EPL Limited (500135) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the EPL Limited Q1 FY '27 Earnings Conference Call hosted by Systematix Institutional Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pratik Oza from Systematix Institutional Equities. Thank you, and over to you, Mr. Oza.

Thank you. Good evening everyone. On behalf of Systematix Institutional Equities, I welcome you all to Q1 FY '27 Earnings Conference Call of EPL Limited. Representing the management today, we have Mr. Hemant Bakshi, MD and Global CEO; Mr. M.R. Ramasamy, COO; Mr. Deepak Goyal, CFO; and Mr. Onkar Ghangurde, Head, Legal, CS and Compliance Officer. We sincerely thank the EPL management team for giving us the opportunity to host this call. And without further ado, I will hand the floor over to Mr. Hemant Bakshi sir to commence the proceedings. Over to you, sir.

Thank you, Pratik. Good evening, everyone, and thank you for joining us for EPL Limited Quarter One FY '27 Earnings Call. I'm delighted to share that EPL has delivered an outstanding quarter in the midst of unparalleled external challenges and a very volatile environment. This amply demonstrates the clarity of our strategy, the resilience of our business model, strength of our customer partnerships and our continued focus on disciplined execution. Revenue for the quarter grew by 25.3%, while EBITDA increased by 15.2% with EBITDA margins at 18.8%. On an underlying basis, excluding the pass-through impact of higher raw material prices, we delivered 20% underlying revenue growth while delivering EBITDA margins of 19.6%. This is a record performance. We have grown our top line faster than any time in the past and held margins despite unprecedented cost inflation. This is the fifth consecutive quarter of double-digit growth. Our growth continued to be broad-based across both categories and geographies. Beauty & Cosmetics maintained its strong growth trajectory with growth exceeding 20%, while Oral Care also crossed the 20% growth mark. Personal Care & Beyond continues to expand and now accounts for 54% of our portfolio, further strengthening our presence in high-growth categories. Regionally, EAP led the quarter with growth of 34.3%, followed by Americas at 29.4%, while Europe and AMESA grew by 20.2% and 17%, respectively, marking another quarter where every region delivered double-digit growth. EBITDA continued its strong momentum, growing by 15.2% and marking our 15th consecutive quarter of double-digit EBITDA growth. We were able to pass on the entire cost increase through judicious pricing across all our regions and customers. Further, our frugal mindset and relentless cost discipline enabled us to continue making growth investments while staying in the target margin range. PAT delivery was in line with our estimates and is on track to deliver double-digit growth in the full year. While Q1 PAT declined by 1.4%, our PBT increased by 10%. The difference is because we are lapping a very low base year ETR, and this will get corrected on full year basis. We have made significant proactive growth investment ahead of the curve in the key strategic areas. This is translating in higher growth. While doing so, we have maintained strong capital efficiency and a disciplined capital allocation approach, resulting in return on capital employed at 18.5%. Sustainability and innovation. Innovation remains central to our long-term strategy as we continue to invest in new technologies and differentiated packaging solutions. This commitment was recognized through multiple innovation awards across India and Europe during the quarter, including the ETMA Tube of the Year Award and the FIPSA Awards for Responsible Packaging. We continue to make meaningful progress on our sustainability agenda with sustainable tubes now accounting for 44% of our overall product mix. Our focus on operational excellence and our people was also recognized through the prestigious IMC Ramkrishna Bajaj National Quality Award for Performance Excellence and our recognition as one of India's Best Company to Work For 2026. Looking ahead, let me first provide an update on our proposed merger with Indovida. During the quarter, we received approval from the Competition Commission of India and the transaction continues to progress well. We remain on track to complete it within our planned timeline and are excited about the opportunities this partnership will create for our customers, employees and shareholders. As we look ahead, while the geopolitical environment and trade dynamics continue to evolve, our priorities remain clear. First, to further strengthen our leadership in Beauty & Cosmetics, we continue to see immense long-term opportunity in the category, supported by a strong pipeline across customers and markets. Our continued investment in innovation, differentiated packaging solutions, front-end specialization and new technologies provides us with a strong platform to capture this opportunity and sustain our growth momentum. Second, to accelerate our presence in high-growth markets. Thailand continues to make excellent progress, supported by a strong customer pipeline and recent wins with multinational customers. We will continue investment behind these opportunities while actively expanding our presence across other attractive growth markets to strengthen our global footprint. Third, to remain relentless on margins and capital efficiency. In an increasingly dynamic global environment, maintaining financial discipline is more important than ever. We remain focused on driving productivity, operational excellence and disciplined capital allocation to support sustainable margin expansion and profitable growth. Fourth, our long-term vision is to go beyond our current format of tubes to expand into newer, higher-growth packaging formats, to become a leader in consumer packaging in emerging markets. Our merger with Indovida is the first step in this very exciting journey. Based on our recent performance and the current environment, we are raising our growth guidance to high teens for next few quarters while holding on to our margin range of underlying 20% EBITDA. We continue to remain focused on managing the extremely volatile environment and feel confident that we will retain and grow our market share, while we also cover the entire cost impact through our pricing actions as we've demonstrated in quarter 1. Our confidence stems from our actions in this quarter where we've demonstrated agility, focus and resilience while continuing to invest behind our strategic big bets. We believe EPL is entering an exciting new phase in its journey with a strong foundation, clear strategic priorities and a relentless focus on execution. We are confident in our ability to deliver sustainable, profitable growth and create enduring value for our customers, employees, shareholders and all our stakeholders. This will be further enhanced as and when the merger with Indovida gets approval and the synergies are fully realized. Thank you for your continued support, and we will now open the floor for questions.

[Operator Instructions] Our first question comes from the line of Sameer Gupta with IIFL Capital.

Now firstly, I'm just looking at the net debt number. And if I back calculate, because CapEx is already given, the net working capital would have roughly increased by INR 180 crores in a quarter. And if I look at this number for full year, that increase for the full year in FY '26 was around INR 170 crores. So just trying to understand what has driven this increase? In particular, have receivables seen a material increase this quarter?

Ladies and gentlemen, please stay with us. The management line seems to have disconnected. Ladies and gentlemen, we thank you for your patience. We have now reconnected with the management. Sameer, I would request you to please repeat your question.

Sure. I'll repeat it. Congrats on a fantastic set of numbers. First question, I'm just looking at the net debt number that you have disclosed in the PPT. And if I just back calculate, net working capital would have roughly increased by around INR 180 crores versus March, in a particular quarter. And if I look at the full year increase in FY '26 in working capital, that number was around INR 170 crores. So just trying to understand what has driven the sharp increase? Is receivables, in particular, has it seen a material increase this quarter? That would be the first question, sir.

Sameer, Deepak here. Thank you for the question. So you're right that our working capital has gone up during this crisis period. However, this is largely driven by inventories. There are 2 reasons. One is the pricing of the inventory itself. With the raw material prices going up, our inventory cost has gone up. So it's not as much an increase in quantity as in the price as well. Second is the safety stock. Supply security was paramount for us, and we ensured that we build the right level of inventory to avoid any supply disruptions. One of the reasons for the net debt growing also is some of the ahead of the curve investments that we have made in our CapEx. So with these 3 reasons, the numbers kind of add up to what you mentioned.

Got it. Got it. Just to clarify, receivables has grown in a normal range is what I'm assuming?

That is right. So while the value would grow because we have taken pricing, the number of days and the aging is well under control.

Got it. But the pricing would also affect the receivables as well as the sales, right?

That's right. That's exactly what I'm saying that the AR values will show an increase because we have taken pricing. However, the underlying aging of the ARs and the quality of receivables remain very solid.

Second question is on the Europe margin contraction. So firstly, can you explain the transitional costs here? What is the adjustment amount? And is it a one-off for this quarter or do you expect this to continue in near future? And a part question to this, which is more strategic. We have had multiple instances of moving manufacturing bases in Europe. So what is the status currently? You think that all of this is now done and large part of manufacturing now is based out of Poland? Or do you think there are any other transitions in the pipeline that you foresee in near future?

Yes. So Sameer, firstly, on Europe, I just want to call out that Europe delivered a 20.2% revenue growth, which is a really exceptional performance. And the growth trajectory in Europe has continued for the last couple of quarters. So we are really pleased with our performance on the top line in Europe. Having said that, as we had called out a couple of quarters back also, there have been operational challenges in Europe. The good thing is that these have been identified fully and are now getting disproportionate focus from the team. We are confident that these will be resolved in the coming quarters. Also, I would like to call out that Europe is the biggest and a widespread B&C market. We have invested in Europe being the future of growth. We have invested in capacity expansion, new production capabilities and front-end people. The pipeline of sales remains very promising, which we -- which helps us in deleveraging our dependency on few customers. These investments are for the long-term growth and are bound to give scale benefits in the coming years. As the operational efficiency improve, we expect margins to progressively recover. I think on the manufacturing footprint, we have a manufacturing footprint in Poland and in Germany. That's our current position, and that's what we will stay with in the near future. As we might have said in the past also, we have centralized some of our capabilities in Poland, both in terms of customer service as well as printing, and this is bringing both efficiency as well as superior service to our customers in Europe.

Got it. So just to quickly summarize, this is new investments that have been made in basically eyeing the great growth opportunity in the medium-term. That would be a correct interpretation?

Yes. The investments are in line with the B&C opportunity we see in Europe and the investments have been made both in terms of front-end capabilities of salespeople as well as CapEx in certain new technologies.

Our next question comes from the line of Sanjesh Jain with ICICI Securities.

First question on the guidance, which you have upgraded to high teens from the double digit. But if I look at -- there are 2 benefits to it, right? Because we are looking at in a rupee term, one is currency depreciation, the other one is the inflation. But if we come down till the PBT level, a lot of it gets offset because we also have a currency negative impact on the depreciation and on the cost line item. Does your view change on the PBT growth as well, or it is largely to the revenue growth?

So I think, firstly, I want to call out that we've increased our guidance on top line. We've raised our guidance from early double digits to high teens. And this is because we've seen continued momentum in B&C over the last few quarters. And with demand remaining healthy and our investments continuing to contribute, we expect this momentum to sustain. Equally, Oral has started to recover strongly, adding further momentum to our growth outlook. We've also, as we've mentioned, set up operations in Thailand. Our Thailand operations are beginning to ramp up, and Thailand is a really significant B&C market, and this ramp-up will be another growth driver as we go forward. At this stage, we expect to operate in a high inflationary environment for some time. Against this backdrop, we've raised our guidance to high teens for the next few quarters, reflecting our confidence in the underlying momentum of the business. Having said this, on margin, we are holding on to our guidance of 20% underlying margin in terms of EBITDA, and this is something which we will sustain as we go forward. I would also like to call out...

So it is fair to assume that -- sorry, sorry, go ahead.

Yes. I would also like to point out that you mentioned our EBIT and PAT. I want to firstly call out that our PAT delivery is fully in line with our plans to deliver a double-digit growth for the year. This quarter numbers are seeming low because of the effective tax rate and phasing issues. Our PBT, if you focus on our profit before tax, is a 10% growth. So therefore, I want to clarify the bottom line. And EBIT has -- there has been a significant increase in CapEx because, as we mentioned already, we are investing ahead of the curve, and that is what is reflecting in these numbers.

So we are looking at a high teens growth in revenue as well as EBITDA and a lot of it will get translated to PBT for the year as a whole. Correct?

Yes.

And second question on the other point you touched upon, moving beyond the tube revenue. One obviously is the Indovida acquisition, which will get us footprint into the rigid plastic. So what other opportunities are we looking? Because you said that is just one of the opportunity we are evaluating. If you can talk about the other opportunities that are today on the drawing board.

Yes. So firstly, I want to just reiterate our vision. Our vision is to become a leader from emerging markets in consumer packaging. So that's our vision going forward. And as we've said in the past, there are 3 drivers to this vision. One is to expand our portfolio going beyond tubes. The second is to go into high-growth markets in the emerging world. And the third is to move from just being a supplier to becoming an innovation partner. I think our merger, which has been proposed with Indovida ticks all 3 boxes. And firstly, we go into another category, which is in terms of TAM, much bigger than tubes. So therefore, that is a positive. But also Indovida is present in a number of emerging markets in Southeast Asia and Africa, where we don't have presence. So therefore, the merger once the approval comes through, will allow us to go into new markets. Having said that, this is a really big first step in our journey. We are interested in moving into new formats, and we actively are scouting for opportunities for acquisition. As far as acquisitions are concerned, our strategy is very clear. We will seek targets which allow us to move into new capabilities, which means new formats or indeed into new markets. Of course, they must meet the criteria of helping us build growth and margin as we go forward. So we are very actively also looking at opportunities for acquisition.

And then how about the synergies from the Indovida because India, which is a much larger market and a secular market, do we want to bring that? Or do you think India is overserviced as far as the rigid plastic goes?

So on Indovida, I must firstly say that we are still awaiting the merger. And till we get approval for the merger, we are not in a position to share any information between the 2 companies. So therefore, anything I can speak is more from what's available in the public domain. I think from that point of view, I just want to also share with all of you that Indovida declared its results a little while back, and they've come out with a really impressive set of results for this quarter. Their volume grew by 11%. Their revenue grew by 25%. Their EBITDA grew by 62%. The margin expanded by 614 basis points to 27%. And in some ways, if I really reflect it, the EBITDA in this quarter of Indovida is almost INR 383 crores. So as you can see, they are doing exceedingly well. And the strategy which they have in place, a growth strategy, is delivering both top line and bottom line. In terms of your specific question on India and so on, I think it's best addressed to the Indovida management right now because we remain 2 independent companies. Post the merger, of course, we look at all opportunities to see how this really handsome growth can be further accelerated.

Got it. One last question on my side. Was there any element of inventory gain because the prices moved quite sharply and we do carry a decent amount of inventory? Was there any element of inventory gain or there was no benefit of inventory gain?

So the consumption cost does have an impact of old inventory, but the pricing also comes with some lag with a few customers. I think net-net, what's important is that in quarter 1, we have recovered the entire cost impact, and we are absolutely confident that we will continue to do so in the future quarters as well.

And when you say entire cost, you mean both raw material and the higher freight cost and currency depreciation, all put together, right?

That is right.

That's correct.

So all our customer contracts, Sanjesh, are on blended cost basis. So currency depreciation also gets recovered. Freight also saw a sharp increase, and we have been able to recover that from the customers.

Very clear. So this time around, we are not struggling with the same problem what we faced post-COVID era, right?

I think it's important to just reflect on what's happened in the past. And you're absolutely right, we did have a challenge when in the past, we were hit by this crisis. I think over a period of time, we've learnt our lessons, and we've built a muscle whereby we can recover price as we go forward. We've built strong tracking and review mechanisms around cost inflation and recovery. Our sales teams proactively have engaged with customers to ensure consistent supplies even during a volatile period and have remained engaged with customers throughout. Our approach is anchored in a few clear principles, which is executing with agility, maintaining financial discipline, safeguarding customer relationships and continuing to drive long-term value. We are confident that our business model has the strength to overcome volatile and uncertain commodity cycles and in some ways, this...

Cyclicality.

...cyclicality. Yes. So we should be able to overcome business cycles as we go forward.

And I would just kind of add, Hemant. Sanjesh, if you recall, in the past, we have always mentioned that one of our key focus areas is to make this business cyclicality proof because the commodity cycles will come and go. And that's exactly what you see demonstrated in our numbers in the quarter.

That's clear. And I think it's good to see those errors being or those issues being fixed. Just one last question.