Change in product mix leads to higher margin • Essel Propack (EPL) :: ICICI Securities, report link

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Change in product mix leads to higher margin
• Essel Propack (EPL) recorded 13% YoY revenue growth supported
by ~20% YoY growth in Amesa and ~27% YoY growth in the
European region. With the Poland facility breaking even, this led to
the European region making a profit of | 4.95 crore vs. | 2.4 crore
loss in Q2FY14. However, with the dismal performance of flexible
packaging segment along with absence of exceptional income in
Q2FY15, Amesa’s EBIT margin declined ~260 bps YoY. Revenue
from European and Chinese operation improved ~27% YoY and
15% YoY, respectively
• Non oral care segment revenue grew ~18% YoY while non oral care
share in topline improved 80 bps YoY and 140 bps YoY for H1FY15
• EBITDA margins witnessed a 45 bps YoY expansion due to saving in
employee cost (supported by volume growth) and change in product
mix (higher contribution of non oral care products). Higher margin
and lower tax outgo helped PAT grow ~29% YoY in Q2FY15
Revival in European region - key trigger for future growth
The European region contributes ~12% to the consolidated topline (lower
than other regions) largely due to under utilisation of its Poland plant.
However, EBIT losses of Europe reduced substantially from | 93 crore in
CY08 to profit of | 6.5 crore in H1FY15, due to implementation of different
cost effective programmes, stabilisation of Poland unit and addition of
new clients in various geographies. The Polish unit is a hub for extruded
plastic tubes. It is also expanding into a major supplier of laminated tubes.
The Polish unit turned positive Q1FY15 onwards with an improvement in
utilisation rate and addition of new clients. Stabilisation of the unit and
new long term contracts would translate into higher operating leverage &
reducing fixed cost.
Focus on non-oral care category to drive volume growth
Non-oral care categories, dominated by toiletries, skin care & shampoo,
use laminated tubes as packing material. Contribution of non-oral care in
total revenue is expected to increase from 39.1% in FY14 to 50% by
FY16. Contribution of non oral in overall revenue increased to 41.9% in
H1FY15. Emerging markets would be the key driver for oral and non-oral
care categories due to lower product penetration. EPL is focusing on
emerging markets of Asia, Africa and Latin America to drive revenue from
the non-oral care category.
Amesa: India remains strong market for Essel
Amesa (Africa, Middle East & South Asia with operations in Egypt and
India) remained a strong growth driver for EPL. We believe the region (led
by India) would continue to grow at 18% CAGR in FY14-17E supported by
rising disposable income, growing urbanisation and lower penetration of
personal care products.
Recent rally captures revival of European turnaround; maintain HOLD
EPL is trading at an enterprise value of 5.6x and 4.7x its FY15E and FY16E
EBITDA, respectively. We roll over our valuation to FY17E EBITDA,
considering recovery in its loss making subsidiary and overall stable
macro outlook. We believe the recent rally captures the turnaround of the
European business. We expect consolidated sales and earning CAGR of
~16% and ~31% in FY14-17E, respectively. We have valued the stock at
4.2x its FY17E EBITDA with revised target price of | 127 and HOLD rating.

LINK
http://content.icicidirect.com/mailimages/IDirect_EsselPropack_Q2FY15.pdf