EPL - Essential Packaging Company

Stock Opportunities Not-so-Hidden Gems
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EPL Ltd.: The Overlooked Giant in FMCG Packaging

EPL Ltd.formerly known as Essel Propack, is a leading global packaging solutions provider, serving nearly every major FMCG and consumer brand worldwide. With a presence in over 100 countries, EPL has established itself as a crucial player in the packaging industry, offering innovative and sustainable packaging solutions that cater to a diverse range of products, from oral care to cosmetics and pharmaceuticals.

Despite this impressive track record and a robust client portfolio, EPL Ltd. has not been able to capture the market attention it deserves. The company’s EV/EBITDA ratio is currently around 10, a stark contrast to the FMCG companies it serves, which are quoting EV/EBITDA ratios as high as 40. This disparity raises an important question: why is EPL Ltd., a company so intricately linked to the success of FMCG giants, not receiving a valuation that reflects its critical role in the supply chain?

The FMCG Connection

EPL’s close association with FMCG companies should theoretically position it as a proxy investment for those looking to tap into the consistent growth of the FMCG sector. However, the market seems to have overlooked this connection. While FMCG companies enjoy high valuations due to their stable cash flows, brand loyalty, and essential nature of their products, EPL, as a supplier, remains undervalued despite being an integral part of these companies’ value chains.

Recent Performance and Market Response

EPL Ltd. recently announced its June 2024 quarterly results, which showcased strong all-around growth and significant margin expansion. The company reported an impressive increase in revenue, driven by both volume growth and improved pricing power. Additionally, cost efficiencies and strategic investments in technology have bolstered its margins, painting a picture of a company that is not only growing but doing so sustainably.

However, the market response to these stellar results has been lukewarm at best. Despite delivering a fantastic quarter, EPL Ltd.'s valuation remains subdued, suggesting that investors are either unaware of the company’s potential or are hesitant to assign it the same premium as its FMCG clients.

Valuation Conundrum

The question of why EPL Ltd. is not getting the valuation it deserves is a complex one. One possible explanation could be the market’s perception of the packaging industry as a low-margin, commoditized sector, which traditionally doesn’t command high multiples. Additionally, investors might view EPL as a supplier rather than a brand in its own right, leading to a lower valuation compared to consumer-facing FMCG companies.

However, this perspective fails to recognize the strategic importance of packaging in the FMCG value chain. Packaging is not just about containment; it’s about brand identity, product protection, and sustainability—areas where EPL excels. As consumer preferences shift towards eco-friendly and innovative packaging, EPL’s role becomes even more critical.

The Path Forward

For EPL Ltd. to gain the market attention it deserves, there needs to be a broader recognition of its value proposition. This could involve better communication of its role in the FMCG ecosystem, more aggressive marketing of its innovative solutions, and perhaps a reassessment of how the market views packaging companies in general.

Investors who recognize the disconnect between EPL’s market valuation and its underlying business strength might find a compelling opportunity here. With strong fundamentals, a growing market, and a solid track record, EPL Ltd. appears to be a diamond in the rough, waiting for the market to catch up to its true potential.

epl.pdf (2.0 MB)

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Thanks for good points

I too thought this company was very undervalued compared to other peers. But the following point made me wait and watch.

Growth potential
~50% of revenue comes from Oral Care which is matured and has low growth. Even Personal Care and Beyond is building with adopting a strategy to focuss on small customers so they can compete with regional tube makers

Any thought as to how it could continue growing faster from this level?

Pricing Power
The company has made investments to improve its sustainability and develop advanced tube recyclability. I initially thought the company would have been able to opt for better pricing as its clients decided to switch to recyclable packaging. But to my surprise, the company has adopted a strategy where it wants to sell at the same price point or relatively same margin level.

I feel this is just a commodity business, Do you have any other thoughts on why they opted for the same pricing?

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Thanks for sharing your insights. I agree that the growth potential is a key concern, especially with the heavy reliance on Oral Care, which is indeed a mature segment with limited growth opportunities. The focus on smaller customers in the Personal Care and Beyond segments might help in diversifying the revenue stream, but it also suggests a strategic shift to compete on price and volume rather than on premium offerings. This could be a long-term play to build market share, but it may also slow down overall growth unless they can capture significant market share quickly or scale up operations efficiently.

Regarding pricing power, the company’s decision to maintain similar pricing despite the shift to recyclable packaging is intriguing. It does raise the question of whether they view this as a commodity business, where they must compete primarily on price rather than on differentiated value. However, their investments in sustainability and advanced recyclability could be a strategic move to position themselves as a leader in this space, potentially opening up future opportunities as sustainability becomes a non-negotiable for many clients.

It seems like they’re playing the long game, focusing on building relationships and volume rather than immediate margin expansion. This could be a defensive strategy to protect market share in a highly competitive environment. I’m curious to see if this approach pays off in the long run or if they eventually pivot to a more aggressive pricing strategy as the demand for sustainable solutions grows.

What are your thoughts on the potential for this long-term strategy to drive growth and profitability?

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Regarding opting for same pricing in sustainable
recycling tubes, this is what the company had said in q4fy24 concall, I am paraphrasing here:

‘Pricing for sustainable tubes is pretty much the same as normal tubes, this is a strategic decision so that the shift to sustainable tubes isn’t slowed due to someone else offering normal tubes at lower prices. Also, they don’t want to loose wallet share because of this.’

They try to price it higher wherever possible, so doesn’t seems to have any pricing power yet.

With too many geographies there are many moving parts and probability of some thing going wrong is higher. Mgmt guidance is for double digit revenue growth with 20% ebitda margin.

Disc: Invested with zero returns in this for past 3 years.

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Few possibilities for growth

  1. Existing large customers continue to grow healthy. Good possibility of happening
  2. A few small players grow big and start becoming key volume drivers - it will take time could happen
  3. The market eliminates small players who can not invite themself to the recyclable packaging - a long way to tell less chance as most of the players have found some solution.
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Limited view: Would not be fixated on whether EPL should command a premium valuation or not like FMCG companies. The company seems to be focused on long term sustainable growth and capacity expansion (e.g. Brazil operations). Its a healthy dividend paying company which is helpful in my case
Operationally their profits continue to grow. Their ability to pay back borrowings would be to watch out for along with commodity price pressures

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Regarding the statement: “this is a strategic decision so that the shift to sustainable tubes isn’t slowed due to someone else offering normal tubes at lower prices.”

If one were to read one layer below into this statement, doesn’t it suggest that their customers currently do NOT put any value on ‘sustainable’ tubes? They are only willing to go ‘sustainable’ if it comes at no cost at all. So basically, customers would still stick to a lower-cost ‘normal’ tube if the price is cheaper. Makes me question how strong this ‘sustainability packaging’ trend narration they are putting forth actually is!

Or maybe EPL itself is unclear on the pricing power ‘sustainable’ packaging really has, and is playing this with a more defensive mindset as they really…REALLY…don’t want to take a chance of losing wallet share.

One has to ponder on this! Any further analysis on this are kindly invited.

Disc: not invested; but tracking

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So I can just try to answer a part of your question, like they’ve already mentioned that some of their clients/MNCs mainly have sustainability targets (previously mentioned by them in PPTs as well) so I mean those cos. would want the sustainable tubes so they might be getting to increase wallet share & gain few customers due to sustainable move. But yes I do agree with you on the pricing front, I myself would like to believe that there should be some sort of advantage in pricing of sustainable tubes vs. normal ones. Let’s see maybe down the line things change.

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Sustainable or no, these tubes are commodities, why do you think they deserve a premium?

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I believe you are right. They don’t seem to have any special pricing power with regards to sustainable tubes. For all the talk about sustainable environment by MNCs, they don’t want to shell out more for sustainable tubes going as per management commentary. If they are playing defensive as they don’t want to lose wallet share, then one needs to question how differentiated is their product.

Though I am still invested as i think they are finally walking the talk this quarter by showing double digit revenue growth(driven by oral and recoveryin US and europe), improving americas and europe margins and onbarding new clients in brazil. Also, i think technically the stock has crossed important resistance around 240 with good volumes, so there might be more upside.

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While its early days to see the trend on pricing power, sustainable packaging may become a minimum hygiene qualification criterion for a vendor to qualify for a FMCG contract especially in EU

In December 2023, EU governments agreed to amend European legislation on packaging waste to increase the reuse of packaging and make all of it recyclable

https://www.consilium.europa.eu/en/press/press-releases/2023/12/18/packaging-and-packaging-waste-council-adopts-its-negotiating-position-on-new-rules-for-more-sustainable-packaging-in-the-eu/

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there were two distinct plays for the business - 1) was increasing share of personal care and beyond (its gone up by 6-7% in the past 6 years) and 2) increasing share of recyclable tubes (which currently stands at 30%)

Within all of this, revenue growth has been low single digit despite moving to a higher ASP product (personal care + recyclable tubes) - point is at what number do these ‘newer’ initiatives make their mark on the P/L?

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Mean reversion and operating leverage playing out superbly here! Single-digit revenue growth but EBITDA/PAT up 20%/70% respectively (YoY).

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  • As expected, stabilizing raw-material prices showing up as increase in gross margins from ~54% to ~60% over the last 6-8 quarters.
  • Front-loading of expenses had been depressing profits earlier. Now we are seeing the reverse, with revenue growing while interest and depreciation have stabilized over the last 4 quarters.
  • Share of recyclable tubes rising fast and now at 33%.
  • Business momentum looks good (personal care and recyclable tubes).

Not to forget the significant exit market-cap linked incentives upto ~Rs. 600 crores for management and allotment of ~Rs. 25 crores worth of stock options to MD Anand Kripalu recently.

PS: Invested

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Q2 FY25 Earnings Report and Takeaways from Investor Presentation

Summary of key financial and operational highlights from EPL’s latest earnings report:

Metric Q2 FY24 Q2 FY25 % Change
Revenue from Operations 10,016 million 10,862 million 8.4%
EBITDA 1,810 million 2,167 million 19.7%
EBITDA Margin 18.1% 20.0% 188 bps
PAT 505 million 870 million 72.3%
Basic EPS 1.58 Rs 2.73 Rs 72.8%
Net Debt / EBITDA 0.88x 0.76x -13.6%
ROCE 13.9% 16.5% 260 bps
“Personal Care & Beyond” % 47% 48% 100 bps
Recyclable Volume % 21% 33% 1200 bps

Profitability

  • EPL achieved nine consecutive quarters of EBITDA margin improvement.
  • Q2 FY25 EBITDA margin reached 20%, driven by strategic price management, cost optimization, and automation investments.
  • Profitability improvements in the Americas and Europe offset a decrease in AMESA.

Future Plans and Other Relevant Information

  • Sustain Double-Digit Growth: EPL plans to achieve sustained double-digit growth by focusing on its “Personal Care & Beyond” category and scaling up its presence in Brazil.
  • EBITDA Margin Expansion: The company aims to continue expanding EBITDA margins through various initiatives and reach a target of over 20%.
  • Sustainability Leadership: EPL is committed to its sustainability initiatives, with a target of achieving EcoVadis Platinum status and partnering with customers on their sustainability journeys. The company has already achieved a Gold rating and is in the top 2% of companies globally. One-third of EPL’s portfolio consists of sustainable tubes, and the company is committed to increasing this proportion.
  • New Product Categories: EPL is venturing into new categories, such as tubes for cat and dog lice treatment and dry hair gel.
  • New Customers: EPL has added a new multinational customer in Brazil, its third in that market.
  • Employee Recognition: EPL was certified as a “Great Place to Work” in six countries.

Well-positioned for continued growth and profitability. Strong market position, focus on innovation, and commitment to sustainability should drive continued success.

Disclaimer: Invested and Biased. Less than 5% of PF. No transactions in the last 30 days. Post purely for study purposes. Consult your advisor before any investment decisions.

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Good question:

As EPL is more of processor or convertor kind of business, EBIDTA / ton would be a more appropriate metric to evaluate performance.

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Disc: No holdings

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Indorama Ventures will acquire a minority stake (~24.9%) from Blackstone @ 240 per share subject to approvals.

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