Shares of a midcap company, which manufactures laminated plastic tubes catering to the FMCG and Pharma space, have risen 58 percent in the calendar year 2020 so far while the benchmark Sensex is still 6 percent down this year.
Even after such stellar gains amid the coronavirus pandemic, the stock looks poised to surge further owing to its secular demand and dominant market share.
The stock is Essel Propack.
Owned by the Blackstone Group, headquartered in Mumbai, the company claims to be the world’s largest manufacturer of laminated plastic tubes with units operating across countries such as the USA, Mexico, Colombia, Poland, Germany, Egypt, Russia, China, Philippines and India.
This tube-packaging company reported a 13.96 percent year-on-year (YoY) increase in consolidated net profit to Rs 45.62 crore for the June quarter of FY21.
Revenue from operations climbed 17.72 percent to Rs 741.49 crore, as against Rs 629.83 crore in the corresponding quarter of the previous fiscal.
EBITDA margins improved 253 bps YoY to 19.8 percent, aided by cost efficiencies and operating leverage.
The company's expansion into the personal care packing business is generating strong returns. Experts point out that Essel's personal care growth was boosted by a surge in demand for hand sanitizers, which the company capitalised by signing up with 50 brands globally.
Brokerage firm Emkay Global expects the company's accelerated growth in personal care to continue amid high demand for sanitizers, forex tailwind, and recovery in the beauty and cosmetics segment.
Top brokerages are positive on the stock as they have shown faith in Essel's business model.
"We like Essel’s business model which has an underlying secular demand and has a dominant market share in oral care. The company has a long runway for growth in personal care on move from plastic and aluminium tubes to laminate tubes," said brokerage firm ICICI Direct which has an 'add' call on the stock with a target price of Rs 325.
"Blackstone is living up to its motto of ‘capital-efficient consistent earnings growth’ and its new board and management bring significant experience in driving personal care revenues and optimising costs. We also see headroom for inorganic growth backed by Blackstone’s ability to crack good deals and cross-selling to Blackstone-backed companies," ICICI Direct added.
Brokerage firm JM Financial pointed out that there is still a very healthy growth opportunity in the personal care packaging segment.
"Given Essel Propack’s expertise remains in tubes market, its segments of relevance include oral care, personal care (especially skin creams and shampoos), healthcare and food and beverages. While these end markets are perceived to have lower growth rates, our conversation with the management leads us to believe that scaling-up revenue growth to double-digit levels is quite possible over medium-term," JM Financial said.
The brokerage believes this level of growth would be achieved through sharply defining the end-market segmentation and capturing opportunities in low penetrated categories.
As per the estimates of JM Financial, the overall tubes market in the region of presence for Essel Propack is pegged at 4,000-4,200 crore including oral care (1,600 crore tubes), personal care (1,400 crore tubes), healthcare and foods (that account for the balance).
"From Essel Propack’s point of view, while personal care contributes 45 percent to revenue, its contribution to volumes is mere about 25 percent and oral care accounts for the balance 75 percent - implying a nearly 35 percent market share in the latter and less than 10 percent market share in personal care (about 62 percent of the market). This presents an attractive opportunity to accelerate revenue growth partly aided by a mix-impact (realisations in personal care is 2-3 times the oral care space)," JM Financial said.
The brokerage has a buy call on the stock with a target price of Rs 310 and believes Essel Propack’s strong clientele, focus on innovations and a portfolio of sustainable packaging solutions positions it to gain in the future as well.
The valuation of the stock is not a concern at this juncture as there is an expectation of strong earnings growth in the coming quarters.
"Expectations of strong earnings growth trajectory (26 percent CAGR over FY20-23 implying a PEG of about 1 time) lends support to valuation," JM Financial said.
Despite the recent rally in the stock, brokerage firm Motilal Oswal still believes there is room for further upside.
The brokerage believes Essel's earnings momentum would continue on the back of increasing revenue share from personal care, new launches (hand sanitizers) and recyclable tubes, kicking-in of operating leverage (namely, Europe region), increasing shift from plastic to laminated tubes and market leadership position in the oral care segment.
"We expect revenue/EBITDA/PAT CAGR of 11/15/24 percent over FY20-23E and value the stock at 26 times September 2022 EPS," Motilal Oswal said.
Motilal Oswal has maintained a 'buy' on the stock with a target price of Rs 314.
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