Ess Dee Aluminium

Given the pace of growth in the organised packaging industry, there can still be some upside left for Ess Dee Aluminium's stock

 

ESS DEE ALUMINIUM is a leading provider of packaging solutions for the Indian pharmaceutical, food and FMCG industries. Its stock has consistently outperformed the Sensex during the last one year. It gave a return of around 72% compared to 16% of that of Sensex. The company reported net sales (Q4) of Rs 129 crore, up 29% on a quarter-on-quarter basis. It performed even better on the profitability side as its net profit surged 232% to Rs 27 crore.

BUSINESS:

ESS DEE Aluminium is the first company in India to manufacture dedicated high-end pharma packaging products like cold form blister and childresistant-blister packaging. The quality of the product portfolio has been significantly enhanced by sophisticated and technologically advanced products. The company has strengthened its presence in eastern India after acquiring India Foils. ESS DEE Aluminium has established itself as a leading supplier of primary packaging materials and as a specialist in providing tailor-made aluminium foils-based flexible packaging laminates. The company also wants to increase its dominance by eating the share of unorganised packaging industry.

FINANCIALS:

The company's net sales have grown at a compounded annual growth rate (CAGR) of 125% over the past five financial years to around Rs 468 crore in FY10. The company has incurred higher capex over the past three years, as its high investment phase is over and it can generate more free cash flows going forward. The topline and bottomline have seen a marked improvement in the year ended March '10. Net profit margin also improved to 21% from 8% on a quarter-on-quarter basis. Having expanded its manufacturing facilities, the company has no major capex requirements in the coming years.

VALUATION:

ESS DEE Aluminium trades at a P/E of 15.5 times its trailing 12-month earnings. Compared historically, the stock is trading close to its all-time high valuation. However, given its pace of growth and opportunities in the organised packaging industry, there can be still some upside left for the stock.

CONCERNS:

Although the company is able to generate good operating profits by streamlining its operations, there are concerns at the cash conversion cycle. The company lags behind its peers in the time taken to convert finished goods into cash. It could also face some pressure on raw materials cost as it is keeping low inventory, thereby exposing itself to price risk.