Essel Propack: CD Equisearch maintain 'Buy' rating for a reduced target price
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Essel is targeting its non-oral care revenue share to reach 50% by end of FY18. Its growth strategy is to identify and tap new geographies and increase market share. The company’s dedicated facility for non-oral care in China will help tap huge opportunities in pharma and FMCG space. The development will not only drive its volume growth but also help to increase its revenue share of non-oral care segment and expand margins.
Management reviewed recently that there is a strong growth pipeline happening in Europe. Essel has signed a ten year contract with an existing oral care customer. The margins in Poland have been flat as its plastic tube business (mostly non-oral care) is yet to stabilize. EBIT margin (excluding EDG) non-oral care category EBIT improved by 20bps to 5.3%. Currently the EBIT level in Germany is negative, but is expected to turn profitable in next few months. Forex loss rose to Rs 7.33 crores ($1.1m) in Q3 compared to Rs 1.12 crores ($0.2m) in the same quarter last year mainly due to loss arising out of an asset deal in Egypt.
Net profit declined by 7.6% in Q3 partially due to demonetization of high currency notes in India which impacted revenue booking from AMESA region. Europe (excluding EDG) showed a revenue decline of 8% not least due to decline in new customer development in non-oral care category. Thanks to rising commodity prices, raw material cost (adjusted for changes in inventory of finished goods) as percentage of sales increased by 400 bps y-o-y. Sharp increase in raw material cost was partially offset by modest increase in lower employee cost and other expenses during the period. A healthy performance at Americas was led by stabilization of Colombian unit and good revenue growth in Mexico.
Strong market presence in America and Europe has enabled the company to tap the new generation (high luster, recyclable) laminated tubes for non oral care customers. Share of non oral care revenue in America segment jumped by 2.1% to 29.6% in FY16 contributing nearly 20% to the overall sale. Americas segment will be able to seize the export market with further capacity expansion in Columbia. Continuous repayment of its long term debt has improved its debt equity from 1.2 in FY15 to 0.7 in FY16 & 0.6 in FY17. We expect the debt-equity ratio to improve further in FY18. Considering the huge size of the non oral care markets and increasing awareness among customers about the superior barrier properties and decoration capability of the laminated tubes, the bottom-line is expected to grow at 11% in two years ending FY18.
The stock currently trades at 20.5x FY17e EPS of Rs 11.39 and 16.5x FY18e EPS of 14.17. Beset by higher raw material prices and partially by demonetization of high value currency notes, earning declined by nearly 2% in 9MFY17. Rebound in European economy and robust off take in AMESA region would aid earnings (24.4%) in FY18. Essel’s peppy introduction of value added products would support margins. Given increasing consumer preferences towards personal care, FMCG sector presents Essel an opportunity to grow its non oral market share. Weighing all odds, we maintain our ‘buy’ rating on the stock with a target of Rs 283 (previous Rs 298) based on 20x FY18e earnings (forward peg ratio: 0.8) over a period of 9-12 months.
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CD Equisearch Pvt. Ltd. is one of the leading stock broking firms in the country with strong presence in the institutional and HNI broking segment. The company boasts of a strong Equity Research Division, and has offices in the several cities in the country including Mumbai, Kolkata, Delhi, Bangalore, Hyderabad and Chennai. The company serves a huge clientele of over 4,000 retail clients, High Net worth Individuals, Non Resident Indians, large Corporate Groups, and Financial Institutions. For more information, please visit www.cdequi.com.
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