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Gradual recovery; margins to normalize in FY23

EPL’s Q2FY22 revenue recovery was gradual on transient issue in Europe; remaining regions showed a decent performance. Margins were hurt by the time lag in passing on raw material inflation, and higher labour and freight cost. The company remains confident of a recovery in gross margins over the next few quarters, and is working on certain costs to improve EBITDA margin as well. It is also emphasizing heavily on sustainable tube for grabbing higher wallet / mind share of customers which is impressive. We have cut our EPS estimate by 15% / 7% for FY22 / FY33 on higher operating cost, depreciation and tax. We assume cost inflation to slow down and margins to normalise in FY23. However, we have cut our DCF-based target price to Rs290 (from Rs322) as we cut our terminal growth rate to 5.5% (earlier 6%). Maintain BUY.

* Revenue recovery gradual. In Q2FY22, EPL’s revenue grew only 13% YoY (up 8.9% QoQ) to Rs8.7bn despite higher RM inflation in LLDPE, HDPE and LME (which were up >25% YoY) and merger of Creative w.e.f. Feb’21. EPL clarified it has not lost any wallet share, and transient revenue impact in Europe has led to slower overall growth and shutdown of Russia plant also played a role. It is yet to see revival of tube demand rise from travel tubes which was impacted from lockdown. Oral care revenue rose 10.3% YoY to Rs4.3bn; personal care was up 14.4% YoY to Rs3.6bn. Within personal care, pharmaceutical rose 22% YoY while beauty & cosmetics and other rose at 12.6% and 12.1% YoY, respectively.

* Gross margin shrinks 130bps QoQ to 56.5%. Gross profit was up 9.8% YoY (6.5% QoQ) to Rs4.9bn. EPL has contractual agreements for passing on inflation with 3-month lag, and volatility and sharp movement in price has made efficient passing of raw material challenging. The company has been making efforts to normalise margins with passing input inflation. It expects margins to continue to grow in the next few quarters. EBITDA dipped 4.1% YoY to Rs1.6bn, impacted by 26% rise in other expenses on higher freight costs. Net profit fell 24% YoY to Rs507mn, and was hurt from one-off in associate of Rs60mn and higher effective tax rate.

* Geographical performance. 1) AMESA revenue rose 18.7% YoY to Rs3bn partly due to Creative; EBITDA rose 2.4% YoY to Rs679mn and EBITDA margin dipped 352bps YoY to 22.1%. 2) EAP revenue grew 11.9% YoY to Rs2.1bn; EBITDA fell 6.5% YoY to Rs476mn with EBITDA margin down 440bps YoY to 22.3%. 3) Revenues from the Americas rose 21.7% YoY to Rs1.9bn; EBITDA increased 11% YoY to Rs284mn. 4) Europe revenue dipped 2.9% YoY to Rs1.9bn and was impacted by weaker sales in personal care; EBITDA dipped 26.7% YoY to Rs206mn and EBITDA margin contracted 350bps YoY to 10.9%.

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