EPL – Essential Packaging Company

I made a presentation on EPL Ltd. at the VP Meet in Kolkata on 18.06.2023. I feel there’s a high probability of a turnaround in the business as supply side challenges ease, and we’ll be able to see better margins and return ratios in the next few quarters.

Posting a summary of my thesis and attaching the Presentation as well. Please have a look at the pdf for detailed understanding of the product mix, as I had explained that using the slides from the EPL Investor Presentation and Annual Report.

EPL Ltd. – Recovery and Beyond

About EPL Ltd.

• Erstwhile Essel Propack Limited
• The company was acquired by Blackstone in August 2019 from the the Essel Group
• Manufactures 8 billion tubes per year
• 36% global market share in Oral Care tubes, so 1 out of every 3 tubes used globally is manufactured by EPL
• 7-8% global market share in Personal Care tubes
• 50% of Sales from Long Term contracts
• Strong relationships with the leading companies in Oral Care, FMCG, Beauty & Cosmetics, Pharma, Home Care, etc.
• Raw Materials – Polymers and Aluminium Foil

Key Data:

• CMP: Rs. 202 (as on 18.06.2023)
• Market Cap: Rs. 6425 Cr.
• 52 Week High/ Low: 209/ 147
• Lifetime High: 300 (August 2020)
• P/E: 28
• P/B: 3.2
• Mcap to Sales: 1.74
• EV/ EBITDA: 11
• Dividend Yield: 2.12%
• ROE: 12% (Range: 9-18%)
• ROCE: 12% (Range: 11-19%)
• Debt/ Equity: 0.45
• Promoter Holding: 51.5% (Blackstone)

Focus on Sustainability:

• Vision of EPL is to be the most sustainable packaging company in the world
• “People are dumping the carton and the tube is becoming the 1st moment of truth for consumers, so better printing and design in the tube is the first priority”
• Plan to double the sale of sustainable tubes in FY24
• Company was the first in the industry to obtain certification from the Association of Plastics Recycler (APR, USA) for a 100% recyclable Laminate
• 2.5x sustainable tubes delivered during the year contributing to 10% of total volume
• Supplying sustainable tubes at almost the same price as non-sustainable tubes for faster adoption (for market share gains)

Future Guidance:

• Double digit growth in revenue along with margin improvement
• Drive recovery in EAP; expected recovery of economy post Covid
• Ramp up Brazil volume and expand customer base in Brazil
• Continued focus on
• Margin improvement through mix and cost efficiency
• Efficient capital allocation
• Manufacturing location optimization
• Targeting to double sustainable tubes volume next year with continued focus on customer conversion to sustainable solutions
• Hungry for acquisitions – they have identified M&A opportunities in Europe
• Margin accretive personal care segment to be a key growth driver
• Large part of business strategy is premiumization, which comes from driving higher growth in sectors like Personal care and beyond division
• Region wise strategy:
• • AMESA: Growth in market share + Premiumization
• • EAP: Low base + China recovery
• • Americas: Price hike + Market share gains + Brazil plant growth
• • Europe: Price hike + Market share gains + M&A

Brazil Plant:

• Brazil plant has commenced commercial operations in May 2023
• Long term commitment from anchor customer
• “Going to be one of the only major global players in this space and many of the multinational customers as well as local customers are evincing huge interest”
• Ramp-up production from Q1FY24 and expand customer base in Brazil
• Margin accretive from 1st quarter itself
• Tubes manufactured in-house by the largest FMCG player (Colgate). However, the market is evolving and the management sees a huge growth opportunity in this region.
• Market leader is Amcor (Switzerland), but plants far from demand areas

Management Commentary:

• Brazil operations have started and is undergoing customer validation. Company expects some sales in FY23 though significant addition to volumes should start from Q1FY24. Existing customer is discussing to add more SKUs and EPL had incoming interests from other customers as well in Brazil.
• India demand for tubes remains intact. EPL has a fair mix in product categories and customers, which protects it from market share volatility.
• EPL also does not expect significant slowdown in revenue growth with lapping-up of price increases in base. Growth is expected to accelerate in EAP and Europe.
• EPL is in discussions to increase prices for buyers in Western countries due to rise in operating costs. Easing inflation in select cost lines should benefit EBITDA margins.
• “Over last two years, a sizeable amount has been spent on developing products that are recyclable, reusable and reducible.”
• “From our side, we should have a full capability to offer recyclable products in every segment. We are ready. We should have the capability to produce when customers asks. That we are ready up to 50%. And we will be ready over a period of time to do up to 85% full effective. But the current rate of conversion is only 10%. So, we are well adept in term of meeting the market demand, offering products for wide range of products.”

Why I like EPL:

• Quasi consumer play
• Quality business in a cyclical down cycle
• Cyclical, where margins, ROE and ROCE have bottomed out
• Front loaded Capex, which will eventually show a higher rate of change in earnings and return ratios
• High probability of turnaround in the next 1-2 years
• Possibility of rerating (Mold Tek Packaging, for example)
• Little need to raise capital
• Proven management team, having a focus on growth
• Strong cash flow generation + consistent dividend payout
• Reasonable valuations
• Sticky business + Large Opportunity + Growing Market Share + Growing Customer Wallet Share + ESG + Fast scalability
• Focus on Sustainability
• Leading in Innovation through Patents & IP
• First mover advantage when it comes to shift to sustainable packaging
• Competitive advantage in tubes is with the supplier that uses the lowest amount of plastics, where they are the best in the industry
• Betting on the jockey, ie. Anand Kripalu
• ROCE + Scalability = Wealth creation
• Feel there will be huge M&A in the industry going forward

Key Risks:

• Higher raw material costs
• Currency fluctuation
• Continued pressure on margins, particularly in Europe
• Moderate competition from unorganised segment
• Erstwhile promoter, ie. Ashok Kumar Goel holds 7.60% stake (Subhash Chandra’s brother)
• Slower than expected customer demand for sustainable solutions

Management interview post Q4 results – Anand Kripalu (MD & Global CEO) – EPL’s Anand Kripalu On Revenue Outlook | Midcap Radar | CNBC-TV18 – YouTube

Regards,
Saurabh.
Presentation – EPL Ltd.pdf (1.9 MB)