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Margins likely to recover in coming quarters

EPL’s Q4FY21 revenue beat was 5.3%, largely on RM inflation while gross profit was 1.5% higher and EBITDA miss was 9.3%. Long-term contracts allow RM inflation pass-through with 3-month lag, which should catch up in subsequent quarters. Company is also undertaking multiple measures to expand margins in FY22, which looks good. Acquisition of Creative has helped increase revenue growth and we expect more acquisitions going forward. We are also impressed with EPL’s efforts on sustainability through its Platina range of recyclable tubes, which could be a key competitive differentiator in the market. We raise our EPS estimates by 0.5% each year in FY22E/FY23E on factoring-in the Creative merger. Accordingly, we increase the target price to Rs322 (from Rs318). Maintain BUY.

* Revenues were higher on RM inflation and acquisition of Creative Style Packs. In Q4FY21, EPL’s revenues grew 17.6% YoY to Rs8.1bn on high inflation in LLDPE, HDPE and LME (which were up >25% QoQ) and merger of Creative w.e.f. Feb’21. America and Europe revenues grew slower YoY at 2.1% and 5.6% and were impacted by labour shortage; demand recovery however remained encouraging. Personal care segment grew 30% YoY on low base and inclusion of Creative. Oral care was up 11.8% YoY, but laminates revenue rose only 0.2%.

* Gross margin shrunk 180bps YoY on delay in RM inflation pass-through. Gross profit rose 14% YoY to Rs4.6bn. EPL has contractual agreements for passing on inflation with 3-month lag, which means margins should normalise only by Q2FY22. Also, it should benefit from increase in automation in developed markets, and in-house manufacture of caps and closures. Company has also shut its Russia plant operations. EPL’s EBITDA rose 0.9% YoY to Rs1.4bn and was impacted by 27% rise in other expenses. Net profit rose 17% YoY to Rs568mn on lower ETR.

* Geographical performance. 1) AMESA revenues rose 28.5% YoY to Rs2.8bn partly due to Creative; EBITDA rose only 7.2% YoY to Rs565mn and EBITDA margin dipped 410bps YoY to 20.4%; 2) EAP revenues grew 37% YoY to Rs1.8bn on strong orderbook and focus on fast-growing regional players; EBITDA rose 27% YoY to Rs329mn with EBITDA margin dip of 140bps YoY to 17.8%; 3) Revenues from the Americas rose 2.1% YoY on new customer conversion across categories and conversion of bottle-to-tube products; EBITDA fell 21% YoY to Rs309mn on high base; and 4) Europe revenues grew 5.6% YoY to Rs2bn (won a large customer in oral care), and the business now caters to all large oral care brands; EBITDA grew 25% YoY to Rs323mn; EBITDA margin expanded 250bps YoY to 16.1%.

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