Stock Review: Ess Dee Aluminium

 

Since the past four quarters, sales of Ess Dee Aluminium (EDA) have been growing at 20% year-on-year, faster than mainstream metal companies. This is because its end-users are pharmaceutical and FMCG companies, which have reported buoyancy in the past few quarters. Ess Dee Aluminium provides end-to-end aluminium foil and polyvinyl packaging solutions to FMCG and pharmaceutical companies. Its clientele includes ITC, Nestle India, Cadbury, Cipla and Pfizer, among others. It is a leader in the organised aluminium packaging industry in India with a market share of 10%.

The metals packaging industry has been growing at over 10% annually and is expected to continue on the back of robust growth in the FMCG and pharmaceutical sectors. To capitalise on this growth, the company has been increasingly expanding its capacity, the acquisition of India Foils being the most recent. India Foils, one if the largest aluminium foil producers in Asia, adds a capacity of 19,000 tonne to EDA, taking its total capacity up to 37,000 tonne per annum. India Foils has two facilities — one at Kamarhati and another at Hoera — both of which are expected to be fully operational by April 2011. This is expected to add about 40% to EDA's net sales by FY12.

EDA procures aluminium, which constitutes about three-fifth of its total expenditure, via quarterly contracts with the Gulf Aluminium Rolling Mill Company (GARMCO). However, it is able to pass on the cost to its customers and hence is less vulnerable to fluctuations in the price of aluminium. It is, therefore, able to consistently maintain operating profit margins within the 25-28% range.
For the quarter ended December 2010, the company's sales increased 19% year-on-year while margins were flat net profit grew 23%. Over the past five years, the company's sales have grown at 55% compounded annually. It has a debt-equity ratio of 0.33 and has been steadily generating cash flows from operations. At . 405, it trades at a 12-month price earnings multiple of five times.
The stock has declined 20% in the past three months, following weakness in the broader market. The company looks well placed to take advantage of its additional capacity and demand buoyancy from user industries.