Essel Propack- Covid-19 to affect China demand temporarily

Essel Propack (ESEL) derives 25% of its revenue (FY19) from East Asia Pacific (for 9MFY20 its revenue share was 22.8%). China accounts for the majority of revenue in this geography. ESEL’s facility in China has been shut since Feb’20 due to Covid-19.

 ESEL exports laminates from China and supplies laminated tubes to its Chinese Oral and non-oral customers. ESEL 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 re-opening of the China facility and normalcy returning to operations, we trim FY20/21/22E revenue by 2%/1%/1%. After strong cost optimization in Q3FY20, we raise FY20/21/22E EBITDA margin by 33/20/20bps.

 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%/21.6%/22.2% for FY20/21/22E are conservative as ESEL has already delivered 22.2% in Q3FY20. Maintain Buy with a TP of Rs200 (9x FY22E EV/EBITDA).

5% yoy decline in Q4FY20 revenue ESEL’s China facility exports laminates to the US and Mexico. The company is catering to these exports from its India facility as it has underutilized laminate capacity. However, domestic China revenue loss (laminates and laminated tubes) could occur due to Covid-19 and hence we believe that it will impact Q4FY20 top line. We are factoring in a 5% yoy revenue decline in Q4FY20 on account of the drag from China and a fall in polymer prices (lower RM price result in lower sales but conversion margin remains the same).
Margin improvement to cushion revenue loss Despite the China facility shutdown, we expect ESEL’s EBITDA margin to improve 90bps yoy to 19.9% in Q4FY20 on the back of cost-efficiency initiatives (Q3FY20 EBITDA margin improved 330bps yoy). Hence, we maintain our EBITDA/profit estimates.
Outlook: China news flow to weigh in the near term Our FY21/22 revenue growth estimates of 9.1%/7.7% have downward risks due to Covid-19 disruption, while our EBITDA margin of 21.6%/22.2% have upside risks due to costoptimization and efficiency initiatives. China news flow could weigh on the stock in the near term as investors wait for clarity on the resumption of China operations and signs of a demand pick-up. We maintain Buy with a TP of Rs200 based on 9x FY22E EV/EBITDA. Key risks: 1) prolonged shutdown in China; 2) sharp increase in raw material prices; and 3) slowdown in demand for customers’ products.