EPL: Business Analysis

EPL’s product is probably the first thing we interact with when we wake up. EPL manufactures the tube in which toothpaste, beauty creams and medical ointment are packed. It is the medium through which we identify our favorite brands and use them on a daily basis.

EPL is the global leader in the manufacturing of laminated tubes which are used to package toothpaste, cream, ointments etc. The company has units operating across countries such as USA, Mexico, Colombia, Poland, Germany, Egypt, China, Philippines and India. These facilities cater to diverse categories that include brands in Oral Care, Beauty & Cosmetics, Pharma & Health, Food, and Home. It produces more than 800 crore tubes annually. Blackstone acquired the majority stake in the company during FY20 and has articulated a goal to deliver capital efficient consistent earnings growth.

Product Portfolio

The product portfolio of EPL consists of laminates, laminated tubes, extruded tubes, caps and closures.

Laminates are composite materials made from LLDPE that form the core barrier of the tube body. They help keep contents fresh and safe with multiple layers of foil. 

Laminated tubes are widely used for packaging in personal care, food, pharma and industrial applications. These tubes have excellent barrier properties and sealability and enable high filling line speed during the packaging process.

Extruded tubes are used to pack high-end, low-volume products across industries. They offer enhanced shelf and superior brand salience on shelf and are an attractive and durable packaging solution for a variety of product lines.

Categories Served

Oral Care 

The global market for oral care tubes is about 1500 crores p.a. (volume).

EPL is the globally dominant supplier of tubes to the toothpaste makers. It has a 36% market share globally i.e., 1 in every 3 toothpaste tubes sold globally, is made by EPL. EPL is a preferred global partner to Oral Care giants like Colgate Palmolive, P&G, Unilever and GSK. It offers them a range of exclusive solutions with high-quality barrier coatings that help fluids remain fresh and effective for longer. The company also invests in dedicated packaging facilities attached to customer's factories. Many leading oral care brands rely solely on EPL to provide them extended shelf life and enhanced visibility.

Oral care has earned the reputation for EPL courtesy of its long-term supply relationships with the globally dominant toothpaste makers. However, this segment can only be expected to grow in low single digits and most of the incremental growth will come from pocketing new clients, market share gains and product premiumization. Revenue in the oral cares segment has grown at a CAGR of 10% over the last 10 years.

Beauty & Cosmetics

Beauty & Cosmetics, as a category, witnesses fast-changing demands of brands which means that EPL has to constantly keep exploring new ideas in decoration, structure and chemical resistance. The aesthetics of the packaging plays a very important role in beauty & cosmetics segment. EPL leverages its relationship with global FMCG players whom it supplies under oral care verticals to drive sales under beauty & cosmetics segments.

EPL has slowly expanded its offerings and reach under the beauty & cosmetics vertical and going forward, this segment should drive the growth as it is a much larger market with significant scope for winning clients over and penetrate newer areas.

The total market for beauty & cosmetics and pharmaceuticals tubes is about 2300 crores p.a. globally.

Pharmaceuticals

Pharmaceuticals vertical demands technical qualifications and the company has to maintain clean-room readiness, barrier properties, dosage and application. EPL is fully equipped to produce 100% sterile tubes, and produces tubes that are used in the packaging of ointments and lotions for a variety of medical applications. Aluminium tubes are quite prevalent in pharmaceuticals vertical and EPL is striving hard to direct its clients towards using laminated tubes.

Other Segments

Besides oral care, beauty & cosmetics and pharmaceuticals vertical, EPL also caters to the need of food & nutrition and home care customers. It actively targets food & dairy brands looking to move from rigid plastics to laminated tubes, saving both material and cost. EPL has solutions for viscous products like sauces, pastes, ketchup and honey, that combine convenience, economy and controlled dosage.

The home care category offers packaging to store industrial, cleaning and hygiene-related products. Uses cases include packaging for cleaning products, lubricants, pesticides or adhesives.

The personal care vertical (every other segment except oral care) has grown at a CAGR of 15% over the last 10 years.

The Co-Creation Model

EPL works closely with its client teams to define, design, develop, and deploy new ideas. It engages with its customers across the entire cycle from concept to commercialization, co-creating ideas, consulting on product & process, and hand-holding right through to the delivery of viable solutions. Some of the popular packaging products developed under the co-creation model domestically include Himalaya Oil Clear Face wash and Lip Balm, Medimix Body Wash, Beardo Face Mask, Joy Face Wash, Colgate Vedshakti Toothpaste among others.

Globally Diversified Operations

EPL has a globally diversified operation base with manufacturing facilities spread across 10 countries. It has 6 manufacturing facilities in India, 5 in China and 1 each in Germany, UK, Egypt, US, Mexico, Colombia, Poland, Russia and Philippines.

EPL has segregated its operations into four regions namely, EAP (East Asia Pacific), AMESA (Africa, Middle East and South Asia), the Americas and Europe.

EAP

EAP consists of manufacturing facilities in China and Philippines. More than 90% of the revenues in this region is contributed by China alone. EAP region’s contribution in EPL’s total revenues was ~24% during FY22. The region is witnessing fast accretion of revenues from personal care segment for EPL. Given the vastness of the Chinese market, EPL still has significant room to grow its share EAP region. The revenues in the EAP region have grown at a CAGR of 9% for the pas 5 years while EBIT has grown at a CAGR of 10% during the same period. EBIT margin is highest in this region.

AMESA

AMESA has the largest share in EPL’s total revenue accounting for 34% of total sales. India is the largest market in this region accounting for more than 80% of EPL’s revenues from AMESA. The company has consolidated its manufacturing operation in western India at a single facility in Vapi while it has also commissioned a facility in Guhwati.

The AMESA region is home to a vast population base which is also growing rapidly. EPL here has an opportunity to drive volume growth over a sustained period of time. India being a pharma hub also presents opportunity for EPL to target customer conversion from aluminium to laminated tubes.

Revenues in AMESA region has grown at a CAGR of 5% while EBIT has been flat over the last 5 years.

Americas

The Americas operations of EPL includes manufacturing facility in US, Colombia and Mexico thus, it serves both the North and South American markets. The region accounts for 21% of EPL’s revenues. In the last few years, the company has made investments in expanding its footprint in the west coast of the USA, and in operations to develop a strong sales pipeline.

Further, the company has recently announced its entry in Brazil. EPL has incorporated a wholly owned subsidiary in Brazil that has started the construction of factory. The company has highlighted that it is entering the market on the back of commitment from a large global customer. Any meaningful contribution from Brazil will only start from FY24.

Revenues from the Americas region has grown at a CAGR of 9% while EBIT has been flat over the last five years.

Europe

Europe accounts for 21% of EPL’s revenues. The company has units in Poland, Russia and Germany. Personal care segment dominates the revenue in Europe while oral care share is also improving. Revenue growth in this region has been healthy with 5-year CAGR of 11% while EBIT growth has faltered at 2% CAGR. The EBIT margin in this region is also the lowest with low single digit number. The offtake of customers in Europe has been lower than expected.

Acquisition by Blackstone

Blackstone acquired a majority stake in EPL in April 2019 by buying out the stake of its promoter Ashok Goel at 134/share. The acquisition triggered an open offer in which Blackstone further acquired 26% stake in the company for 139/share.

In Sept 2020, Blackstone cashed out 23% of its stake at 256/share in a block deal where several institutional investors were allotted shares. The move was towards enhancing the “liquidity” and getting rid of the extra stake picked up in the open offer. Nonetheless, Blackstone does not have any plans currently to cash out further.

Blackstone has revamped the Board of Directors (BOD) of the company with influx of a number of seasoned professionals from FMCG industry. Davinder Singh Brar has been appointed as the chairman of the board. He is the promoter of GVK Biosciences Private Limited, Excelra Knowledge Solutions Pvt. Ltd and Davix Management Services Private Limited. He has served as the CEO and MD of Ranbaxy Labs. Other key appointees include Uwe Ferdinand Roehrhoff who served as the CEO of Perrigo Company, a manufacturer of OTC health and wellness solution and Dhaval Buch who was the Global Chief Procurement Officer for Unilever.

Anand Kripalu has been appointed as the MD & CEO of EPL. He has more than 30 years of industry experience in the FMCG industry. Anand Kripalu has held the executive positions in companies like Diageo India, Mondelez International and Unilever.

Heightened Raw Material Prices Have Depressed Margins

EPL is currently bearing the brunt of spike in raw material prices. Quarterly EBITDA margin runrate has consistently declined during each quarter of FY22. EBITDA margin of 15% reported during Q4FY22 was one of the lowest figures reported by EPL in past few years.

Though EPL enters into long term commitments with its customers that have price escalation clauses, the wild fluctuations in raw material prices have made it difficult to pass on the cost to the customers. There is generally a lag of one quarter in passing on the cost increases. While cost increase will eventually be passed on to the customers, EPL has also resorted to operational efficiencies to control costs. Reduction of scrap and waste, opportunistic procurement, increasing value added product sales are some of the measures being adopted by the company.

One thing to be noted here is that in an environment were raw material prices decline substantially, the realization will drop and revenue growth may falter.

The key raw materials include polymers like HDPE and LLDPE and, aluminium foil. Prices of polymers are dependent on crude oil though individual demand-supply dynamics vary so there is some disconnect in short term.

Financials

EPL is dependent on FMCG players and thus demand is heavily correlated with growth in FMCG industry. A high single digit or a low doble digit growth in revenue is possible and that is what EPL has exhibited over the years. The last 10/5-year CAGR in revenue has been 8%/8%.

EBITDA has grown at a CAGR of 8%/6% for the past 10/5-years. EBITDA margins have been in the range of 17-20% with FY20 and FY21 sustaining ~20% margins. FY22 has been difficult and margins were depressed to 16.6% for the full year.

PAT has grown at a CAGR of 16%/2% for the last 10/5-years.

Cash conversion has been superior with total CFO generated in last 10 years being twice the PAT during the same period.

EPL has generated positive free cash flow in each of the past 10 years.

EPL has operated with a fair amount of debt on its balance sheet. Its D/E was around 1.4x in FY14 but since then has declined to around 0.4x and should not move much upwards from here. Interest coverage ratio is ~8x.

ROE/ROCE have been in the mid-teens range. Fixed assets turnover has been ~2.3x.

Receivable days has deteriorated from around 60 days during the first half of last decade to around 70 days currently. Inventory days has also deteriorated during last few years.

Valuation

Multiple wise, EPL is trading at a PE ratio of 28x which is higher than its last 5 years median PE of 25x. The stock has been a lagard for the past year due to its weakness in maintaining margins in a tough environment. 

Articles

Comments