Essel Propack Fundamental Analysis: Packing a Punch

Packaging is the most important aspect of a product. It not only attracts customers, but also provides utility and ease of use, thus enhancing user experience. Businesses these days pay special attention to packaging of their products, which is why packaging companies are providing innovative packaging solutions to their clients.

Essel Propack is one of the most innovative packaging companies in India. With biggest consumer names in its portfolio, company is the world’s largest packaging company. Company is in the business of manufacturing packaging tubes such as laminated tubes, plastic tubes and specialty packages such as laminated sachets and refill packs for some of the biggest names in consumer and pharmaceutical business. Company has a market share of 36% globally and 65% domestically.

Revenue Streams and Geographies:

Company generates revenue from Oral and non-oral segments, with oral segment being major revenue contributor of about 60%. However company is now focusing on expanding business to non oral care packaging business, as it offers better margins and de-risks company’s over exposure to just one segment. Company also has presence in multiple geographies, such as AMESA (Africa, Middle East, and South Asia), Americas, Europe and EAP (East Asia Pacific). Company’s major revenue comes from AMESA, almost 45%.

So what makes Essel Propack a Long term multibagger? Here is my analysis.

Basic EPS:

Basic earning per share or simply called EPS is a measure of how much a company is earning against each share outstanding. If Basic EPS of a company is  on a growth trajectory year after year, it means company is generating higher income than its previous years. Basic EPS is calculated by dividing net income of the company from the total outstanding shares of the company.

The Basic EPS of Essel propack grew from Rs. 2.38 per share in 2007 to Rs. 7.57 per share in 2016, a growth of 12.27% CAGR per year. In the last 5 years company’s Basic EPS grew at 19.4% CAGR per year.

Cash EPS:

Cash EPS for Essel propack has seen a healthy growth in the past 10 years from Rs. 3.66 in 2007 to Rs. 10.59 in 2016, CAGR growth of 11.21% per year. In the past 5 years, however, Cash EPS has seen a significant growth of 16.38% CAGR per year.

Revenue from operations/Share:

Company’s revenue from operations per share has seen a healthy growth in the past 10 years from Rs. 19.89 per share in 2007 to Rs. 47.29 per share in 2016, growth of 9.05% CAGR per year. In the past 5 years, company’s Revenue from operation per share has grown at 8.31% CAGR per year.

Net Profit Margins:

Company’s net profit margins have been stable in the past 10 years around 11.97% in 2007 to 15.57% in 2016. In the past 5 years however, margins have seen good growth of 9.52% CAGR per year.

ROCE:

ROCE for Essel Propack has seen a good growth from 4.6% in 2007 to 15.4% in 2016, a good growth of 12.84% CAGR per year. I the last 5 years ROCE have improved further 23.36% CAGR per year. A rising ROCE means company is making more profits on its invested capital, clear sign of improved business efficiency.

Debt/Equity:

Essel Propack debt has reduced in the past 5 years as company has improved its profitability, Company’s debt to equity ratio in 2007 was 0.7, while in 2016 it reduced significantly to 0.32. Companies with low debt, retain bigger portion of their profits with themselves, thus improving Cash flow.

Dividend payout ratio of net profit:

Company has reduced its dividend payout in the past ten years. In 2007, company paid almost 59% of its net profit as dividends, but in 2016, the ratio came down to 29.85%. This has happened because company is trying to retain major part of its earnings to fund its future expansion plans.

Dividend Per share:

Company’s Dividend per share has seen a slight improvement in the past ten years. Company is its growth phase and is expanding its business, it needs to finance these expansion plans. A successful expansion will generate higher revenues in the future which will be reflected in improved profitability and price appreciation of company’s shares.

Future Expansion plans:

Company has biggest brands as its clients. Companies such as Colgate, Unilever and many others are a part of Essel Propack’s packaging business. Company’s major source of revenue comes from packaging oral care products. To reduce company’s overexposure towards one source of revenue, and to de-risk its business, Essel Propack is now focusing on non oral care categories, such as toiletries, skin care and shampoo segments. Company is targeting 50% revenue from non oral care segment in the next 2 years. Company’s contribution to revenue from non oral care business has increased from 40% to 42% in 2016.

Company is also focusing on emerging markets such as Asia, Africa and Latin America to drive revenue from non oral care segment. Rising disposable income in these markets will drive discretionary spending which will push up the demand for cosmetics and oral care products.

What makes Essel Propack a great Investment?

• Dominant player in packaging industry, with 65% market share in India and 33% globally.
• Biggest brands in its client portfolio. Colgate, P&G and Unilever are few names.
• Presence in multiple geographies, specially emerging markets makes it a strong global player.
• Diversification from oral care to non oral care segment, which is a higher margin segment, will boost revenue, de-risk business and improve profits in the long run.
• Eyeing Patanjali as a potential client for its packaging business. Patanjali is fastest growing non listed FMCG Company.