Up for 5 straight months, HDFC Securities identifies EPL stock as its ‘pick of the week’

After a robust financial performance and 5 straight months of gains, brokerage house HDFC Securities has picked EPL as its 'pick of the week'

"We believe investors can buy the stock in ₹245-255 band (20.5x FY26E EPS) and add on dips in ₹220-230 (18.5x FY26E EPS) band for a base case fair value of ₹274 (22.5x FY26E EPS) and bull case fair value of ₹292 (24.0x FY26E EPS) over the next 2-3 quarters," said the brokerage.

Stock Price Trend

The stock has risen 27 percent last 1 year and over 42 percent in 2024 YTD, giving positive returns in 6 of the 8 months so far. It has advanced over 13 percent in August so far, extending gains for the 5th straight month after a 14 percent rise in July, 8.5 percent in June, 0.4 percent in May and 1.3 percent in April. However, before that, the stock fell 4.2 percent in March and 7.3 percent in February. In January, it was flat, up 0.1 percent.

The stock also hit its 52-week of ₹262.50 last week. Currently trading at ₹252.55, it has jumped almost 49 percent from its 42-week low of ₹169.85, hit on June 5, 2024.

Investment rationale

EPL Limited (EPL), the world’s leading manufacturer of laminated plastic tubes, holds approximately 35 percent of the global market share in oral care, serving major companies like Unilever, Colgate, and P&G. In the personal care market, EPL’s global share stands at around 10 percent, offering a significant growth opportunity given that this segment is three times larger than oral care. As EPL increases its share of higher-value personal care tubes, margins are expected to improve, said the brokerage.

It further pointed out that the The laminated tubes industry is highly concentrated, with key global players such as ALBEA S.A., CCL Industries, and EPL dominating the market. EPL operates in a niche business that plays a crucial role in the FMCG and Pharma sectors, where packaging is a vital component of the marketing mix that drives brand success. Annually, EPL sells approximately 8 billion tubes.

Moreover, the growth potential in this business is underscored by the fact that the market for oral care tubes stands at 17 billion units per year, beauty and cosmetics at 14 billion units, and pharmaceuticals at 8 billion units. While EPL commands about 35 percent of the oral care market, it is still expanding its presence in the Personal Care & Beyond (PC&B) segment, where it currently holds a 10 percent share. Notably, the revenue contribution from PC&B has grown from 41 percent in FY18 to 47 percent in FY24, and the management aims to further increase this share, stated HDFC.

"EPL’s integrated and vast operations make it a preferred one stop solution for its big clients who form long term partnership with EPL. Replacement of aluminum/ plastic tubes by laminated tubes continues at a good pace across the globe due to better aesthetics, lower cost, higher plastic-barrier properties, product and design flexibility and higher sustainability. The unique business model, extensive reach, excess capacity and management focus will help the company to gain market share," explained the brokerage.

Valuation and Estimates

According to the brokerage, EPL is poised to continue gaining market share as the industry undergoes a structural shift driven by innovative product introductions. HDFC says that EPL's robust innovation pipeline, a wide array of sustainable solutions, and a sharp focus on sustainability align well with the growing commitment of larger personal care brands to meet their sustainability goals. The company’s proactive approach to identifying new market opportunities and increasing its share of customer wallets enhances its growth prospects, added the brokerage.

EPL’s management is committed to achieving double-digit revenue growth, with a target EBITDA margin of around 20 percent by FY25. The stabilization of raw material prices is expected to further support margin recovery. Looking ahead, HDFC expects EPL to achieve a revenue and EBITDA CAGR of 11 percent and 14 percent, respectively, over FY24-26E. Additionally, Return on Capital Employed (RoCE) and Return on Equity (RoE) are projected to improve from 15.0 percent and 13.4 percent in FY24 to 19.5 percent and 17.1 percent by FY26.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.