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Input cost inflation dampens margin

Earnings below our estimate

* EPLL reported a subdued operating performance, with EBITDA declining by 13% YoY to INR1.26b as the EAP business was impacted by COVID-led lockdowns in China, continuing raw material inflation, and other input cost increases.

* Factoring in a revenue, EBIDTA, and adjusted PAT miss in 1Q, we decrease our FY23 earnings estimate by 10%, led by a lower operating margin estimate in Americas and Europe. We largely maintain our FY24 estimates on the back of the revenue addition from Brazil.

* We value the stock at 20x FY24E EPS to arrive at TP of INR225. We maintain our Buy rating.

Broad based revenue growth offset by a weak margin

* Revenue grew 4% YoY to INR8.3b (est. INR9b), led by a strong performance across all regions, except EAP. EBITDA margin contracted by 300bp YoY to 15.1% (est. 15%) on higher raw material and other input cost. EBITDA fell 13% YoY to INR1.26b (est. INR1.34b). Adjusted PAT declined by 40% YoY to INR345m (est. INR451m).

* Revenue from AMESA grew 13% YoY to INR3.2b in 1QFY23, led by volume growth across segments. EBIT margin contracted by 130bp to 9.7%, with EBIT at INR309m (down 1% YoY).

* EAP revenue declined by 6% YoY to INR1.9b, adversely impacted by the COVID-led lockdowns in China. EBIT margin contracted by 390bp to 12.8%, with EBIT down 28% YoY to INR247m. * Revenue from Americas grew 20% YoY to INR2b, with growth in Oral Care on the back of a partial recovery in travel tubes and sample tubes. EBIT margin contracted by 200bp to 5.3%. EBIT fell 12% YoY to INR105m, led by an inflationary raw material scenario and higher wages.

* Revenue from Europe grew 11% YoY to INR2b. EBIT margin contracted by 380bp to 1.7%. EBIT declined by 66% YoY to INR34m, led by a surge in input cost amid the ongoing war between Russia and Ukraine.

Highlights from the management commentary

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

* Capex for FY23 will be around the average of last three-to-four year’s depreciation. Its Brazil capex will be over and above its normal capex guidance.

* Its project in Brazil is making good progress, with the recent incorporation of the new entity. The first commercial delivery is expected by the end of FY23. Outlay on Phase I of the project is pegged at INR1.3b.

Valuation and view

* We expect EPLL’s earnings momentum to improve, led by: a) growing revenue contribution from B&C and the Pharma segment, b) a gradual shift to laminated tubes from aluminum tubes and rigid packaging, c) customer additions across geographies as well as greater cross-selling opportunities, d) its entry into the Brazil market, and e) a focus on sustainability, which will propel double-digit profitable growth.

* With the softening of raw material prices and aggressive price hikes in recent months, we expect a sequential recovery in margin from 2QFY23 onwards.

* Factoring in a revenue, EBIDTA, and adjusted PAT miss in 1Q, we decrease our FY23 earnings estimate by 10%, led by a lower operating margin estimate in Americas and Europe. We largely maintain our FY24 estimates on the back of the revenue addition from Brazil.

* We expect a revenue/EBITDA/adjusted PAT CAGR of 11%/20%/29% over FY22- 24E. We value the stock at 20x FY24E EPS to arrive at TP of INR225. We maintain our Buy rating.

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