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Margin remains under pressure; sequential improvement visible

Earnings above our estimate

* EPLL reported a subdued operating performance (a contraction of 270bp YoY), led by input cost pressures and a currency devaluation, while revenue improved by 9% on back of strong demand and price hikes across regions.

* We largely maintain our FY23/FY24 earnings estimate and maintain our Buy rating with a TP of INR200.

Broad based revenue growth offset by a weak margin

* Revenue grew 9% YoY to INR9.5b (est. INR9.1b) on the back of broad based growth across all regions, except EAP (up 1%). EBITDA margin contracted by 270bp YoY to 15.7% (est. 16.1%) on higher input cost and impact from the currency devaluation. EBITDA fell 7% YoY to INR1.5b (est. INR1.5b). Adjusted PAT declined by 9% YoY to INR462m (est. INR429m).

* Revenue from AMESA/EAP/Americas/Europe grew 17%/1%/20%/9% YoY to INR3.6b/INR2.2b/INR2.2b/INR2.1b on the back of strong price action. EBIT margin contracted by 220bp/430bp/60bp YoY to 9.3%/4.8%/3.4% for AMESA/Americas/Europe, while the same for EAP expanded by 90bp to 17.4%. Margin was impacted by continuing raw material inflation and currency devaluation.

* The Oral Care/Personal care segment grew 17%/31% YoY in 2QFY23, with the share of Personal care segment improving by 260bp YoY to ~48%.

* Revenue grew 7% YoY to INR17.8b, while EBIDTA/adjusted PAT fell 10%/26% to INR2.7b/INR807m in 1HFY23. CFO stood ~INR2.1b v/s INR1.8b in 1HFY22.

Highlights from the management commentary

* Guidance: EPLL is targeting double-digit revenue growth in FY23, led by a robust pipeline. Gross margin is expected to improve sequentially, with the softening of raw material prices and aggressive price hikes; followed by better EBIDTA margin led by cost optimization measures.

* The management expects an improvement in the EAP region going forward. However, China’s zero tolerance policy towards COVID-19 cases will be a hurdle. It expects a huge operating leverage once the region normalizes.

* Its Brazil project is on track, with the first commercial delivery expected by the end of FY23. Apart from the anchor customer, many local and global players are showing interest in this supply base.

Valuation and view

* With the softening of raw material prices and price hikes taken across regions in recent months, we expect a sequential recovery in margin witnessed in 2QFY23 to continue going forwards.

* We expect a revenue/EBITDA/adjusted PAT CAGR of 13%/17%/22% over FY22-24.

* We largely maintain our FY23/FY24 earnings estimate. We value the stock at 20x FY24E EPS to arrive at TP of INR200. We maintain our Buy rating.

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