Benefitting from the pandemic

* ESEL beat our street high revenue/EBITDA/adj. PAT estimates by 13%/12%/40% on the back of 21.2% growth in Personal Care. Personal care growth was boosted by a surge in demand for hand sanitizers, which ESEL capitalized by signing up with 50 brands globally. Constant currency growth stood at 13.6%, reflecting a 4% gain on forex.

* EBITDA margins improved 253bps yoy to 19.8%, aided by cost efficiencies and operating leverage. ESEL has already achieved 176bps margin improvement in Phase-I of its cost-saving initiative Project Phoenix and has already launched Phase-II in Q1FY21. Hence, we expect the margin improvement to sustain and see upside risks to our FY21 EBITDA margin estimate of 21.6%. Management indicated that they have passed on the benefit of low raw material prices to customers.

* We expect ESEL’s accelerated growth in Personal Care to continue amid high demand for sanitizers, forex tailwind, and recovery in the beauty and cosmetics segment. We increase our FY21 revenue/EBITDA estimates by 3% but leave our FY22/23 estimates unchanged. Our annual FY21E EPS estimates remain unchanged due to Rs161m impairment provided on assets in Russia as ESEL realigned its manufacturing to increase efficiencies.

* We increase our target multiple to 10x EV/EBITDA (vs. 9x earlier), considering a high FCF yield of 8.2%/6.3%/6.7% for FY21E/22E/23E. We maintain strong Buy and increase our TP to Rs230 as we roll forward to Sep-22E EV/EBITDA.

Sharp recovery in EAP revenue surprises us: ESEL’s EAP revenues increased 45.6% yoy on the back of 90.8% growth in the Personal Care segment and double-digit growth in the Oral care segment. Management mentioned that there was some spillover from Q4FY20 to Q1FY21. However, like-to-like growth was robust at over 70% in Personal Care after considering the effect of the spillover. Europe revenue increased 30.3% yoy mainly on the back of new order wins and ramp-up of volumes in existing orders. Revenue from Americas increased by 10.5% yoy, while AMESA revenues decreased 2.7% yoy due to weak sales in India in April. Management guided that India business has returned to growth from June onward. EBITDA margins improved for all geographies except AMESA – EAP (+660bps yoy), Americas (+90bps yoy), Europe (+510bps yoy) and AMESA (-20bps yoy).

De-leveraging continues: ESEL net debt declined 48% yoy/10% qoq, aided by robust operating cash flow generation. With major capex behind, we expect ESEL to return excess cash to shareholders or pursue inorganic growth opportunities. ESEL trades at an attractive FCF yield of 8.2%/6.3%/6.7% for FY21E/22E/23E.

Outlook: We increase our target multiple to 10x EV/EBITDA (vs. 9x earlier) considering high FCF yield of 8.2%/6.3%/6.7% for FY21E/22E/23E. We maintain strong Buy and increase our TP to Rs230 as we roll forward to Sep-22E EV/EBITDA.

Key risk are: 1) slowdown in demand for its products, and 2) the inability to pass on the increase in raw material prices

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