Epack Durable Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Margin transformation, not revenue growth: Revenue was flattish as brands liquidated excess inventory, but EBITDA grew over 400% YoY and EBITDA margin reached 8.5%, up from 1.6% two years ago, driven by backward integration and operating efficiencies.
• The balance sheet has been derisked: Working capital days nearly halved from 91 to 51, and debt-to-equity fell from 1.58x to 0.73x, funded by internal accruals and a stronger net worth.
• Capacity and portfolio are expanding in sync: A new Sri City facility is operational, adding 50% capacity, while the company entered air coolers and component supply, diversifying both revenue and client mix.
• A major customer loss was neutralized: One top-three customer cut ~₹200+ crores of volume by insourcing, but EPACK replaced it with new clients and product segments, demonstrating portfolio resilience.
• What to watch next quarter: Whether the 15-20% industry growth forecast materializes in the critical January-June season, the pace of utilization of the new 50% capacity, and any margin uplift from the cooler business as it begins contributing from end-Q2 FY25.

Margin & Efficiency Levers

• Backward integration is the core margin engine: In-house manufacturing of cross flow fans, PCB controllers, universal motors for mixer grinders, and induction coils replaced imports and lifted EBITDA margin from 1.6% in Q3 FY22 to 8.5% in Q3 FY24.
• Operating margin improved sharply: Operating margin rose from 11% in Q3 last year to 17% this year, and from 13% to 15% on a full-year basis, reflecting the same integration benefits plus better asset utilization.
• Working capital discipline freed the balance sheet: Working capital days dropped from 91 to 51, and debt-to-equity improved from 1.58x to 0.73x, with ₹80 crores of IPO proceeds used for long-term debt repayment on 31st January.
• Management targets sustained margins at current levels: The company traditionally maintained 7-8% EBITDA margin and will try to maintain a similar level going forward, with backward integration expected to further improve margins in coming quarters.

Demand & Inventory Cycle

• Flattish revenue was an inventory story, not a demand story: A lean summer season at the beginning of FY24 caused demand disruptions and significant inventory pile-up in Q1, which brands then liquidated through Q2 and Q3, suppressing EPACK's offtake.
• The channel is now clean and lean: By the end of Q3 FY24, most brands had liquidated their excess inventory and entered the main season with minimum stock, setting up a normalized demand environment.
• Seasonality shifted by 30-45 days: Overall AC demand peak ramped up with a delay compared to previous years, pushing manufacturing seasonality from mid-November/December to mid-January, which compressed the Q3 production window.
• The industry expects a strong season ahead: The entire industry is positive that the coming season will grow by at least 15% to 20% on average, and EPACK's order book has been built accordingly.

Management: "In terms of the seasonal requirement, the entire industry is very positive, that for the coming season the market is destined to grow by at least 15% to 20% on average."

Capacity & Portfolio Expansion

• Sri City adds 50% capacity at the right time: The new Andhra Pradesh facility is now operational, and management aspires to utilize the newer capacity better than old capacities, improving service levels to customers during peak season.
• Air coolers extend the manufacturing season: Cooler penetration in the organized market is 17%, roughly twice that of AC, and the product runs on a 10-month manufacturing cycle versus AC's 5-6 months, improving asset utilization for injection molding; the company started with one large customer.
• Component supply opens a new revenue stream: EPACK began manufacturing and supplying components including plastics, copper, cross flow fans, and sheet metal from Bhiwadi and Sri City to major brands, attracting customers who lack their own manufacturing capability.
• Small appliances will contribute from late FY25: The small domestic appliances segment is expected to start contributing meaningfully from end of June/July, with an uptick visible from the end of Q2 next financial year.

Ajay DD Singhania: "So, now we are equipped with 50% extra ammunition to fire during the peak season."

Customer & Competitive Dynamics

• A top-three customer cut ~₹200+ crores of volume: One of the three largest customers, who was largely dependent on EPACK, reduced volume by almost ₹200+ crores after increasing its own manufacturing capacity.
• The loss was neutralized through diversification: EPACK replaced that volume by adding newer clients and newer product segments, including many rapidly growing mid-tier customers and larger customers who are now outsourcing at a higher level due to market size expansion.
• OEM-brand coexistence is structural, not transitional: Management argues that both OEMs and brands coexist because of mutual interdependence: it is not generally possible for a brand to manufacture everything it wants on its own, and the dust on brands adding capacity will settle over the next three to four quarters.
• Component approvals are a long-lead but progressing: The approval process for component supply is customer-specific and lengthy, but traction is building and supplies have started for certain items like cross flow fans and plastic parts.

Management: "So, both OEMs and brands coexist, because there's a lot of interdependence, it is not possible, or generally possible for a brand to manufacture everything it wants on its own. So, it's mutual interdependence."

Segment & Product Mix

• RAC remains the core, with capacity expanding across tonnages: EPACK added capacity for 0.75 ton, 1 ton, and larger sizes like 2 and 2.5 ton room ACs, and consolidating quantities from several customers makes the expansion viable.
• Management declined to split margins by segment: When asked whether RAC margins or small domestic appliance margins are higher, management said those numbers are not reported or measured in that sense because of seasonality, and would not be correctly indicative of company performance.
• The company is an ODM, not a brand play: EPACK positions itself as India's second-largest room air conditioner original design manufacturer, and when asked about launching its own brand, management reiterated that its core competence is manufacturing and did not directly address forward integration.

Bajrang Bothra: "EPACK Durable Limited it is the second largest room air conditioner original design manufacturer, ODM in India."

Guidance & Commitments

Key Metrics