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Higher raw material price drags margin

* Q4 EBITDA/PAT missed estimates by 11%/15%, dragged down by a 175bps yoy decline in gross margins due to higher raw material costs. Management guided that they have started passing on higher raw material (RM) costs with a 3-month lag. We expect absolute EBITDA spreads to normalize by the end of Q1FY22.

* We increase our FY22E/23E revenue by 5%/6% to factor in the pass through effect of higher RM costs. We reduce our FY22/23 EBITDA margin assumptions by 130bps/116bps to adjust for the pass through effect. We retain FY23E absolute EBITDA and reduce FY22E EBITDA by 1% to factor in the lag in passing on RM costs in Q1FY22.

* We expect EPL to maintain its absolute EBITDA spreads, considering 1) it passes on increased RM prices to customers by Q1FY22, 2) manufacturing efficiency initiatives through phase II of project Phoenix, and 3) improvement in the product mix.

* We maintain Hold and roll forward to 10x Jun’23E EV/EBITDA (10yr/5yr avg: 6.9x/9x) to arrive at our revised TP of Rs260. We believe that EPL is fairly valued and we await better entry points.

AMESA and EAP revenue growth on favorable base

Revenue from AMESA and EAP increased 28%/37% yoy on the favorable base due to Covid19 as well as improved wallet share in existing customers. Revenue growth in Americas and Europe was largely in line with expectations at 2%/6% yoy. Travel related demand had a large contribution in Americas. With receding Covid-19 cases and vaccination in Americas, especially USA, management expects travel to bounce back in FY22 and drive demand in Americas. Overall, Oral care revenue declined 2.6% yoy (Emkay est.), whereas non-oral care revenue increased 45% yoy due to a favorable base in EAP and AMESA. Adj. EBITDA margins declined in all geographies, except Europe, due to raw material pressure and Covid19 related costs: AMESA (-400bps yoy), EAP (-130bps yoy), Americas (-510bps yoy) and Europe (+250bps yoy). Margin in Europe increased due to higher utilization on the back of new customer wins in the oral care segment.

Payout to be in the range of >50%

EPL’s FY21 dividend payout stood at 54%. Management guided to maintain higher dividend payout going forward as well. We have modelled in 60% dividend payout assuming no large inorganic acquisitions.

Outlook: CMP factors in improvement in balance sheet and earnings We maintain Hold and roll forward to 10x Jun’23E EV/EBITDA to arrive at our revised TP of Rs260. Our change in TP is entirely based on roll-forward to Jun’23E. Key risks: 1) demand slowdown for client products; and 2) inability to pass on the increase in raw material prices to customers.

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