Ess Dee Aluminium Ltd | Buy

15th March 2010

We met the management of Ess Dee Aluminium earlier this

BUY
month. We believe that there is huge potential in the Indian
Price (INR) 416
pharma packaging space and the company’s growth prospects
looks bright. The stock has high chances of rerating based on
Target (INR) 551 its scalable business model and high entry barriers in the sec-
tor.
Return (%) 32%
Ess Dee Aluminium Limited manufactures aluminum foil-based
Beta (Sensex) 0.5 flexible packaging laminates and polyvinyl chloride (PVC) and
poly-vinylidene dichloride (PVDC) coated PVC-based thermoform-
ing solutions for the pharmaceutical and FMCG industry.

Market Data The stock is currently trading at 10.1, 7.1 and 5.3 times Adjusted
EPS of 41.3, 59.0 and 78.7 for FY11e, FY12e and FY13e respec-
Total Shares (Mn) 32.0 tively. We value the stock at a conservative multiple of 7xFY13e
EPS of 78.7 and recommend a buy with a target price of INR 551.
Mar Cap (INR Mn) 13,334
Investment Rationale
52 Wk High/Low (INR) 577/377
Increase in utilization of idle capacity in FY12 and additional ca-
Avg Qtr Dly Vol (000's) 42 pacity of 15,000 TPA in FY13 to boost topline, revenues likely to
grow at a CAGR of over 30% in next two years

Established relationship with large pharma players and regula-

Shareholding tory approvals for pharma packaging like USFDA to act as entry
barrier for new entrants
Promoter 59.5%
Volumes and realization growth potential high as 50% of current
DII 10.6% pharma packaging domestic demand being met from imports,
also the packaging expense is just 4% of the product
FII 21.4%
Large and diversified client base, total 200 clients, top ten clients
Non Institution 8.4% account for only 15-18% of total revenues

Billet caster to become operational from FY12, to help in back-

ward integration and enhance margin
Stock Code
INR Mn FY09 FY10 FY11e FY12e FY13e
Net Sales 4,515 5,885 7,356 10,114 12,896
NSE ESSDEE Adjusted PAT 30 1,834 1,325 1,890 2,523
Total Capital 6,151 6,322 9,934 11,649 13,197
BSE 532787 Total Equity 3,328 5,067 8,679 10,494 12,942
Debt Equity Ratio (x) 0.5 0.5 0.2 0.1 0.1
Bloomberg EDA IN Total Asset Turnover (x) 0.8 0.9 0.9 0.9 1.0
Adjusted PAT Margin (%) 0.7 31.2 18.0 18.7 19.6
RoE (%) 0.8 43.7 19.3 19.7 21.5
Reuters ESDA.BO EV/EBITDA (x) 23.3 7.5 5.7 4.0 3.1
P/BV (x) 3.5 2.3 1.5 1.3 1.0
Source : MLR, Company Adjusted P/E (x) 388.1 6.3 10.1 7.1 5.3
1 MLR Investment Research
Ess Dee Aluminium Ltd | Buy
15th March 2010

Company Background

Ess Dee Aluminium Limited manufactures aluminum foil-based flexible packaging laminates and
polyvinyl chloride (PVC) and poly-vinylidene dichloride (PVDC) coated PVC-based thermoforming
solutions for the pharmaceutical and FMCG industry.

Mr. Sudip Dutta, is the Executive Chairman of the Board and Managing Director of Ess Dee Alu-
minium Limited and is responsible for the overall operations and management of the Company.
He is also the Chairman of the wholly owned subsidiary, Flex Art Foil Private Limited.

Integrated Business Model

Foil Stock PVC Granules converted into

PVC & PVC/PVDC Films at Goa

Foil Rolling Unit at Hoera, Kamarhati and Daman

Cold Rolling

Foil Converting Unit at Hoera, Kamarhati and Daman

Printers Stock

Flex Foil Pvt Ltd

(100% Subsidiary at various locations)

Baddi Daman Goa Vasai Sikkim

Customers in Pharma and FMCG industry

Source : MLR, Company

2 MLR Investment Research

Ess Dee Aluminium Ltd | Buy
15th March 2010

Capacity utilization rates picking up at IFL, Ess Dee running at

optimum capacity

Ess Dee acquired a majority stake in India Foils Ltd. (IFL) a Ve-
danta Group Company which was under BIFR in November,
2008. IFL was subsequently merged with Ess Dee after approval
from BIFR in October, 2010. The total present capacity of the
company is 37,000 TPA (18,000 TPA for ESS Dee and 19,000 TPA
for IFL). The ESS DEE production unit is currently running at 90%
capacity utilization rate, however the average utilization for IFL
production unit for FY11e is at sub optimal level but has started
picking up and was 80% at the end of Q3 FY11.

Additional capacity of 15,000 TPA to come up in FY13

The company has plans to come up with a new capacity of

15,000 TPA in FY13, however the production process is highly
skill oriented and the training of new manpower will be critical
to effectively utilize the new capacity. The pharma packaging is a
very specialized product and requires a lot of know-how which
comes from regular interaction with pharma companies over a
period of time. The packaging provider has also to be USFDA ap-
proved for supplies to the USA and Ess Dee is having USFDA ap-
proval. This also creates an entry barrier for new players.

Indian pharma sector meets packaging demand from imports,

high growth potential in domestic market

Half of the current requirement of packaging for Indian pharma

sector is supplied from abroad, the domestic suppliers account
for the rest 50% out of which 35% is unorganized and 15% is or-
ganized, this throws good opportunity to companies like Ess
Dee. The cost of packaging in pharma is around 4% of the prod-
uct as compared to around 20% in FMCG and hence there is also
a scope for improvement in realizations.

3 MLR Investment Research

Ess Dee Aluminium Ltd | Buy
15th March 2010

The top ten clients account for only 15-18% of total revenues,
company targeting around 500 clients by the end of 2012

Pharma sector accounts for 85% of revenues of Ess Dee, rest

15% is mainly contributed by FMCG sector. Currently the com-
pany has 200 clients and is targeting around 500 clients by the
end of 2012 which will help in scaling up the business. The top
ten clients account for only 15-18% of total revenues which
brings a lot of stability into the business.

Hub & Spoke model to help integrate the business with the de-
mand in the pharma sector

The company has adopted the hub & spoke model of business.
The two hubs are located in Daman and Kolkata where the foil
stock which is the main raw material is cold rolled into various
thicknesses and laminated based on the packaging requirement.
The company also has nine spokes in major pharma manufactur-
ing bases like Baddi, Goa, Sikkim, etc where the output from the
hubs is further customized and printed according to the need of
the client. The hub & spoke model helps in ensuring just in time
delivery and increase inventory turnover ratio.

Billet caster unit at IFL to help in backward integration

The IFL Hoera plant has a billet caster with a capacity of 11,000
TPA. The company plans to make the billet caster operational
from FY12. Once the billet caster becomes operational the com-
pany can source ingots from domestic suppliers and convert it
into billets which will help in backward integration and enhance
EBITDA Margin. Currently the company is sourcing the raw ma-
terial from GARMCO, a Bahrain based Aluminum Foil Products
supplier.

4 MLR Investment Research

Ess Dee Aluminium Ltd | Buy
15th March 2010

High EBITDA Margin to provide cushion against Aluminum price

fluctuation

The company has been able to maintain a healthy EBITDA Mar-

gin of around 28% in spite of highly volatile aluminum price
which has gone up sharply in recent months. This is because of
high customization and value addition which the company does.
Also 85% of the company’s revenue comes from the pharma sec-
tor where the cost of packaging is just 4% of the product and any
increase in raw material prices can be easily passed on.

Risks & Concerns

 Lack of skilled manpower may delay capacity ramp up

 Cancellation of regulatory approval like USFDA could affect

business

 Any technological development which eases entry barrier

 Cheap imports from China and other countries might put

pressure on margin

5 MLR Investment Research

Ess Dee Aluminium Ltd | Buy
15th March 2010

Financials & Valuations

 The Net Sales is likely to grow by 25% in FY11, increase in

capacity utilization at IFL will boost Net Sales in FY12 by
37.5%, and new capacity will further drive Net Sales by
27.5% in FY13.

 The EBITDA Margin for FY11 is likely to be around 28.1%,

backward integration through the billet caster unit at IFL will
improve EBITDA Margin by 100 bps in FY12, and improve-
ment in realizations in FY13 will further aid EBITDA Margin
by 25 bps.

 The Adjusted PAT Margin is also likely to grow from 18% in

FY11 to 18.7% in FY12 because of improvement in EBITDA
Margin and 19.6% in FY13 led by slight improvement in
EBITDA Margin, Total Asset Turnover and lower interest ex-
pense.

 The Adjusted PAT is likely to go down by 27.8% in FY11 be-

cause the company got tax benefit in FY10; however it is
likely to grow by 42.6% in FY12 and 33.5% in FY13.

 A 15.2% dilution in equity along with a de growth in Adjusted

PAT will lead to 37.3% decline in EPS in FY11. No further eq-
uity dilution is expected in next few years and the EPS is
likely to grow by 42.6% and 33.5% in FY12 and FY13 respec-
tively.

6 MLR Investment Research

Ess Dee Aluminium Ltd | Buy
15th March 2010

Consolidated Quarterly Financials in INR Mn

Income Statement Dec-10 Dec-09 Sep-10 Sep-09 Jun-10 Jun-09 Mar-10 Mar-09
Net Sales 1869.0 1577.0 1622.2 1416.0 1530.6 1303.8 1587.9 1180.1
Net Sales Growth (%) 18.5 - 14.6 - 17.4 - 34.6 -
Operating Expense 1329.6 1096.9 1176.2 1004.3 1101.3 977.4 1229.8 972.9
EBITDA 539.4 480.1 446.0 411.7 429.3 326.4 358.1 207.2
EBITDA Margin (%) 28.9 30.4 27.5 29.1 28.0 25.0 22.5 17.6
EBITDA Growth (%) 12.4 - 8.3 - 31.5 - 72.8 -
Other Item 44.5 10.9 134.8 7.5 33.2 6.0 131.6 -1077.0
Depreciation 49.5 43.3 47.9 43.3 47.9 42.7 44.9 52.7
Interest 61.0 37.7 61.1 53.8 52.9 52.1 56.1 62.9
Tax 93.0 99.8 66.6 79.2 92.5 62.8 96.4 56.9
Minority Interest 0.0 0.1 0.0 0.2 3.3 1.2 0.6 0.0
PAT 380.4 310.2 405.2 242.9 269.2 174.9 292.3 -1042.3
Non Recurring Item 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -720.7
Adjusted PAT 380.4 310.2 405.2 242.9 269.2 174.9 292.3 -321.6
Adjusted PAT Margin (%) 20.4 19.7 25.0 17.2 17.6 13.4 18.4 -27.2
Adjusted PAT Growth (%) 22.6 - 66.8 - 53.9 - -190.9 -
Share Capital 320.5 278.3 294.9 278.3 278.3 278.3 278.3 278.3
Face Value (INR) 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0
Adjusted EPS (INR) 11.9 11.1 13.7 8.7 9.7 6.3 10.5 -11.6

Profits Equity

15,000.0 15,000.0
10,000.0 10,000.0

5,000.0 5,000.0

0.0 0.0
FY11e FY12e FY13e FY11e FY12e FY13e

Net Sales Adjusted PAT Total Capital Total Equity

RoE Valuations

30.0 10.0
8.0
20.0
6.0
10.0
4.0
0.0 2.0
FY11e FY12e FY13e 0.0
FY11e FY12e FY13e
Debt Equity Ratio (x) Total Asset Turnover (x)
Adjusted PAT Margin (%) RoE (%) EV/EBITDA (x) P/BV (x) Adjusted P/E (x)

Source : MLR, Company

7 MLR Investment Research

Ess Dee Aluminium Ltd | Buy
15th March 2010

Consolidated Annual Financials in INR Mn

Income Statement FY08 FY09 FY10 FY11e FY12e FY13e
Net Sales 3,169.4 4,515.2 5,884.6 7,355.7 10,114.1 12,895.5
Operating Expense 2,284.2 4,006.7 4,295.9 5,288.8 7,170.9 9,110.7
EBITDA 885.2 508.5 1,588.7 2,067.0 2,943.2 3,784.8
Other Item 79.0 -390.1 153.6 212.6 0.0 0.0
Depreciation 35.4 103.8 174.1 125.5 184.0 242.6
Interest 76.3 155.7 209.8 246.0 239.8 178.2
Tax 118.1 256.5 -574.5 477.0 629.8 841.0
Minority Interest 0.0 -157.7 0.0 0.0 0.0 0.0
PAT 734.5 -239.9 1,932.8 1,431.1 1,889.5 2,523.0
Non Recurring Item 16.3 -269.7 98.8 106.3 0.0 0.0
Adjusted PAT 718.1 29.8 1,834.0 1,324.8 1,889.5 2,523.0
Dividend 55.7 55.7 64.1 64.1 64.1 64.1

Balance Sheet FY08 FY09 FY10 FY11e FY12e FY13e

Share Capital 278.3 278.3 278.3 320.5 320.5 320.5
Reserve 3,440.9 3,050.1 4,788.9 8,358.8 10,173.5 12,621.6
Total Equity 3,719.2 3,328.3 5,067.1 8,679.3 10,493.9 12,942.1
Loan Fund 999.7 1,478.7 1,996.8 1,996.8 1,896.8 996.8
Minority Capital 0.0 1,255.0 0.0 0.0 0.0 0.0
Deferred Tax Liability 45.4 89.0 -742.1 -742.1 -742.1 -742.1
Total Capital 4,764.2 6,151.0 6,321.8 9,933.9 11,648.6 13,196.8
Fixed Asset 1,558.9 4,001.0 3,784.1 5,158.6 7,224.6 7,482.0
Investment 318.6 0.2 0.2 1,250.2 1,250.2 1,250.2
Cash 194.4 123.8 158.4 1,484.6 368.1 887.3
Inventory 416.2 435.8 546.4 613.0 842.8 1,074.6
Other Current Asset 2,785.2 3,428.2 4,455.7 4,203.3 5,779.5 7,368.9
Total Current Liabilitiy 509.0 1,838.0 2,622.9 2,775.7 3,816.6 4,866.2
Net Current Asset 2,886.8 2,149.8 2,537.6 3,525.1 3,173.8 4,464.6
Total Asset 4,764.2 6,151.0 6,321.8 9,933.9 11,648.6 13,196.8

Ratio Analysis FY09 FY10 FY11e FY12e FY13e

Net Sales Growth (%) 42.5 30.3 25.0 37.5 27.5
EBITDA Margin (%) 11.3 27.0 28.1 29.1 29.4
EBITDA Growth (%) -42.6 212.5 30.1 42.4 28.6
Adjusted PAT Margin (%) 0.7 31.2 18.0 18.7 19.6
Adjusted PAT Growth (%) -95.8 6,048.8 -27.8 42.6 33.5
Total Asset Turnover (x) 0.8 0.9 0.9 0.9 1.0
Debt Equity Ratio (x) 0.5 0.5 0.2 0.1 0.1
RoE (%) 0.8 43.7 19.3 19.7 21.5
EV/EBITDA (x) 22.5 7.2 5.5 3.9 3.0
BVPS (INR) 119.6 182.1 270.8 327.4 403.8
P/BV (x) 3.4 2.2 1.5 1.2 1.0
DPS (INR) 2.0 2.3 2.0 2.0 2.0
Dividend Yield (%) 0.5 0.6 0.5 0.5 0.5
Adjusted EPS (INR) 1.1 65.9 41.3 59.0 78.7
Adjusted P/E (x) 375.6 6.1 9.7 6.8 5.1
Source : MLR, Company

8 MLR Investment Research

Ess Dee Aluminium Ltd | Buy
15th March 2010

Research Analyst
Saurabh Singh +91 22 40023026 saurabh.singh@mlrsecurities.com

Head of Research
Aditya Damani +91 22 22630125 aditya.damani@mlrsecurities.com

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9 MLR Investment Research