Packaging growth

SPECIAL REPORT

Speciality packaging companies will benefit from the retail revolution that has made attractive packaging mandatory for FMCG companies.

With consumerism on the rise, packaging is gaining a lot of importance. Packing is getting a further boost because of the advent of the modern retail format where goods are getting eye-catching display.

Modern retail is set to grow big "� 25-30 per cent a year to Rs 1 lakh crore by 2010. This increasing relevance of packaging means good times for packaging companies.

In fact, the retail boom is said to be the key growth driver for the speciality packaging business, and three companies "� Paper Products, Essel Propack and Bilcare.

Paper Products (PPL) receives 85 per cent of its revenues from the FMCG sector. It leads the domestic flexible packaging space with a 65 per cent market share.

PPL is one of the few companies to offer integrated packaging solutions to its customers. It benefits from the expertise of its Finland-based parent Huhtamaki Group, which is a leading global packaging company, and owns 59 per cent in PPL.

Essel Propack, which manufactures laminated and plastic tubes used for toothpastes, cosmetics and pharmaceuticals, too stands to benefit from the tilt towards the modern retail format given its product lines.

Growth impetus
Sensing the emerging opportunity from the retail sector, these companies are expanding capacities. PPL is setting up a new plant in Uttaranchal at a cost of Rs 65 crore to address the North Indian market.

"This market is strategically and logistically important for Paper Products as it is the second largest domestic region for flexible packaging," says Pratik Dalal, an analyst at Emkay Shares and Stock Brokers.

This expansion will largely be funded through internal accruals and debt. This plant will increase the company's capacity by 30 per cent.

While PPL is following the inorganic route, Essel Propack has made an acquisition. Besides, Essel and Bilcare are also diversifying into other areas. Essel bought Chennai-based Packaging India Pvt Ltd from the CavinKare group in August 2006 for Rs 63.5 crore.

Packaging India is into flexible and speciality material packaging which is used by the food, beverages and pharmaceutical industries. The flexible and speciality material packaging market is estimated to be worth Rs 2,500 crore and is growing at 15 per cent annually.

"The growth in the laminated and plastic tube business is around 5-6 per cent. This acquisition puts the company in a fast growing segment instead," says Hiral Sheth, analyst at Equitymaster.com.

"Besides, the acquisition also eliminates the gestation period involved in setting up of a greenfield plant," she adds.

Packaging India is the third largest producer of speciality packaging materials in India with a market share of around 18-20 per cent of the organised sector and is a market leader in South India.

Besides being able to cater to the special needs in the FMCG sector, the acquisition will also enable Essel to tap the significant potential in the high margin pharma segment.

The speciality pharma packaging market was valued at Rs 460 crore in 2005 and is estimated to increase to Rs 810 crore by 2009. Essel had earlier acquired an 85 per cent stake in Tacpro Inc, US and Avalon Medical Services, Singapore.

The companies design and manufacture medical devices for sale under the brands of large companies in the retail space in the US and European markets.

Bilcare is a company that specialises in pharma packaging. Bilcare, too, acquired a UK based company "� DHP in September 2006, which is in the clinical services area.

In 2005, Bilcare had set up its clinical trial services business in India, and this acquisition will now help the company in addressing the UK and US markets.

Bilcare's profits have grown at a compounded annual growth rate of 76 per cent between FY03 and FY06. As Bilcare is a research-based pharma packaging solutions company, it can not only charge a premium, but also earn other income by charging for its research services, says an analyst.

"Innovation capability and improved product development are crucial for continued success in the packaging industry," says Dalal. Paper Products is taking this rather seriously. The company follows a strategy of new applications, structures, products and processes wherein the focus is on innovation.

Any innovation introduced in the year of manufacturing or two years before that comes under this strategy and the company strives to achieve at least 30 per cent of its revenues from such developments.

Financials
PPL's sales have grown 18 per cent to Rs 373.99 crore y-o-y for the nine months ended September 2006. Its operating margin has also improved from 12.32 per cent in nine months ended September 2005 to 14.4 per cent this year. 
 

PAPER PRODUCTS
(Rs crore)	Sep 2005	Sep 2006
Net sales	317.80	373.99
Total Expenditure	278.65	320.12
Operating profit	39.15	53.87
OPM (%)	12.31	14.40
Net profit	19.16	32.37
EPS in Rs (nine-months)	15.28	25.81
Nine-months ended September 2006

"Operating margins have held above the 12 per cent mark over the last three years, which is creditable in the backdrop of the steep raw material price rise and the imperative to keep product prices in check," says Nikhil Vora, vice president-research, SSKI Securities.

"Margins should be better in the December quarter now that crude prices, and consequently raw material prices, have cooled," says Dalal. At its current market price of Rs 370, the PPL stock trades at 15.3 times trailing 12-month earnings. 
 

BILCARE
(Rs crore)	Sep 2005	Sep 2006
Net sales	109.10	150.88
Total Expenditure	76.62	109.35
Operating profit	32.48	41.53
OPM (%)	29.77	27.53
Net profit	16.83	22.94
EPS in Rs (six-months)	11.85	16.15
Six-months ended September 2006

For six months ended September 2006, Bilcare has maintained its trend of strong sales growth at 38.3 per cent to Rs 109.1 crore. Though its operating profit margin declined, its net profit growth was quite similar to its top line growth. The stock trades at Rs 510, around 16 times trailing 12-month earnings, and appears attractive. 
 

ESSEL PROPACK
(Rs crore)	Sep 2005	Sep 2006
Net sales	698.90	720.60
Total Expenditure	442.10	549.80
Operating profit	154.80	170.80
OPM (%)	25.93	23.70
Net profit	63.20	68.40
EPS in Rs (nine-months)	4.04	4.37
Nine-months ended September 2006

Essel Propack has posted a y-o-y consolidated sales growth of 20.72 per cent to Rs 720.6 crore for nine-months ended quarter. The operating margin of this company has suffered slightly.

It is down 223 basis points to 23.7 per cent in the nine months ended September 2006. At Rs 90, it trades at 14.8 times trailing 12-month earnings, and is the cheapest stock of the three.