Shareholding (%) Dec-13 QoQ chg

Promoters : 58.94 0.00

Stock Data
No. of shares : 15.7 Cr
Market cap : Rs 760 Cr
52 week high/low : Rs 52/ Rs 30
Avg. daily vol. (6mth) : 71,220 shrs
Bloomberg code : ESEL IN
Reuters code : ESSL.NS
Ready to PACK a Punch
Essel Propack Ltd
CMP: Rs 48
Target Price: Rs 65
Potential Upside: 35%
Absolute Rating: BUY
1 1
Financial Summary
Source: Company, Axis Securities Ltd.
Source: Axis Securities Ltd, Bloomberg
Relative Performance
Promoters : 58.94 0.00
FIIs : 9.35 0.14
MFs / UTI : 3.09 (0.15)
Others : 28.62 0.01
Y/E
March
Total Income
(Rs Cr)
PAT
(Rs Cr)
EPS
(Rs.)
Change
(YoY %)
P/E
(x)
RoE
(%)
RoCE
(%)
DPS
(Rs)
2012 1584 63 3.27 29% - 7.3 9.8 0.65
2013 1832 81 5.16 21% - 8.8 11.6 0.75
2014E 2070 101 6.41 31% 7.6 10.2 12.8 0.85
2015E 2329 128 8.14 28% 6.0 11.8 14.3 0.95
February 5, 2014
Ujwal Shah
Chief Manager
ujwal.shah@axissecurities.in (+91 22 4325 3163)
60
90
120
150
180
Feb-13 Jun-13 Oct-13 Feb-14
Essel Propack BSE_SENSEX
Long Standing customer relations
Caters to elite global as well as domestic customers (both in oral and non-oral care categories)
Long standing relations to be utilized for cross selling of products
Turnaround of European operations in-sight
Poland largest operations in Europe(~70% of Euro regions topline); to breakeven by Q4FY14E
Essel has bagged a 1+5 year contract from a leading MNC FMCG player for supply of lami-tubes which will contribute revenue of
approx. Euro 15 mn p.a.
Essel has discontinued manufacturing operations in UK and its clients are serviced from Poland & German plants. This aids in reducing
costs & consolidating capacities in the EU region.
Essel is fully restructuring operations in Russia by undertaking measures such as change in Management, leaner employee structure and
improving cost efficiencies. Co expects to successfully turnaround its Russian operations and report EBITDA profits in FY2015.
Investment Rationale
2
p g p y p p p
AMESA Opportunities Galore
India has been the growth engine for Essel and has been consistently earning higher margins than consol business.
Essel is a market leader in India with share of 67% in laminated tubes and 38% in plastic tubes. India is fast becoming a sourcing base
for MNC & acts as an export hub to other Asian countries such as Sri-lanka & Bangladesh.
Flexible packaging business is a high growth low margin category for Essel, with steady revenue growth of @ 16 -18% and earns
good RoCE as investments required is relatively less for this business.
EAP The margin propeller
Increased focus on cosmetics, pharma and niche non-oral care categorys for growth going forward.
Market Plastic Barrier Lami (PBL) tubes to existing customers (oral and non-oral). This strategy has paid off whereby 1 MNC customer
has awarded contract for PBL tubes to Essel for Chinese markets.
EAP earns over 20% EBIT margin as against Essels consol. EBIT margin of 11%. Essel is focusing on increasing revenue growth from
EAP region and this shift in revenue mix with higher contribution from EAP will drive margins in the medium term.
1408
1584
1832
2070
2329
17.6%
16.8%
17.1%
18.0% 18.6%
3.5%
4.0%
4.2%
4.8%
5.5%
0%
4%
8%
12%
16%
20%
0
500
1000
1500
2000
2500
FY11 FY12 FY13 FY14E FY15E
Investment Rationale
Americas Focus on Moving up the Value Chain
Focus on value (as volumes have peaked) by improving
product mix in favor of high end non-oral care & cosmetics
products in US
Focus on increasing customer base and getting orders to
improve capacity utilization rate.
PBL Tubes The Transition has Begun
PBL tubes are gaining prominence as they provide similar
effects as that of plastic tubes at comparatively lower costs.
Essel intends to market PBL tubes via cross selling them to
existing client base (FMCG giants), target existing customers
entering newer markets and by targeting new clients
Steady growth coupled with strong margins
(
R
s

C
r
)
(
%
)
3
FY11 FY12 FY13 FY14E FY15E
Total Income EBIT Margin PAT margin
entering newer markets and by targeting new clients.
Anticipate Consol Revenue and Adj. PAT CAGR of 13%
and 30%, respectively
Turnaround in European ops
Improvement in EBITDA margin to 18.6% in FY15E from
current 17.1%. Comfortable Net Debt to Equity at .7x
Consistently rewarding shareholders with dividends since
1991
RoE and RoCE to substantially improve to 11% and 14% in
FY15E from 9% and 11% in FY13; lead by strong rebound in
Polish op. coupled with improving productivity & better margins.
We initiate BUY with target price of Rs 65 based on 8x
FY15E, providing potential upside of 35%
Source: Company, Axis Securities Ltd.
Non-oral care contribution: Management targets 50% in FY15
64.8%
59.2%
50%
35.2%
40.8%
50%
0%
20%
40%
60%
80%
100%
FY12 FY13 FY15 T
Oral Care segment Non-Oral Care segment
Business Overview
Incorporated in 1984, Essel Propack (Essel) is a leading manufacturer of laminated and plastic tubes globally and offers flexible
Revenue mix: 2005 Revenue mix: 2013
35%
24%
23%
18%
AMESA East Asia and Pacific (EAP) Americas Europe
47%
18%
22%
13%
AMESA East Asia and Pacific (EAP) Americas Europe
4
packaging solutions to the oral care, cosmetics, pharmaceutical, personal care, food and industrial sectors worldwide.
Essel has 24 manufacturing facilities spanning across12 countries to serve customers worldwide.
Essel is the worlds largest integrated laminated tube manufacturer with a market share of 33% globally.
The company has consistently focused on increasing contribution from high margin non-oral care category which currently accounts for
40.8% in FY13 as compared to 35.2% in FY12.
The company operates in 4 key regions
AMESA: Africa, Middle East & South Asia (with operations in Egypt and India)
EAP: East Asia Pacific (with operations in China, Philippines & Indonesia)
Americas: (with operations in the USA, Mexico & Colombia)
Europe: (with operations in the UK, Germany, Poland & Russia).
Essel Propacks (Essel) portfolio of packaging products consists of laminate (lami) tubes, plastic tubes, Caps and
Closures & flexible packaging. The tubes find application in oral care, cosmetics, other personal care, pharmaceutical,
food and industrial sectors. Flexible packaging business is operated under a wholly owned Indian subsidiary
Packaging India Pvt. Ltd.
Laminated Tubes
Laminated Tubes are used for packaging by various sectors like oral care, food, cosmetics, Pharma and industrial applications.
The oral care industry contributes to 70% production of lami tubes. Essel offers a range of customized laminated tubes like:-
- Aluminium Barrier Laminates: Used for pastes, ointments and over the counter pharmaceutical products.
- Plastic Barrier Laminates: Used for packaging products that needs to maintain their form and shape with high decoration and photo quality.
- Specialty and Custom Materials: Used to provide more value or unique look to the customers brand.
Product Profile
5
Plastic Tubes
Plastic tubes are used to enhance the shelf-life of packaged goods & create a unique product identity.
Essel offers high-end decoration techniques and custom colored materials to fit the needs of the brand/products of each client.
Caps & Closures
Essel manufactures caps and specialty closures for its products mainly in 3 markets; India, USA and India.
New Products
IPR Protected products: Etain, Egnite, Titanium Oxeblock, Ishine, High Cloud, Dual Barrier Medi Tube, High Clear UV protected Tubes.
Etain is a fully recyclable plastic packaging tube which is highly customizable and ensures that the lifecycle of a product does not
destroy the source of the product or the environment.
Egnite is a high luster laminate which facilitates complex printing and novel color effects. The metallic finish makes the foil blocking
process redundant and also offers advantages of striking product differentiation.
Domestic and Global Elite Customer list
Oral Care customers Non-oral care customers
6
Europe At the Onset of Revival
Russian operations:
Restructuring over,
focus on profitability
P l d t t
7
Germany out of the
woods; time to
consolidate
Poland to turn
PAT +ve from
4QFY14E
European operations: (13% of FY13 consolidated revenue)
EU operations include operations in Poland, Russia & Germany. Essel offers both laminated tubes and plastic extruded tubes in EU.
Poland Turnaround In-sight
Poland largest operations in Europe; to breakeven by Q4FY14E (~70% of Euro regions topline)
Started operations in 2008 and manufactures both laminated and plastic tubes
Export hub for entire Europe (supplies to France, Germany and Eastern European countries) and UK.
Weak local competition
What went wrong in Poland Remedial measures taken by Essel
Customer dissatisfaction of with product & services during
transition from UK to Poland
Essel made sweeping changes in production techniques,
changed entire Management Team, focus on reducing
scrap rates, focused on delivery reliability amongst others.
8
Drivers of strong growth
Essel has bagged a 6 year contract from a leading MNC FMCG player for supply of lami-tubes (capacity utilization of 75%) in Europe.
Upon full ramp up, this contract will contribute approx. Euro 15 mn p.a.
Moreover, company is aggressively focusing on winning orders for its plastic tube business (current capacity utilisation of 45-50%);
which will provide dual benefit of revenue accretion and margin expansion. (Earnings from plastic tubes is 2x - 3x of lami-tubes).
Essel will also enjoy tax holidays for its Polish facility.
Essel expects to double its revenue from this region over next 2-3 years. Polish facility will be PAT +ve by 4QFY14E and will
meaningfully contribute to companys bottom-line from FY15E. We believe Polands return to profitability will be a game-changer event.
Source: Company, Axis Securities Ltd.
Low capacity utilization for both Lami-tubes and
Plastic tubes
With the above mentioned changes, over 2009-13; Essel
has been successful to regain lost volumes, secure long
term contracts & improve plant utilization rates
Germany and Russia Operations Back in Green
Germany Restructuring pays off
Essel holds 25% stake in Essel Deutschland; a JV formed to
target Germanys market.
Manufactures laminated tubes with focus on niche segments.
Essel had to face lot of operational issues on top of the
alarming attrition rates during 2009-2013.
However, Essel successfully resolved Management &
operational issues and helped business turnaround. Thus,
German operations have turned profitable and earn better
margins than consolidated business.
Essel has discontinued manufacturing operations in UK and
its clients are serviced from Poland & German plants. This
Russia Winning long term contracts key to
profitability
Entered the Russian market in 2004. Russia business is
dominated by non-oral care category focusing on Food &
Beverages and Cosmetics Segment.
Suffered initial set back when a customer backed off after
planning a long term contract with Essel. Moreover lack of
anchor customers coupled with absence of any long term
contracts had impacted capacity utilization and profitability.
Russian business earns one of the highest realizations when
compared to other regions. However higher wastages, cost
inefficiencies and productivity issues affect margins.
9
aids in reducing costs & consolidating capacities in the EU
region.
Plans to increase presence in the cosmetics sector which can
prove to be a huge growth driver going forward.
Source: Company, Axis Securities Ltd.
Essel fully restructured operations in Russia undertaking
measures such as change in Management, leaner employee
structure and improving cost efficiencies.
Essel in Russia has struggled to find an anchor customer.
Company currently is in advanced talks with an anchor
customers which is encouraging.
Enhanced focus on gaining large contracts has paid dividend
as the company recently won a new order which will be
serviced from Jan 2014 and ramp up benefits will be seen in
FY15E.
With the focus on making this unit profitable by improving
utilization rates; efforts are on to gain larger contracts going
forward. Essel currently is in advanced talks to get a few
large customers on board.
131
172
237
308
376
(16.8%)
(14.7%)
(11.8%)
(2.0%)
4.0%
-20%
-10%
0%
10%
0
200
400
FY11 FY12 FY13 FY14E FY15E
Europe EBIT Margin
Europe Revenue (Rs. Cr)
AMESA Opportunities Galore
Egypt:
Gateway to Middle East and Africa
India:
10
Flexible Packaging:
High volume low value game
India:
The mainstay of AMESA
AMESA operations: (47% of FY13 consol. Revenue)
AMESA has been one the most prolific and consistent contributor for Essel over the past, and the trend looks likely to continue.
India Focus on Consolidating its Leadership Position
Strong foothold in India- India accounts for over 65% of AMESAs topline
India has been the growth engine for Essel and has been consistently earning higher margins than consol business.
Over 65% of AMESAs topline is contributed by India (excluding Flexible packaging).
Essel is market leader in India with share of 67% in laminated tubes and 38% in plastic tubes
India is fast becoming a sourcing base for MNC & acts as an export hub to other Asian countries such as Sri-lanka & Bangladesh
In India, company deals with over 250 clients catering to both; local manufacturers (ITC, Dabur, Emami) as well as MNCs (Unilever,
Colgate) which have India as one of their product sourcing base catering to Asia and SE Asia.
High margin non-oral category (contribution of approx 51%) benefited from increased penetration in pharma & cosmetics category.
K i
11
Key strategies
To further increase penetration in non-oral care category
Essel is also working towards developing solutions for fast growing food segment and pharma categories.
Introducing new business model of Customer Owned Company Operated long term contract.
Limited Competition:
Essel and Alcan together cater to nearly ~85% of lami - tubes market in India, with Essel being the market leader (67% market share).
Essel also is a leader in Plastic tubes market with a market share of 38% and top 3 players cover nearly 2/3rd of the entire market.
Competition is expected to remain muted due to high entry barriers (such as Technology, distribution network and time lag in
developing client relationship amongst others).
Essel stands to further leverage its position from the growing middle class spend, heightened focus on domestic opportunities by
FMCG giants amongst other macro drivers.
Source: Company, Axis Securities Ltd.
Oral Care in India Good Times to Continue
622
561
374
277
137
0
100
200
300
400
500
600
700
Brazil USA Philipines China India
Market size doubles
if PCC reaches
China levels
75
78
79
80
84
87
90
91
38
42
43
46
49
56
61
63
0
25
50
75
100
2005 2006 2007 2008 2009 2010 2011 2012
32.9 cr consumers
do not use Toothpaste
Toothpaste Penetration: Rural largely untapped PCC of toothpaste is extremely low as compared to other nations
12
Source: Source: Colgate presentation 2013, Company, Axis Securities
Per capita consumption of toothpaste (in gms)
2005 2006 2007 2008 2009 2010 2011 2012
Urban Rural
Macro drivers for Oral Care in India:
There remains 32.9 cr people (~10% of the urban population and ~37% of rural population) using conventional methods of oral care
In India, currently only 15% of population brush their teeth twice daily in contrast to developed markets where 87% of population
1 in 2 children in India suffer from cavities. 1 in 6 Indian people suffer from sensitivity. 1 in 3 Indian people suffer from gum problems
We believe, Indian Oral care market has a long way to go before it can reach the maturity stage. There are multiple factors (as mentioned above) which
will work in favor of oral care players in India. Consequently, the benefits will also flow down to allied industries like packaging and to its prominent
players like Essel. Essel is the leader in the Indian oral packaging market with 67% market share and we believe the company will continue to consolidate
its position going forward.
(Source: Colgate presentation 2013).
Non Oral Category (India) - Multi Sectors, Multi triggers
Pharma: A USD 200 bn incremental opportunity India FMCG ($ bn)
Nascent Categories Penetration - All India Skin Care Per Capita Consumption () Indian packaged food industry ($ bn)
28
50
87
12
50
FY10 FY15E FY20E
Base Case Higher Case
0
500
1000
1500
CY06 CY11 CY16E
Global spending on medicines ($ bn)
10%
8% 250
13
Source: Source: Colgate presentation 2013, Company, Axis Securities
Indian non-oral category is growing @ scorching pace with rising disposable income, exploding middle class, young population adopting new lifestyle
trends and significantly underpenetrated categories (be it health, food or FMCG). This kind of unperturbed growth has aided packaging companies like
Essel who is a leader in the non-oral care packaging category(Market share of 38%) in India. Going forward, this category is expected to not only drive
revenues but also act as margin booster for the company.
8%
6%
5% 5%
0%
5%
10%
Face
Wash
Body
Lotions
Hair
Cond.
Liquid
Soaps
5.9%
3.2%
0.6%
0%
2%
4%
6%
8%
China Indonesia India
121
194
0
50
100
150
200
250
2012 2015E
Flexi a Stable Business and EGYPT an Emerging Destination
Egypt:
Egypt was the company's first overseas venture which commenced operations in 1993. Essel primarily focuses on laminate tubes
catering to the oral care industry. Essel is the single largest tube manufacturer in Egypt.
Egypt has huge potential of developing cosmetic industry which is currently dependent on Europe for its needs. Moreover, Essel is also
actively targeting pharma manufacturers by offering laminated tubes as alternative to the aluminum tubes.
Egypt provides a location advantage as it can cater to emerging requirements from Middle East and African countries.
2 global FMCG giants have their filling stations positioned in Middle East and Essel intends to tap this opportunity from its
manufacturing base in Egypt.
This region earns Essel very healthy margins (better than consol EBIT margin) and thus is an exciting business opportunity for long term
14
This region earns Essel very healthy margins (better than consol EBIT margin) and thus is an exciting business opportunity for long term.
Flexible packaging- Another growth lever
Flexible packaging is used in most common mass products such as biscuit wrappers, confectioners, sachets, etc.
Essel entered this segment through inorganic route by acquiring Packaging India Pvt. Ltd (PIPL) in 2006.
This segment is a high growth low margin segment for Essel, with revenue growth @ 16 -18% whereas the margins do not exceed 11-
12% range. However, it earns good RoCE as investments required is relatively less for this business.
The company is looking at further developing customers in food and pharma segment. It is also actively looking at developing export
market for its offerings and has set up a dedicated plant in South catering to Sri Lanka and African regions.
Essel is working on debottlenecking its plants which will open up capacities, limit capex and augment return ratios from this business.
With its leadership position in this region, we expect AMESA to register revenue CAGR of 13% over FY13-15E.
EAP The Margin Propeller
Philippines: Attractive
margin
China: Reduce client concentration and
focus on non-oral category
15
Indonesia: Ventured with a 30%
stake in regional player
focus on non-oral category
EAP operations (18% of FY13 consol. Revenue)
EAP earns EBIT margin of over 20% as against Essels consol. EBIT margin of 11%. Essel is focusing on increasing revenue growth from
EAP region and this shift in revenue mix with higher contribution from EAP will drive margins in the medium term.
China accounts for lions chunk of EAP business
Essel has created a very strong presence in China with facilities in 4 locations; 1 in North, 1 in East and 2 in Southern China.
China has emerged as an important export hub and is being utilized to service SE Asian countries. Essel has already started catering
to Japan (one order in hand), Korea (LG amongst host of other clients) and Australia amongst others from its Chinese facilities.
Oral Care segment
Essel has been present in China since last 16 years and has emerged as a strong player in oral care category.
Last 2 years, Essels oral care volumes stagnated as demand from 2 of its prominent clients (2 of the largest oral care player in China)
faltered under intense competition (local as well as MNCs) in China. However, its important to note they have not lost any market
share in this region
China Short Term Blip, Long Term Fillip
16
share in this region.
Non oral Care segment
Essel is increasingly focusing on non-oral category by focusing on pharma, cosmetics and F&B segments in China. Company has
already started manufacturing tubes for pharmaceutical segment and this is expected to fuel future growth.
Key strategies going forward
Oral Care: Chinas oral care market is expected to maintain steady growth momentum with a constant value CAGR of 6% from 2012
to 2017 (Source: Euromonitor International). Essel plans to broaden its customer base by attracting local manufacturers. This will aid
in reducing revenue concentration and improve revenue visibility from its Chinese operations.
Non Oral Care: Essel is focusing on increasing its non-oral care pie by cross selling its non-oral care products to its oral care
customers (FMCG giants) for application in their other business vertical, extensive marketing (I Shine Program) to create its brand
presence and deepen penetration on the East China region with presence in Shanghai amongst other prominent cities.
Non-oral care in China: Exploding opportunity
Retail value of cosmetics (RMB bn) China commands a lions share in terms of Purchase of Cosmetics in 2012 (%)
Skin Care market in China (RMB bn) China's Premium cosmetic market (RMB bn)
Cosmetics Imports have grown @ CAGR of 33% over CY
00-11
6
5
3
72
43
7
19
20
51
60
0 10 20 30 40 50 60 70 80
Other Overseas Countries
Japan/Korea
Europe
Mainland China
HongKong/Taiwan/Macao
2012 2009
18%
20% 80 0
9 9%
10% 10% 10% 10% 10%
597
740
889
1103
1340
22%
17% 17%
19%
17%
0%
10%
20%
30%
0
500
1000
1500
2008 2009 2010 2011 2012
Sales Value Growth
1200
17
The Chinese cosmetics market has more than doubled in size between 2008 and 2012 to $22.8 bn and is expected to continue to grow at blistering pace.
Average skincare product consumption level per capita of current China is 28 Yuan/year while it is 36-70 USD (about 300 Yuan) in developed countries. which
depicts a huge gap between China and developed countries.
We believe, Chinese non-oral care category will be the next growth frontier for Essel to scale and the company is already readying itself (by foraying into newer
regions in China, marketing efforts amongst others) to tap this lucrative market.
30.5
35
40
45
51
59
67
18%
14% 14% 14% 14%
14%
14%
0%
4%
8%
12%
16%
20%
0.0
20.0
40.0
60.0
80.0
2011 2012E 2013E 2014E 2015E 2016E 2017E
80
89
97
107
118
130
9.9%
10% 10% 10% 10% 10%
0%
2%
4%
6%
8%
10%
0
40
80
120
160
2012 2013E 2014E 2015E 2016E 2017E
45 48 44
79
138
207
264
355
567
604
804
1072
0
200
400
600
800
1000
1200
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
Philippines
Essel is only one of the 2 players present in Philippines.
Characteristics of this market: Static growth for packaging industry (as MNCs mainly import from Thailand, China amongst other
nations). Margins are pretty attractive for players like Essel who cater to mushrooming domestic industries in Philippines.
Indonesia
Essel is present in Indonesia via an investment (associate company) where 30% stake is held by Essel Propack.
Indonesia could add 90 mn new consumers by 2030 to become the worlds 7th largest economy. By 2016, the revenue from the
packaging sector is expected to double at a CAGR of more than 10% (Source: McKinsey Global Institute).
Philippines Domestic Thrust, Attractive Margins
18
Essel is upbeat about the prospects of this region and will continue to monitor it for future opportunities.
Key strategies for EAP
Increased focus on cosmetics, pharma and niche oral care categories for growth going forward.
Market Plastic Barrier Lami (PBL) tubes to existing customers (oral and non-oral). Company is already successful in this strategy whereby
one MNC customer has awarded contract for PBL tubes to Essel for Chinese markets. We believe, Essel has just scratched the surface
and has huge potential via cross-selling its products to its existing elite clientele base.
EAP earns EBIT margin of over 20% as against Essels consol. EBIT margin of 11%. So focus is on increasing revenue growth from
EAP region and this shift in revenue mix with higher contri. From EAP will drive margins going forward.
With demand resumption in Chinese oral care and increased thrust on non- oral care category, we expect high
margin EAP region to register revenue CAGR of 10%.
Americas Focus on Moving up the Value Chain
Mexico: Restructured
operations, time to reap benefits
US business: Thrust on non oral
care business
19
Columbia: Sourcing nation for other
LATAM markets
Americas operations: (22% of consol. Revenues)
The Americas operations is expected to provide several triggers in the medium term with the US market to improve margins, Mexico to
turnaround its operations and sustained strong growth from Columbian operations.
US region: Transitioning from oral care to non oral care segments:-
Essel started operations in 2002 in the US and currently markets both lami-tubes and plastic tubes in this region.
The US has largely been a lami-tube market for Essel; primarily focusing on oral care category.
Company started operations with only 1 customer (Till date a customer) and within a decade has managed to increase its customer
base to over 22 prominent companies.
Oral Care: Essel already has 2 anchor clients of the largest 3 oral care players present in US. Considering the market is saturated,
tube volumes have been in-sync with the oral market growth rates of this region.
Plastic Tube: Essel is focusing on churning plastic portfolio and getting fresh orders in order to increase capacity utilization rates. Co.
h l t t d ti b f t i f 1 f ilit i l f 2 i l hi h l d t t i f US$ 1
US Region Thrust on non-oral care
20
has also restructured operations by manufacturing from 1 facility in place of 2 previously which lead to cost savings of US$ 1 mn p.a.
Key strategies
Essel intends to focus on value (as volumes have peaked) by improving product mix in favor of high end oral and non - care products.
Focus on increasing customer base and getting orders to improve capacity utilization rate for Plastic tube business which will translate
in higher revenue and better margins going forward.
Increased thrust has been laid on non-oral care category such as cosmetics and pharma using PBL solutions. Company is reaping
benefits of revamped marketing and sales team coupled with portfolio churn as incremental orders have been received from cosmetic
and Pharma segment (non-oral). Moreover, cross selling of products to oral care customer is also bearing rich dividend as Essel has
already won a new order for Plastic tubes from an existing oral care client.
Mexico Turning Around, Columbia the LATAM Mainstay
Mexico: Operations restructured, time to reap benefits
Essel entered Mexico in 2000 and is currently one of the
only 2 lami-tube manufacturer in this region.
Due to prevalent operational inefficiencies, Management
opted for restructuring exercise by changing the entire
Management Team, transferring Head Honchos (with
proven track-records) to Mexico to drive growth and focus
on gaining new orders.
Many US companies have turned to Mexico as their
sourcing nation under the prevailing free trade treaty. This is
a huge business opportunity emerging for Essel which is yet
untapped.
M t h tli d th f ll i th d i f
Columbia: Sourcing nation for LATAM countries
Essel is the only lami-tube manufacturer present in Columbia.
Essel serves the local players as well by providing decoration
services which aids in product marketing.
This facility acts as supply base for all other LATAM markets
and thus is a pivotal clog for Essel in its global plans.
Facility in Columbia currently operate at close to full capacity
utilization rates.
Unlike Mexico and the US; this region also has a good mix of
high margin non-oral care business. Approx. 45 50% of
business is contributed from non-oral care category as against
30% for the US and 10 20% for Mexico.
21
Management has outlined the following growth drivers for
this region;
- Thrust on business from US and non oral care business
- Focus on gaining orders and volumes
Essels Mexico unit has won a new contract in oral care in
1QFY14 (ramp up in FY15) and one new contract in non
oral care in last few months of 2013. Thus, FY15 looks
extremely promising and Management expects Mexicos
operations turning around from next quarter.
Essel has undertaken massive restructuring over past couple
of years and is poised to reap benefits over the next 2
years. We expect Mexico operations to break even in 2H
FY14 and report profits in FY15 which will holistically
propel consol margin from FY15E.
Source: Company, Axis Securities Ltd.
Columbian operations are expected to grow @ double digits
with margin improvement over next 2 years.
328
358
404
424
445
1.0%
4.1%
6.5%
8.0%
8.0%
0%
2%
4%
6%
8%
10%
0
100
200
300
400
500
FY11 FY12 FY13 FY14E FY15E
Americas EBIT Margin
Americas Revenue (Rs Cr)
PBL Tubes The Transition has Begun
Plastic barrier Laminated (PBL) Tubes: Product Profile
An evolution from Aluminium Tubes; PBL tubes are a good option for packaging that needs to maintain its form and shape. It presents
a more cosmetic look, is environmental friendly and prolongs the shelf life of the product. PBL consists of several plastic layers with an
high oxygen barrier layer embedded between them to protect the product. This is a safe barrier for many common products related to
industrial, food, pharma and oral care.
PBL tubes: Cost advantage
Ad t f PBL T b t li t
Lami Tubes PBL tubes Plastic Tubes
Cost differentials x In the range of x 3x 4x 5x
22
Advantages of PBL Tubes to clients
Gives similar effects as that of plastic tubes at lower costs.
PBL tubes use less plastic compared to Plastic tubes and thus is preferred by MNCs aiming to reduce their global carbon footprint.
Essel intends to market PBL tubes via
Cross selling: Market PBL tubes to existing oral care clients (FMCG giants). Essels strong and long standing relations with these
clientele aids in cross selling products.
Target existing customers entering new markets: Essel intends to tap its clients who are expanding geographically into newer regions.
(For instance, J&J and Loreal are marquee customers of Essel. They were relatively late entrants in Chinese market. Essel now intends
to target them promoting PBL tubes for their products marketed in China).
Target new customers (local and MNCs): Target new customers (local as well as MNCs) in all the regions marketing PBL tubes.
Essel has been one of the global pioneers responsible for substitution of aluminum tubes to the current use of lami - tubes. They have
now identified PBL tubes as a product which will on the long run substitute Plastic tubes. Globally plastic tube is a colossal market (Only
EU plastic tube market size is 2.5-3 bn tubes) and thus this transition is the next growth lever for Essel in the long run.
Financial Evaluation
World leader in Lami tube segment with strong ties with established global MNC companies.
We expect Sales CAGR of 13% over FY13-15E. Focus would be on non-oral care segment (Management targets 50% revenue mix in
FY15E from current 41%).
EBITDA Margin to expand by 150 bps over next 2 years driven by
Polish operations which will turn profitable at the end of FY14
Higher capacity utilization and improving product mix
PAT to grow at 30% CAGR over FY13-15E benefiting from operating leverage and several regions returning to profitability (Poland,
Mexico and Russia)
Stable net Debt to equity at .9x (FY11-13) despite continuous capex; expected to trend lower to 0.72x in FY15.
Improving return ratios with RoE and RoCE expected to scale 11% and 14% in FY15E from 9% and 12% in FY13.
23
Non-oral care contribution: Management targets 50% in FY15
Source: Company, Axis Securities Ltd.
With improving op. performance, return ratios are steadily improving
64.8%
59.2%
50%
35.2%
40.8%
50%
0%
20%
40%
60%
80%
100%
FY12 FY13 FY15 T
Oral Care segment Non-Oral Care segment
6.1
7.3
8.8
10.2
11.5
10.4
9.8
11.6
12.7
14.1
0.0
4.0
8.0
12.0
16.0
FY11 FY12 FY13 FY14E FY15E
ROE (%) ROCE (%)
Valuation and Risk Factors
Valuation
We expect Revenue CAGR of 13%, and PAT CAGR of 30% over
FY13-FY15E
Scalable Business Model
Improving return ratios
Despite experiencing several business headwinds in sync with the
global economic downturns; Company has always been rewarding
its shareholders by consistently paying dividend since 1991.
We value Essel Propack on PE basis to arrive at a Target price of Rs
65 (8x FY15E EPS of Rs 8.14), giving potential upside of 35%.
Risk Factors
Any further delays in Polish operations turnaround can severely
hamper companys profitability
12mth fwd PE (x)
0
5
10
15
20
25
A
p
r
-
0
9
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-
0
9
O
c
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-
1
0
J
a
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-
1
1
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-
1
1
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-
1
1
O
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-
1
1
J
a
n
-
1
2
A
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-
1
2
J
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-
1
2
O
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-
1
2
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1
3
A
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3
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4
24
hamper company s profitability
Slower than anticipated demand pick-up for PBL tubes will impact
companys growth plans going forward.
* All figures of Essel are in Rs cr and financial year ending is March whereas peers figures are in US mn & year ending is December. Source: Company, Bloomberg, Axis Securities Ltd.
Essel Propack 12m fwd P/E Mean +1 SD -1 SD
Peer comparison: Attractive valuation as compared to its peers
Sales PAT EPS P/E
Company
FY13/
CY12
FY14e/
CY13e
FY15e/
CY14e
FY13/
CY12
FY14e/
CY13e
FY15e/
CY14e
FY13/
CY12
FY14e/
CY13e
FY15e/
CY14e
FY13/
CY12
FY14e/
CY13e
FY15e/
CY14e
Essel Propack * 1832 2070 2329 81 101 128 5.16 6.41 8.14 9.4 7.5 5.9
Aptargroup Inc 2331 2484 2592 163 185 207 2.45 2.75 3.09 28 25 22
Silgan Holdings 3588 3729 3960 151 182 199 2.18 2.80 3.16 22 17 15
Ball Corp 8736 8570 8766 404 462 494 2.61 3.15 3.50 20 17 15
Sonoco Products 4786 4838 4975 196 235 257 1.93 2.30 2.51 22 19 17
Bemis Co 5139 5032 5107 174 237 251 1.67 2.28 2.46 24 18 16
Profit & Loss (Rs cr) Key Ratios (%)
Company Financials (Conso)
Y/E March FY12 FY13 FY14E FY15E
Total income 1,584 1,832 2,071 2,329
Material Cost 762 887 996 1,127
Employee Cost 241 285 324 360
Other Manufacturing Cost 183 203 229 251
Contribution (%) 25 25 25 26
Advt/Sales/Distrn O/H 131 143 148 156
Operating Profit 267 313 374 434
Y/E March FY12 FY13 FY14E FY15E
Sales growth 12.3 15.6 13.3 12.6
OPM 16.8 17.1 18.1 18.6
Oper. profit growth 7.3 17.4 19.3 16.0
COGS / Net sales 74.9 75.1 74.8 74.7
Overheads/Net sales 8.3 7.8 7.2 6.7
Depreciation / G. block 5.9 5.9 6.2 6.4
Effective interest rate 9.6 9.6 9.9 9.8
25
Other income 20 30 20 20
PBIDT 286 343 394 453
Depreciation 117 126 143 158
Interest 84 91 97 97
Other Pre-tax 0 0 0 4
Pre-tax profit 85 126 154 195
Tax provision 22 44 52 66
(-) Minority Interests 3 3 3 3
Associates 2 2 2 2
Adjusted PAT 63 81 101 128
E/o income/(Exp)/Land sale (11) 5 0 0
Reported PAT 51 86 101 128
Net wkg.cap / Net sales 0.3 0.3 0.3 0.3
Net sales / Gr block (x) 0.9 0.9 0.9 1.0
RoCE 9.8 11.6 12.8 14.3
Debt / equity (x) 1.0 1.0 1.0 0.9
Effective tax rate 26.2 35.2 34.0 34.0
RoE 7.3 8.8 10.2 11.8
EPS (Rs.) 3.27 5.16 6.41 8.14
EPS Growth 28.8 28.9 24.4 26.9
CEPS (Rs.) 11.5 13.2 15.5 18.2
DPS (Rs.) 0.65 0.75 0.86 0.95
Source: Company, Axis Securities Ltd.
Balance Sheet (Rs cr) Cash Flow (Rs cr)
Y/E March FY12 FY13 FY14E FY15E
Total assets 1,852 1,933 2,043 2,151
Gross block 1,991 2,149 2,308 2,468
Net Block 762 771 787 789
CWIP 39 49 40 30
Investments 45 46 46 46
Wkg cap (excl cash) 485 556 684 783
Y/E March FY12 FY13 FY14E FY15E
Sources 205 217 248 259
Cash profit 230 278 348 390
(-) Dividends 16 21 24 27
Retained earnings 214 257 324 363
Issue of equity 0 0 0 0
Borrowings 86 3 28 0
Company Financials (Conso)
26
Wkg. cap. (excl cash) 485 556 684 783
Cash / Bank balance 91 94 70 86
Others/Def tax assets 429 417 417 417
Capital employed 1,852 1,933 2,043 2,151
Equity capital 31 31 31 31
Reserves 860 919 996 1,097
Borrowings 935 960 988 988
Others 25 23 28 35
Borrowings 86 3 28 0
Others (95) (43) (104) (105)
Applications 205 217 248 259
Capital expenditure 157 122 150 150
Investments 0 0 0 0
Net current assets 18 91 123 92
Change in cash 30 4 (25) 16
Source: Company, Axis Securities Ltd.
Disclaimer
The views expressed / recommendations made in this report are based on fundamental research and other inputs and could be at variance with the companys / groups views
based on technical analysis. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any
way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent. This report and
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made as to the accuracy, completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this
document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change
without any prior notice The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior
27 27
without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior
approval. Axis Securities Ltd. (ASL), its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as
principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment
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Axis Securities Limited, SEBI Reg. No. NSEINB/INF/INE 231481632, BSE INB/INF 011481638,MCX SXINB/INF/INE 261481635, ARN No. 64610, CDSLINDPCDSL6932013. Main/Dealing off. Unit No.
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Centre, Pandurang Budhkar Marg, Worli, Mumbai 400 025. Compliance Officer: An and Shaha, Email: compliance.officer@axisdirect.in, Tel No: 02242671582.