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Small package big surprise

Small package big surprise

Ignored by the stock markets in 2007, Essel Propack — the largest lamitube manufacturer in the world — has found its way out of the woods. You cannot possibly find a cheaper global play.

Mudar Patherya
Mudar Patherya

Fancy being able to say “Oh, I need to buy the biggest lamitube company in the world” and running out into the backlane, emptying your pocket of all the loose change on the table, counting all the coins totting up to Rs 900 crore, then coming home to tell the family, “Mammyyyy, see what I got home for you today!”

No fantasy. You can still buy Essel Propack for a shade under Rs 1,000 crore. The company makes tubes (lamitubes and plastic tubes), speciality packaging and medical devices; a couple of these are reasonable annuity business where you provide a service and pass on raw material cost increases with a reasonable lag. The company has long-standing buyers and—here is where it becomes interesting—earnings are at that point when they start going north in a hurry so don’t blink.

But I would be skimming over reality if I didn’t explain how Essel failed to beat the throw in the short run. Total income rose from Rs 833 crore in 2005 to Rs 1,028 crore in 2006. Earnings before interest, tax, depreciation and amortisation rose from Rs 210 crore to Rs 240 crore. This is where you get your first clue on the umpire’s verdict.

Interest shot up from Rs 13.2 crore to Rs 23.5 crore, so after accounting for all the interest, depreciation, tax and minority interest, profits rose modestly from Rs 90 crore to Rs 98 crore.

Turn to the balance sheet and you get a stronger lead. Gross block increased from Rs 304 crore to Rs 406 crore and capital employed shot up from Rs 1,136 crore to Rs 1,317 crore.

The inference: Essel reached wider and deeper across the world, extended across business and geographies, made proactive investments, some clicked, some didn’t, the experts said the company had bitten off more than it could masticate, the market fretted and said, “Let us busy ourselves with some other stock,” the Sensex rallied, devotees bowed their head in front of everything including junk listings, but somewhere in this story someone forgot to say, “We’ve overlooked the largest lamitube manufacturer in the world” and so Essel declined. This is where I come in. The pieces could start coming together from January-March 2008.

• Volumes from the expanded US capacity start rising

• Realisations start improving following negotiations with key customers

• The enhanced efficiencies and decline in costs will become visible

• Sharp dip in product development costs as payoffs from investments (Mar-Oct 2007) in new products and technologies (printing, styling and capping) start happening — a double play

• Transition of the erstwhile loss making Mexico market into the black; turnaround of the UK laminated unit; expansion of Russian unit and a probable reduction in losses in 2008 leading to presentable numbers in 2009

• Closure of Arista, the plastic tubes making acquisition, plugs profit drain

• Altered management structure resulting in tangible impact

My back-of-the-envelope calculation indicates a 15-18% top-line growth and net profit of Rs 130 crore for 2008. That’s an estimated PE of 7. If you can locate a global play that cheap, send me a mail.

Disclosure: The author holds stocks of Essel Propack

Mudar Patherya, Chief positioning officer of Trisys, an annual reports consultancy. He can be reached at mudar@trisyscom.com