EPL Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Revenue crossed ₹1,000 Crore for the first time, but headline growth of 5.6% was dampened by commodity-driven pricing pass-through; underlying business growth excluding Brazil was 4%.
• EBITDA margin hit 19%, up 267 bps YoY, marking the fifth straight quarter of sequential improvement, driven by softening costs, mix improvement and productivity.
• Brazil plant reached over 80% of its lead customer's committed volume in its first full quarter and is poised to turn EBITDA-positive imminently, with steady-state margins expected to be accretive to the group.
• The negative price mix headwind will persist for another quarter or so, as pricing unwinds from last year's elevated input-cost base, creating a near-term drag on reported revenue.
• What to watch next quarter: Whether the Americas margin recovery projects deliver on their Q4 FY2024 timeline, the pace of beauty and cosmetics customer conversion following the NEOSeam launch, and the trajectory of interest costs as rates stay hard for two to three more quarters.

Brazil Ramp-Up

• Operational milestone: The plant hit over 80% of the lead customer's committed volume in its first full quarter and is on track to fulfill that demand fully in the next few months, freeing capacity to onboard additional customers.
• Customer pipeline building: EPL has a list of about 10 interesting prospects; samples have already been supplied to a couple for storage and testing, and 7-8 more have shown interest, including big multinational players seeking substantive volume.
• Expansion ready: Civil work and utilities for an additional line are already complete, so if large customer orders materialise, capacity can be added quickly.
• Profitability trajectory: Management expects Brazil to start delivering positive EBITDA in the next month and certainly within the next quarter; by the end of FY2024 it will be making positive EBITDA and positive EBITDA margin, and FY2025 will be full steady state, margin-accretive to both the Americas region and EPL globally.

Kripalu: "First of all the journey of incurring losses is start-up related and not steady state business related."

Margin Recovery & Regional Fixes

• Fifth straight quarter of expansion: EBITDA margin reached 19%, a 267 bps YoY improvement, with absolute EBITDA growth described as solid and the real reflection of the expanding profit pool.
• Americas margin drag: Americas EBITDA margin sits at mid-teens (15.7%), weighed down by structurally higher insurance costs in the US. Capital-investment projects to bring that cost down structurally are underway and will fructify by Q4 FY2024, after which the benefit should start flowing through. Management is committed to delivering mid-to-high teens margins for the region.
• Europe cost-base reset: The European P&L needs fixing because the cost base was structured for higher growth levels that have not materialised. The choice is to either accelerate growth quickly or start cooling the cost base; management is committed to delivering mid-teens margins in Europe, which currently accounts for about 5% of total EBIT.
• Structural margin levers: Four to five drivers are being pursued: accelerated growth in the margin-accretive beauty and cosmetics segment, strategic price management, continued insourcing of components like caps, manufacturing realignment from higher-cost to lower-cost locations, cross-sourcing between plants and regions, and collective automation particularly in high-cost regions.
• Cost vs growth asymmetry: Management draws a distinction: cost is more deterministic and internally controllable, while growth is more probabilistic and externally facing, requiring disproportionate management focus.

Kripalu: "Cost is actually more deterministic; it is more with an internal control on margin and cost management. Growth is a bit more probabilistic because it is more external pacing, and that requires a lot more focus from management."

Beauty & Cosmetics Push

• NEOSeam as the unlock: The technology eliminates the seam on laminated tubes, removing the negative cosmetic appeal that previously hindered conversion from extruded tubes. Laminated tubes can go to 200 microns versus the 350-400 microns required for extruded tubes, offering less plastic consumption and a significant price advantage.
• Market opportunity: The beauty and cosmetics tube category is a 2,500 crore unit market in which EPL currently holds about 10% share. The business has transformed from an oral-care company a decade ago to one where half the portfolio is now in personal care and beyond.
• Backend investment: To win smaller beauty and cosmetics customers, faster turnarounds and smaller batch sizes are essential; EPL has either built or is well on the way to building that backend flexibility and agility.
• Front-end strengthening: EPL is significantly stepping up its hunting organisation, both in headcount and skill level, and has already segmented the market to identify which customers to target.

Kripalu: "I think sometimes what happens in life is suddenly you feel the stars are reliant, the ducks are in a row and the penny dropped, and I think the cracking NEOSeam capability has brought the whole thing together."

Sustainability as Competitive Moat

• EcoVadis recognition: EPL was awarded Gold by EcoVadis, placing it in the top 5% of all manufacturing companies worldwide, and has launched a company-wide initiative targeting Platinum status, which would put it in the top 1%.
• Recyclable tube adoption accelerating: Last year 10% of tubes supplied were recyclable; this year that is expected to exceed 20%, and management expects adoption to accelerate dramatically over the next couple of years as customer sustainability commitments come due.
• Capacity readiness: 85% of EPL's capacity is now recyclable-ready, positioning the company to capture the conversion wave.
• Pricing strategy is deliberately non-opportunistic: Management has chosen to invest alongside customers for the long-term growth of sustainable tubes as a category rather than extracting maximum margin during the transition, a decision framed as strategic rather than tactical.

Kripalu: "This game is about staying one step ahead. Now we believe that we are currently at least one if not several steps ahead of other players when you look at this in totality, but the work on R&D and staying one step ahead is something that you have to keep doing."

Headwinds & Risks

• Price mix drag: The negative price mix, a consequence of lapping last year's higher input costs and the pricing levels tied to them, impacted reported revenue in the quarter and is likely to continue for another quarter or so. For contractual customers this unwinds almost directly per the contract; for non-contractual customers EPL is trying to retain as much pricing as possible.
• Interest cost burden: Interest costs spiked to approximately ₹31 Crores, driven by the hard interest-rate environment in the US and Europe plus debt taken for the Brazil greenfield capex, where local rates are high. Rates are expected to stay hard for the next two to three quarters before any softening begins.
• Western geography softness: Demand in Western geographies has softened, and the ability to grow aggressively there is flagged as a key risk, alongside the need to get a better grip on the Western cost base, which has been a drag on total business margins even as MSI and EAP have delivered broadly stable margins.
• Inflationary pricing risk: The ability to secure pricing quickly in a highly inflationary cost environment remains a key risk; management's confidence rests on catching up much faster than last time, when the lag eroded Americas margins.

Guidance & Commitments

Key Metrics