Epack Durable Ltd: For medium to long term investment

On the face of it the PE multiple looks expensive, but when one considers the investment of Rs150 crore each over the last 2 years and being eligible for benefits under the PLI scheme, the issue looks attractive

Enhancing Production

• It had revenues of Rs1,538.83 cr in FY23
• EBITDA at Rs102.52 cr, PAT at Rs31.97 cr
• EPS on a fully diluted basis was Rs4.64
• PE price band is 46.28-48.83
• Allocation of 83,48,504 shares to anchor investors
• It has 3 factories in Uttarakhand, Rajasthan and AP
• Increasing production, operations

EPack Durable Ltd’s IPO opened on Friday (January 19) and would close on Wednesday (January 24). The issue has been extended by a day because of the stock exchange holiday declared on Monday (January 24). Even though markets were open on Saturday (January 20), bidding for the issue was not available. Hence, the extension. The price band for the issue is Rs218-230. It consists of a fresh issue for Rs400 crore and an offer for sale of 1.04 cr shares. The company completed allocation to anchor investors of 83,48,504 shares to 15 investors comprising of 18 entities. Of these, there was one mutual fund who invested through 4 schemes 15,65,265 equity shares. At the end of bidding on day one, the issue is subscribed 0.79 times.

The company is into contract manufacturing of air-conditioners, small domestic appliances and also supply of moulded components. As part of the backward integration that the company has done for air conditioner manufacturing, it has set up a modern plastic moulding factory. This becomes effectively idle when the air-conditioning plant is not on for about 5-6 months during a year. The company has factories at three locations in Uttarakhand, Rajasthan and Andhra Pradesh. The company has backward integrated substantially so that the share of the pie can be increased. Its strength lies in the fact that it has invested around Rs300 crore under the PLI scheme over the last two years which would give the company an advantage when it makes more components for the small appliance industry. With this in mind, the company has entered into the small home appliances segment making products like water dispenser, air coolers, induction cooktops and mixer grinder. The product range has been expanded and its inhouse R&D team is actively engaged in increasing the product range and design of existing products.

The company reported revenues of Rs1,538.83 crore for the year ended March 2023, an EBITDA of Rs102.52 crore and a profit after tax (PAT) of Rs31.97 crore. The EPS on a fully diluted basis was Rs4.64 and the PE price band is at 46.28-48.83. On the face of it the PE multiple looks expensive, but when one considers the investment of Rs150 crore each over the last two years and being eligible for benefits under the PLI scheme, the issue looks attractive, simply for the immediate future potential. Further, the revenue mix currently is skewed in favour of making air conditioners which is roughly 85 per cent of the revenue mix. Air conditioner making is a cyclical industry with production for roughly 6-7 months. In the remaining period, component making machinery is idle and if it can be ramped up, it could provide substantial benefits for a manufacturer. It is this that Epack would look to maximise going forward. Take for example if the small home appliances segment revenue is increased by 10 per cent, more than just the revenues, the components that would go into making that appliance would increase capacity utilisation and thereby contribute to the fixed overheads.

The competitors for EPACK include companies like Dixon Technologies, Amber Electronics, P G Electroplast and Elin Electronics. Each of these players has a niche and are supplying to many of the top brands in each product basket. The various brands in this segment also buy products from more than one manufacturer. These manufacturers do business on an ‘ODM’ basis as well where the design of the product is made by the contract manufacturer and then supplied to the brand. In this, the margins are slightly better and also the stickiness of the customer as he has to depend on the same supplier for his inventory. Overall margins in contract manufacturing are lower as it is a volume game and manufacturers are assured of volumes.

Coming to the demand of air conditioners, it’s growing close to double digits and fresh capacity is being added even by the brand manufacturers. The penetration is quite poor in India and herein lies the opportunity. To add to this is the fact that climate change is ensuring that normal seasons have changed and temperatures risen. The need for air conditioners is being felt in places where the same was not required earlier. Also, the fact that general temperatures have risen by 3-5 per cent over the last couple of years have increased the demand considerably. An export opportunity has also opened up with India able to make the entire components except the compressor for the air conditioner.

There is an investment opportunity available in the shares of Epack Durable Ltd. While there may be some listing pop available, it should be considered as a bonus. Investment in the share is meant for the medium to long term. The second half of the financial year is the better half for the companies in this sector and the first half should never be taken as an example of the performance in any year. The PLI scheme will ensure that the company receives a steady flow of incentives over the next few years to help the company shore up its profits. Invest for the medium to long term.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)