EPL’s Q4FY23 print has shown sequential improvement in EBITDA margin; however, it is still far away from normal. ICICI Securities believes FY24 could potentially have exponential recovery with demand normalising across geographies, selective price increases, ramp up in Brazil operation and stable inflation.

EPL has shown remarkable growth in sustainable tubes (2.5x in FY23) which is aiding it to grab a higher tube market share and this phenomenon should only accelerate. Gold Medal certificate by EcoVadis rating puts EPL in an advantageous position in sustainable tubes which has been the highest-priority area for the entire FMCG customer base of EPL.

ICICI Securities expects EPL’s EBITDA and net profit CAGR of 20% and 29%, respectively, over FY23-25E which should also drive higher FCF / dividend.

Revenue up 10.1% YoY to Rs9.7bn. Revenue growth was aided by improvement in EAP, up 8.6% YoY, easing lockdown in China, and strong growth in the Americas and Europe where revenues were up 17.1% and 19.9% YoY, respectively. EPL is selectively taking price increases in developed markets to pass on higher operating cost which will help revenue and margins in FY24. AMESA’s revenue grew 7.6% YoY, and was impacted by currency depreciation in Egypt; adjusted for Egypt revenue, it grew 15% YoY. Brazil has commenced production and the company expects ramp up in Q1FY24 which will likely further aid revenue. Oral care revenue rose 16.6% YoY to Rs4.9bn. Personal care segment was up 8.2% YoY to Rs4.1bn. Beauty & cosmetics showed growth of 19.6% YoY; pharmaceutical revenue was up 12.6% YoY and ‘others’ was down 9.9% YoY. Laminate revenue declined 12.7% YoY to Rs750mn.

Gross margin dipped 80bps QoQ to 54.0%. Gross profit was up 10.2% YoY to Rs5.2bn. Despite lower raw material prices, margin dropped on change in product and geographical mix. Employee and other expenses have grown 9.8% and 6.2% YoY; EPL continues to be hurt from rise in minimum wages and higher power cost in Europe. EBITDA grew 16.2% to Rs1.5bn and was impacted by Brazil establishment cost. EBITDA margin improved 10bps QoQ to 15.9%. In FY24, EBITDA margin should benefit from price increases and Brazil may become a margin-accretive business. Other income benefited from grants and EPL had tax rebate in Q4FY23. PAT grew 73% YoY to Rs0.8bn.

Geography-wise performance. 1) AMESA’s revenue rose 7.6% YoY to Rs3.4bn; EBITDA was up 41.0% YoY to Rs805mn, and EBITDA margin was up 310bps QoQ to 23.8%. 2) EAP revenue rose 8.6% YoY (dip 5.4% QoQ) to Rs2.1bn; EBITDA rose 32.6% YoY to Rs386mn with EBITDA margin decline of 360bps QoQ to 18%. 3) Revenue from Americas increased 17.1% YoY to Rs2.3bn, but EBITDA dipped 17.4% YoY to Rs257mn. EBITDA margin was down 90bps QoQ to 11.2%. 4) Europe revenue rose 19.9% YoY to Rs2.5bn; EBITDA was up 14.3% YoY to Rs288mn and EBITDA margin expanded to 11.5% from lows (5.7%) of Q3FY23.

Conference call highlights

* Brazil operations have started full commercial production and ramp up will be seen from Q1FY24 aided by anchor customer. The priority is to supply contracted volumes to one customer, and eventually build more MNC and local customer base in Brazil. Brazil, in its first year of operation, is expected to be margin accretive;

* AMESA performance will continue to be strong adjusted for translation impact from Egypt;

* Americas was earlier impacted by large inventory build-up which has eased; revenue growth trajectory to improve;

* Europe will benefit from rise in volumes, and the company is selectively pushing price increases;

* Freight cost has eased; power cost continues to see inflation across geographies;

* Sustainable tubes revenue has grown 2.5x in FY23 and contributed 10% of total tubes. EPL is using its superior capabilities in sustainability to grab more market share. It is working on further strengthening its sustainable tube barrier properties where peers have failed to match its tube efficacy;

*  The company is among few to have been awarded the Gold Medal certificate by EcoVadis rating. It should also help in boosting EPL’s strong positioning in sustainable packaging; and 8) capex should be equal to depreciation. However, the company is actively pursuing inorganic growth opportunities.