This company has silently invaded our bathroom cabinets. Now Essel Propack wants to squeeze more profit from its tubes
Apparently a lot. Just ask Ashok Goel, the reticent and media shy boss of Essel Propack, the world’s largest laminated tube maker.
Over the last decade, Goel and his brothers — who were also co-promoters till two years back — never shied away from unbridled growth or scale. It came from global expansions, through a series of acquisitions and greenfield expansions that made them world beaters.
Then came the big financial landslides of 2007-08. Suddenly consumers were beginning to skimp. From toothpastes to ointments, downtrading became rampant and premium products stuck to the shop shelves like glue. And when volume growth crashed for FMCG players, vendors like Essel received a body blow.
It was actually a double whammy for Essel. On the one hand, raw material prices — that of crude and crude derivatives like polymers, naphtha — shot through the roof, on the other, inventories were simply not moving. Margins were on the chopping board as contracts came under the negotiations scanner. All this at a time when Essel had already pumped in close to $45 million in high-end technology to enhance its European and US plastic tube-making expertise in the months immediately preceding the crises. It’s a different matter that despite having the biggest market share in laminated tubes — at 33 per cent — Essel has remained largely anonymous. For Goel, a man who fearlessly guards his privacy —- he did not even have his family name in his earlier passport — being invisible is a matter of choice. The company, to borrow a phrase from author Hermann Simon (Hidden Champions of the 21st Century), which worked in the “hinterland of the value chain”, learnt its biggest lesson in business: That past performance is no guarantee of future performance. That in an increasingly volatile world, large-scale growth is not necessarily a given.
The leveraged debt of Rs 1,000 crore on the consolidated balance sheet, thanks to rapid organic and inorganic expansions, was also weighing down the company and it ended 2008 with a turnover of Rs 1,300 crore but a net loss of Rs 80 crore. Profitability had taken a bad beating.
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For Goel who had built an empire out of tubes that are filled, squeezed and thrown away, squeezing profits out of his large scale manufacturing was becoming increasingly difficult. It was time for serious introspection.
Looking outwards
“We had to recalibrate the organisation from one that is sales driven to one that is product development driven. Since the crisis, we are focusing on innovation as we try to diversify beyond oral care. Growing the plastic tubes and speciality packaging businesses also became a key focus area,” says Goel, the company’s vice-chairman & managing director.
Aluminium is no longer fashionable for tube making as it tends to bleach and requires washing. Fluoride reacts with the flexible aluminium metal sheets and creates a toxic chemical. Some solvents essential to process aluminium can also contaminate the formulations. So now, tubes are rolled together with five alternating layers of polymers and metals to create laminated sheets. This conversion had catapulted Essel’s early growth.
Laminated tubes are the company’s mainstay to this day and it produces 5 billion tubes every year — an overwhelming 75 per cent of the total production. Seventy per cent of that goes to oral care brands from the likes of Unilever, P&G and Colgate. The remaining segments such as cosmetics, pharma, haircare and industrial, which has in recent times seen a 25 per cent jump in demand.
Currently, only about 30 per cent of the 2.5 billion tubes sold in India are used by non- oral care players, but as Goel says, “more and more hair care and men’s grooming products are being launched and a lot of over-the-counter and prescription pharmaceutical products are now moving from aluminium tubes to laminated tubes.” So the prospect is bright. But in a market where toothpastes are still a luxury for many who chew neem twigs, where some consumer products are sold in sachets for no more than Rs 5, Goel sees virtue in waiting.
Growth in non-oral care would mean smaller batch sizes or SKUs (stock keeping units). There is another facet to this product diversification. Contracts to produce tubes for oral care are normally for a period of three-five years, whereas in non-oral care it is a year or a year-and-a-half. “That means in oral care, once we have bagged a contract, it’s just servicing. So we have reorganised our sales time to focus more on marketing. We have also got newer technologies to ensure there is a quicker turnaround time for non-oral care tubes,” says Goel.
Plastic too is a bet for the future, even though it’s three times costlier. It’s a puny operation now, with only 400 million tubes produced annually but it’s growing 100 per cent year on year compared to just 7-8 per cent for laminates. Goel knows, as it gains popularity, the economics of the business will also alter. So he’s making sure that Essel continues to invest in the category, especially for pharma, food and industrial packaging.
Overall Essel operates at a 16-18 per cent margin. Analysts say typically, plastic tubes offer margins three to four times higher than laminates, which have been scoring on volumes so far. Which is why it is unlikely that price sensitive mass products like toothpastes will easily switch to plastic. The switch is made more difficult by the unique characters of laminates that trap the fragrance and taste.
It makes sense to go the whole hog. Other than laminated and plastic tubes, Propack is also growing its flexible packaging vertical which includes sachets and packets for wafers and biscuits. It produced 12,000 tonnes of flexible packaging in 2010-11 for Unilever, P&G, CavinKare, Britannia and Pillsbury through its 100 per cent subsidiary Packaging India Pvt Limited.
Goel clearly knows that spreading the risks makes good business sense. Not just geographically but also through a portfolio of products. Fortunately for Goel, in the last few years, many of his big global customers like L’Oreal and Mary Kay have also discovered new products and categories like affordable luxury. And here packaging needs to play an even more significant role.
“Ever since the downturn, the consumers want more of the wow factor. By just touching a tube, they want an emotional or sentimental connect with the goodness of the product inside. We are a B2B company and rarely have a direct interface with consumers. So for the last few years, we are working closely with our strategic partners to step up on the innovation scale,” says Mrinal Kanti Banerjee, Essel Propack’s director, creative & innovation.
| THE LAB RATS |
| Procter & Gamble needs a fragrant tube, so that the customer can smell the fragrance of the inner formulation by simply rubbing a particular spot. Unilever’s Kissan jam requires a specially “packaged” tube where the product can be filled in high temperature of 90 degree Celsius. Dabur Honey wants an “ultra-clear” transparent tube which is “as good as glass.” It’s same for the ketchup clients. Foxed? That’s the challenge that Essel’s 20-member strong innovation team faces every so often. Sectoral standards vary. In pharma or food packaging, the polymers should not give anything to the product or absorb any active ingredient from the formulations, so that the potency of the drug remains till the end of its designated shelf life. But for the scientists at the company’s mother lab in Vasind near Mumbai or in the global R&D outposts in Danville, US, or Guangzhou, China, or even Poland’s Posnan, such product enhancers have now become cakewalk. “Our innovation team is also quite innovative,” says Banerjee and adds. “At a centralised level at the headquarters, we only act as a moderator while different projects teams carry out the different assignments.” Innovation at Essel does not stop at silk screen combination printing, like the ones you see on Sunsilk Shampoo tubes. Neither is it just coming up with new shapes and product sizes. If you need to compete with the best, innovation is at the very heart of sustenance. For example, to enhance the consumer experience, premium cosmetic companies like Shahnaz Husain and Olivia approached Essel with a simple brief. “Egnite” tubes were thus born “to turn heads on the shelf.” With super high, it looks like metal, but is actually made out of recyclable plastic. The six Egnite offerings are currently awaiting patent approvals. Similarly, keeping corporate sustainability in mind, Essel’s product innovation team has introduced “Etain” — a combo of Essel and Sustain. Etain tubes are made out of post consumer regrind. These are sourced from the popular milk jars from the US supermarkets as they are made out of natural high density polymers. It is then mixed with tube packaging materials for toiletries, cosmetics and dentifrice (read toothpastes) for players like Colgate. High end fashion is big business. So for the luxe set of Christian Dior and Chanel, Essel came out with iridescent tubes where an interplay of rainbow colours was created. |
Efficiency also means reorganising the scale of business. Size matters, but not more than sustenance. Essel — the biggest speciality packaging giant with 23 factories, spanning 11 countries — has also started to restructure its global operations, shutting two plants each in the US and Egypt and relocating operations to Eastern Europe to rationalise costs and streamline its business in tandem with its big clients.
“Many of our clients are consolidating, from country specific operations to a region-oriented businesses. We also want our manufacturing plants to act as a hub for particular regions, rather than having a plant in each country,” explains Goel. From GlaxoSmithKline to Unilever, Procter& Gamble and Colgate, most FMCG and pharma companies in Europe are moving out of high cost manufacturing regions of Western Europe.
For Essel, Poland has become a key manufacturing hub. Thus, Arista’s plastic tube operations in the UK — one that was acquired in 2004 — had to be shut and subsequently moved to Poland which in turn has led to 25 per cent savings on manpower costs.
New world order
In the global realignment, emerging markets of India, China or Mexico will increasingly play a bigger role. Even though 80 per cent of Essel’s business is from multi-nationals, Goel wants India to be the flagship market with six units already up and running. As for China, in 2010 alone, two more facilities were added in that country taking the total to four. Brazil and Egypt too will emerge as key growth drivers.
India and China especially have gained significance as they are now part of Essel’s hub and spoke vision for laminated tubes. Using its early mover advantage and large scale operations, the company has integrated backwards by setting up centralised lamination facilities in these markets. “We source polymers from global giants and make the substrate, that is, the tube laminates, ourselves. It then gets consumed locally or exported to different markets,” explains R Chandra Sekhar, president, Essel Propack. “It’s a cost-effective model for these big markets.”
In Mexico, the non-oral care segment is growing faster but the existing plant could not keep pace with the changing market. So a few months back, a new greenfield plant was set up close to the old one which will have 40 per cent more production capacity. But following the global template of being an asset light company, the real estate remains on lease. “The new relocated Mexico plant is more modern. Since non-oral was giving us more revenues and profits, the increased capacity will predominantly focus on those high growth and profitable segments.”
In the US, Essel had two plants five miles apart. This called for a split in operations. So while one solely focused on plastic tubes and cap manufacturing, the other was expanded to cater exclusively as a printing facility. “We avoided replication of tasks and saved management time. This way we expect to save at least a couple of million dollars on operating cost between the two plants. It also gives us much better control of production cycles and will also gives us scope to further expand in the US,” says a rather ebullient Goel.
Being a pass through in a highly competitive and cost conscious market, Goel has always been extra sensitive to his customers, giving them whatever they want. So in the US, the plant in Danville was set up close to P&G’s Crest facility in North Carolina, custom made for the FMCG giant. But now he is even willing to go a step forward.
For Unilever in China, for example, he has actually set up his own “in plant” right within the client’s factory in Hefei. It’s a captive of sorts and being a service provider who is there from “door to filling line,” it saves on both freight and packaging costs.
Goel is willing to grow with his customers and tweak his business model accordingly. So he can even set up shop close to a client’s site or in clusters where many are already present. “Essel figures always in a customer’s mind. And we want to increase this engagement as that’s a happy situation for me,” Goel admits.
No one is complaining. “For over 15 years, we are sourcing our Ever Youth tubes from them. Essel supplies 90 per cent of our requirements. So in a cut-throat environment, if we stick with them for so long, it speaks volumes of their capability, innovation. They grow with you and their exclusive relationships are truly what they say they are,” says an emphatic Anand G Deo, managing director, Zydus Wellness.
Business should connect with consumers, but not get bogged down with emotions. Shutting shop and exiting markets are therefore not too difficult either. From the politically volatile markets of Columbia, Venezuela and Nepal to high cost bases in the UK, if it is not worth it, Goel has no patience to buy time or peace.
And he is not stopping at that. He is out with his shopping bag, the moment he spots an opportunity. Raas Extrusions and Raas Propack — two packaging companies languishing in BIFR — have seen Goel swiftly move in to become a co-promoter by putting in a much needed Rs 25 crore. Their standalone revival was impossible, but as part of Essel’s family, turnaround is near the corner. Industry watchers say, it’s also a great strategy to ring fence good assets from competition.
If everything is scripted to perfection, why then are investors still shying away from the company? The stock is tremendously undervalued with at Rs 671 crore (as on May 24) and market cap which is less than half its turnover.
The performance over the last two years is on a road to recovery. “In the past, most people ignored that the return on capital was around 16 per cent as everyone gave valuations based on the growth prospects. But when the growth stopped and the balance sheet looked stretched then a severe rerating happened,” points out Pritesh Chheda, research analyst at Emkay Securities. Today, at around Rs 250 crore EBIDTA and an enterprise value of Rs 1,400 crore, the company is valued six times its EBIDTA. That’s a steal. From a negative operational cash flows of Rs 145 crore in 2008, today the situation has clawed back substantially and at Rs 200 crore, it’s generating more cash than even the peak 2006 figure of Rs 164 crore.
“It has come back to its business strengths, but it does not necessarily get reflected on its valuation. I still see upside going forward,” adds Chheda.
Restructuring the debt is first on Goel’s priority list. “In the beginning of this year, we had a global consolidated debt about Rs 1,000 crore and by the end of the year we have brought it down to Rs 850 crore. Going forward, we expect the debt to go down by another Rs 150 crore while we continue to expand and make capital expenditure,” outlines Goel.