EPL Ltd

NSE:EPL

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Q1 FY '24 Earnings Conference Call of EPL Limited, hosted by Systematix Institutional Equities. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Pratik Tholiya from Systematix Institutional Equities. Thank you, and over to you, Mr. Tholiya.

[Pratik Tholiya, analyst]

Yes. Thanks, Michelle. Good evening, everyone. On behalf of Systematix Institutional Equities, I would like to welcome all the participants who logged into the first quarter FY '24 earnings conference call of EPL. From the management team, we have Mr. Anand Kripalu, MD and Global CEO; Mr. M.R. Ramasamy, COO; Mr. Amit Jain, CFO; and Mr. Shrihari Rao, President, AMESA Region. At the outset, I would like to thank the management for giving us the opportunity to host this conference call. I would like to now invite Mr. Anand Kripalu to begin the proceedings by taking us through the quarters that has gone by. Thank you, and over to you, sir.

[Anand Kripalu, executive]

Thank you very much, Pratik, and hello, everyone. Very good evening to you, and welcome to the Q1 FY '24 Earnings Call. Before we get into the discussion on Q1 results, I am pleased to introduce EPL's new CFO, Deepak Goyal, who is here with us today on the call. We are very excited to have Deepak on board and I have no doubt that he will be a great addition to the team. He brings a wealth of rich experience of over 22 years across diverse industries like FMCG, Financial Services and Hospitality Tech.

He has a proven track record in Indian and global roles in established companies like PepsiCo, GE and OYO. Most recently, Deepak was the CFO for OYO Vacation Homes, one of the largest vacation rental businesses Europe and was based in Switzerland. So he is now relocated with his family to Mumbai. I would also like to take this opportunity to thank our outgoing CFO, Amit Jain for his 11 years at EPL, particularly through the COVID crisis, and the promoter stake sale. And Amit, of course, is also with us here today and will be helping me to respond to some of your questions.

So moving on to our performance for Q1 FY '24. The operating environment continued to steadily move in the right direction in the last quarter with input costs stabilizing. EPL's Brazil operations have been steadily ramping up, but for better comparison, all financial numbers are excluding Brazil, unless otherwise mentioned.

In Q1, EPL posted a solid revenue growth of 9.2%, broad-based across all regions. MSR grew at 5%, partly impacted by the devaluation of the Egyptian pound. EAP continues to bounce back with double-digit growth of 11.5%. Europe grew by 7.8% and Americas grew by 9.5%. Our continued focus on personal care and beyond has seen success with the category now contributing 49% to total sales in Q1. Importantly, the journey on EBITDA margin recovery has persisted. We delivered a solid EBITDA margin of 17.9%, an improvement of 282 basis points with an absolute EBITDA growth of 29.6% year-on-year. This is a result of softening costs coupled with active price management, mix improvement and productivity.

Significantly, this is the fourth straight quarter of EBITDA margin increase signaling the recovery in the business. Net profit for the company grew by 82.3%. ROC also improved to 16.2%. Including Brazil, the EBITDA margin stood at 17.5%, and absolute EBITDA and PAT growth rates were 26.6% and 57.4%, respectively.

By way of an update on Brazil, our Brazil plant is now fully operational. It is a state-of-the-art manufacturing facility integrated with SAP. Commercial production and delivery is underway. Several potential customers have evinced keen interest and we are confident of winning new business and expanding our market share in the near future. As far as sustainability, innovations, recognition and wins are concerned, we steadfastly continue to pursue our ambition to be the most sustainable packaging company in the world.

Getting assessed Gold by EcoVadis was a major step towards that objective. Our efforts are now being recognized across forums with EPL winning two prestigious awards at the 4th edition of the India ESG Summit & Awards 2023 by Transformance. EPL was presented with the ESG Best Performer of the Year, while EPL's global lead in sustainability was recognized as a Top 20 ESG Champion. We continue to remain signatories to the Ellen MacArthur Foundation, the United Nations Global Compact and the India Plastics Pact while continuously working towards improvement on external validation and recognitions.

With this backdrop, we have launched a company-wide effort toward Ecovadis Platinum. EPL continues efforts on innovations with the company receiving 3 awards at the recent ResPack, which is Responsible Packaging Awards for its innovative and sustainable packaging. Some of our business wins include entry into new categories and Lamitube and Platina conversions.

Examples of these have been shown in the investor pack that has been circulated. So looking ahead, clearly, the environment is looking more stable and more predictable, but some challenges remain. Our priorities as we look ahead include continued growth momentum in India and China, though recognize that there is some demand softening in Western geographies; accelerate Beauty & Cosmetics by winning small consumers -- small customers; ramp up volumes and expand our customer base in Brazil; continued focus on margin improvement through mix and cost efficiency; efficient capital allocation and manufacturing location optimization.

And finally, drive customer conversion to sustainable solutions. So in continuation of past quarters, we remain focused on driving growth with continuing margin recovery. Net-net, we are cautiously optimistic about the future to deliver double-digit growth with margin improvement. Thank you. We will now open the call up for questions.

[Operator]

[Operator Instructions]. The first question is from the line of Sameer Gupta from India Infoline.

[Sameer Gupta, analyst]

Firstly, just trying to get more color on the overall top line growth performance. What I noticed is that there has been a slowdown in the revenue growth trajectory across all geographies except China. China also, the base was very low. So 11.5% growth looks good, but I would believe on a low base, it's still on the lower side. So just wanted to understand this performance geography-wise. Is it just a phasing issue? Any major issues that you would want to highlight?

[Anand Kripalu, executive]

So I would say that as far as the demand outlook is concerned, our assessment is that India remains solid. China, you're right, we are lapping a relatively low base. What has happened in China is that there has been some shift away from China for exports by large multinationals, but that's already in the base, okay? Exports out of China that we do, right, beyond that, to places like Thailand and so on, remain robust. I would say that given the overall environment in China, I think we are just being watchful of how China plays out, okay?

We have seen some demand softness in U.S. but particularly in Europe, okay? And we are continuing to see a bit of that softness play out as far as these two geographies are concerned. I think we remain more, what should I say, realistic about what's going to happen in the U.S., but probably a little more pessimistic given the overall environment in Europe. So that's really a round up. So the numbers are the numbers that you've seen, but that's really a flavor of how we are seeing it, right?

As far as we are concerned, I can tell you that over the last 1.5 years or so, a lot of the management intensity went behind margin improvement and cost reduction. We are keeping a tight leash on costs and keeping the belts tight, but we are renewing efforts to push growth harder particularly behind B&C, Beauty & Cosmetics, where you know we have lower global share, right? And we have a big headroom for improvement. So we are doubling up efforts to push growth in B&C. So that's broadly, I would say, a sum up of the top line.

[Sameer Gupta, analyst]

Sir, got it. Second question is on the margins. Europe and Americas, I mean, they continue to be subpar. So are we still getting -- facing issues getting price hikes here? Are we done with the price hikes and this is the new normal? Is it just a function of negative leverage? Any color here would be helpful.

[Anand Kripalu, executive]

I'm not sure if -- well, that's your judgment on that being subpar. But let me put it this way that both have delivered double-digit margin, okay? I think there's opportunity for margin improvement. Particularly in the Americas, there have been some one-offs to do with health insurance and so on, which will not happen again because of which the margins are a little subdued, okay? But overall, I think that as we drive growth momentum and as growth comes back to Europe, we have significant opportunities to improve margin. What I can tell you is that the belts have been tight on cost and by and large, we've met whatever OpEx forecast we had. So it's really a bit of growth leverage, right, that we need to continue to drive.

[Sameer Gupta, analyst]

Just a follow-up, sir, here, the price hikes that were due here in Americas and Europe, are we still in that process or that is done now and going forward, it is for customers here and growth?

[Anand Kripalu, executive]

Yes, I would say that price hikes in general, not just for Europe and Americas, in general now, are few and far between, okay? By and large, whatever had to come has come. However, I have to say that there are some, particularly with our contracted customers, there's a passthrough of cost -- input cost reductions that has started flowing into pricing as well. So I think one has to recognize that there will be a tempering of pricing, right? Not so much in terms of positive pricing, but there will be some negative pricing as well that is flowing through and some of it has started flowing through, particularly for contracted customers already.

[Sameer Gupta, analyst]

Got it, sir. I'll come back in the queue for any follow-up.

[Operator]

The next question is from the line of Ritesh Gandhi from Discovery Capital.

[Unknown Analyst]

Actually, would you be able to share a data on EBITDA [Technical Difficulty] by product and by geography to give us an indication on the trajectory of the business?

[Anand Kripalu, executive]

I'm sorry, I didn't quite follow the question. Would you mind repeating?

[Unknown Analyst]

Sure. So if you could just share with us the EBITDA per unit ton by product and by geography, it would be helpful to help us evaluate the trajectory of this business?

[Anand Kripalu, executive]

By product, we don't share. By geography, it is there in the deck, right, by geography. And we give geography by regions, 4 regions, that data is in the deck already. And that should be available to you if you access the Investor deck.

[Unknown Analyst]

Okay. Okay. Okay. Maybe I have missed this one. Let me just get back in queue.

[Operator]

[Operator Instructions] The next question is from the line of Sanjesh Jain from ICICI Securities.

[Sanjesh Jain, analyst]

I'm sticking on this revenue growth again. You said that MSR, you are satisfied. But if you look at the number of 5% growth Y-o-Y, it really doesn't picture the kind of robustness we are seeing. And if you look at for last 4 quarters, progressively, the revenue has only decelerated. While last year, it was a double-digit growth, now we are at a mid-single-digit growth. Is it to do more with the price pass-through? If that is the question, then why margins have again fallen sequentially? With price pass-through our EBITDA per kg or gross profit per kg is protected which should have implied that we -- our margins ideally should have gone up, while MSR, if you see sequentially, margins have also dipped by 200 basis points and revenue growth has also fallen to 5% Y-o-Y growth, how should we reconcile this on the MSR side?

[Anand Kripalu, executive]

So I'll request Amit to chip in on the margin part. See, on the growth part, I just want to say this that -- so there is some tempering of the revenue growth numbers because we've had a specific short-term challenge in Egypt, right? There is a translation loss of the Egyptian pound which I mentioned earlier, right? And the reality is that now fresh pricing is few and far between, okay? So when you combine all of that, right, the optics of revenue growth are going to be a little softer, right, in the immediate term, right? And that's what is there.

Now this does not mean, by the way, that we are not doing lots of things to push growth harder, right, and I said that in response to the earlier question. We are absolutely doing stuff to push growth harder. But that is a reflection also of the softening input costs, right, and therefore, what is happening to the optical revenue numbers. Now as far as the margin is concerned...

[Amit Jain, executive]

Yes, margin -- Sanjesh, margin for -- you can't see it on a sequential basis because there is seasonality also in this business. And if you see -- for the last quarter, the revenue was also higher if you see the June numbers, correct? So that will depend on the product mix.

[Sanjesh Jain, analyst]

It was only INR 2 crores more, Amit. It was only INR 2 crores more in the MSR. We were at INR 338 crores, we are at INR 336 crores. I don't see too much of a difference in revenue there.

[Amit Jain, executive]

That's right, but there are seasonality and there are product mix also, correct? Because from the seasonal, your product mix also changes between Beauty, Pharma and Oral.

[Sanjesh Jain, analyst]

Okay. Okay. Continuing on this revenue growth again, Amit, I thought we have dollar billings. So how should the currency depreciation or a devaluation really hit us on the revenue? You are telling that [indiscernible] itself has collapsed there and that's the reason? And how much is Egypt hitting if you can also number? Assuming Egypt was normalized, what would have been the revenue growth?

[Amit Jain, executive]

So see, in each country, there are some of the export sales also, which is dollar building also, but the local sales are in the local currencies, correct? So that is one. But if you see India standalone and the numbers are there in the public, India standalone growth is almost around 7%, 6.9%.

[Sanjesh Jain, analyst]

But again, 6.9% is really not that encouraging. We were talking of a double-digit growth, right, to sustain and in that context, is that a slowdown? Are we losing market share? What is really -- how should one see this?

[Anand Kripalu, executive]

So I just want to say that -- so our medium- to long-term ambition absolutely is double digit, right? Now we are going through cycles of commodity of acceleration and inflation and softening of commodities, right? And obviously, that affects pricing and revenue, okay? So I just want to say categorically that as far as India is concerned, we have actually built market share, right? There is absolutely no question of market share loss. Now the revenue numbers are a combination, obviously, of margin, of mix and of prices, right? And it's a combination of that.

So I think we're just going through these cycles when you add hyperinflation of input now having softening to an extent. And part of that is playing out in the revenue numbers, right? So are we alarmed about performance in India, no, right? There is absolutely nothing that is to do with market share loss or any challenge other than the fact that the number is a combination of these 3 factors, right? And I think these things will normalize themselves as we look ahead.

[Sanjesh Jain, analyst]

Fair enough. My next question is on Americas. In America, if you go back to FY '20, we had a quarterly revenue of close to INR 150 crores, INR 170 crores, and we used to do an EBITDA margin of 20-plus percent. The revenue has scaled up to above INR 200 crores kind of a run rate, while margins have fallen to 11% kind of a thing. How should we see the margins in America again going back to 20%? Is it really possible? Or you think the new normal level of margins in America will be significantly lower than the historical trend?

[Anand Kripalu, executive]

So Americas is a combination of mix of the countries as well, right, which is Mexico and Colombia. I mean, if I were to just -- so there has been some margin erosion, particularly in the U.S. during this period, okay? During this period of hyper input cost inflation, there has been some loss of margin. We have a very clear plan for margin recovery. I'm not going to say whether it's 20% or some other number, right? But we have a very, very clear plan for margin recovery, which includes growing the business as well as some structural cost changes, right? And we are absolutely working on that.

So that's the best visibility I think I can give you as far as the U.S. is concerned, right? There has been no big margin erosion, right? And I'm not looking at one quarter alone, no big margin erosion in the other smaller countries, right? There has been something in the U.S. and there's a clear plan to recover that.

[Sanjesh Jain, analyst]

Got it. Last question from my side on Brazil. Can you give you more color on the financial in terms of what is the revenue run rate annualized for, say, exit month? What kind of utilization level have we reached? And are you achieving the profitability what we anticipated at the time of starting the project, that will be helpful?

[Anand Kripalu, executive]

It's too early to give you any steady-state kind of indication as far as Brazil is concerned. I will say that there was a slight delay in the volume ramping up, okay? And that is absolutely normal in the project of this kind when customers are also down-stocking volumes, et cetera, et cetera, right? I think we have started reaching the kind of ramp-up that we would like in July, okay, so that, we have seen the step-up happen. Q1 was relatively soft on volume, but a lot of trial was happening, some commercial sales started happening. But July, I think the ramp-up has started. We are nowhere near the ramp-up numbers that we want, and it will still ramp up from July onwards.

But July, we've had a sizable volume as far as Brazil is concerned. I think we'll have to wait at least another quarter for us to give you a better guidance on where the stable volumes are, what will contribute and how the profitability will look for the project, right? But by and large, apart from a month here or there, for most factors, I would say, we are broadly on track.

[Sanjesh Jain, analyst]

Just one follow-up. Are we still in active discussion with the potential client? And how is that pipeline looking in Brazil?

[Anand Kripalu, executive]

So we are in active conversation with several customers. And I think we are very close to having got order from one new customer, right, as we speak. So the journey of expanding the customer base have started albeit with one customer right now, but the teams on the ground are at it. We have ourselves connected with many global MNCs who are present on the ground in Brazil. And all I can say is that there's huge interest, and I think you will see momentum building in terms of widening the customer base.

[Sanjesh Jain, analyst]

Got it. Thank you for providing elaborate answers. And best of luck for the coming quarters.

[Operator]

[Operator Instructions] We'll take the next question from the line of Sumant Kumar from Motilal Oswal.

[Sumant Kumar, analyst]

So can you talk about -- you were talking about health insurance costs in America. So of health insurance, what is the EBITDA -- EBIT margin for America?

[Amit Jain, executive]

So I can't share the numbers specifically, Sumant. But this is kind of a timing difference only which will over a period of time during the course of year will nullify.

[Sumant Kumar, analyst]

So net-net, if we'll incorporate health insurance cost, so there is no margin decline?

[Amit Jain, executive]

No, no, I'm not saying that. I'm saying that there is a one-off in this quarter because of the health insurance. And I'm saying that it is just a timing difference. Over a period of time in this year, this cost will nullify over a period of time, so.

[Sumant Kumar, analyst]

Okay. And tax side, we have a lower tax this quarter. So what is the effective tax rate for FY '24?

[Amit Jain, executive]

FY '24, you can take effective tax rate as a normal around, say, 26%, 27%.

[Sumant Kumar, analyst]

Okay. So you were talking about in 3 quarter, the tax rate will be higher?

[Amit Jain, executive]

Tax rate on -- and it will also depend on certain dividends, which comes from the subsidiary which we have seen last 2, 3 quarters. So there will be some benefit also. Maybe just wait for one more quarter and then we will have visibility on those things also.

[Sumant Kumar, analyst]

Okay. So we can maintain the previous guidance what you have given in the Q4 of tax rate?

[Amit Jain, executive]

Yes. Yes.

[Operator]

[Operator Instructions] We'll take the next question from the line of Ritesh Gandhi from Discovery Capital.

[Unknown Analyst]

I just had a relook through bit of presentation. I am not able to locate the EBITDA per unit ton anywhere, actually. If you could point me out on where it is?

[Amit Jain, executive]

Ritesh, normally, we do not share EBITDA per ton or per thousand product-wise. Our normal reporting is the segment results. And you will see reason-wise EBITDA on Slide #20...

[Unknown Analyst]

No, I see that. I see that. How about -- sir, in actually a business where our revenue increases when raw material prices increase which leads to then a lower EBITDA margin. In an environment where, obviously, raw material reduces, our revenue may go down and our EBITDA percentage may go up. So all through our introductory actually comment, we are talking about EBITDA percentage increasing, but that in actuality is irrelevant from an investor angle, right? Because unless we know what is the volume growth which is happening, what is a historical EBITDA per ton, where are we in now, how are we able to make a decision on how to look at the business, the actual percentage is totally irrelevant, right?

[Anand Kripalu, executive]

So forget the percentage. In my opening comments, I talked of absolute EBITDA growth.

[Unknown Analyst]

Sir, I get that. But I think that might also be -- but I think that would also be a factor of actually increased -- actually capacity utilization can also lead to higher absolute EBITDA, right? So how do we get a breakup to know how much of an absolute EBITDA growth is driven by actual increase in volume versus by increase in pricing, so we can get us a sense on where the trends are heading in this business?

[Anand Kripalu, executive]

See, we are not giving granularity on pricing separately, right? Our revenue growth is a combination of volume, price and mix, right? And I've explained many times before that strategically, this business is driving growth through B&C over Oral, right? Therefore, doing mix improvement. And of course, there has been some pricing as well. But there's also volume as well. So we are not giving that granularity because strategically, we are trying to drive revenue growth through all these 3.

[Unknown Analyst]

I understand that, sir, but I'm saying for us to evaluate, are we driving the revenue growth at the cost of lower margins? Or are we not? I mean, I'm sure -- I mean you've got Blackstone as an investor, you can ask them also, this would be a key data point. Anyone would look at to invest in any business which is actually a convertible business, right?

[Amit Jain, executive]

So Ritesh, I think we normally do not share this kind of granular data. And maybe on the number...

[Unknown Analyst]

I would just leave this as a request with you. If you could consider in the future to actually bring in high-quality new public investors, this is a very important data point in my view for us to get a real view on what is the quality of the business going ahead? And how could it [indiscernible] been able to?

[Amit Jain, executive]

Yes, Ritesh, we can take it offline.

[Operator]

[Operator Instructions] We'll take the next question from the line of Sameer Gupta from India Infoline.

[Sameer Gupta, analyst]

Now earlier, when we were going through the inflationary period and there were subsequent price increases lined up, we had said that typical margin equivalent of the previous years will be 18.5% because of the optical impact on price increases and costs going up. Now in line with the deflationary time when we are passing on the decrease in commodity costs at least where we are contracted, would it be fair to assume that this 18.5% will probably settle at a higher rate, maybe will take some from the revenue growth, but margins should settle at a higher number. Would that be a fair assumption?

[Anand Kripalu, executive]

See, we're not going to give you a number of our margin ambition. But what I have said in the opening comments is that we are committed to continuous margin improvement, right? And we get the margin to what we believe will keep us competitive in the marketplace as well, right? So you cannot keep increasing the margins indefinitely. But please also look at absolute EBITDA growth, okay, because that's a reflection of real profit that the business is making.

And one more comment that I would like to make is from a revenue standpoint, this is business with some seasonality, right? So sequential comparisons, right, we don't really believe reflects the performance of the company. It is Y-o-Y. You have to look at the same quarter of the previous year to get a proper assessment of how we are performing, okay? So I just want to leave that as well, not just for you but for everyone else in the call.

[Sameer Gupta, analyst]

Fair enough, sir, that's all from me. Just will take this moment to thank Amit for all his time and inputs and welcome Deepak.

[Anand Kripalu, executive]

Thank you for doing that.

[Operator]

[Operator Instructions] We'll take the next question from the line of Udit Gupta, an individual investor.

[Unknown Attendee]

Sir, my question is regarding the debt level. Do we see it moving lower?

[Operator]

I'm sorry to interrupt. Mr. Gupta, your voice is breaking.

[Unknown Attendee]

One moment. Question is -- is my voice clear right now?

[Anand Kripalu, executive]

Yes.

[Unknown Attendee]

Yes. So my question is regarding the debt level, sir. So by the end of the financial year, do we see it moving higher or lower? So what is the trajectory?

[Amit Jain, executive]

So the debts are normally -- we track our debt based on different ratios. It's not a question of absolute values where the debts are. Based on the growth, we definitely leverage our balance sheet. But our leverage ratios are very strong, be it DSCR, ISCR and debt equity. So if there are growth opportunities, yes, the balance sheet can take more leverage, but that's how we monitor our debt.

[Operator]

Thank you, sir. Sir, the participant has left the queue. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Pratik Tholiya for closing comments. Over to you, Mr. Tholiya.

[Pratik Tholiya, analyst]

Yes. Thanks, Michelle. On behalf of Systematix Institutional Equities, I would like to thank all the participants. I would like to also take this opportunity to thank Mr. Amit Jain, our outgoing CFO, for his support over the last many years, to all of us, analysts as well as investors. And I would like to also welcome our incoming CFO, Mr. Deepak Goyal. Once again, thanks to the management for giving us the opportunity to host this conference call. Mr. Kripalu, would you like to make any closing comments?

[Anand Kripalu, executive]

No, I just want to thank everyone who attended this call for the interest that you've shown. And yes, that's it. Thank you.

[Amit Jain, executive]

Thank you.

[Pratik Tholiya, analyst]

Thank you so much, sir.

[Operator]

Thank you very much -- thank you, sir.

[Anand Kripalu, executive]

Bye-bye. Thank you.

[Operator]

Ladies and gentlemen, on behalf of Systematix Institutional Equities, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.