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Tuesday, December 05, 2006

IPO - Ess Dee Aluminium


Expensive packing

Ess Dee Aluminium, promoted by Sudip Dutta in February 2004, manufactures aluminium foils and polyvinyl film-based packaging products for the pharmaceutical sector. The company took over Atlanta Vinyl, which produces polyvinyl films, on 1 April 2005. It acquired the entire share capital of Flex Art Foil, churning out printing aluminium foil-based packaging products, on 31 March 2006. It is now a 100% subsidiary of Ess Dee Aluminium.

Ess Dee Aluminium converts cold rolling aluminium foil stock to aluminium foil, which is further converted into printers’ stock through lamination for strip pack or coating for blister pack. The company also manufactures thermoforming polyvinyl chloride films (rigid PVC films) as well as PVdC (polyvinylidene chloride)-coated PVC barrier thermoforming films for blister packaging. Along with subsidiary Flex Art Foil, it provides end-to-end packaging solutions to the pharmaceutical end users.

In the current fiscal, Ess Dee Aluminium has increased its foil rolling capacity from 3,600 tonnes per annum to 9,100 tonnes and will ramp it further to 18,000 tonnes by next year. To fund the expansion project, the company has lined up a public issue to raise Rs 139.20 crore – Rs 156.60 crore. In May/June 2006, it had raised Rs 21.70 crore through issue of 4,75,205 equity shares at Rs 160, and 19,05,500 equity shares at Rs 74 through private placement with a clutch of investors. The net proceeds are intended to set up additional manufacturing facilities for aluminium foil-based packaging products at Daman at Rs 114.79 crore, for general corporate purposes, and public issue expenses. The current consolidated gross block (investment in fixed assets) is only Rs 22.35 crore.

Strengths

  • The growth of pharmaceutical packaging is directly linked to the growth of the pharmaceutical industry, where packing material cost is about 4-5% of sales. Ess Dee Aluminium is also planning to venture into flexible packaging by pursuing specialised aluminium foil-based packaging applications for the food and FMCG sectors, where growth will be driven by the spurt in demand for convenience and branded products.

Weaknesses

  • As the major portion of the funds of Ess Dee Aluminium are blocked in inventories and debtors. The company has negative cash flow at the operating level for all the periods for which financials are available. The negative cash flow at the operating level in FY 2006 and H1 FY 2007 stood at Rs 6.05 crore and Rs 2.59 crore, respectively.
  • Aluminium foil stock (aluminium sheets) is the major raw material for Ess Dee Aluminium’s packaging products. Aluminium prices have been quite volatile. If the company is not able to pass on any increase in the cost of aluminium to its customers, profit will be affected. The company imports aluminium sheets, the largest component of raw material cost, So it is exposed to foreign currency risk.

Valuation

The annualised (consolidated) EPS for half-year ended September 2006 on post-issue equity works out to Rs 9.1 and PE 22.0 - 24.8 at the price band of Rs 200– Rs 225. Ess Dee Aluminium converts aluminium foils with some value addition as packaging material for pharmaceutical products. TTM PE of Aluminium- Sheets/Coils/Wires/Others industry is 5.2.