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Second COVID wave disrupts recovery

EPL’s FY21 Annual Report highlights its performance and key initiatives in the Personal and Oral Care segments. The report also focuses on the business performance and change in dynamics across the four geographies: AMESA, Americas, EAP, and Europe. During FY21, EPL achieved a record high revenue share from Personal Care, despite tepid performance from the two major geographies: Americas and AMESA. Key highlights below:

Personal Care segment records strong growth despite a demand shortfall in certain regions

* Personal Care: EPL’s revenue contribution from the Personal Care segment saw a 100bp YoY increase to 46% in FY21, with a corresponding revenue growth at 15% YoY to INR12.8b. However, the segment’s performance was offset by slower pick-up of Personal Care volumes in Europe and Americas, due to lockdown restrictions in the backdrop of the second COVID wave. With the impact of pandemic gradually subsiding, both regions are expected to report strong volume growth in the near-term. Going forward, we expect revenue share from Personal Care to increase further with the resumption in demand for travel and sample tubes in Americas and addition of new clients across geographies. This is in line with EPL’s long-term strategy as it plans to raise revenue contribution from the Personal Care segment to ~50% over the next 3-4 years.

* Oral Care: Revenue share from Oral Care fell to 54% in FY21 (v/s 59% in FY15). The corresponding increase in revenue was 10% YoY to INR15.1b. EPL continues to maintain its global leadership position in the Oral Care segment with a market share of ~36%. EPL’s long-term relationship with clients will provide sustainable revenue visibility in the long run as majority of Oral Care revenue accrues from long-term contracts. Wallet share gain with marquee consumers in Europe and Americas and market share gain in China are some of the major growth drivers for Oral Care.

* New launches: In FY21, EPL’s Platina Tube, with an HDPE closure, was recognized by APR (Association of Plastic Recyclers) as the world’s first fully sustainable and completely recyclable tube with a cap combination. With large FMCG conglomerates moving towards more sustainable and environmentally friendly options, EPL’s Platina Tube is expected to gain traction in the near-to-medium term.

EAP and Europe at the helm

* The EAP region reported robust revenue growth (26% YoY) at INR7.8b in FY21, due to higher penetration in new categories and gains from a sharp Vshaped economic recovery in China. Revenue from the Personal Care category rose 52% YoY to INR2.6b on the back of a strong business pipeline and increased focus on fast growing regional players. EBIT from EAP surged 44% YoY to INR1.4b in FY21, with a corresponding EBIT margin up 230bp to 18.3% in FY21, due to strong topline growth, leading to the kicking-in of operating leverage and a 590bp increase in revenue from the Personal Care segment to 40.4%.

* Revenue from Europe grew 13% YoY to INR7.7b on the back of strong new customer wins across larger MNCs and local customers. Revenue from the Personal Care segment grew ~15% YoY to INR4.8b in FY21, with a corresponding rise in revenue share to 65.2% in FY21 (v/s 64% in FY20). EBIT from Europe rose 64% YoY to INR625m in FY21, largely due to fixed cost leverage on the back of strong revenue growth. EBIT margin expanded by 250bp YoY to 8.1% in FY21 due to increased revenue share from the Personal Care segment.

* Revenue from AMESA grew 6% YoY to INR9.9b due to sluggish demand in B&C on account of the COVID-19 outbreak. Revenue from the Personal Care segment grew marginally (2.1% YoY) to INR3.9b in FY21. EBIT from AMESA was stagnant at INR1b in FY21. Corresponding EBIT margin contracted by 60bp YoY to 10.9% as growth in Personal Care revenue was stagnant. The same was partly offset by a boost in performance from the recently launched Hygiene products.

* A 5% YoY revenue growth was recorded in the Americas at INR6.5b. Growth in the region was due to new customer wins across categories, higher shift from bottles to plastic tubes, and increased crossing selling opportunities. Revenue from the Personal Care segment rose 5.8% YoY to INR1.6b in FY21, whereas revenue share from the Personal Care category fell 40bp to 25%. EBIT from Americas dropped 20% YoY to INR712m in FY21. EBIT margin contracted by 340bp YoY to 10.9% in FY21 due to a drop in revenue share from Personal Care products like travel and sample tubes.

Strategic initiatives taken by EPL

* Phoenix 2.0: EPL has initiated Project Phoenix 2.0 and identified targets and various initiatives for FY22. Under this project, EPL eyes better machine utilization, raw material reduction, use of alternate materials, rationalization of manufacturing, and constant benchmarking. This focus has yielded strong EBITDA gains over the years, and is likely to support growth going forward.

* ePAD: Recently, the company went live with its shop floor automation initiative ePAD. It aims to digitize its shop floor processes by integrating Edge Computing, Mobile Computing, Mobile Device Management, IoT (Internet of Things), and ERP on a single platform.

* New launches: EPL’s Platina Laminate portfolio is expanding fast, with new extensions like 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 is awaiting commercialization. EPL has received strong global recognition for these efforts and has been qualified by APR as the world’s first 100% recyclable tubes, including shoulder and caps.

Steady cash flow and prudent capital allocation to benefit in the long run

* Revenue/EBITDA/adjusted PAT grew 12%/10%/18% YoY in FY21 to INR30.9b/INR6.1b/INR2.6b. Gross margin improved marginally (10bp YoY) to 58.2% in FY21, which can be attributed to a marginal drop in RM cost. Except for RM cost, all other operating expense line items rose marginally (as a percentage of sales), leading to a slight contraction (40bp) in EBITDA margin to 19.8%.

* EPL incurred a capex of INR1.9b/INR2.8b/INR2b in FY20/FY19/FY18. Capex rose to INR3b in FY21. Of which, INR1b was due to the addition of machineries on acquisition of Creative Stylo Packs.

* Net debt increased by 15% YoY to INR3.1b, which includes INR1.67b from cash proceeds paid for acquisition of Creative Stylo Packs. After adjusting for acquisition cost, net debt stands at INR1.4b.

* CFO decreased marginally (1% YoY) to INR4.6b in FY21 due to 15% increase in working capital. FCF dropped by 77% YoY to INR647m due to addition of assets and goodwill post merger of Creative Stylo Packs. After adjusting for addition of assets/goodwill, FCF declined by 5% to INR2.7b, which was due to increase in working capital.

* Inventory days remained unchanged at 49 days. Receivables/payable days increased by five/three days (to 70/50 days). Overall working capital days increased to 69 days from 67 days.

* Contingent liability for the year dropped by 36% YoY to INR479m due to a sharp reduction in ‘disputed direct taxes’ to INR109m (v/s INR326m in FY20).

Valuation and view

* The earnings momentum would continue on the back of: a) higher revenue sustainability owing to long-term contracts in the Oral Care segment, b) a steady increase in revenue contribution from the Personal Care product category, c) growing traction in the volume of recyclable tubes (viz. Platina), along with an increasing shift toward Laminated Tubes (from plastic/aluminum tubes), and d) a volume uptick across product segments and geographies (with the impact of COVID-19 gradually subsiding).

* We expect a revenue/EBITDA/PAT CAGR of 13%/17%/24% over FY21-23E. With the impact of COVID-19 gradually subsiding, we expect Personal Care products to gain traction across geographies, particularly in Americas. We value the stock at 26x FY23E EPS. A steady increase in revenue share from the Personal Care segment (higher margin business and lower sensitivity to RM cost) and new product launches is expected to aid growth. Our TP of INR320 per share implies a 34% upside. We maintain our Buy rating.

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