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Essel Propack - Essential Packaging Company

About Company:

Essel Propack(Mkt Cap 5450 Cr) established in 1982, is the largest specialty packaging global company, manufacturing laminated plastic tubes catering to the FMCG and Pharma space.

This company is the world’s largest manufacturer of laminated plastic tubes with units operating across countries such as USA, Mexico, Colombia, Poland, Germany, UK, Egypt, Russia, China, Philippines and India.

These facilities cater to diverse categories that include brands in Beauty & Cosmetics, Pharma & Health, Food, Oral, and Home. Some of company’s customers are mentioned in the below image.

The company offering customized solutions through continuously pioneering first-in-class innovations in materials, technology, and processes.

Employing over 2852 people representing 25 different nationalities, Essel Propack functions through 20 state of the art facilities and in eleven countries, selling approximately 7 billion tubes and continuing to grow every year.

What is the rationale for investment now?

  1. Management control has been shifted from the Promoter Essel group to PE firm Blackstone.
  2. Blackstone not only acquired the promoter stake but also increased the total share ownership to 75% which is maximum allowed limit via open offer. Below is the latest shareholding pattern from BSE.
  3. Blackstone is really committed to India. This is what happened after it acquired another Indian firm Mphasis.

    The same is happening with Essel Propacking business.
  4. Blackstone has brought in new professional management. Below is the CEO details from the recent investor presentation.

  5. Margins are impvroing.
  6. Return on Capital Employed has improved, Net Debt has decreased and Capex has decreased.
  7. The company is pursuing various cost reduction initiatives.
  8. The company is having enough cash reserves to tide the current crisis comfortably.
  9. It’s ready to innovate or to execute when the market demands a new set of requirements. I would not read much into this. But it conveys the company is not beyond the curve.
  10. Gaining market share in Oral Care.
  11. Has been entering into new segments of Personal Care.
  12. The Company is conscious of sustainable ESG needs.
  13. The business nature of the company is resilient in nature.
  14. The management focus on “Capital Efficient, Consistent Earnings Growth” will create value for all shareholders.
  15. RoE profile is Ok.
    image
  16. New management increased the Dividend amount.
  17. Inventory Turnover is looking good at around 7-9 times.
  18. The cashflow profile is looking good over the last decade.
  19. Do not see any significant risk to the Balance Sheet. It looks very healthy.
  20. The company will benefit from lower taxes announced in 2019 by FM.
  21. Not sure about this. But I am hoping the new management will change the name of the company from Essel Propack to something else considering the reputation of the Essel group. It’s just my wild guess.

I did not study much of the other worldwide packing businesses. Studied some about Indian listed firm Uflex. But it has some Corporate Governance issues. So didn’t pursue much after that.

Any thesis is incomplete unless we know the disconfirming evidence in advance.

Below are some negatives about the company:

  1. The Company is operating a B2B business. Sooner or later it’s the customer may exert more bargaining power on the company. Not sure about the depth and width of the company’s moat.
  2. The margin profile is at its peak. Margins are one of the important cylinders for growth to fire upon. This may dampen the growth prospects of the business once it cannot improve thereafter.
  3. Last 3yr Sales growth Less than 10%.
  4. Industry valuation multiple are not that great. It’s abysmal.
  5. The industry seems to be Cyclical in nature only.
  6. Not enough pricing power to pass on Raw material costs.
  7. Off late I am trying to stay away from businesses where the company got rated by CARE Ratings. This company has got some instruments rated by CARE Rating. I hope the new management will shift to CRISIL/ICRA soon.

Regards,
Ramesh

Disc: I have a 1% allocation to this business of my Direct Equity portfolio. I have been studying the business to increase it to around 5% after Blackstone acquired it. Till now didn’t develop enough conviction to increase the allocation.

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Thanks for starting this thread. Blackstone acquisition is definitely heartening to see , but key points to monitor here will be almost 80% business coming from Personal care and Oral care ( colgate in particular ) - Slowdown in both expected going forward

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Hi @Mukundks,

Thanks for your reply.

Non-Oral care is contributing around 45% to the revenues. And, it has been increasing YoY gradually.

Management primary focus is on growing the Non-Oral care segment and sustaining the market share on Oral care.

I would quote below statement on Non-Oral care from the MDA section of 2019 AR.

Having established global leadership with its laminated
tubes for the oral care category, your Company began
to pursue a considerably bigger market opportunity in
the non-oral care category. This also is the space where
market is getting more and more dynamic and throwing
up opportunities with new products, new applications, new
brands and expanding consumption as outlined earlier.
With its global manufacturing and marketing presence,
large scale, strong R&D and New Product Development
(NPD) capability, state of art equipment, your Company
has been active and growing inter alia in the high value
add non oral care category. Its growth in the non-oral
care category is further powered by the larger diameter
tube packaging format in the case of Beauty & Cosmetics
aluminium tubes and bottles to the new generation
laminated tubes, a trend in some way heralded by the new
generation laminated tubes introduced by your Company
as a superior value proposition for these categories.

Regards,
Ramesh

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The company has also developed packaging solutions for Sanitizers. Sanitizer packaging and Dispense systems can be a huge tailwind for this co. going forward.

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With a PE of 25, PB of 4, the stock is expensive. Management change and bringing in BlackStone can be a good thing for the company, but I feel it’s already pretty expensive.
Most of what they manufacture is used by FMCG/Pharma sector. So, this would just be a proxy play on those 2 sectors. Not sure, if we can expect huge movement from here. But thanks for bringing this on my radar. :slight_smile:

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Hi,

Request views on following aspects:

  1. Blackstone will want to exit this investment in few years and this can create value for other investors as well.
  2. The demand for branded consumer products may increase post covid impact there by increasing demand for laminated plastic tubes.

I would like to quote Charlie Munger here.

“Never, ever, think about something else when you should be thinking about the power of incentives.”
— Charlie Munger

I think here Blackstone has created the right incentive structure for the current Management so that all stakeholders will have win-win situations.

Coming to the demand, as of now, the consumer products were not facing any headwinds due to COVID19. That doesn’t mean that sector has huge tailwinds. I think essential products demand will be there forever. But some discretionary consumer products may face some challenges if there is no improvement in the incomes of its consumers.

Above image is taken from Essel Propack website about the divisions of its products.

From this, if we can classify based on high-level knowledge

Food - Essential
Oral - Essential
Pharma & Health - Essential
Beauty & Cosmetics - Discretionary
Home- Discretionary

The hard part if to figure out how much revenue from these essential and discretionary divisions.

Regards,
Ramesh

Thank you team for bringing this on my Radar.

I went through the company, acquisition from Blackstone group increase conviction but i am still puzzled on why the valuations are so expensive wrt other industry players?
Reasons could be:

  1. Blackstone group
  2. High OPM
    But the sales growth is poor. Can these valuations sustain for next 2-3 years if the sales growth doesnt improve?

Yes, even I felt that this was good investment but the valuations are very high specially keeping in mind that they are in B2B business where they may not be able to maintain high margins for long time.

Hi Akshat, this maybe the reason for the premium valuation of this stock. As all say Market is always forward looking.

Please go through the image. This is part of report on Essel Propack by valueresearchstock.

Hope this helps.

Regards,
Vikas

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record date for dividend

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