Initiate coverage on Essel Propack (EPL) with a ‘buy’ rating and target price of R184 per share valuing at 7x FY17e EV/ebitda, implying a discount of 21% on EV/ebitda and 27% on P/E compared to global peers. 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.
We expect increase in asset turn and higher PAT margins to catapult EPL’s RoE to 21.3% in FY17e. Consequently, PAT will post CAGR of 27.0% over FY14-17e.
EPL has enhanced its laminated tubes market share from 28% in CY02 to 34% currently. 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.