This small cap stock is all set to surf the sustainability wave

Cook defends Apple’s sustainability initiatives, and finally makes a point with a new product, the Apple Watch, saying it is 100% carbon neutral. He commits that by 2030, all Apple devices will be carbon neutral. By the end, it seems he has pacified Mother Nature.

In 2020, BlackRock CEO Larry Fink put the world’s largest money manager behind the cause of purpose-driven investing, kicking off the sustainability revolution.

Multinationals are becoming more serious – and vocal – about their sustainability targets, some with hard deadlines.

Apple is not alone. Colgate and HUL have said they aim to use 100% reusable, recyclable, or compostable plastic packaging by 2025, and P&G plans to do so by 2030.

I don’t believe in following narratives blindly, be it ESG or the renewable energy theme. It’s always about a hunt for solid companies with strong balance sheets.

But one small company seems set to benefit from the race to sustainability, and has solid fundamentals.

EPL Ltd, formerly known as Essel Propack, is a small company with big credentials. It is the world’s largest specialty-packaging company, manufacturing everything from laminate sheets to finished tubes.

Its plastic tubes house the products of blue chips in FMCG, pharma, beauty, cosmetics, and food.

With a volume base of over 8 billion, it commands a 20% global market share in the segment.

In oral packaging (such as toothpaste tubes), it has a 35% share of the global market. The category accounts for 52% of its revenue.

The share of non-oral tubes (used for cosmetics, medicines, food and other goods) is 48%. EPL also has a 10% market share in personal care and 8% in the home/food and industrial segments.

These are impressive numbers. But what’s next for the company?

Already a market leader, how can it pull off the double-digit growth when the FMCG industry is growing at just around 5%?

To achieve high growth, it will have to take market share from competitors and grab a bigger share of customers’ spending.

That’s why it’s betting big with its “sustainable packaging” products.

EPL has been working on its molds and machines to make them fit to produce recyclable tubes. The management says 85% of its machines are ready to do so.

The share of recyclable tubes was 10% in FY23 and is nearing 20% in FY24. By FY26, it’s expected to touch 60%.

The company also boasts a sustainability rating from Ecovadis Gold, which places it among top 3 plastic-making companies.

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

But will this help it earn better margins?

Well, the management sees sustainability as helping it win more business, market share, and wallet share. It does not plan to charge more just for offering sustainable packaging.

That’s one growth driver.

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

What does this mean for growth?

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

In the non-oral or personal-care segment, it expects better growth as it has just a 10% market share. This category is a bigger global opportunity in absolute terms. It’s a market of 25 billion tubes as compared to 17 billion tubes in the oral category.

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

The company covers a wide range of markets. Growth prospects and margins are better in Amesa (Africa, the Middle East and Asia) and EAP (East Asia Pacific) markets as inflation concerns remain in America and Europe.

The management expects double-digit growth in the topline and 20%-plus margins in the business.

In 2019, Blackstone took over the promoter stake in the company for around ₹136 a share. It acquired another 26% in the company through an open offer to shareholders, taking its total stake to 75%.

In 2020 it cut its stake to 52% through a market sale at ₹256 a share. The stock is currently trading around ₹200.

Having clocked a revenue of ₹37 billion in FY23, the management is targeting up to ₹46 billion in FY25 and up to ₹58 billion in FY27, with margins of up to 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 12.5%. If the margin and growth are in line with the management’s expectations, there could be a meaningful improvement. The debt to equity stands at 0.4.

The dividend yield is 2.2%, with a payout ratio of 60%.

The stock is trading at a PE ratio of 25, and at a PEG (price/earnings to growth) ratio of 0.7.

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

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. 

This article is syndicated from Equitymaster.com