>ESS DEE ALUMINIUM LIMITED (EQUITY RESEARCH)

INVESTMENT RATIONALE

■ Still a fair bit of steam left: We had recommended Ess Dee Aluminium (EDAL) in February 2009 at a price of Rs 135 with a target of Rs 223. Since then, the stock has gained 145% (point to
point return) and has breached our target price. However, we believe that there is still room for significant upside from a medium term perspective. On account of the merger with India Foils (IFL), the company is expected to land quite a few benefits. Foremost amongst them would be a tremendous boost to its capacity, which will now enable the company to grow its consolidated topline by 27% CAGR between FY09 and FY12 as opposed to the earlier projection of 12% between FY09 and FY11. Thus, not only are we adding projections for one more year, but the underlying growth is also expected to be a lot higher. Furthermore, continued strong demand for packaging and stable outlook for margins make the company a good low-risk bet from a 2-3 year perspective.

■ IFL merger benefits: Ess Dee Aluminium (EDAL) has recently acquired 90% stake in India Foils Limited (IFL), from Madras Aluminium Ltd (MALCO) a Vedanta Group Company. It infused Rs 1.2 bn into IFL and would merger it during the current fiscal. It has plans to revive IFL, currently under BIFR through a Rehabilitation Scheme. EDAL along with MALCO have infused Rs 2.61 bn in IFL in the form of equity and preference shares to repay all outstanding
debt IFL has with various lenders, thus making it totally debt free. IFL is a frontrunner for the distinction of being one of the earliest manufacturers of aluminium foil in Asia. For FY09, IFL‟s net sales stood at Rs 980 m and the company is profitable at the EBITDA level. The merger will benefit EDAL in the following ways:

• Additional capacity: When fully integrated, the IFL-EDAL combine will have a capacity of 36,000 tonnes, twice the level of EDAL‟s present capacity, making it the largest pharmaceutical foil manufacturing company. The synergy would provide EDAL with additional capacity, thus providing it with an opportunity to grow its volumes. Further, IFL has three manufacturing facilities located in West Bengal backed by adequate front end conversion capacity which would allow EDAL the flexibility to offer value added products. This also saves the time and cost involved in greenfield expansions.

• Access to client base: EDAL would also get access to IFL‟s existing clients and higher international presence (IFL exports to over 35 countries globally). With the help of new capacities under its belt, the company can look at launching a basket of new products to meet the growing demand for packaging.

• Reduction in tax liability: EDAL would have the option of using IFL‟s accumulated losses (Rs 3.30 bn YTD) for reducing its tax liability in the event of a merger.

To see full report: ESS DEE ALUMINIUM