Q1FY24 Review: EPL Ltd: Price-hike lever largely played out

9 Aug 2023 , 11:16 AM

EPL’s Q1FY24 results were below estimates, with sales growth below analysts of IIFL Capital Services expectations across geographies. Ebitda grew 23% with margin improving by 184bps to 16.9% Top-line performance was impacted by multiple factors such as price pass-through and demand softness in Americas and Europe. With the price-hike lever largely played out, analysts of IIFL Capital Services believe that the low-hanging fruits of margin improvement have been plucked. Analysts of IIFL Capital Services downgrade their recommendation on the stock from BUY to ADD and value the stock on 20x Jun’25 EPS at Rs230. 

Below estimates: 

EPL reported Q1FY24 estimates below analysts of IIFL Capital Services estimates, driven by a sub-par top-line performance. Revenue growth was softer than expectations across geographies, and was impacted by multiple factors such as price pass-through (in case of contracted customers), demand softness in Americas and Europe and a slower pickup in China. Overall revenues grew 9.4% (6% below estimate); Ebitda grew 22.8% (11% below estimate) with Ebitda margin expanding by 184bps to 16.9%. 

Price-hike lever largely played out: 

Significant efforts in the past year have gone towards getting price hikes for non-contracted customers. The price-hike lever to improve margins has largely played out; going forward, management expects price increases to be selective, few and far between. With the softening of major commodities such as polymers and aluminium, there would be price pass-through for the contracted customers, which could impact revenue growth in the near term. 

RECO downgrade to ADD: 

Analysts of IIFL Capital Services downgrade their EPS estimates by 7%/7%/6%, as they lower their sales growth estimates and factor in higher depreciation costs. Ebitda margin has recovered steadily from the low of 15% in Q1FY23 to 16.9% in the current quarter, and is likely to improve further with price deflation in key commodities. However, with the price hike lever largely played out, analysts of IIFL Capital Services believe the low hanging fruits of margin recovery are plucked. The stock has moved up 26% in the past 3 months and trades at 20x FY25 EPS, broadly pricing in the margin improvement in their view. Analysts of IIFL Capital Services downgrade their recommendation from BUY to ADD on the stock and value it on 20x Jun’25 EPS to arrive at a price target of Rs230.