Essel Propack: revenue recovery key for continued outperformance

Essel Propack has been reporting subdued revenue growth for some time now—revenue grew in the range of 1-3% in the previous three quarters


As Essel Propack reported steady improvement in margins and earnings, the stock rallied 44% over the last one year. Ebitda margins softened a bit in the June quarter.
As Essel Propack reported steady improvement in margins and earnings, the stock rallied 44% over the last one year. Ebitda margins softened a bit in the June quarter.

Have investors begun attaching greater importance to revenue growth at Essel Propack Ltd? The stock has lost ground after the packaging firm reported a tepid 3.5% rise in revenues for the June quarter (first quarter or Q1). Revenues are adjusted for a divestment Essel did last year.

To be sure,the company has been reporting subdued revenue growth for some time now—revenues grew in the range of 1-3% in the previous three quarters. But the stock never saw such a sharp correction after the results announcement.

In fact, as Essel reported steady improvement in margins and earnings, the stock rallied 44% over the last one year. Ebitda (earnings before interest, tax, depreciation and amortization) margins softened a bit in the June quarter. But that was due to low revenue growth. Lower-than-planned offtake by key customers and slower ramp-up of new capacities in the non-oral care category business outside India impacted revenue growth, the company said.

Essel works on a cost-plus business model. So low raw material prices can suppress revenue growth. If one considers this effect, revenue growth would have been 5.5% instead of 3.5%. Even then, for a stock that rallied 44% last year and is trading at 16 times current fiscal year earnings estimates, the 5.5% growth is nothing to be excited about.

Further, the results have limited cues about the prospects of seeing sustainable double-digit revenue growth that can help the stock enter the next leg of growth. In its results presentation, Essel said it expects revenue growth to recover to 12% in the coming months. Business in Africa, Middle East and the South Asia region is recovering on improvement in demand and new customer wins.

But commentary on the troubled Europe and Americas businesses, which together generate more than a third of the company’s revenues and were responsible for a subdued Q1, remained vague. Essel is developing non-oral care business in the US and Europe, and several new projects will be commercialized in the near term. But there is no clarity when these measures will take effect or these regions will come out of the growth slump.

So analysts remain sceptical about the revenue growth trajectory. Motilal Oswal Securities Ltd has reduced earnings estimates and downgraded the stock. Another broking firm Way2Wealth Brokers Pvt. Ltd said the stock is pricing in an “optimistic” business cycle. “The company has been able to meet its 20:20:20 vision on both the operating margin level and profit growth targets. For the topline (revenue) to grow at 20% the company needs a healthy demand in its international business which continues to be marred by economic slowdown. We believe that will take time,” Way2Wealth said in a note.

Overall, while the Essel stock impressed investors with strong returns in the last one year, replicating that performance will be tough if the company does not deliver on revenue growth.

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