company in 2008 for Rs. 128 cr. It infused Rs. 150 cr for
refurbishment of the plant since the buyout. IFL also has a
castor plant at its facility which makes Aluminium sheets which
is the input for Ess Dee. The current capacity utilization of
castor plant is 60% which is much below the breakeven
rate(80%). This current under utilization is expected to
improve in Q3FY13 which will increase income which have
currently been hit due to underutilization at IFL. EDAL
currently imports Aluminium Sheets, its raw material, from
only one supplier GRAMCO which costs ‘LME+$650’. After
the Castor at IFL reaches 80% utilization the cost of sheets to
EDAL will come down to ‘LME+$220’. This will give
additional profit to EDAL, thus increasing profit margins.

ESS DEE ALUMINIUM In the slow lane :: Edelweiss

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Ess Dee Aluminium’s (Ess Dee) Q3FY12 PAT at INR167mn was
significantly below our expectation. Volumes continued to disappoint,
declining marginally YoY as per our estimates. Management attributed
subdued sales to slower ramp up in production at IFL plants and
slowdown in demand. Outlook for Q4FY12 remains bleak. We maintain
‘HOLD’ with a target price of INR190/share.
Results below expectation
Ess Dee reported a 16% YoY decline in revenue to INR1.6 bn. This was driven largely by
a fall in LME prices (down 11% YoY in USD terms). While management did not disclose
volume numbers, they are likely to have dipped YoY in our view, which is a key
disappointment. EBITDA margin contracted 560bps to 23% due to expenses incurred in
stabilizing IFL plants. Thus, PAT for the quarter at INR167mn was down 56% YoY (27%
below our estimates).
Slow ramp up in volume from IFL plants a concern
Volumes were disappointing for the fourth consecutive quarter. Management
highlighted that it has been cautious in ramping up volumes from IFL plants to keep
quality under control and avoid any undue loss in the process of stabilizing the plants.
They also acknowledged some pressure on demand from pharma companies during
the quarter, but sounded confident of a revival in demand going forward. Volumes are
likely to remain flattish in Q4FY12 and a pick up in volumes is expected only in FY13.
Outlook and valuations: Cautious; maintain ‘HOLD’
We are revising down our EBIDTA estimates 5‐10% for FY12‐13 to factor in the
continued slow ramp up in volumes and lower margins. Ess Dee is currently trading at
FY12E and FY13E P/E of 7.3x and 6.1x, respectively. Our target price of INR190 per
share is based on 6x FY13E P/E. With no visibility of a volume ramp up in the near term
we maintain our ‘HOLD’ recommendation.

IDFC research, ESS DEE ALUMINIUM : IDFC Emerging Stars Conference

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ESS DEE ALUMINIUM 
UNRATED (RS427, MCAP: RS13.7BN / US$303.6M)


• Ess Dee Aluminium Ltd. (EDAL) is India’s premier manufacturer of aluminium foil and foil products catering to the
pharmaceutical and FMCG sectors. It derives 70% of its revenues from the pharma sector and the rest from FMCG.
• Revenues and EBITDA witnessed 64% and 35% CAGR over the past four years on the back of aggressive capacity
additions (acquired India Foils Ltd. recently) and buoyant offtake from end-user industries (given limited competition
in domestic markets).
• EDAL’s product range can be broadly classified into aluminum-foil-based flexible packaging laminates and PVCbased
thermo forming products, including aluminium strip foil, blister pack foil, PVC and PVdC coated film,
laminates and cold forming Alu-Alu packaging products. The company supplies these products to various reputed
domestic and international pharmaceutical and FMCG companies based in India.
• Raw material costs account for 86% of EDAL's revenues. EDAL imports aluminium from the Gulf Aluminium Rolling
Mill Co in Bahrain every quarter at market prices. It manages volatility in gross margins by maintaining low
inventory days and any gain/ loss in inventory is passed on to customers (packaging accounts for a small amount of
the final product price), which helps absorb higher raw material prices by producers.
• EDAL’s business model is characterized by the following:
o Hub & spoke model – the company remains in close proximity to the customer, ensuring lowest lead time/
freight cost
o Ability to execute a wide range of order sizes
o Strong designing capability helps provide clients with appropriate solutions
o Comfortable with long receivable cycles, which eliminates competition from smaller players.

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).