IGI Logo

Margin recovery on track; focus shifts to revenue growth acceleration

EPL’s Q1FY24 print shows recovery in margins (gross profit margin up 375bps QoQ to 57.8%; and EBITDA margin up 150bps QoQ to 17.5%) aided by price hikes, lower input prices and optically lower realisations. However, revenue growth has decelerated, particularly in AMESA (and India). EAP (China) revenue growth recovery is also slower than anticipated. Despite the slowing consumption in developed markets, EPL was able to grow its gross profit by 12.7% YoY to INR 5.3bn. It appears Brazil ramp-up is delayed by a quarter, but the company has stepped up utilisation from Jul’23. It is close to signing up another customer in Brazil, which provides visibility for growth in the Americas. Europe business has higher dependence on personal care segment, hence a meaningful cut in discretionary consumption could impact EPL.

With margin recovery, the company’s focus is now shifted to accelerating revenue growth. We have cut our EPS estimates for FY24E / FY25E by 2-3%. Accordingly, we reduce our target price to INR 230 (earlier: INR 240) valuing the stock at 20x FY25E EPS. Downgrade to ADD (from BUY).

Revenues up 9.4% YoY (down 6.1% QoQ) to INR 9.1bn

Revenue growth was aided by improvement in EAP (up 11.5% YoY), easing lockdown in China, and steady growth in the Americas (up 10.4% YoY). However, Europe revenue growth was slower at 7.8% YoY as it was hurt from slowing consumption growth. AMESA revenues rose only 5% YoY, impacted by Egypt currency devaluation, and India growth also slowed. Company said, though it has taken selective price increases in the Americas and Europe, it has started passing lower input cost prices to customers. Brazil ramp-up is delayed by a quarter, though the company has stepped up utilisation since July’23. Oral care revenues rose 6.9% YoY to INR 4.3bn. Personal care segment was up 11.8% YoY to INR 4.1bn. Beauty & cosmetics showed growth of 15.7% YoY. Pharmaceutical revenues were down 1.7% YoY and ‘others’ were up 9.2% YoY. Laminate revenues rose 11.8% YoY to INR 644mn.

Gross margin rose 375bps QoQ to 57.8%

Gross profit was up 12.7% YoY to INR 5.3bn. This benefited from better product mix (rise in personal care mix), selective price hikes and lower input costs (which optically increases margin as denominator/realisation drops). Employee and other expenses decelerated to 12.5% and 3% YoY. EBITDA grew 26.6% YoY to INR 1.6bn and was impacted by Brazil establishment cost. EBITDA margin improved 150bps QoQ to 17.5%. Interest cost grew 93% YoY and 14% QoQ to INR 235mn. PAT was up 63% YoY to INR 0.5bn.

Geography-wise performance

1) AMESA revenues rose 5% YoY to INR 3.4bn; EBITDA was up 15.5% YoY to INR 732mn, and EBITDA margin was at 21.8%, down 200bps QoQ. 2) EAP revenues rose 11.5% YoY to INR 2.1bn; EBITDA rose 30.7% YoY to INR 489mn with EBITDA margin decline at 22.8%, up 470bps. 3) Revenue from the Americas increased 10.4% YoY to INR 2.2bn, but EBITDA rose only 3.3% YoY to INR 250mn. EBITDA margin expanded 30bps QoQ to 11.5%. 4) Europe revenues rose 7.8% YoY to INR 2.1bn; EBITDA was up 40% YoY to INR 242mn and EBITDA margin slightly dipped to 11.4%, down 10bps QoQ.

Conference call highlights

1) Brazil operations ramp-up was slightly delayed; however in July’23 it reached expected levels on utilisation. Company expects Brazil business to directionally move towards better utilisation levels as supply ramps-up. Company is also close to adding another customer in Brazil. 2) AMESA performance was impacted by Egypt currency devaluation. Company sells products in Egypt in local currency. 3) Standalone (India) revenues have also grown slower at ~7.5% YoY. 4) Americas margin was impacted partly due to insurance-related issue. 5) Europe was hurt from slowdown in consumption. 6) Company revenues are optically lower as it is now passing lower input costs to contracted customers. 7) With margins significantly recovered, management focus is now to drive revenue growth acceleration.

Risks

1) Lower than expected revenue growth, particularly in AMESA; and 2) continued pressure on margins, particularly in the Americas/Europe.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://secure.icicidirect.com/Content/StaticData/Disclaimer.html
SEBI Registration number INZ000183631

Above views are of the author and not of the website kindly read disclaimer