EssDeeAluminium_MLR_150311

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Ess Dee Aluminium Ltd | Buy15th March 2010

1 MLR Investment Research

We met the management of Ess Dee Aluminium earlier this month. We believe that there is huge potential in the Indian pharma packaging space and the company’s growth prospects looks bright. The stock has high chances of rerating based on its scalable business model and high entry barriers in the sector.

Ess Dee Aluminium Limited manufactures aluminum foil-basedflexible packaging laminates and polyvinyl chloride (PVC) andpoly-vinylidene dichloride (PVDC) coated PVC-based thermoform-ing solutions for the pharmaceutical and FMCG industry.

The stock is currently trading at 10.1, 7.1 and 5.3 times AdjustedEPS of 41.3, 59.0 and 78.7 for FY11e, FY12e and FY13e respec-tively. We value the stock at a conservative multiple of 7xFY13eEPS of 78.7 and recommend a buy with a target price of INR 551.

Investment Rationale

Increase in utilization of idle capacity in FY12 and additional ca-pacity of 15,000 TPA in FY13 to boost topline, revenues likely togrow at a CAGR of over 30% in next two years

Established relationship with large pharma players and regula-tory approvals for pharma packaging like USFDA to act as entrybarrier for new entrants

Volumes and realization growth potential high as 50% of currentpharma packaging domestic demand being met from imports,also the packaging expense is just 4% of the product

Large and diversified client base, total 200 clients, top ten clientsaccount for only 15-18% of total revenues

Billet caster to become operational from FY12, to help in back-ward integration and enhance margin

Source : MLR, Company

INR Mn FY09 FY10 FY11e FY12e FY13eNet Sales 4,515 5,885 7,356 10,114 12,896Adjusted PAT 30 1,834 1,325 1,890 2,523Total Capital 6,151 6,322 9,934 11,649 13,197Total Equity 3,328 5,067 8,679 10,494 12,942Debt Equity Ratio (x) 0.5 0.5 0.2 0.1 0.1Total Asset Turnover (x) 0.8 0.9 0.9 0.9 1.0Adjusted PAT Margin (%) 0.7 31.2 18.0 18.7 19.6RoE (%) 0.8 43.7 19.3 19.7 21.5EV/EBITDA (x) 23.3 7.5 5.7 4.0 3.1P/BV (x) 3.5 2.3 1.5 1.3 1.0Adjusted P/E (x) 388.1 6.3 10.1 7.1 5.3

BUY

Price (INR) 416

Target (INR) 551

Return (%) 32%

Beta (Sensex) 0.5

Market Data

Total Shares (Mn) 32.0

Mar Cap (INR Mn) 13,334

52 Wk High/Low (INR) 577/377

Avg Qtr Dly Vol (000's) 42

Shareholding

Promoter 59.5%

DII 10.6%

FII 21.4%

Non Institution 8.4%

Stock Code

NSE ESSDEE

BSE 532787

Bloomberg EDA IN

Reuters ESDA.BO





Company Background

Ess Dee Aluminium Limited manufactures aluminum foil-based flexible packaging laminates andpolyvinyl chloride (PVC) and poly-vinylidene dichloride (PVDC) coated PVC-based thermoformingsolutions for the pharmaceutical and FMCG industry.

Mr. Sudip Dutta, is the Executive Chairman of the Board and Managing Director of Ess Dee Alu-minium Limited and is responsible for the overall operations and management of the Company.He is also the Chairman of the wholly owned subsidiary, Flex Art Foil Private Limited.

Integrated Business Model


Foil Rolling Unit at Hoera, Kamarhati and Daman

Flex Foil Pvt Ltd(100% Subsidiary at various locations)

DamanBaddi Goa SikkimVasai

Foil Stock

Cold Rolling

Foil Converting Unit at Hoera, Kamarhati and Daman

Printers Stock

Customers in Pharma and FMCG industry

PVC Granules converted into

PVC & PVC/PVDC Films at Goa





Capacity utilization rates picking up at IFL, Ess Dee running atoptimum capacity

Ess Dee acquired a majority stake in India Foils Ltd. (IFL) a Ve-danta Group Company which was under BIFR in November,2008. IFL was subsequently merged with Ess Dee after approval

from BIFR in October, 2010. The total present capacity of thecompany is 37,000 TPA (18,000 TPA for ESS Dee and 19,000 TPAfor IFL). The ESS DEE production unit is currently running at 90%capacity utilization rate, however the average utilization for IFLproduction unit for FY11e is at sub optimal level but has startedpicking up and was 80% at the end of Q3 FY11.

Additional capacity of 15,000 TPA to come up in FY13

The company has plans to come up with a new capacity of 15,000 TPA in FY13, however the production process is highlyskill oriented and the training of new manpower will be criticalto effectively utilize the new capacity. The pharma packaging is avery specialized product and requires a lot of know-how whichcomes from regular interaction with pharma companies over aperiod of time. The packaging provider has also to be USFDA ap-proved for supplies to the USA and Ess Dee is having USFDA ap-proval. This also creates an entry barrier for new players.

Indian pharma sector meets packaging demand from imports,high growth potential in domestic market

Half of the current requirement of packaging for Indian pharmasector is supplied from abroad, the domestic suppliers accountfor the rest 50% out of which 35% is unorganized and 15% is or-ganized, this throws good opportunity to companies like Ess

Dee. The cost of packaging in pharma is around 4% of the prod-uct as compared to around 20% in FMCG and hence there is alsoa scope for improvement in realizations.





The top ten clients account for only 15-18% of total revenues,company targeting around 500 clients by the end of 2012

Pharma sector accounts for 85% of revenues of Ess Dee, rest15% is mainly contributed by FMCG sector. Currently the com-pany has 200 clients and is targeting around 500 clients by the

end of 2012 which will help in scaling up the business. The topten clients account for only 15-18% of total revenues whichbrings a lot of stability into the business.

Hub & Spoke model to help integrate the business with the de-mand in the pharma sector

The company has adopted the hub & spoke model of business.The two hubs are located in Daman and Kolkata where the foilstock which is the main raw material is cold rolled into variousthicknesses and laminated based on the packaging requirement.The company also has nine spokes in major pharma manufactur-ing bases like Baddi, Goa, Sikkim, etc where the output from thehubs is further customized and printed according to the need of the client. The hub & spoke model helps in ensuring just in timedelivery and increase inventory turnover ratio.

Billet caster unit at IFL to help in backward integration

The IFL Hoera plant has a billet caster with a capacity of 11,000TPA. The company plans to make the billet caster operationalfrom FY12. Once the billet caster becomes operational the com-pany can source ingots from domestic suppliers and convert itinto billets which will help in backward integration and enhanceEBITDA Margin. Currently the company is sourcing the raw ma-terial from GARMCO, a Bahrain based Aluminum Foil Products

supplier.





High EBITDA Margin to provide cushion against Aluminum pricefluctuation

The company has been able to maintain a healthy EBITDA Mar-gin of around 28% in spite of highly volatile aluminum pricewhich has gone up sharply in recent months. This is because of

high customization and value addition which the company does.Also 85% of the company’s revenue comes from the pharma sec-tor where the cost of packaging is just 4% of the product and anyincrease in raw material prices can be easily passed on.

Risks & Concerns

Lack of skilled manpower may delay capacity ramp up

Cancellation of regulatory approval like USFDA could affectbusiness

Any technological development which eases entry barrier

Cheap imports from China and other countries might putpressure on margin





Financials & Valuations

The Net Sales is likely to grow by 25% in FY11, increase incapacity utilization at IFL will boost Net Sales in FY12 by37.5%, and new capacity will further drive Net Sales by27.5% in FY13.

The EBITDA Margin for FY11 is likely to be around 28.1%,backward integration through the billet caster unit at IFL willimprove EBITDA Margin by 100 bps in FY12, and improve-ment in realizations in FY13 will further aid EBITDA Marginby 25 bps.

The Adjusted PAT Margin is also likely to grow from 18% inFY11 to 18.7% in FY12 because of improvement in EBITDAMargin and 19.6% in FY13 led by slight improvement in

EBITDA Margin, Total Asset Turnover and lower interest ex-pense.

The Adjusted PAT is likely to go down by 27.8% in FY11 be-cause the company got tax benefit in FY10; however it islikely to grow by 42.6% in FY12 and 33.5% in FY13.

A 15.2% dilution in equity along with a de growth in AdjustedPAT will lead to 37.3% decline in EPS in FY11. No further eq-uity dilution is expected in next few years and the EPS is

likely to grow by 42.6% and 33.5% in FY12 and FY13 respec-tively.





Consolidated Quarterly Financials in INR Mn


Income Statement Dec-10 Dec-09 Sep-10 Sep-09 Jun-10 Jun-09 Mar-10 Mar-09Net Sales 1869.0 1577.0 1622.2 1416.0 1530.6 1303.8 1587.9 1180.1Net Sales Growth (%) 18.5 - 14.6 - 17.4 - 34.6 - Operating Expense 1329.6 1096.9 1176.2 1004.3 1101.3 977.4 1229.8 972.9EBITDA 539.4 480.1 446.0 411.7 429.3 326.4 358.1 207.2EBITDA Margin (%) 28.9 30.4 27.5 29.1 28.0 25.0 22.5 17.6

EBITDA Growth (%) 12.4 - 8.3 - 31.5 - 72.8 - Other Item 44.5 10.9 134.8 7.5 33.2 6.0 131.6 -1077.0Depreciation 49.5 43.3 47.9 43.3 47.9 42.7 44.9 52.7Interest 61.0 37.7 61.1 53.8 52.9 52.1 56.1 62.9Tax 93.0 99.8 66.6 79.2 92.5 62.8 96.4 56.9Minority Interest 0.0 0.1 0.0 0.2 3.3 1.2 0.6 0.0PAT 380.4 310.2 405.2 242.9 269.2 174.9 292.3 -1042.3Non Recurring Item 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -720.7Adjusted PAT 380.4 310.2 405.2 242.9 269.2 174.9 292.3 -321.6Adjusted PAT Margin (%) 20.4 19.7 25.0 17.2 17.6 13.4 18.4 -27.2 Adjusted PAT Growth (%) 22.6 - 66.8 - 53.9 - -190.9 - Share Capital 320.5 278.3 294.9 278.3 278.3 278.3 278.3 278.3

Face Value (INR) 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0Adjusted EPS (INR) 11.9 11.1 13.7 8.7 9.7 6.3 10.5 -11.6

0.0

5,000.0

10,000.0

15,000.0

FY11e FY12e FY13e

Net Sales Adjusted PAT

0.0

5,000.0

10,000.0

15,000.0

FY11e FY12e FY13e

Total Capital Total Equity

0.0

10.0

20.0

30.0

FY11e FY12e FY13e

Debt Equity Ratio (x) Total Asset Turnover (x)

Adjusted PAT Margin (%) RoE (%)

0.02.04.06.08.0

10.0

FY11e FY12e FY13e

EV/EBITDA (x) P/BV (x) Adjusted P/E (x)

Profits Equity

RoE Valuations





Consolidated Annual Financials in INR Mn


Income Statement FY08 FY09 FY10 FY11e FY12e FY13eNet Sales 3,169.4 4,515.2 5,884.6 7,355.7 10,114.1 12,895.5Operating Expense 2,284.2 4,006.7 4,295.9 5,288.8 7,170.9 9,110.7EBITDA 885.2 508.5 1,588.7 2,067.0 2,943.2 3,784.8Other Item 79.0 -390.1 153.6 212.6 0.0 0.0Depreciation 35.4 103.8 174.1 125.5 184.0 242.6

Interest 76.3 155.7 209.8 246.0 239.8 178.2Tax 118.1 256.5 -574.5 477.0 629.8 841.0Minority Interest 0.0 -157.7 0.0 0.0 0.0 0.0PAT 734.5 -239.9 1,932.8 1,431.1 1,889.5 2,523.0Non Recurring Item 16.3 -269.7 98.8 106.3 0.0 0.0Adjusted PAT 718.1 29.8 1,834.0 1,324.8 1,889.5 2,523.0Dividend 55.7 55.7 64.1 64.1 64.1 64.1

Balance Sheet FY08 FY09 FY10 FY11e FY12e FY13eShare Capital 278.3 278.3 278.3 320.5 320.5 320.5Reserve 3,440.9 3,050.1 4,788.9 8,358.8 10,173.5 12,621.6Total Equity 3,719.2 3,328.3 5,067.1 8,679.3 10,493.9 12,942.1

Loan Fund 999.7 1,478.7 1,996.8 1,996.8 1,896.8 996.8Minority Capital 0.0 1,255.0 0.0 0.0 0.0 0.0Deferred Tax Liability 45.4 89.0 -742.1 -742.1 -742.1 -742.1Total Capital 4,764.2 6,151.0 6,321.8 9,933.9 11,648.6 13,196.8Fixed Asset 1,558.9 4,001.0 3,784.1 5,158.6 7,224.6 7,482.0Investment 318.6 0.2 0.2 1,250.2 1,250.2 1,250.2Cash 194.4 123.8 158.4 1,484.6 368.1 887.3Inventory 416.2 435.8 546.4 613.0 842.8 1,074.6Other Current Asset 2,785.2 3,428.2 4,455.7 4,203.3 5,779.5 7,368.9Total Current Liabili tiy 509.0 1,838.0 2,622.9 2,775.7 3,816.6 4,866.2Net Current Asset 2,886.8 2,149.8 2,537.6 3,525.1 3,173.8 4,464.6Total Asset 4,764.2 6,151.0 6,321.8 9,933.9 11,648.6 13,196.8

Ratio Analysis FY09 FY10 FY11e FY12e FY13eNet Sales Growth (%) 42.5 30.3 25.0 37.5 27.5EBITDA Margin (%) 11.3 27.0 28.1 29.1 29.4EBITDA Growth (%) -42.6 212.5 30.1 42.4 28.6Adjusted PAT Margin (%) 0.7 31.2 18.0 18.7 19.6Adjusted PAT Growth (%) -95.8 6,048.8 -27.8 42.6 33.5Total Asset Turnover (x) 0.8 0.9 0.9 0.9 1.0Debt Equity Ratio (x) 0.5 0.5 0.2 0.1 0.1RoE (%) 0.8 43.7 19.3 19.7 21.5EV/EBITDA (x) 22.5 7.2 5.5 3.9 3.0BVPS (INR) 119.6 182.1 270.8 327.4 403.8

P/BV (x) 3.4 2.2 1.5 1.2 1.0DPS (INR) 2.0 2.3 2.0 2.0 2.0Dividend Yield (%) 0.5 0.6 0.5 0.5 0.5Adjusted EPS (INR) 1.1 65.9 41.3 59.0 78.7Adjusted P/E (x) 375.6 6.1 9.7 6.8 5.1





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Head of ResearchAditya Damani +91 22 22630125 [email protected]

Head Office

4th Floor, Surya Mahal5, Burjorji Bharucha Marg

Fort

Mumbai-400001

Research AnalystSaurabh Singh +91 22 40023026 [email protected]

EssDeeAluminium_MLR_150311

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