Packaging firm EPL’s stock has corrected 33%. Can it rebound?

Mumbai-listed tube packaging company EPL Ltd (formerly Essel Propack), which has seen a 33% correction in its stock price over the last seven months, is likely to see a rebound driven by improvement in revenue and margins.

EPL’s shares on the NSE were quoting at Rs 196.45 apiece at noon on Friday, down 0.1% from the previous close. The stock had touched a high of Rs 291.95 in June 2021 due to reduced demand for beauty and skin products and margin pressure from elevated inflation.

Japanese securities and investment banking firm Nomura has initiated a ‘buy’ rating on the stock with a target price of Rs 255 apiece, valuing the stock at 23 times its price-to-earnings based on December 2024 EPS of Rs 11.1.

“We believe demand for beauty and skin products will pick up with improved mobility, and margins will recover sequentially as EPL has hiked prices (with a quarter’s lag) to protect gross profit margins,” said Nomura analyst Mihir P. Shah.

EPL says it is the global leader in laminated tubes with a 19% market share. Its business spans oral and personal care categories, which cumulatively account for 88% of revenue led by Africa, Middle East, South Africa (AMESA) regions followed by East Asia Pacific, Europe and Americas.

Wide moats enabling multi-category presence

Nomura says that being the world’s largest fully integrated manufacturer of laminated tubes has given EPL the ‘right-to-win’, as it has significant scale, competitiveness, and cost moats versus global peers which operate in only one or two production stages.

EPL deploys advanced research and development (R&D) and design strengths in product engineering to yield differentiated products and enhance customer loyalty. It has 66 patents with another 30-40 in the pipeline.

Customised geographic expansion strategies

In the AMESA region (32% of revenue), EPL is now a leading supplier to India’s pharmaceutical companies, and is winning business with niche personal care brands (with more than 70% share per customer).

In East Asia Pacific (24% of revenue), it is focusing on fast-growing local players to drive growth. In Europe (24% of sales), it is driving personal care growth with a strong business pipeline. In the Americas (20% of sales), its travel and sample tubes are recovering alongside the gradual pickup in overall demand, Nomura said.

M&As on the agenda

EPL has been making regular acquisitions especially over the past two decades for expansion in new segments or geographies. Some prominent acquisitions include Propack (2000), Arista Tubes UK (2004), Telcon Packaging UK (2005), Tacpro Inc USA, Avalon Medical Services Singapore, and Packaging India (2006).

According to EPL management, it sees inorganic growth as crucial to drive overall growth over the medium-long term, and will actively scout merger and acquisition targets that complement its portfolio. It will specifically seek targets that aid in penetrating new customers, new categories, new geographies or new capabilities/ technologies, and are also revenue/earnings accretive.

“We believe EPL’s agenda of complementing growth through bolt-on M&As will continue, adding to its product and market portfolio and giving further upside to margins,” Shah said.

Project Phoenix

According to EPL, it is the cost leader in the industry in view of its sustained sharp focus on cost control. It is running Project Phoenix, an organisation-wide initiative comprising 350 regional projects to cut costs.

These initiatives include in-sourcing of caps and closures production where it expects to save 100 basis points in margins, the ‘Modern Times’ project to improve manufacturing efficiency through automation, and implementing better machine utilisation, scrap and wastage reduction.

The initiatives also include efforts to reduce raw materials and use substitute materials, rationalise manufacturing and support sites, and rationalise energy consumption.