EPL ltd Analysis : focus on sustainability
Stock Call & Research Report by ICICI Direct Research
Sector : Packaging
CMP Rs. 172, Target Rs. 225 ( 30 % upside)
Target Period : 12 Months
EPLL discussed the near- and long-term outlook with utmost focus on sustainability. The management:
Highlighted the key industrial trends beneficial for EPLL such as: a) the shift towards sustainability, b) the shift from aluminum tubes to laminated tubes, c) the shift from rigid packaging to tubes, d) carton-less packaging, and e) premiumization through design.
Laid out its long-term strategy to become the most sustainable packaging company by offering the most sustainable packaging solutions.
Focused on growth and margin improvement through customer acquisitions and cost control measures in the near term.
Global shift to laminated tubes bodes well for EPLL
The global tube market volume is around 42b of which, the laminated
and extruded tubes account for 81% share i.e. 34b tubes. Of this 34b
tubes, laminated accounts for two-thirds volume share. Aluminum tubes
volume is ~8b globally. The global tube market, excluding in-house tubes,
is 36b.
EPLL is a major global player with around 20% market share on blended
basis, selling ~8b tubes annually. Category wise, it has 33% market share
in oral tubes; 10% in beauty & cosmetics (B&C) and pharma; and 8% in
food, home and industrial tubes segment.
Over the years, the industry has witnessed a shift from traditional tubes
such as aluminum and rigid to laminated tubes. Following are the key
industry trends highlighted by the management
Recycle, Reduce and Reuse – Majority of the customers is converting
into recyclable tubes. Overtime, the percentage of Post Consumption
Recycling (PCR) in EPLL’s tubes will increase.
Shift from aluminum tubes to laminated ones – Despite having the
best barrier properties, aluminum tubes lack collapsibility, which is a
critical characteristic for a tube. While, laminated tubes have better
appearance and qualities of both metal and plastic, also offers
collapsibility.
Shift from rigid packaging to tubes – Tube consumes less plastic than
a rigid packaging and with growing sustainability, companies are
moving towards tubes. For instance, Pantene has shifted from
bottles to tubes for its hair products.
Carton-less packaging – Companies are saving costs by removing the
cartons and focusing more on improving the look of the tubes.
Premiumization through design – Premiumization is being focused
through launch of innovative products such as oval tubes, fluorescent
tubes and improving the quality of printing to make products more
attractive. EPLL aspires to be in the value added products (VAP) in
tubes.
Long-term focus on sustainability
The company has laid out its long-term roadmap with an aspiration to become
the world’s most sustainable packaging company. EPLL also has modified its logo
by adding ‘Sustainably’ at the bottom.
The company will follow the 4×4 mantra with four Cs and four enablers:
Management will drive profitable growth and enable product sustainability
by focusing on four Cs which are: 1) Category – growth in B&C and Pharma
will be faster than Oral care; 2) Customer – EPLL will serve both the large
global MNCs and regional players; it will intensify its focus on regional and
local customers through customer segmentation; 3) Country – build wallet
share in all key countries – Brazil, Sub-Saharan Africa, South East Asia, and
EU; and 4) Cost – EPLL is working on various cost saving activities such as
caps and laminates insourcing, reducing the waste and improving organizational effectiveness.
To drive Process and People sustainability, EPLL has laid down four enablers
which are: 1) Innovation – ambition-driven program; 2) Sales & Marketing –
hunt down growth; 3) Digital Transformation – becoming future ready and
driving automation using IOT on shop floor as well as other initiatives to
improve efficiencies; and 4) One EPLL – enable horizontal working.
Both these strategies will offer the most sustainable packaging solutions and will
help EPLL to become the most sustainable packaging company.
Short-term focus on growth and margin improvement
The management indicated that raw material inflation is still having pressure on
the margins.
EPLL is aiming to grow faster by capturing higher market share, acquiring small
customers, aggressively gaining market share from small competitors, doubling
down on sustainable offerings and continuing its excellence on service and
quality. The management expects high single-digit growth in the Oral care
segment while B&C and Pharma to register a high double-digit growth as EPLL
has low market share and wider room to grow in those areas.
Price increase – EPLL will pass on raw material, freight, packaging and other cost
inflation to its customers. It will look for one time top-up with all the contracted
customers. Further, it is looking forward for proactive price increases with noncontacted customers. The management is ensuring that the new business wins
are margin accretive.
Control Costs – The company is ensuring cost control across all line items in the
financials. EPLL has an ongoing cost rationalization program known as Phoenix.
It is working on various costs saving initiatives such as insourcing of caps &
laminates, reducing wastages, improving working capital and organizational
efficiencies.
Other key highlights from the investor meet
EPLL has faced significant challenges over the last two years such as inflation,
unpredictability of prices, supply chain disruption, increase in freight charges,
container shortage and Russia-Ukraine crisis that impacted its margins
adversely. The challenges were further aggravated by serious shortage of labor during the pandemic along with shortage of key raw materials. However,
management has stated that the margins will improve once things normalize.
Sustainability: EPLL continues to invest in R&D for developing products, which
are thinner or are having less weight. Further, it is looking for alternative
material such as paper or bio-degradable product to make its product more
sustainable.
Platina: EPLL has launched ‘Platina’, which is fully recyclable – this will help the
company to move towards its goal of sustainability. Platina is the most superior
100% recyclable tube. EPLL sold 300m tubes of Platina in FY22 and is aiming to
double the sales. Such products give a competitive advantage to the company.
EPLL faced competitive intensity from regional and local players as the company
faced huge resistance from customers for price increase.
All the mass brands have already shifted from plastics or rigid packaging to
laminates. Further, there is a lot of opportunity from emerging brands as they
have lower volumes and customers are willing to pay higher prices. This resulted
in faster growth in laminated tubes than the extruder tubes.
The company will continue to focus on tubes business only, as the management
believes that the business has tremendous growth opportunity in the long term.
EPLL’s global category mix between Oral and B&C/Pharma: AMESA – 50:50;
Europe – 60:40; EAP – 65:35; and Americas – 75:25.
The B&C and Pharma segment is bigger than Oral in terms of value. Average selling
price of B&C/Pharma is 2-3x of Oral with margins of the former being better.
Valuation and View
We expect EPLL’s earnings momentum to improve, driven by: a) growing
revenue contribution from B&C and Pharma segment, b) a gradual shift to
laminated tubes from aluminum tubes and rigid packaging, c) customer
additions across geographies as well as greater cross-selling opportunities, and
d) focus on sustainability, which will propel double-digit profitable growth.
We expect a revenue/EBITDA/PAT CAGR of 9%/19%/29% over FY22-24,
respectively. We value the stock at 20x FY24E EPS to arrive at our TP of INR226.
We retain our BUY rating on the stock
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