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Emkay Global
Essel Propack (Buy)
CMP: ₹173.5
Target: ₹200
Essel Propack derives 25 per cent of its revenue (FY19) from East Asia Pacific (for 9MFY20 its revenue share was 22.8 per cent). China accounts for the majority of revenue in this geography. Essel’s facility in China has been shut since February 2020 due to Covid-19.
Essel exports laminates from China and supplies laminated tubes to its Chinese Oral and non-oral customers. The company has diverted laminate exports from China to its India facility; however, the inability to cater to local demand could lead to a loss of revenue.
As we are yet to see any visibility on the reopening of the China facility and normalcy returning to operations, we trim FY20/21/22E revenue by 2 per cent/1 per cent/1 per cent. After strong cost optimisation in Q3FY20, we raise FY20/21/22E EBITDA margin by 33/20/20 bps.
We believe that Covid-19-related disruptions are temporary and will pass. As of now, we have not factored in any material impact in FY21. If Covid-19 disruptions prolong, there could be further downside to our revenue estimates. Our EBITDA margin assumptions at 20.4 per cent/21.6 per cent/22.2 per cent for FY20/21/22E are conservative as Essel has already delivered 22.2 per cent in Q3FY20. Maintain ‘Buy’ with a TP of ₹200 (9x FY22E EV/EBITDA).
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