The Hindu Business Line : Essel Propack upbeat on plastic tubes business

PACKAGING major Essel Propack, which acquired in August the UK-based Arista Tubes, hopes to chart out a trajectory of growth in plastic tubes that is similar to the leadership role it carved out in the laminated tubes business globally.

The global market for plastic tubes, at an estimated seven billion tubes, is smaller than the market for laminated tubes, pegged at 11.5 billion tubes. The latter's value is put at $600-700 million annually.

Though smaller in overall market size, against similar volumes plastic tubes are worth 2.5 times more than their laminated counterparts.

This is mainly because plastic tubes are used in the high-end cosmetics industry where packaging assumes critical importance, to the point of sometimes being the prime differentiator between one product and another. It calls for product excellence and a superior quality of external printing.

Further with packaging being an active tool for responding to competition in the segment, it is regular for cosmetics manufacturers to suggest frequent changes to the tubes and their appearance.

Thus a typical `run' in plastic tubes is of the order of 5000-10,000 tubes where as it could exceed 100,000 units in laminated tubes, the main consumer of which is the oral care industry.

Oral care customers lock their orders in for three years or so but clientele for plastic tubes moves from order to order given the more dynamic market they operate in. In turn, all this requires that the tubes maker be capable of flexibility and quick response, which alongside the higher quality of printing, renders margins in the plastic tubes business better than what is available in laminated tubes.

However, input costs are usually higher in plastic tubes given the emphasis on quality printing and the importance assigned to the tube's dispenser.

At a macro level, the plastic tubes market is worth entering because unlike oral care products, usually bought for the whole family, purchase of cosmetics, follow individual choice and are that much less price sensitive. As a laminated tubes major, Essel Propack benefits from plastic tubes clientele in another way too - there is a reverse conversion to laminated tubes happening at some of the low end cosmetic brands.

Arista is Essel Propack's biggest plastic tubes facility, other units being at Wada in India and a joint venture in Indonesia. All put together, the company's current global market share in plastic tubes should be no more than 1.5-2 per cent, Mr R. Chandrasekhar, Chief Operating Officer, said. But he believes growth similar to what Essel Propack did in laminated tubes, where it leads globally with 32 per cent market share, is possible.

Whether that growth would be organic or through acquisitions, is unclear yet. But the plastic tubes industry worldwide is adequately fragmented to make inorganic growth attractive and viable.

Much of this fragmentation is courtesy the fragmented nature of the cosmetics industry, which even as it sports dominant global brands has its share of resilient regional players.

Theoretically the acquisition route should be more to Essel Propack's liking because payback for its acquisitions typically happen over three years while greenfield projects bring cost pressures for a while.

For the nine months ended September 30, Essel Propack's sales was up 13.4 per cent to Rs 474.2 crore and its profit, up 15.2 per cent to Rs 59.1 crore.

According to Mr Chandrasekhar, 2004 has been a good year. The US market has more or less stabilised, Essel Propack's investments in additional capacity have been used fully and it managed to use its laminated tubes facility in China more effectively.

Worries were primarily around raw material prices, particularly polyethylene prices, which have not been in line with crude oil prices and appear to harbour speculation. "We hope to see stability in raw material prices after the first quarter of 2005," he said.