In the backdrop of an operationally excellent quarter from Colgate- Palmolive India, our research team stumbled upon an exciting company at the cusp of a breakout.
Previously we had ignored the prospects of the company- Essel Propack because of it being under the Ownership of the debt-ridden Essel Group. However, as at Quarter ended September 2019, 75% of the company is owned by the BLACKSTONE GROUP.
We had bought Mphasis when it got taken over by the Blackstone Group, on the expectations that the PE Group could revive the company and put it on its growth trajectory owing to a portfolio of IT Holdings which could produce cross-synergies. (Read the entire analysis). However, the growth prospects of Essel Propack under the new management is both exciting and promising.
The Company
Essel Propack, established in 1982 under the leadership of Subhash Chandra is the largest specialty packaging global company, manufacturing laminated plastic tubes catering to the FMCG and Pharma space. The company is the world’s largest manufacturer of laminated plastic tubes with units operating across countries such as the USA, Mexico, Colombia, Poland, Germany, the UK, Egypt, Russia, China, Philippines, and India. These facilities cater to diverse categories that include brands in Beauty & Cosmetics, Pharma & Health, Food, Oral, and Home, offering customized solutions through continuously pioneering first-in-class innovations in materials, technology, and processes.
We, expect the company to benefit from the sudden demand in sanitizers.
The Product
The product line caters to a wide array of industries, interestingly the company also holds a dominating market share in most. While the lockdown, all 20 plants of the company were said to be operational.
The company has global leadership in toothpaste tubes, backed with long-duration contracts with marquee brands. Sustained innovation paves the way for its products to cross-sell to major FMCG personal care marquee companies.
The COVID- impact across the globe have been hard on smaller companies which in turn has improved Essel's market share and product presence.
The New Management (The key Re-Rating Trigger)
Post the change in ownership, the company has a new team of very promising leaders each with a track record of performance in their respective industries.
Sudhanshu Vats (ex-Viacom18, Unilever) hired as Managing Director and CEO
Parag Shah (ex-Unilever, Nike) hired as CFO
While the company already supplied global clients, we strongly feel Blackstone's team of global managers and the portfolio of companies they onboard will help the company emerge as an even bigger supplier with even stronger negotiating terms.
The new management will help the company reduce debt and be more capital efficient- improved finances, well-managed operations can unleash the company's growth.
Valuation and Probable Future
We strongly believe the new ownership will unlock value with better financial efficiency, the same would lead to lower cost of capital higher valuation premiums, and a re-rating soon.
Currently, the company priced at 190/share is trading at EV/EBIT multiples of 16.42x with an SGR of 10.12%.
While it seems expensive when compared with the median EV/EBIT, the company does not seem to be effected with the lockdown, instead we believe the company would benefit from higher revenues due to the sudden demand of sanitizers for which the packaging would be supplied by the company.
Though a slightly higher D/E of 0.42x would usually be concerning, the deep pockets of Blackstone are relieving.
Considering how Blackstone paid 3215 Cr for 75% ownership of the company, viz- total market capitalization of ~4287 Cr. The current market capitalization of ~5996 Cr, is barely 40% higher, which for a PE Group of the stature of Blackstone is not even the tip of the iceberg.
