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One-off events drag profitability…

About the stock: EPL is the world’s largest manufacturer of laminated plastic tubes (~8 billion tubes annually) catering to the FMCG and pharma space.

* Oral care segment contributes ~54% of total topline while the rest comes from the personal care category

* Focus on debt reduction, improving RoE, RoCE (~15%, 16%, respectively)

Q2FY22 Results: Lower profitability in Europe and one off losses dragged overall profitability.

* Consolidated revenue growth of 13% YoY to | 870 crore led by America and Amesa regions (up ~22%, ~19% YoY, respectively). However, revenue decline of ~3% YoY in Europe region restricted overall topline growth

* Higher raw material prices and other expenses (up 26% YoY) dragged EBITDA margin down 326 bps YoY to 18.3%

* PAT fell 23% YoY to | 53 crore due to losses from associates of ~| 7 crore

What should investors do? EPL’s share price has grown by ~2x over the past five years (from ~| 116 in November 2016 to ~| 222 level in November 2021).

* We maintain our HOLD rating on the stock

Target Price & valuation: We roll over our valuation on FY24E and value EPL at | 245 i.e. 10x EV/EBITDA on FY24E EBITDA

Key triggers for future price performance:

* Performance of Amesa region has been a laggard (FY18-21) mainly due to lower volume offtakes. However, consolidation of Creative Stylo and improved product mix would help drive revenues of the region

* Performance of America and European regions has remained volatile amid pandemic led challenges. This, coupled with improved revenue contribution from personal care segment would help drive future margins

* Focus on maintaining a quality balance sheet, going forward

Alternate Stock Idea: We like Mold-Tek Packaging in the packaging space.

* Strong volume growth of ~19% in FY21-24E led by capacity expansion and client additions in the high margin product categories

* BUY with a target price of | 850

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