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  • Stock recommendation: Buy Essel Propack Ltd

    Publish date: 7th August, 2018


    Initiating coverage

    Essel Propack (ESEL) is a global leader in laminated, extruded plastic tubes and speciality packaging with a global market share of ~36% in oral care category. Diversification to non-oral care (relatively higher realisation) has augured well for the company. It has helped Essel Propack Ltd (ESEL) to increase its EBITDA margin to 19% at the end of FY18 from 16.7% in FY14, largely backed by increasing share of non-oral care business. Given its strong R&D efforts and expertise, ESEL has successfully converted many plastic/aluminum tubes into non-oral care laminated tubes. A pioneer in oral care tube manufacturing, ESEL has successfully captured the market share in India (65%) and globally (36% in oral care) by entering the appropriate geographies at the right time and backed by region-specific strategy.

    With a dominant market share in oral care, EPL is focusing on improving revenue from non-oral care segments such as beauty, cosmetics and pharma to maintain growth. We believe that, focus to increase the contribution of non-oral care segment to 50% should help the company to sustain its EBITDA margin at 19-19.5% in the coming years. Besides this, business development in Europe could be the key driver for future earnings. We model revenue and earnings CAGR of 10% and 25%, respectively during FY18-FY20E period, led by AMESA and EUROPE region. At CMP, the stock is trading at 15.8x/12.9x FY19E/FY20E. We initiate coverage with BUY rating, and a target price of Rs140, valuing it at 17x FY20E earnings.


    Key investment argument

    • Leader with 36% market share: ESEL is the global leader in laminated tubes globally, with a market share of 36%. The company manufactures laminate tubes for oral (59% market share) as well as non-oral care (41%) segments. In the domestic market ESEL has a share of 65% and was the first company to spot the gap for a need in plastic/laminated tubes in India. Having established global leadership with laminated tubes for the oral care category, the company began to pursue a considerably bigger market opportunity in the non-oral care category. ESEL has a footprint across the globe, with presence in 11 countries and having 19 manufacturing facilities. It has divided its operations into four regions AMESA, America, Europe and EAP.
    • Non-oral care to support growth: Oral care segment consists more of staple products and is driven by the sales force, while the non-oral (dominated by toiletries, skin care and shampoo) segment is product development driven and requires R&D and innovations. The non-oral care segment is more than 3x in value terms compared to the oral care segment. Pharma and healthcare segment is 2.5x and beauty segment is 3.5-4x of oral segment. The total market size for non-oral care is estimated to be ~20-22bn tubes as compared to 14bn tubes oral market size. Hence, the company is aiming to increase the revenue contribution from non-oral category to 50% in the next three years from 41% in FY18. ESEL would be focusing on Emerging markets and Europe (biggest non-oral care market) to drive revenue from the non-oral care segment. We expect, the higher contribution from non-oral care should help the company to sustain its EBITDA margin at 19-19.5% in the coming years.
    • Stabilisation in Europe business to boost earnings: Europe operations was a setback since 2008, when ESEL shifted its manufacturing operations from UK to Poland to bring down costs. In FY18, the European region contributed ~22% of the revenue, but EBIT remained under pressure due to the implementation of different cost effective programmes, stabilisation of the Poland unit and lower offtake from new clients in various geographies. EBIT margin turned positive in Q4FY18 to 3.7% as compared to -1.1% in 3QFY18. 1QFY19 margin stood at 1.5%. Stabilisation of the unit and new long term contracts are expected to translate to higher operating leverage and reducing fixed cost. We expect the momentum to continue in the coming years as well, due to decent pipeline, inquiries and ESEL’s efforts to bring EDG at the level of overall Europe’s profitability.

    Outlook

    The EDG acquisition and increase customer offtake, coupled with demand recovery in India (post GST implementation), is expected to support the recovery in the EU and AMESA region. Further, with company’s focus on increasing contribution from non-oral care segment across geographies, we expect EBITDA margin to sustain at 19-19.5%. We model revenue and earnings CAGR of 10% and 25%, respectively, during the FY18-FY20E period, led by AMESA and EUROPE region. Large non-oral care market and better utilisation of assets at Europe, make ESEL a good investment opportunity. At CMP, the stock is trading at 15.8x/12.9x FY19E/FY20E. We initiate coverage with BUY rating, and a target price of Rs140, valuing it at 17x FY20E earnings.


    Key Risks

    a)   raw material risks (linked to crude prices); b) risk related to overseas operation and c) backward integration by customers.


          

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