The Hindu Business Line : `We plan to focus on US, European markets'

In terms of geographies, EPL plans to focus on the US and the European markets. According to Mr R. Chandrasekhar, Chief Operating Officer (Global), EPL, growth in these mature markets will come from grabbing market share from competitors. Excerpts from the interview:

Your 2004 annual report mentions that many of your clients are consolidating in select geographies. You have just acquired Telcon Packaging of the UK. What does it mean for your growth? Would you now look at brownfield expansion rather than acquisitions?

Consolidation of clients is a reality. For instance, ten years ago P&G, Lever and Colgate had a number of facilities. Progressively, this number has been going down driven by economies of scale and the emergence of trade blocs.

EPL has presence in almost all trade blocs. That is one factor we keep in mind when we look for acquisitions. It is our belief that the process of consolidation will continue rigorously as new trade blocs emerge. Overall, duty tariffs are coming down, so free movement of goods becomes a reality. Today, there is enough technology and logistics to make distribution easier from one country to another. All these factors drive towards consolidation. EPL's growth is through focus on the Americas and Europe. It will also grow in other markets; it will be a mixed bag — through acquisitions and greenfield expansion. In the last one year, EPL acquired Arista, a UK-based plastic tube company, expanded capacities in the laminated tube facility in Germany and has now acquired Telcon Packaging, a laminated tube company.

We are largely driven by the short-term and mid-term opportunity. But Arista fits into our overall long-term strategy of developing a second product.

For many other product categories Europe is considered a matured market. How come this happens to be the growth market for EPL?

Growth in Europe is not because of the expansion of the market but on our ability to grab market share from competitors. Growth in the Indian and Chinese markets was entirely based on converting metal tubes into laminated tubes on a cost-efficient platform. This model will work in many of the markets where there is an opportunity across industries such as pharma, which predominantly uses metal tubes. In mature markets such as Europe and the US, the game plan has to be a share shift plan.

Is it right to assume that in 2004 when your European share shot up to 13.4 per cent from around two per cent, the steep jump came from grabbing market share from competitors?

This increase in market share has come from the Arista acquisition and expansion of the German operation. Possibly, in 2005 there will be a further increase because the greenfield plant in Russia has commenced operations and the Telcon acquisition has been done.

About 50 per cent of your products were developed in the last 18 months. That emphasises product development as a differentiator. Will investment in that go up?

Product development for us at EPL is around the substrate or the tube laminate we use. The challenge for EPL is to continuously rework the formulations of the substrate. We have to do it in a way we become more cost-efficient and competitive in the marketplace. At the same time, ensure that the product quality is intact either in terms of barrier to flavour or fragrance.

Additionally, we are faced with the challenge of rising prices of polyethylene. There is tremendous pressure from our consumers to ensure that we do not get into a situation where you have runaway prices. Over the last few years we have been steadily increasing the hardware aspect of how much we are spending in the laboratory. That has become very important.

When you start using new polymers you have to understand the fingerprint to find out what it can and cannot do. That requires high level of sophisticated equipment.

This investment has been steadily increasing. Capital expenditure on our R&D has been steadily increasing and that process will continue.

How much does the Telcon acquisition add to your 32 per cent global market share in laminated tubes? Is there not an urgency to develop plastic tube business because chunk of your business is in laminated tubes?

The Telcon acquisition does not add much share to our business. To develop our plastic tube business we need to work on a different technology platform. We need to replicate some of what we learnt from our laminated tube business. We are looking at the plastic tube business as one of the growth engines.

During 2004 China's contribution to your operations has slipped. What is your outlook on the Chinese operations?

Two things are happening in the Chinese market. Multinational products have been steadily increasing their market share vis-à-vis domestic. And a number of Chinese companies are entering the cosmetic market.

EPL has a large base of MNC customers as well as local Chinese companies as clients.

Initially, we started with local Chinese players. Because of the churn in the marketplace local companies are under pressure as they are losing market share. Tube producers are also under pressure because their capacities are idling.

For a capital-intensive business, idle capacity is a very expensive proposition and creates mind-boggling pressures on the balance-sheet.

It is our belief that we are at the fag end of that price pressure point. No new tubing capacities are being put up. Besides, local companies are realising that there is no sense in lowering prices any further at a time when raw material prices are rising. We expect price stabilisation to take place in the second half of 2005.

With crude prices going up, is there a case to look at non-polymer products?

The alternatives to polymer are aluminium and paper. It is a definite no for metal. Prices of metal as well as paper have gone up.

Input costs for metals have moved up. In the last 15 years we have not had a situation where consumers have moved from laminated tubes to metal. We define our core competency around plastic conversion, co-extrusion, lamination, compression moulding and injection moulding.

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