Q2FY24 Review: EPL Ltd: Negative pricing impacts top-line

9 Nov 2023 , 10:15 AM

EPL’s Q2FY24 results were broadly in-line at Ebitda level (growth of 21% during the quarter) while PAT was 23% below analysts of IIFL Capital Services estimate (higher interest costs and tax rate). Brazil ramp up has progressed well and is likely to contribute to near term growth in Americas. While the management is tapping on the themes of sustainability and conversion from extruded to laminated tubes (in beauty & cosmetics category), these are likely to yield results over the medium term in analysts of IIFL Capital Services view. Maintain ADD rating with a target price of Rs215. 

Broadly in-line at Ebitda level: 

EPL’s sales grew 5.6% (4% below estimates), while Ebitda grew 20.8% (broadly in-line). PAT grew 9% and was 23% below analysts of IIFL Capital Services estimates, driven by higher interest costs and tax rate. The revenue miss was driven by Europe and higher inter-segmental sales. Ebit margins were better than expected in AMESA and Americas. Growth in Americas at 13% was boosted by steady ramp up in Brazil geography. 

Focus on accelerating top-line growth: 

Revenue growth in Q2FY24 has been impacted by negative pricing (related to softening of major commodities), which is likely to continue over the next few quarters. Volumes in Brazil have been ramped up to 80% of anchor customer commitment and management expects this to increase to 100% by Q4FY24, even as efforts are on to on-board more clients in this geography. Management reiterated its focus to accelerate growth in the beauty and cosmetics category by driving conversion from extruded tubes to laminated tubes, leveraging its recently developed neo seam technology (near zero side seam). 

EPS downgrade of 8%/2% in FY24/25: 

Analysts of IIFL Capital Services factor in a lower sales growth due to negative pricing, while their Ebitda estimates are broadly unchanged. They downgrade their EPS estimate for FY24 by 8% to factor in higher depreciation and interest costs but broadly maintain their FY25/26 EPS estimates. While the low hanging fruits pertaining to margin expansion have been plucked in the form of price hikes, the efforts to accelerate top-line growth are likely to bear fruit over the medium term in analysts of IIFL Capital Services view. Maintain ADD rating with TP of Rs215.