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Covid-19 headwinds to weigh in the near term

* EPL’s EBTIDA/PAT came in below our estimates by 6%/7% due to a 320bps EBIT margin decline in Americas and a 130bps decline in the AMESA region. According to management, the muted margin performance was due to continued investments in geographies despite short-term headwinds on consumption stemming from Covid-19.

* Revenues increased 7.9% yoy to Rs7.7bn, in line with our estimate of Rs7.6bn. Management expects Covid-19-related demand headwinds to weigh in on near-term revenue performance as travel-related tube demand continues to suffer.

* Management also highlighted some pressure on gross margins going ahead due to a lag in passing on the cost increase arising from rising polymer prices. We leave our revenue estimates unchanged but trim our FY21-23E EBITDA/PAT by 2-4% as we factor in margin headwinds.

* We maintain Hold rating with a revised TP of Rs250, valuing it on 10x Mar-23E EV/EBITDA (implied P/E of 26.5x/23x on FY22/23E EPS). In our view, EPL is fairly valued and await a better entry point.

EAP and Americas deliver growth but AMESA’s woes continue: EPL’s revenues from Americas increased 19% yoy on new customer wins and ramping up pilot clients to commercial orders. Strong growth in EAP continued in Q3 as well, with 9M revenue already above FY20 revenue. EAP revenues increased 17.4% yoy on penetration into high-growth regional beauty and cosmetic and pharma clients. AMESA revenue declined 6.1%/8.8% yoy/qoq and was a negative surprise to us given improved qoq recovery among end-clients. As per management, the weakness in AMESA was due to sluggish demand in the beauty and cosmetics segment. Overall oral care revenues increased 2.4% yoy (Emkay est.), while non-oral care revenues increased 14.6% yoy (Emkay est.). Adj. EBITDA margin declined in across all geographies except for AMESA due to continued investments in the business for future growth and Covid-19-related operational costs: AMESA (+50bps yoy); EAP (-20bps yoy); Americas (-330bps yoy); and Europe (-40bps yoy).

Balance sheet continues to strengthen: EPL’s net debt was reduced by 55%/31% yoy/qoq on robust operating cash-flow generation. We expect EPL to generate Rs8.3bn in cumulative FCF over FY21-23E on a modest 10% revenue CAGR over FY21-23E. In our view, EPL can increase its capex if growth picks up

Outlook: CMP factors in earnings growth and strong balance sheet:  As we await a favorable entry point, we maintain Hold rating with a revised TP of Rs250 vs. (Rs260 earlier) based on 10x Mar-23E EV/EBITDA (implied P/E of 26.5x/23x on FY22/23E EPS). Key risks: 1) demand slowdown for client products; and 2) inability to pass on the increase in raw material prices to customers.

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