Given the rising consumerism in the country, demand for packaging is set to explode. And flexible packaging materials like plastics and metal foils are gaining momentum because of the benefits they offer such as better appearance, easier transportation and protection of the product's freshness.

According to estimates, about 40 per cent of tubes produced globally comprise metal tubes. This provides enormous growth potential for the laminated tube segment as more and more companies, such as Colgate, that earlier used metal tubes are shifting to laminated tubes.

This augurs well for flexible packaging companies and, here, mention of Essel Propack Ltd [Get Quote] is a must. It is the largest laminated and plastic tubes manufacturing company in the world with around 33 per cent market share. It introduced laminated tubes in India.

The company's products find application in toothpastes (biggest consumer), pharmaceuticals and cosmetics. It has presence in as many as 13 countries with 21 state-of-the-art plants.

Its clientele includes global FMCG and cosmetics behemoths like Unilever, Colgate-Palmolive, SmithKline Beecham, P&G (100 per cent supplier to P&G, US), Revlon and Oriflame.

The contribution from Indian operations has shrunk significantly, from 55 per cent to 30 per cent over the past three-four years owing to geographical expansion.

Yet, Indian operations continue to be the most profitable due to economies of scale and significant favourable operating cost dynamics.

"This is because we have vertically integrated plants in India and China, which is not the case with other plants," says R Chandrasekhar, chief operating officer (global), Essel Propack. "Our major focus would be the US and European markets for the next 18-24 months," he adds.

In November '05, Essel invested $15 million (Rs 65 crore) for expanding its manufacturing facility at Danville, US, to supply laminated tubes and caps and closures to P&G and other toothpaste and cosmetic product companies in the US.

It plans to increase its existing capacity there by 50 per cent in a phased manner till June '06 and double turnover by '07. This plant was set up in 2003 to meet all of P&G's tube requirement in North America.

Of the US laminated tubes market of around 200 crore (2 billion) tubes, Essel enjoys 26 per cent. P&G, one of the key oral care players in this region, has an exclusive contract with Essel. Thus, the company's US revenues are largely dependent on P&G.

The company is on a acquisition spree. It had acquired European $20 million Arista Tubes capable of making higher-diameter tubes with varied types of caps and innovative decorative covering.  It has around 30 per cent market share in the UK and Ireland.

Moreover, the addressable market matches that of Essel. It also acquired $10 million Telcon Packaging, one of Europe's leading laminated tube manufacturer. Through these acquisitions, Essel will not only add better technology to its forte but also expand its product range and strengthen its presence in the European market.

An Angel Broking analyst expects these acquisitions to be a major booster, which will show up in its consolidated revenues in the future. The growth will primarily be driven by increased margins on better capacity utilisation and operational efficiency.

Subhash Chandra, chairman of the Essel group, acquired a 22 per cent stake in Propack from Arfen Hsu, the company's foreign collaborator and co-promoter, at Rs 330 per share for a consideration of Rs 226.49 crore (Rs 2.26 billioN). This, analysts say, inspires investor confidence in the company.

With growing literacy levels, the fact that more and more people are becoming hygiene-conscious is driving the demand for these products and leading to higher packaging needs. Growth is mostly expected to come from Asia, especially south-east Asia, owing to low level of penetration.

In India, the growth potential for laminated tubes is expected to be immense as the per capita consumption of toothpaste - the biggest consumer of flexible packaging is 82 gm - is the lowest in the world and lesser than even less developed countries such as Thailand (262 gm) and Mexico (376 gm).

Essel also stands to benefit from a growing Indian FMCG market witnessing a double-digit growth because of rising disposable incomes, improvement in per capita consumption and a strong rural demand. Going forward, it plans to focus more on the non-oral care segments like pharma, toiletries and cosmetics.

The company's sales growth of around 22 per cent to Rs 816.6 crore (Rs 8.17 billion) in CY05 can be attributed to the acquisitions of Arista Tubes and Telcon Packaging. While its operating margins are showing a dip compared with the CY02-05 period, the net profit margins have been reasonably stable.

"The dip in margins is because the acquired entities have not been performing well. Their margins do not match the historical margins of Essel," says Percy Birdy, finance controller, Essel Propack. But they are expected to be better going forward.

"We see around 18-20 per cent revenue growth and 1 per cent improvement in operating margins for CY06," says Chandrasekhar.

The Essel stock has had a prolonged bull run and has shot up 47.40 per cent y-o-y. It has also announced a stock split recently whereby a share of Rs 10 face value will be split into five shares of Rs 2 each.

Rohit Gala, research analyst, Niche Brokerage, says, "The announcement of US expansion plans and stock split, and expected improvement in margins due to cut in the customs duty on polyethlene has led to the investor's interest."

Currently, the stock is trading at a trailing 12-month P/E multiple of 15.34 times and 16.78 times for expected earnings of Rs 26.3 for CY06.

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