Emkay Global Financial Services is bullish on Essel Propack and has recommended buy rating on the stock with a target of Rs 150 in its August 5, 2014 research report.
>> Results below estimates – due to muted EBITDA margins. Revenue at Rs 5.5bn, +14% yoy, EBIDTA margins down 130bps yoy to 16.1% and APAT at Rs 264mn, up 12% yoy
>> Europe reports EBIT profit after several quarters; Mexico also breaks-even, but EBITDA margins weakens, hit by weaker mix and lower off-take in EAP region
>> Improves net working capital & reduced debt. Better asset allocation coupled with healthy earnings CAGR of 30%+ to drive return ratios beyond +20%
>> Trading at attractive valuations given +30% earnings CAGR 20%+ return ratios. Maintain BUY with revised price target of Rs150
"Q1FY15 results were below estimates on all counts, but largely on Gross and EBITDA margins. Key highlights: (1) Revenues up 14.3% yoy to Rs 5.5bn driven by Europe and AMESA region (2) EBITDA at Rs 886mn, up 6% yoy with EBITDA margins declining 130bps yoy to 16.1% led by lower gross margins (50.4%, down 180bps yoy) (4) APAT grew 12.2% yoy to Rs 264mn owing to lower interest outgo, but other income and depreciation remained high. Europe reported PBIT of Rs 16mn after several quarters, with Poland breaking even. In Americas, Mexico broke even and plastic tube in US closer to break-even. All this has been cost rationalization efforts and consolidation of operations, which have led to improvement in Europe & Americas. However, adverse product & customer mix, flexible packaging in India and lower off-take in oral care sale in China, subsequently impacted gross (-180bps yoy to 50.4%) and EBITDA margins (-130bps yoy to 16.1%). However, with ramp up in Europe coupled with higher share of non-oral care and cost efficiency programs, we expect margins to sustain at 17.5-18% by FY15-FY16E. Company continued its endeavour to effectively use capital, wherein it further improved its working capital productivity by reducing it by Rs 380mn and reduced its debt position by Rs 256mn and further aided by interest rate reduction. We believe efforts on asset productivity coupled with earnings growth of 30% would drive return ratios to 20% range by FY16E."
"While, this was a mild quarter in terms of muted profit growth, break-even in Poland & Mexico was the highlight of the quarter. With capacity ramp-up in Europe, Americas and EAP region and strong contract pipeline both in oral care as well as non-oral care segment, expect higher revenue off-take and margins to increase. Company has targeted for 14-15% revenue CAGR and healthy earnings CAGR over the next 2 years. Stock is trading at attractive valuations of 4.6x EV/EBITDA and 9.3x P/E. We retain BUY with revised target price of Rs 150 (P/e12x FY16 EPS and 5.8x FY16 EV/EBITDA)," says Emkay Global Financial Services research report.
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