EPL shares shed 5% as analysts fret over pace of revenue growth
On August 9, the shares of EPL (the packaging company) experienced a significant decline of 5 percent. This drop was attributed to concerns raised by analysts regarding the company’s revenue growth rate. The decline in share value was observed throughout the day, with the stock trading 5.1 percent lower at Rs 208.50 on the Bombay Stock Exchange (BSE) by 10am.
However, the company’s financial performance in the June quarter seemed promising. EPL managed to achieve a notable increase in its consolidated net profit, which surged by approximately 59 percent compared to the same period in the previous year. This growth in net profit was attributed to several factors.
Firstly, the company experienced an improvement in its product mix, particularly with a rise in the personal care product segment. Additionally, EPL implemented selective price hikes for its products, which contributed to its improved financial performance. Lastly, the company benefited from lower input costs during the June quarter.
Overall, despite the concerns raised by analysts about the pace of revenue growth, EPL demonstrated impressive financial results for the June quarter, driven by its strategies of enhancing product mix, implementing selective price hikes, and managing input costs effectively.
In the June quarter, EPL reported a significant 9 percent year-on-year (YoY) increase in its revenue, reaching Rs 910.20 crore. This growth in revenue was a positive indicator for the company. However, ICICI Securities, a financial services company, highlighted certain trends affecting EPL’s revenue growth in specific regions.
In Europe, the revenue growth rate slowed down to about 8 percent YoY. This deceleration was attributed to reduced consumption growth, which might have been influenced by various economic factors affecting consumer spending in that region.
In the Africa, Middle East, and South Asia (AMESA) region, revenue growth was relatively modest at 5 percent YoY. This slower growth was attributed to two key factors: the currency devaluation in Egypt, which likely impacted the purchasing power and overall economic environment, and slower growth in India, suggesting that the Indian market’s performance was not as robust as anticipated.
Despite these regional challenges, EPL managed to achieve a remarkable increase in its EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), which surged by almost 27 percent to Rs 159 crore. This improvement in EBITDA was accompanied by an expansion in the company’s operating margin, which rose from 15.10 percent in the previous year to 17.47 percent in the current quarter. This margin expansion was attributed to the implementation of price hikes for its products, which likely contributed to higher profitability and improved financial performance.
In summary, while EPL experienced some challenges in terms of revenue growth in specific regions, the overall financial results for the June quarter were positive. The company’s revenue increased by 9 percent YoY, and it managed to achieve significant growth in EBITDA and operating margin through strategic measures such as price hikes.
The Europe business of EPL is particularly reliant on the personal care segment. This means that any substantial reduction in discretionary consumption, such as decreased spending on non-essential items, could have a significant impact on EPL’s operations in Europe. Given that a significant portion of the company’s revenue comes from Europe, any disruptions in this region could affect the overall financial performance of EPL.
To address some of the challenges posed by market dynamics, EPL has taken certain strategic measures. In the Americas and Europe, the company has selectively increased prices for its products. This pricing strategy allows EPL to capture additional revenue and potentially mitigate the effects of cost pressures or other market challenges. At the same time, the company has chosen to pass on the benefits of lower input costs to its customers, which can help maintain competitiveness and potentially stimulate demand.
In terms of expansion plans, EPL’s intended expansion into Brazil has been delayed by a quarter. Despite this delay, the company has observed improvements in its utilization rates since July 2023. This suggests that EPL is effectively managing its existing operations and making adjustments to its expansion plans based on market conditions.
In summary, the personal care segment’s significance in Europe and the potential impact of reduced discretionary consumption highlight the potential vulnerabilities in EPL’s business. However, the company’s strategic initiatives, such as selective price increases and passing on lower input costs, demonstrate its efforts to adapt to market dynamics. The delay in the Brazil expansion plan, along with improved utilization rates, showcases the company’s agility in responding to changing circumstances.
ICICI Securities, a financial services company, has made some adjustments to its outlook on EPL’s stock. They have reduced their target price on the stock from Rs 240 to Rs 230. This new target price reflects a valuation of the stock at 20 times its expected Earnings Per Share (EPS) for the fiscal year 2024-2025 (FY25). This valuation metric is often used by analysts to assess the attractiveness of a stock relative to its earnings potential.
Additionally, ICICI Securities has downgraded its rating on the stock from ‘buy’ to ‘add’. This change in rating indicates that they now consider the stock to have slightly less upside potential compared to their previous assessment.
EPL, previously known as Essel Propack Ltd, is a prominent global company specializing in specialty packaging. The company is engaged in the manufacture of laminated plastic tubes used in various industries, including beauty and cosmetics, pharmaceuticals and healthcare, food, and oral and home products. The versatility of their product offerings allows them to cater to a diverse range of sectors.
