Edelweiss initiates BUY report on Essel Propack - TP: Rs 184

Essel Propack (EPL) is the largest laminated tubes packaging firm globally and a force to reckon with in the global packaging industry. Adhering to the growth cornerstones of innovation and customer-driven R&D, the company has captured one-third market share in laminated tubes. We expect RoE to exceed 21% in FY17 from 13.5% in FY14 as: (1) penetration in non-oral care segment is on the rise; and (2) subsidiaries in Europe and America are turning profitable. While EPL has historically traded at 5-7x EV/EBITDA band, we have valued it at 7x considering that EPL's RoE will transcend its historical range of 8-10%. Our target EV/EBITDA is at 21% discount to global peers despite EPL's margins being much higher. Initiate coverage with 'BUY' and target price of INR184 (57% upside).

Innovation DNA spurring market share gains

The packaging industry has been innovation driven. EPL has enhanced its laminated tubes market share from ~28% in CY02 to ~34% currently, a feat it accomplished owing to sizeable investments in innovation. R&D and innovations have been the company's unequivocal hallmarks, enabling it to pioneer the paradigm shift in packaging, redefining the market and unlocking growth potential.

RoE kickers: Non-oral care focus, turn around in subsidiaries

To propel growth, EPL has set sights on the global 22bn tubes non-oral market. We expect non-oral revenue CAGR of ~15% over FY14-17E, riding conversions in US & Europe and growth in cosmetics, foods & pharma in China & India. Oral care is anticipated to remain the cash cow and log stable revenue CAGR of 7% over next 3 years. Earlier, losses in Americas and Europe had hammered EPL's performance. However, these subsidiaries are now turning around.

Outlook and valuations: Growth impulsion; initiate with 'BUY'

We expect increase in asset turn (focus on high IRR capex) and higher PAT margins (revenue growth, operating leverage) to catapult EPL's RoE to 21.3% in FY17E. Consequently, PAT will post CAGR of 27.0% over FY14-17E. We initiate coverage with 'BUY' recommendation with a TP of INR184 (at 7x FY17E EV/EBITDA), implying a discount of 21% on EV/EBITDA and 27% on P/E compared to global peers.

Shares of ESSEL PROPACK LTD. was last trading in BSE at Rs.123.8 as compared to the previous close of Rs. 118.4. The total number of shares traded during the day was 74232 in over 2178 trades.

The stock hit an intraday high of Rs. 127.5 and intraday low of 119.7. The net turnover during the day was Rs. 9254739.

Source : Equity Bulls

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