This Smallcap Market Leader Could Potentially Unlock 'Recycle' Riches 

Apple recently released a video in which the CEO Mr Tim Cook, playing himself in the ad, has a tense exchange with Octavia Spencer, starring as Mother Nature in the ad. She asks some tough questions, demanding accountability about Apple's carbon footprint, plastic waste, recycling.

Tim is defending Apple's initiatives towards the sustainability drive, and finally makes a point with a new product- Apple's watch, that is 100% carbon neutral. He commits that by 2030, all Apple devices will have a net zero impact.

By the end of the ad, it seems he has pacified mother nature, and has won customers too.

In 2020, BlackRock CEO Larry Fink put the world's largest money manager behind the cause of purpose-driven investing. Ever since, ssustainability is the new buzzword.

Global MNCs are getting more vocal and serious about sustainability targets. This time, with hard deadlines.

Apple is not alone. Colgate and HUL have shared a target to use 100% reusable, recyclable, or compostable plastic packaging by 2025.

P&G is catching up with a similar aim by 2030.

Now I don't believe in following narratives blindly...Be it ESG or renewable energy theme.

It's always about a hunt for solid company with strong balance sheet.

But there is one smallcap company that's seems all set to benefit from the race to sustainability by global MNCs and looks good on fundamentals.

EPL Ltd, formerly known as Essel Propack comes the smallcap category.

But its credentials are quite big.

It is the world's largest specialty packaging company. The company has backward integrated facilities that makes right from laminate sheets to finished tubes.

Its key raw materials are polymers like HDPE and LLDPE and aluminium foil.

The plastic tubes it makes contain the products of bluechips in FMCG, pharma, beauty, cosmetics, and food industry.

With over 8 bn volume base, it commands 20% global market share in this segment worldwide.

Within oral packaging, like toothpaste tubes, it commands 35% market share globally. Oral category accounts for 52% of its revenue.

The share of non-oral tubes is 48%.

The segment combines beauty, cosmetics, pharma, food, and others. EPL has 10 % market share in Personal care and 8% market share in home/food and industrial segment.

Now these are impressive market shares. But what next?

Already a market leader, how can this company pull off the double-digit growth rates that it aspires for, when the FMCG industry itself is growing at around 5%?

It will indeed require the company to take market share away from competition and get a higher wallet share with its customers.

And that's where it is betting big with its "sustainable packaging" offerings.

EPL has been working on its molds and machinery to make them fit to produce recyclable tubes.

The management says that 85% of company's machine are ready to make recyclable tubes.

The share of recyclable tubes was 10% in FY23. It is nearing 20% this FY24. By FY26, the share is expected to hit 60%.

What's more, the company boasts sustainability rating from Ecovadis Gold which places it among top 3 plastic making companies.

If the MNCs have made up their mind to have 100% sustainable packaging products, sooner or later the supply ecosystem will follow. The company wants to beat other players on this aspect by being ahead of the curve.

Will this help the company make better margins?

Well, the management sees sustainability as an aspect that will help it improve its right to win more business, market share, wallet share and add clients. It does not intend to charge higher just for offering sustainability.

That's one growth driver.

Another is a greenfield facility in Brazil, which is a virgin market. So far, the company is supplying to one major customer, but is in talks with 10 others and expects to add more.

So, what does it mean for growth?

Well, the company expects 8%-9% kind of growth in the oral segment where it already has 35% share.

In the non-oral or personal care segment, it expects a better growth as this segment is still relatively underpenetrated with 10% market share.

Do note that non-oral care globally is a bigger opportunity to exploit in absolute terms. It's a market of 25 bn tubes as compared to 17 bn tubes in the oral category.

In fact, EPL's revenue share from non-oral category over last few years has been consistently increasing, and the trend is likely to continue.

The company covers a wide range of markets. The growth prospects and margins are better in Amesa i.e., Africa, Middle East, and Asia; and EAP or East Asia Pacific markets, as inflation and slowdown concerns prevail in America and Europe economies. But overall, the management expects a double-digit growth in the topline and 20% plus margins in the business. The company expects higher insourcing of products such as cap closures to help in improving margins and efficiencies.

The capex required is likely to be in line with the depreciation expense.

The challenges could be slowdown in Western regions, currency fluctuations, inflationary pressures that led to margin contraction in last two to three years but are easing now. Almost 50% of the business is on contract basis that uses formula-based pricing and there is a time lag of around three months.

Coming to the management,

In 2019, Blackstone took over the promoter stake in the company at a price of around Rs 136 per share. It further acquired 26% stake in the company, taking it to 75% through open offer to public shareholders. In 2020, it brought its stake down to 52% through market sale at Rs 256. The stock is trading around Rs 200.

As against a revenue of Rs 37 bn in FY23, the management is targeting upto Rs 46 bn in FY25 and upto Rs 58 bn in FY27, with margin of upto 21%-22%.

For the trailing 12 months, revenue growth has been at 8% and EBITDA margins have improved from 15.4% to 16.8%.

The return on equity is at 12.5%. If the margin and growth are in line with the management expectations, there could be a meaningful improvement. In the latest quarter, ROCE is at 16.5%. The debt to equity stands at 0.4 times.

The dividend yield on the stock is 2.2% with a payout ratio of 60%.

The stock is trading at a PE of 25x, and at a PEG or price earnings to growth of 0.7 times.

Do note that this is not a stock recommendation. You must assess the risks and valuations before you take that call. But all in all, EPL is one candidate that should be on your watchlist if sustainability theme excites you.

Thank you for watching.

Goodbye.