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Volatile RM prices impacts profitability

* EPLL reported a weak operating performance in 2QFY22, despite a demand recovery, due to volatile input cost, higher freight cost, and pressure on supply-chains.

* Factoring in its 2QFY22 performance, we decrease our FY22E/FY23E earnings estimate by 20%/8% due to higher RM prices and expenses on account of increased freight cost and supply-chain disruption. We value the stock at 25x FY23E EPS to arrive at our TP of INR285. We maintain our Buy rating.

Strong recovery across geographies drives revenue growth

*  Revenue rose 13% YoY to INR8.7b (est. INR8.7b), led by a strong performance from AMESA, EAP, and Americas. EBITDA margin contracted by 330bp YoY to 18.3% (est. 21.9%) on higher RM cost and other expense. EBITDA stood at INR1.6b (down 4.1% YoY). Adjusted PAT fell 24% YoY to INR507m (est. INR885m).

* AMESA: Revenue rose 19% YoY to INR3b in 2QFY22, led by a recovery in the domestic market with the lifting of travel restrictions. EBIT margin contracted by 340bp to 11.4% and EBIT fell 8% YoY to INR352m.

* EAP: Revenue grew 12% YoY to INR2.1b on the back of a gain in market share. EBIT margin contracted by 420bp to 16.5%, with EBIT at INR353m (down 11% YoY).

* Americas: Revenue grew 22% YoY to INR1.9b, driven by a pick-up in travel and sample tube sales, given the increase in traveling activity. EBIT margin contracted by 110bp to 9%. EBIT stood at INR168m, up 8% YoY.

* Europe: Revenue fell 3% YoY to INR1.9b due to a decline in demand from the Personal Care category, which was affected by recent COVID-related restrictions. EBIT margin contracted by 420bp to 4%. EBIT declined by 53% YoY to INR75m.

* Revenue grew 10% YoY to INR16.7b in 1HFY22, whereas EBITDA/PAT dropped by 3%/15% to INR3b/INR1.1b. CFO stood at INR1.7b in 1HFY22 v/s INR2b in 1HFY21.

Highlights from the management commentary

* Europe was a challenge due to a decline in the Personal Care category. However, the company did not report any loss in wallet share. Personal Care performance has been affected due to COVID-related restrictions and lockdowns.

* Input cost: Increase in RM prices affected operating performance. The surge in freight cost and supply-chain constraints impacted growth. Prices are expected to remain at elevated levels till Feb-Mar’22.

* Shift to Platina: In 2QFY22, EPL converted and commercialized two brands with sustainable Platina tubes for its biggest partner in India.

Valuation and view

* We expect higher earnings growth over FY23E/FY24E on the back of:

a) growing revenue contribution from Personal Care products,

b) gradual shift to Platina tubes from Plastic/Aluminum tubes,

c) a sharp recovery, 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 and greater cross-selling opportunities.

* Factoring in its 2QFY22 performance, we decrease our FY22E/FY23E earnings estimate by 20%/8% due to higher RM prices and expenses on account of increased freight cost and supply-chain disruption.

* We expect a revenue/EBITDA/PAT CAGR of 10%/13%/18% over FY21-24E. We value the stock at 25x FY23E EPS due to growing revenue share from the Personal Care segment (higher margin business) and growing shift towards Laminated tubes, which would aid growth. Our TP of INR285/share implies a 29% upside. We maintain our Buy rating.

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