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Strong pipeline provides growth visibility

We interacted with EPL’s MD and CEO Mr. Sudhanshu Vats for an overall update on its business performance. The discussion included some key factors such as: a) future growth drivers, b) product pipeline/new initiatives, c) gradual shift from plastic/aluminum to laminated tubes, and d) growing share of Personal Care products. Here are some of the key insights from that discussion:

Long-term contracts to mitigate risk and help maintain growth momentum

* EPL’s current product pipeline is robust and substantially higher when compared to previous years. FY22 product pipeline is 30-40% higher than that of FY21. It currently has additional orders of ~80m/90m/40m/20-30m tubes in India/Europe/the US/China, which provides long-term revenue and volume growth sustainability.

* Recent fluctuations in RM prices are unlikely to impact margin. EPL enters into long-term contracts (three-five years) with majority of its clients in the Oral Care segment. The company passes on any fluctuations in raw material prices, power cost, and foreign exchange to its clients with which it has signed longterm contracts. Of overall revenue, EPL generates over 50% sales through long-term contracts. Nearly all contracts entered with clients in the Oral Care segment are long term in nature.

* In FY20, ~55% of the company’s revenue was generated by the Oral Care segment. Of this, over 80% of revenue was through long-term contracts. These provide steady business and growth visibility, and also mitigate the risk of fluctuations in raw material prices and forex rates.

* Going forward, EPL is expected to record double-digit growth on the back of strong order book pipeline. This will help it maintain over 20% margin in the medium-to-long-term.

Pick-up in domestic performance expected soon

* Volumes in the AMESA region (which majorly comprises of India) suffered a setback due to lower B&C (beauty and cosmetics) sales. This was due to lower sales from a large B&C client, whose business operations were affected due to the COVID-led lockdown. It also faced headwinds in upwards of ~200m tubes.

* Despite major headwinds faced throughout FY21, EPL maintained its leadership position and dominated ~50% of the Indian market.

* EPL is in talks to sign a major customer in the domestic market. Excluding that client, the company single-handedly accounts for two-third of overall domestic volumes in India.

* Americas is another region where Personal Care volumes (sample and travel tubes) were significantly affected due to the COVID-led lockdown. Extension of the lockdown in the UK, Germany, and other European countries downplayed the revival in volumes from the Personal Care segment (Europe’s B&C volume shrunk 30%).

* Post stabilization of operations at the customers’ end (affected due to the lockdown) in India and normalization of B&C demand, EPL’s India’s business is expected to record double-digit growth in the near-to-medium term. With increased distribution of a COVID-related vaccine in the European region, the B&C business is bound to pick-up faster than previously anticipated. Margin is expected to increase to double-digits from 5.7% as of FY20.

New initiatives to support growth

* EPL’s Platina/Green Maple Leaf in the Oral/Personal Care segment have been recognized by the Association of Plastic Recyclers (APR) as fully recyclable laminated tubes, which maintain product freshness.

* The company is expected to gain additional clients from increasing conversion of plastic/aluminum to laminated tubes. In the past, the company was able to convert a leading anti-fungal ointment brand to laminated tubes in the AMESA region (earlier used aluminum tubes).

* The management’s long-term focus is to increase revenue share from Personal Care products. Over FY14-20, revenue share of Personal Care increased by 590bp to 45%. The Personal Care tubes market has a much higher value (3-4x) than Oral Care. The Pharma tubes market (part of the Personal Care segment) is 2-2.5x that of the Oral Care tubes market.

* EPL completed acquisition of Creative (acquired 72.5% stake) in Feb’21. In the future, the management may undertake more such acquisitions, where synergy benefits may lead to the addition of new customers, product categories, geographies, or technologies.

* From Jan’21 onwards, the management initiated Phase – III of Project Phoenix, under which it plans to improve operational efficiency. Above initiatives are expected to increase revenue share of Personal Care products, which in turn is likely to improve overall margin.

Valuation and view

* The Europe region is expected to be the next major growth driver for the company. Margin in this region is expected to increase to double-digit levels (in line with other major geographies). EAP is likely to continue on its growth trajectory on the back of new client additions, increasing revenue share from Personal Care, and strong business pipeline from regional players.

* We expect the earnings momentum to sustain, led by: a) increasing revenue contribution from Personal Care products (high margin product), b) greater shift from plastic/aluminum tubes to laminated tubes, c) new product categories – recyclable tubes (Green Maple and Platina), d) strong product pipeline, and e) benefits from innovation and scale of operations.

* We expect revenue/EBITDA/PAT CAGR of 12%/16%/25% over FY20-23E. We value the stock at 25x FY23E EPS. Our TP of INR333/share implies 50% upside. Maintain Buy.

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