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Unpacking sustainable growth despite interim hiccups Price hikes and better demand to combat margin pressure

We believe EPL with its new management under Blackstone is destined for longterm growth, driven by: a) growing revenue contribution from Personal Care products, b) a gradual shift to laminated tubes from plastic/aluminum tubes, c) a recovery in travel tube, with the lifting of travel restrictions across the globe, d) higher revenue sustainability owing to long-term contracts in the Oral Care segment, and e) customer additions across geographies as well as greater crossselling opportunities.

However, EPL has been witnessing margin pressures since the last five quarters, which is likely to continue in the next couple of quarters too due to volatility in raw material prices.

We believe EPL deserves to trade at higher multiples than its peers owing to its better global presence, strong management and leadership position in the Oral Care segment. We value the stock at 21x FY24E EPS to arrive at our TP of INR250. We maintain our BUY rating on the stock.

Key risks to our call: a) fluctuation in the key raw material price of polymer, a derivative of crude, which could pressurize margins; b) higher concentration risk as the top 10 clients contribute predominantly to its revenue; and c) slower growth in oral care could impact earnings adversely as the Oral Care segment dominates its revenue mix

Near-term challenges likely on higher raw material costs

EPL has been witnessing margin pressures since the previous five quarters mainly led by rising polymer prices, freight costs (3.0%/3.4% of FY20/FY21 sales) and power costs (2.6%/2.4% of FY20/FY21 sales). Freight costs increased 24% YoY to INR1,039m in FY21 due to shortage of shipping containers caused by the pandemic. Volatile raw material prices amid the geopolitical conflict and supply-side disruption led to a surge in LLDPE/HDPE prices by 69%/71% in the current quarter v/s the same quarter in the previous year. The raw material price volatility is likely to put EPL’s margins under pressure in the near term.

Polymer prices softened during Nov’21-Dec’21; however, prices surged ~25% over Dec’21-Mar’22 due to the third Covid wave. According to the management communication in the recent analyst meet, EPL has already taken two rounds of price hikes in recent quarters and is planning to take further hikes depending upon the directional shift in raw material prices.

Although EPL enters into long-term contracts (of three to five years) with majority of its clients in the Oral Care segment (54% of its total sales in FY21 and ~80% of its oral care revenue originate from these long-term contracts), the company has been unable to pass on the extreme fluctuations in raw material prices and power costs to its clients. Of the overall revenue, EPL generates more than 50% sales through the long-term contracts.

Entry into the Brazilian market is likely to augment growth

The global tubes market is dominated by the Personal Care tube segment with an estimated volume share of 62-64% (26-28b tubes) at present. Out of the 42b tube industry, Oral Care currently contributes ~16b to the total volume, followed by Beauty and Cosmetics at 14b, Pharmaceuticals at 10b and Food & others at 2b. EPL enjoys volume market share of 7-8% in the global Personal Care segment.

The global tube market was valued at USD9.91b in 2020, which is projected to report a 6.2% CAGR to reach USD13b in 2026, according to a Grandview Research report. The laminated tube market constituted 44.8% of the global tube packaging market in 2020 (valued at ~USD4.4b).  EPL currently commands a ~36% global market share in Oral Care and a 7-8% market share in Personal Care segments. EPL was able to maintain its leadership position and dominate about half of the Indian market in FY21. EPL singlehandedly accounted for two-thirds of the overall domestic volumes in FY21.

EPL is likely to add new clients from increasing conversion of plastic bottle/ aluminum tube to laminated tubes. In the past, EPL was able to convert a leading anti-fungal ointment brand to laminated tubes in the AMESA region.  In line with its global vision, EPL has entered into the Brazilian market (market size of ~3.5b tubes – more than 8% of global laminated tube market) under the Oral Care segment with support from its anchor customers. EPL aims to win over the customers, which have shifted to local manufacturing companies, post-exit of Albea from the Brazilian market. Albea is the single largest unlisted global competitor to EPL, which was bought out by a PE firm in 2018. The company aims to expand in new geographies and capture share from the unorganized regional players.

EPL also aims to expand through the inorganic route, wherein synergy benefits would lead to the addition of new customers, product categories, geographies, and/or technologies. In line with its objective, EPL completed the acquisition of Creative Stylo Packs Ltd in India in FY21.

New product launches and novel initiatives promise long-term growth

EPL’s Platina laminate portfolio is expanding fast, with new extensions such as Platina Pro, Platina Clear, Platina Shine, Platina Me, Platina PCR Max, and Platina Bio Max. Some of these laminates are now in advanced storage trials with global customers and are awaiting commercialization. EPL has received strong global recognition for these efforts and the portfolio has been qualified by the Association of Plastic Recyclers (APR) as the world’s first 100% recyclable tubes, including shoulder and caps.

EPL applied for several patents and it was granted 66 patents in FY21. EPL, inline with its objective to migrate to eco-friendly and 100% recyclable packaging, was successfully able to convince its leading brand partners – such as Vicco, Colgate-Palmolive, Unilever, GSK Consumer Health and Hela Gewürzwerk Hermann Laue GmbH – to use recyclable Platina Tubes in India for multiple segments such as Oral Care, Health & Beauty, and FMCG in FY21.

During the pandemic, EPL introduced its line of ‘hand sanitizer tubes’ that fueled Personal Care product growth. Within a short span of time, EPL has become a leading global supplier of hand sanitizer tubes with large quantum of orders.

Earnings momentum to sustain; deserves to trade at premium multiples

We expect EPL’s earnings momentum to sustain, driven by: a) growing revenue contribution from Personal Care products, b) a gradual shift to laminated tubes from plastic/aluminum tubes, c) a recovery in travel tube, with the lifting of travel restrictions across the globe, d) higher revenue sustainability owing to long-term contracts in the Oral Care segment, and e) customer additions across geographies as well as greater cross-selling opportunities.

EPL generated an FCF of INR7.7b over FY17-21. We forecast the company to generate an FCF of ~INR9.2b over FY22-24E, backed by increased profitability and prudent capital allocation.

We expect a revenue/EBITDA/PAT CAGR of 10%/11%/14% over FY21-24, respectively. We believe EPL deserves to trade at higher multiples than its peers owing to its better global presence, strong management and leadership position in the Oral Care segment. We value the stock at 21x FY24E EPS to arrive at our TP of INR250. We retain our BUY rating on the stock.

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