The Hindu Business Line : `Seamless tubes is our next growth area'

Every third toothpaste that you use bolsters this company's topline growth. Essel Propack's laminated tubes are not only used in packaging toothpastes but also cosmetics and pharmaceutical products. Its customers include Colgate Palmolive, Hindustan Lever and Paras Pharma, to name a few. With plants in India, China, Egypt, Germany, the UK, Nepal, Venezuela, Colombia, Mexico and the US, this tube maker is a global player. The company's Vice-Chairman and Managing Director, Mr Ashok Goel, considers seamless plastic tubes as the next growth engine. Business Line recently spoke to him on a range of issues and the factors driving growth.

Excerpts from the interview:

What is the idea behind the acquisition of Arista Tubes, an UK based co-extruded plastic tube (seamless tubes) maker?

Essel Propack is predominantly into laminated tubes. Though we have grown to the No 1 position in the laminated tube segment, we were told many a time that we are a single product company. We did have a small presence in plastic tubes in India. But we did not have the focus.

Now we are turning our focus to this. Because we have recognised that this is the next growth engine that we can ride on, while we continue to grow in the laminated tubes. Therefore, it is a natural extension. Though in a layman's language it is still a tube, the technology and the marketing techniques are different. Therefore, we consider it as a different product, which should help us grow and repeat the success story of laminated tubes. We had paid $7.2 million for 100 per cent shares of Arista Tubes. The debt of the company was about $1.8 million. So the total cost, in that sense, in $9 million.

Are you planning more acquisitions in the co-extruded plastics segment?

Yes, we are open to (making) acquisitions. But it is not only plastic tubes but also in laminated ones. It could be any geography. We will also grow organically.

Do co-extruded tubes offer higher margins than laminated tubes?

Co-extruded tube is a premium product. What is filled in these tubes are also premium products. Though the volumes (in numbers) of seamless tubes are low, the revenues are higher. The margins are commensurate with that.

What is the contribution to the revenue from your key customers — Colgate Palmolive and HLL?

In the Indian context, the contribution from Colgate Palmolive and HLL together would be about 47 per cent. In terms of segments, oral care contributes 70 per cent of the revenue and the non-oral care segment the rest.

Your per unit sales realisation has been steadily declining over the past three years...

The per unit realisation has been decreasing because of two reasons. One, the tube sizes. We have tubes ranging from 20 gm to 200 gm. If the takeoff of the 20 gm tubes is more, you will see the total number of tubes sold may be the same, but the per unit price goes down. Two, we have, over a period, reduced the over all thickness of the laminate that is used in the tubes. This has resulted in the drop of input costs and in turn lower prices. Therefore, our topline may vary but the bottomline remains constant.

You said you reduced the thickness of the laminate. Was it driven by the customer or you?

It was primarily driven by us. We have research and development centres with dedicated people. That is our way of bringing out innovative products so the cost to the customer ultimately comes down.

What is your outlook on key raw material prices?

Polymer prices have gone up. Contrary to popular beliefs the prices of polymers that are going up, by and large, have no direct co-relation with crude prices. For products such as butane, ethylene, naphtha and propylene, which are directly dependent on crude, the price increase has a direct impact.

All other polymers, by and large are not products of crude. They are products of gas. The crackers are gas-based. So production of these items has no direct linkage with crude. However, it is an opportunity that petrochemical companies are exploiting. How long they will be able to sustain it is something we need to watch.

Essel Propack uses specialty grade polymers. They are usually priced higher than the commodity polymers. The volatility in the prices of these polymers, however, is not as high as in commodity polymers.

But there has been an impact on the polymers we use. We are dealing with it. When the prices started hardening, we had purchased lots of materials at varying prices. So the impact on us on the price increase is only for few months in a year.

We have also been able to pass on the costs to our customers. To a certain extent, we are also absorbing the costs. So, we took into account the rise in polymer prices when we issued the financial guidance.

Do you enter into a long-term contract with your suppliers?

Yes. Any fluctuation in the prices is absorbed by the supplier be it upward or downward. But in markets like this, these contracts come again for renewal. We have given certain price increases to our suppliers and all that has been factored into projections.

Do you also have long-term contract with your customers?

Yes. These contracts have built-in escalation and de-escalation clauses.

Recently there was price war in shampoos, detergents? There is also the possibility of this extending to toothpastes. Considering that your revenues are predominantly driven by oral-care segment, in particular the toothpastes, what is the likely impact on your margins?

In the toothpaste segment it has already started happening. In the case of shampoos and detergents, it is a straight price reduction. In toothpastes, it is the low-cost toothpaste manufacturers who have entered.

The FMCG majors have reacted and countered it in their own way. For instance, Colgate has revived the brand Cibaca and positioned it parallel to these low-cost toothpastes. Unilever may have countered it by offering some freebies along with their toothpastes. So, the overall value to the consumer is equated with the low-priced toothpastes. So those pressures have already come in and they have also been factored in.

What is your outlook on the domestic toothpaste market?

The toothpaste market in India has a growth rate of 3-4 per cent. The low growth rate is not in sync with the fact that India has a low per capita consumption of toothpaste. The entry of new low-cost toothpastes has not expanded the market. Instead there has been a shift in the market share between major players. We do not see any major change to these growth rates for the next two years.

What growth prospects do you see (both near and long term) for laminated tubes in the domestic market?

Being heavily dependent on toothpaste, laminated tubes will grow with the market at the rate of 3-4 per cent. Cosmetics, personal care and pharma segments will contribute more to the laminated tubes market, which again will be at a slow pace.

What strategies are you planning to adopt to increase in your topline growth in the domestic market?

For the Indian market, our strategy is to hold on to our current market share. We will grow with the market in oral care and continue to aggressively pursue better growth prospects in cosmetics, personal care and pharma segments.

Are you planning to increase your production capacities?

Yes, we are setting up a laminated tube factory in Himachal Pradesh. Another one coming up is in Russia. We are actively pursuing one more site, the details of which can't be revealed at present.

Are global FMCG companies looking at shifting their manufacturing bases to India?

That is not happening. If that happens, it will be only to our advantage.

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