Essel Propack (ESSPRO) 248

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1 Result Update February 6, 2017 Rating matrix Rating : Hold Target : 270 Target Period : 12 months Potential Upside : 9% What s Changed? Target Changed from 257 to 270 EPS FY17E Changed from 13.7 to 12.1 EPS FY18E Changed from 16.1 to 14.2 EPS FY19E Introduced at 17.4 Rating Unchanged Quarterly Performance Q3FY17 Q3FY16 YoY (%) Q2FY17 QoQ (%) Revenue EBITDA EBITDA (%) bps bps PAT Key Financials Crore FY16 FY17E FY18E FY19E Net Sales 2,185 2,371 2,699 3,022 EBITDA Net Profit EPS ( ) Valuation summary FY16 FY17E FY18E FY19E P/E Target P/E EV / EBITDA P/BV RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization ( Crore) 3,895.2 Total Debt (FY16) ( Crore) Cash and Investments (FY16) ( Crore) 85.0 EV ( Crore) 4, week H/L 263/ 133 Equity capital ( Crore) 31.4 Face value ( ) 2.0 Price performance (%) 1M 3M 6M 12M Essel Propack Time Technoplast Ess Dee Aluminum Huhtamaki PPL Research Analyst Sanjay Manyal sanjay.manyal@icicisecurities.com Hitesh Taunk hitesh.taunk@icicisecurities.com Essel Propack (ESSPRO) 248 One off events dragged down performance Consolidated revenues witnessed increase of ~17% YoY to 607 crore (I-direct estimate: ~ 542 crore) largely on account of ~54% and ~9% YoY increase in revenue of Europe, Americas regions respectively. However, revenues from Amesa & EAP region impacted by lower offtake from key customers. Company consolidated business of EDG during Q3FY17 which resulted in sharp rise in revenue from Europe. Revenue contribution of non oral care segment increased from 40.5% to 41.2% during Q3FY17 EBITDA margin declined by 272 bps YoY due to higher raw material prices, which was partially offset by lower employee and other expenses. Despite sharp rise in other income, PAT declined by 8% YoY mainly due to higher interest expenses mainly due acquisition of Essel Deutschland Germany. Focus on improving non-oral care category contribution in topline Non-oral care categories, dominated by toiletries, skin care and shampoo, use laminated tubes as packing material. The non oral care tube market is more than 3x in value as compared to oral care tube. Hence, the company is aiming to increase the revenue contribution of 50% from non oral category from 41.8% in FY16 in the next two years. Emerging markets would be the key driver for oral and non-oral care categories due to lower product penetration. Essel Propack (EPL) is focusing on emerging markets of Asia, Africa and Latin America to drive revenue from the non-oral care category. In Q3FY17, revenue contribution from Non Oral care segment in AMESA, Americas, EAP & Europe remain at 49.6%, 21%, 27.2% & 59% respectively. Stabilisation of European business to aid revenues The European region contributes ~18% to the consolidated topline (lower than other regions) largely due to ongoing expansion in that region. However, EBIT losses in Europe reduced substantially from 93 crore in CY08 to profit of ~ 23 crore in FY16, due to implementation of different cost effective programmes, stabilisation of the 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 from Q1FY15 onwards with an improvement in utilisation rate and addition of new clients. Stabilisation of the unit and new long term contracts are expected to translate to higher operating leverage and reducing fixed cost. Company s recent acquisition of EDG will help EPL to unlock synergies such as enhanced cross selling opportunity in the German market, sourcing flexibility and better capacity utilisation at all of its Europe plants. As a result, we have modelled revenue CAGR of 12% for Europe region in FY16-19E Rising input prices to check-on margin; maintain HOLD We have introduced FY19 estimates with moderate revenue growth of ~11% in FY16-19E led by strong Indian, Europe and Americas performance. However, EAP (led by China) business continues to weight on performance. The contribution of non oral care segment (relatively higher margin) recorded marginal decline in 9MFY17. We have slightly tweaked our PAT CAGR downwards at ~15% in FY16-19E (lower than earlier estimate of 18%) due to short term pressure in margin due to EDG acquisition. We roll over our valuation on FY19E and value the stock at FY19E 8x EV/EBITDA (30% premium to its historical on year forward average 5.7x EV/EBITDA) with a revised target price of 270. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q3FY17 Q3FY17E Q3FY16 YoY (%) Q1FY17 QoQ (%) Comments Revenue Other Income Raw Material Exp Employee Exp Though the AMESA region hit by demonetisation in India, but the sales growth in Europe (due to consolidation of EDG business) helped in driving overall sales growth during Q3FY17. With the commodity cost started moving northwards, raw material cost as per cent of sales increased by 418 bps YoY Manufacturing & Other exp EBITDA EBITDA Margin (%) bps bps Depreciation Interest PBT Total Tax PAT Key Metrics AMESA EAP Americas Europe Sharp increase in raw material cost was partially offset by lower employee cost and other expenses during the period Despite increase in other income, company recorded decline in PAT mainly due to lower operating margin and higher interest outgo Marginal revenue growth attributable to Indian business perfromance which was marred by lower volume offtake by FMCG players due to demonetisation EAP region continue to underperform mainly due to lower offtake from the key oral care customers A healthy performance was led by stabilisation of Columbian unit and good revenue growth in the Mexico Sharp revenue growth was on the back of consolidation of EDG business. However, on a like to like basis company witnessed decline in revenue by 8% YoY in Europe Change in estimates ( Crore) FY17E FY18E Introduced Comments Old New % Change Old New % Change FY19E We have marginally tweaked our revenue estimate for FY17E-18E Revenue 2, (1.5) 2, ,022.4 considering impact of demonetisation into AMESA regions. We have introduced FY19E estimates with topline growth of ~12% YoY EBITDA (12.8) (8.6) We believe, EBITDA margin would be under pressure in near term EBITDA Margin % bps bps considering consolidation of loss making EDG business. However, EBITDA 17.8 margin would improve FY18E onwards with the stabilisation of overseas business in Europe and EAP regions PAT (12.0) (12.2) We have modelled PAT CAGR of ~15% for FY16-19E led by stabilisation of EBITDA margin and lower interest incidence going forward EPS ( ) (12.0) (12.1) 17.4 Assumptions Current Earlier FY16E FY17E FY18E FY19E FY17E FY18E AMESA Growth (%) EAP Growth (%) Comments Post demonetisation impact, we believe AMESA region would record sales CAGR of 13% in FY16-19E largely supported by revival in demand from FMCG players in India backed by rising disposable income, growing urbanisation and lower penetration of personal care products Change in product mix coupled with recovery in demand from China would drive the performance of EAP regions Americas Growth (%) Recovery in sales led by stabilisation of Columbian plants Europe Growth (%) Revenue growth would be driven by consolidation of EDG business in Europe ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis During Q3FY17, the European region recorded revenue growth of ~54% YoY to 127 crore while the EBIT margin declined ~335 bps YoY to 1.8%. This was mainly due to acquisition of EDG during Q2FY17. Europe excluding EDG recorded decline in the revenue by 8% YoY due to delay in new customer development in the non oral care category. However, EBIT margin for the region remained at 5.3% (Vs 5.1% during Q3FY16) Concern on European region subsides The performance of the European region has remained subdued since 2008 when the company decided to shift its manufacturing base from the United Kingdom to Poland. The move was largely to rationalise its cost of production through sourcing from its cost efficient manufacturing base. However, the decision backfired due to the economic slowdown and EPL incurred substantial losses from the Polish unit in CY08. However, EBIT losses from the European unit reduced substantially from 93 crore in CY08 to profit of ~ 23 crore in FY16. This was largely due to improved utilisation of loss making units (Poland) and implementation of different cost effective programmes over the years. The European region recorded a strong performance with revenue CAGR of ~23% in FY We believe EPL s performance (in terms of sales) in the regions will improve further with its recent acquisition of EDG (EPL acquired 100% stake in Essel Deutschland Germany (EDG). Earlier, EPL has been a JV partner with 24.9% share in EDG). The acquisition would help EPL to unlock synergies such as enhanced cross selling opportunity in the German markets sourcing flexibility and better capacity utilisation at all of its Europe plant. Further, company has planned to revamp EDG operations to match margin profile in Europe. As a result, we have modelled revenue CAGR of ~12% for FY16-19E in the European region. During 1HFY17, Indian operation witnessed a growth of 15.4% despite consolidation of its Silvassa & Chakan operations in a new unit commenced in Vapi. However, due to lower offtake by FMCG customers post demonetisation, India standalone revenue is adversely impacted and recorded mere ~2% YoY growth in revenue during Q3FY17. The management has guided that the impact of demonetisation would normalize with pick up in demand of FMCG products by Q4FY17. In Americas region, revenue grew by 8.7% mainly on account of higher revenue growth in Mexico and stabilization of Columbian unit. The company also commission newer machinery in Americas region producing 500 tubes per minute as against the older one with 180 tubes per minute. It has extended contract with one of the clients with 15% higher volumes. The company would be shifting one of the older machines in India & one in Maxico. We believe the move would give higher operational efficiency to the company in America region. Exhibit 1: Expect European region revenue CAGR of 12% in FY16-19E CAGR ~12% ( crore) CAGR ~23% FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E ICICI Securities Ltd Retail Equity Research Page 3

4 Rising concentration of non oral care segment During Q3FY17, contribution of non oral care products sales increased from 40.5% to 41.2% into topline mainly due to good volume offtake by its key customers in America and European regions Exhibit 2: Rising contribution of non oral-care segment In order to de-risk its business model, EPL plans to increase its focus on the non-oral care category. The non-oral care category, which is largely dominated by toiletries, skin care and shampoo, uses laminated tubes as packing materials. Contribution of the non-oral care category to total sales has increased from 40% in FY12 to 42% in FY16. It is focusing on emerging markets of Asia, Africa and Latin America to drive revenue from the non-oral care category. Further, the management has reiterated that revenue contribution from the non-oral care category is expected to be 50% in the next two years. Exhibit 3: Sharp jump in non-oral care revenue against oral care revenue (%) FY13 FY14 FY15 FY16 ( crore) FY14 FY15 FY16 FY14 FY15 FY16 Non oral care Oral Care Non oral care Oral Care Asset light business model COCO to reduce capex In addition to the above, the company has also increased its focus on replacing plastic tubes with specialised laminated tubes in the European and American regions. The EAP region witnessed a sluggish offtake from key customers in 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 started operations from Q2FY15 onwards on a trial basis. 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 takes full responsibility for technology, process efficiencies and supplies. We have modelled revenue CAGR of 8.5%, 12.3%, 10.2% and 14.9% in FY16-18E for Amesa, EAP, Americas and Europe, respectively. ICICI Securities Ltd Retail Equity Research Page 4

5 Major revenue flow to come from Amesa, Europe EPL recorded net sales CAGR of ~6% in FY13-16, lower than historical growth due to divestment of its flexible business and muted performance in the EAP and Americas region. In addition, growth in non oral care segment remained subdued in FY16 due to lower volume offtake in the Middle East and India region. Currently, revenue from the oral care category dominates the contribution with 58% (in FY16) in the consolidated pie. However, over the years, contribution of the non-oral care category increased substantially to ~42% in FY16 (35% in FY12) in consolidated revenue. On the geographic front, net sales growth from Amesa and Europe are expected to be higher (~13% CAGR and ~12% CAGR in FY16-19E, respectively) compared to other regions supported by healthy volume growth. The revenue growth is expected to be largely driven by volumes from Amesa and Europe backed by demand from emerging markets remaining intact (dominated by domestic business) and stabilisation of plant and new contract wins from Europe, respectively. In Q3FY17, revenues from EAP region continue to remain sluggish mainly due to lower new customer development in oral care category in China. Regional performance Revenue ( crore) Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Amesa EAP Americas Europe Total Exhibit 4: Region wise performance CAGR CAGR FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY13-16 FY16-19E Revenue ( crore) (%) (%) Amesa# EAP Americas Europe Total* * adjusting with eliminations, FY13-16 not adjusted with Ind-AS Stabilisation of raw material prices may restrict further benefits During the quarter, EBITDA margins declined by ~272 bps YoY mainly due to higher raw material prices We believe, up tick in the raw material prices (largely crude led derivatives) coupled with acquisition of loss making unit (EDG) would put some pressure in the EBITDA margin for the near term (due to lower operating leverage). However, we believe EBITDA margin would improve FY18E onwards considering stabilisation of overseas business (Europe and EAP) and demand recovery in the domestic business. Exhibit 5: EBITDA margin to inch up, going forward ( crore) Q4FY14 FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 FY16 Q1FY17 Q2FY17 Q3FY17 FY17E FY18E FY19E (%) - EBITDA ( crore) EBITDA Margin (%) ICICI Securities Ltd Retail Equity Research Page 5

6 EPL to record PAT CAGR of 15% FY16-19E We have slightly tweaked our PAT CAGR downwards at ~15% in FY16-19E (lower than earlier estimate of 18%) due to short term pressure in margin due to EDG acquisition. Further, recovery in margin from FY18E onwards coupled with improved cash flow on account of stabilisation of European operations would help drive EPL s bottomline, going forward. We expect increasing operational efficiency in the EAP and European region to help drive overall profitability. We believe the bottomline of the company will grow at a CAGR of 15% in FY16-19E Exhibit 6: Recovery in Europe, saving in interest cost aid PAT growth ( crore) Q4FY14 (%) FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 FY16 Q1FY17 Q2FY17 Q3FY17 FY17E FY18E FY19E PAT ( crore) PAT Margin ICICI Securities Ltd Retail Equity Research Page 6

7 Outlook and valuation EPL is one of the dominant play in the packaging (tube) industry with 65% and 33% market share in the domestic and international market, respectively. The stock had been punished severely in 2009 (down ~85% from its closing price of March 2006) largely due to a mounting debt burden, economic slowdown in its major markets in the US and Europe in addition to an inflationary environment. Historically, in , the company has traded at an average one year forward EV/EVBITDA multiple of 5.7x considering lower debt level and average D/E of 0.6x. However, the EV/EBITDA multiple shrank sharply during FY10-13 (average one year forward EV/EBITDA multiple of 2.9x) considering the sharp rise in D/E to 1.1x and margin erosion. The stock is trading at 8.7x FY18E and 7.3x FY19E EBITDA. We have introduced FY19 estimates with moderate revenue growth of ~11% in FY16-19E led by strong Indian, Europe and Americas performance. However, EAP region (led by China) business performance continues to weigh on performance. The contribution of non oral care segment (relatively higher margin) recorded marginal decline in 9MFY17. We have slightly tweaked our PAT CAGR downwards at ~15% in FY16-19E (lower than earlier estimate of 18%) due to short term pressure in margin due to EDG acquisition. We roll over our valuation on FY19E and value the stock at FY19E 8x EV/EBITDA (30% premium to its historical on year forward average 5.7x EV/EBITDA) with a revised target price of 270. We have maintained Hold rating on the stock. Exhibit 7: Valuation Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY FY17E FY18E FY19E ICICI Securities Ltd Retail Equity Research Page 7

8 Company snapshot ( ) Jan-15 Apr-15 Jun-15 Sep-15 Nov-15 Feb-16 Apr-16 Jun-16 Sep-16 Nov Feb-17 (%) Source: Bloomberg, Company, ICICIdirect.com Research Key events Date May-09 Price Idirect target Consensus Target Mean % Consensus with BUY Event Stock jumps sharply on rumours EPL is planning to acquire UK based tube manufacturer Betts Aug-09 Company decides to exit non-core activities namely medical devices business which is located in US and Singapore Sep-09 EPL's Chinese subsidiary, EP China, renews long term contract with a leading FMCG player in China. The total volume involved in these contracts is ~600 million tubes per year Jan-10 EPL starts new production unit in Tianjin city of North East China Mar-11 EPL plans to close down two of its plants each in the US and Egypt and consolidate its operations in Europe to rationalize costs and streamline its global operations in line with its clients Mar-11 The company starts new manufacturing plant in Mexico Jun-11 EPL signs long-term agreement with Colgate-Palmolive India to supply the tubes. Company has also planned to set up a manufacturing plant in Goa with the investment of 40 crore. Feb-13 Essel Propack's subsidiary in Poland bags long term contract from a leading multinational FMCG player for supply of tubes in Europe Apr-13 Essel Propack's manufacturing plant at Danville VA in US reports minor fire Jan-14 Company records profit at EBIT level from European region during Q3FY14, first time since shift of its manufacturing base from UK to Poland Dec-14 As part of a modified family arrangement Subhash Chandra (Chairman of Essel group), his immediate family members and entities controlled by him and his immediate family members cease to be part of promoter group of the company Jul-15 Essel Propack sells wholly-owned subsidiary Packaging India Pvt Ltd (entire 100% stake) at an enterprise value of 165 crore to Amcor Flexible India Sep-16 Lamitube Technologies (LTL), a wholly owned subsidiary of Essel Propack in Mauritius has agreed to acquire remaining 75.1% share in Essel Deutschland Gmbh & Co. KG, Germany (EDG) Top 10 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m)n Change (m) 1 Whitehills Advisory Services Pvt. Ltd. 30-Sep Essel Group 30-Sep Gagandeep Credit Capital Pvt. Ltd. 30-Sep M. M. Warburg Bank (Schweiz) AG 30-Sep Amrit Petroleums Pvt. Ltd. 30-Sep FIL Investment Management (Singapore) Ltd. 30-Nov Dimensional Fund Advisors, L.P. 30-Nov UTI Asset Management Co. Ltd. 30-Sep DSP BlackRock Investment Managers Pvt. Ltd. 30-Sep L N Minerals, L.L.P. 30-Sep Source: Reuters, ICICIdirect.com Research Recent Activity (in %) Dec-17 Mar-17 Jun-17 Sep-17 Dec-17 Promoter FII DII Others Buys Sells Investor name Value(m) Shares(m) Investor name Value(m) Shares(m) Grandeur Peak Global Advisors, LLC ICICI Prudential Asset Management Co. Ltd FIL Investments (Japan) Limited M. M. Warburg Bank (Schweiz) AG FIL Investment Management (Singapore) Ltd Motilal Oswal Asset Management Company Ltd DSP BlackRock Investment Managers Pvt. Ltd Fidelity International Asset Management Company (Korea) AllianceBernstein Investments Taiwan Ltd UTI Asset Management Co. Ltd Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 8

9 Financial summary Profit and loss statement Crore (Year-end March) FY16 FY17E FY18E FY19E Net Sales Growth (%) Expenses Raw Material Expenses Employee Expenses Marketing Expenses Administrative Expenses Manufacturing & Other Exp Total Operating Expenditure EBITDA Growth (%) Interest Other Income Depreciation PBT before Exceptional Items Less: Exceptional Items PBT Total Tax PAT before MI Minority Interest Profit from Associates Less: Prior Period Items PAT Growth (%) EPS Cash flow statement Crore (Year-end March) FY16 FY17E FY18E FY19E Profit after Tax Depreciation CF bef working capital chag Net Increase in Current Assets Net Increase in Current Liabilities Net CF from operating act (Purchase)/Sale of Fixed Assets Minority Interest Others Net CF from Investing act Equity Capital Loan Total Outflow on account of dividend Others Net CF from Financing Act Net Cash flow Cash and Cash Equ at the beg Cash Balance sheet Crore (Year-end March) FY16 FY17E FY18E FY19E Equity Capital Reserve and Surplus Total Shareholders funds Total Debt Minority Interest Other Non Current Liabilities Total Liabilities Assets Total Gross Block Less Total Accumulated Depreciation Net Block Total CWIP Total Fixed Assets Other Investments Inventory Debtors Loans and Advances Cash Other Current Assets Total Current Assets Creditors Provisions Total Current Liabilities Net Current Assets Total Assets Key ratios (Year-end March) FY16 FY17E FY18E FY19E Per Share Data EPS Cash EPS BV DPS Operating Ratios EBITDA Margin PAT Margin Return Ratios RoE RoCE RoIC Valuation Ratios EV / EBITDA P/E EV / Net Sales Market Cap / Sales Price to Book Value Turnover Ratios Asset turnover Debtor Days Creditor Days Solvency Ratios Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 9

10 ICICIdirect.com coverage universe (Consumer Discretionery) Sector / Company CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) ( ) TP( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E Asian Paints (ASIPAI) 985 1,090 Buy 94, Bajaj Electricals (BAJELE) Hold 2, Havells India (HAVIND) Hold 26, Kansai Nerolac (KANNER) Buy 19, Pidilite Industries (PIDIND) Buy 34, Essel Propack (ESSPRO) Hold 3, Supreme Indus (SUPIND)* 964 1,050 Buy 12, Symphony (SYMLIM)* 1,327 1,530 Buy 9, V-Guard Ind (VGUARD) Hold 6, Voltas Ltd (VOLTAS) Buy 10, * FY16E for nine months ICICI Securities Ltd Retail Equity Research Page 10

11 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 11

12 ANALYST CERTIFICATION We /I, Sanjay Manyal, MBA (Finance) and Hitesh Taunk, MBA (Finance) Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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