THE INDEX / Consolidation gains

Essel Packaging: Propped up by Propack

Manish Joshi & Dhruv Rathi

ESSEL Packaging (EPL) has recorded a flat performance during the year to March 2001, if one excludes ‘other income’ component of Rs 8.5 crore. It mainly comprises of dividend, technical know-how fees from overseas subsidiaries and joint ventures and export incentives. Since the company’s strategy is to grow through subsidiaries and joint ventures, the ‘other income’ can be considered as a part of income from operations.

Sales grew by 10.2 per cent to Rs 228.1 crore. Nearly full capacity utilisation in the financial year 1999-2000 did not leave much scope for volume growth during 2000-01. Hence, it can be concluded that higher price realisation played a major role in the turnover growth.

However, increase in price of finished goods could not fully make up for a sharp rise in prices of raw materials such as polymer resins and aluminium foils. Consumption of raw material went up by 24.7 per cent to Rs 95.1 crore. Operating profit (including other income) climbed up by 11.9 per cent to Rs 87.9 crore. There is not much to comment on interest and depreciation figures. Profit before tax and extraordinary items showed a reasonable growth of 21.1 per cent to Rs 59.4 crore.

However, the true picture of EPL’s performance emerges if one looks at the consolidated global revenue statement that includes performance of Propack group. Consolidated profit after tax is impressive at Rs 68.3 crore, which translates into an EPS of Rs 28, on a substantially higher equity base due to a bonus issue in the ratio of 3:5. However, the low return on capital employed has been the major worry for the company. The current year’s equity capital has further gone up from Rs 24.3 crore to nearly Rs 31 crore owing to allotment of shares to the Propack group.

EPL’s hidden strength lies in its wide network of subsidiaries and joint ventures scattered across the globe. Their contribution to the overall performance is bound to rise in future. Consolidated results will assume greater significance in future as the consolidation of holding-subsidiary accounts has become mandatory from the current financial year.

Burroughs Wellcome
Buroughs Welcome has notched up a growth of 6.1 per cent in sales to Rs 29 crore in the first quarter to March 2001, reversing the declining trend during the year to December 2000. One reason could be the revamping of marketing staff, including that of Glaxo. Despite the hit ‘Septran,’ the largest selling brand, received in sales following the price reduction by NPPA in September 2000, the comapny was able to post higher sales due to higher growth in other topline products. Raw material cost rose by 32 per cent to Rs 12.7 crore but total expenses remained unchanged.

Operating profit declined by 5.7 per cent to Rs 5.09 crore and OPM from 16 per cent to 15.5 per cent. Net profit was Rs 2.6 crore. Lack of focussed planning and aggressive and marketing of new products has affected their sales.

The company’s product basket does not have growing molecules. All topline products were introduced before 15 years. So their sales have hit a plateau and in most cases need to be replaced by new molecules. In all growing companies, major turnover is contributed by the new brands introduced in the last 10 years. The company’s research and development expenses are very low and do not drive the company towards growth. Despite low expenses on R&D, the company has not imported any technology in the last five years. These weaknesses have checked the company’s growth.

The merger of Smithkline Beecham with Glaxo will provide further boost to the sales of the company as all these brands will be marketed under broad strategies. Penetration of products in larger areas with a follow-up by skilled field force will help the company to increase its market share.

Now the management has to take some corrective action in order to propel growth. The company has been surviving on its old strength. The company is a zero debt company. Its fixed assets are also low. Therefore interest and depreciation are also very low. The company needs to cash in on these advantages in its march towards a high growth trajectory.