EPACK Durable: Q2-25 Earnings Call Highlights
Riding strong demand in air conditioners. Addressing margin pressure & capacity utilisation concerns via diversification, strategic partnerships, & cost optimisation strategies
epackdurable.com | NSE: EPACK
1. Key Takeaways
1.1 TLDR
EPACK is riding a wave of strong demand in the home appliances sector, particularly in air conditioners.
The company is proactively addressing margin pressure and capacity utilisation concerns through diversification, strategic partnerships, and cost optimisation strategies.
EPACK appears confident in its ability to fund its ambitious growth plans through a combination of internal accruals, IPO proceeds, and debt financing.
Investors are closely watching the company's performance on margins, capacity utilisation, and its ability to execute its strategic partnerships effectively.
The long-term outlook for EPACK hinges on sustained demand growth, successful execution of its expansion and diversification strategy, and its ability to achieve targeted profitability and return metrics.
1.2 Operational Highlights:
Strong Revenue Growth: EPACK reported a significant revenue increase, driven by strong demand for air conditioners and expansion into new product categories and customer acquisition. Q2 FY25 revenue was INR 377 crores, up 112% YoY.
Margin Concerns: While revenue grew substantially, margins saw pressure, particularly in Q2, due to the increased contribution of lower-margin air conditioners. Management maintained that overall margins for H1 remained stable compared to the previous year.
Capacity Utilisation and Sri City Plant: Concerns were raised about the underutilisation of the Sri City plant. Management outlined plans to enhance utilisation by expanding product lines (small home appliances, washing machines, coolers) and securing component supply agreements with major customers.
Strategic Partnerships: EPACK announced key partnerships with Hisense and Panasonic, signaling its commitment to growth and diversification. The Hisense partnership aims to generate $1 billion in revenue over five years, while the Panasonic tie-up focuses on component manufacturing and supply.
Funding Growth and Capital Allocation: Questions were raised about EPACK's ability to fund its ambitious growth plans, given the current margin profile and working capital requirements. Management highlighted the unutilised IPO proceeds (INR 230 crores in fixed deposits) and emphasised internal accruals and bill discounting facilities as sources of funding.
1.3 Key Themes:
Product Mix and Revenue Contribution: Air conditioners accounted for 70% of product revenue in Q2 and saw a YoY growth of 187%. The product business contributes to 98% of total revenue.
Revenue Breakdown: ACs contribute 70% of product revenue, experiencing a 187% YoY growth in Q2 FY25.
Sri City Plant: Focus on enhancing utilisation by adding small home appliances, washing machine, and cooler production lines.
ROE & ROCE Targets: Management is confident in achieving a minimum 15% ROE and ROCE within the next two to three years.
Inventory Levels: Channel inventories are currently low, indicating continued bullishness in the industry.
Funding Strategy: IPO proceeds of INR 230 crores will fund new projects. Debt levels are expected to remain manageable through internal accruals and working capital management
Hisense Partnership: The partnership will involve a new facility in Andhra Pradesh, starting production from June 2025. The capex for this project is estimated at INR 240 crores over three years.
Panasonic Partnership: This involves manufacturing components at Bhiwadi and Sri City plants, including supplying printed circuit board controllers.
Asset Turnover: EPACK is targeting an asset turnover of 4.5, with the new Hisense facility aiming for 5-6.
PLI Benefits: EPACK has accrued INR 21 crores in PLI benefits in H1 FY25, with a total expected income of INR 37.5 crores for the year.
Exports: The company is actively pursuing export opportunities and awaits certifications for entering markets like the US.
1.4 Key Quotes
"Our product business remains the cornerstone of our success, contributing 98% of our total revenues in Q2 of this year."
"The company partnered with Hisense to manufacture its air conditioners and home appliances locally in India. Company will be investing in a new facility in Andhra which is set to start production from June of '25."
"Further, another notable announcement done in last quarter was a strategic tie-up with Panasonic Life Solutions India Private Limited for manufacturing of its components both in Bhiwadi and Sricity and supplies to Panasonic."
"The company already has a kitty from the IPO proceeds, which currently lies unutilized. Hence, we have a fixed deposit of INR 230 crores with us lying in the bank, which will be used towards funding the new upcoming projects."
EPACK Durable Limited Q2 FY'25 Earnings Call FAQ
Q1: Why did EBITDA margin decrease year-on-year in Q2 FY'25 despite strong revenue growth?
A1: While revenue from operations increased by an impressive 112% year-on-year in Q2 FY'25, the EBITDA margin saw a dip compared to the same quarter in the previous fiscal year. This is primarily attributed to the change in revenue mix. Air conditioners (AC), a relatively lower-margin product, constituted a significantly larger portion of total revenue in Q2 FY'25 (approximately 75%) compared to previous periods. This shift towards AC sales, while driving strong top-line growth, resulted in a lower overall EBITDA margin for the quarter.
Q2: How does EPACK Durable plan to fund its ambitious growth plans, given the current working capital situation and return on equity?
A2: EPACK Durable aims to achieve significant growth in the coming years, targeting $1 billion in revenue within the next five years. The company plans to fund this growth through a combination of internal accruals, strategic partnerships (such as the recent one with Hisense), and utilization of the unutilized proceeds from the IPO, currently parked as fixed deposits worth INR 230 crores. While the current return on equity is in the single digits, the management expects to achieve a minimum ROE and ROCE of 15% in the next two to three years, driven by improving operational efficiency and diversification into new product segments.
Q3: What is the company's strategy to improve EBITDA margins and return on equity in the future?
A3: EPACK Durable is pursuing a multi-pronged strategy to enhance profitability and return on equity. This includes:
Diversifying the product portfolio: Expanding into new product segments such as washing machines, refrigerators, and small home appliances. This will not only help improve overall margins but also enhance capacity utilization throughout the year, as different products cater to different seasons.
Increasing operational efficiency: The company aims to improve asset turnover from the current 3.25-3.5 to at least 4.5, with a target of 5-6 for the new facility being set up with Hisense.
Focusing on higher-margin products: While ACs currently dominate the revenue mix, the company is focused on increasing the share of higher-margin products like small home appliances and components.
Strategic partnerships: Leveraging partnerships like the one with Hisense to drive growth and gain access to new markets.
Q4: What is the current status of channel inventories for ACs, given the approaching winter season?
A4: The company believes that channel inventories for ACs are currently at acceptable levels, lower than what is typically seen during this time of the year. The trade remains optimistic, with manufacturers ramping up production in anticipation of the upcoming wedding season and the summer season next year.
Q5: What is the expected timeline for the Hisense partnership, and will EPACK Durable require additional capex for this venture?
A5: Production for Hisense air conditioners is expected to commence from July 2025. The estimated capex for setting up the AC manufacturing capacity over the next three years is around INR 240 crores, which will be funded through existing resources, including the IPO proceeds. This investment excludes sheet metal and injection molding facilities, which will be supplied from EPACK Durable's existing facilities. The current Sri City facility will be utilized for the production of Hisense washing machines, requiring no additional capex.
Q6: Is EPACK Durable planning to venture into the consumer electronics space, considering the government's focus on boosting domestic manufacturing of electronic components?
A6: While EPACK Durable acknowledges the opportunities in the consumer electronics and EMS (Electronic Manufacturing Services) space, the current focus remains on expanding and solidifying its position in the home appliances segment. The company is carefully evaluating opportunities in consumer electronics for the medium to long term, and any developments in this area will be communicated accordingly.
Q7: Does EPACK Durable anticipate any supply chain challenges, particularly for raw material procurement, in the coming year?
A7: EPACK Durable has taken significant steps to mitigate supply chain risks and reduce import dependency. The company manufactures around 75% of its components in-house, including motors, for which it recently increased its stake in Epavo to 50%. While the entire industry is facing challenges related to the import of plain copper due to recent BIS certification regulations, EPACK Durable is actively working with the government and industry stakeholders to address these issues and ensure a smooth supply chain.
Q8: What are the key growth drivers for EPACK Durable in FY'26?
A8: The company anticipates continued growth in the AC segment, albeit at a normalized rate compared to the exceptional growth witnessed in FY'25. Key growth drivers for FY'26 include:
New product launches: Introduction of new products like air fryers in the small home appliances segment and commencement of washing machine production.
Scaling up existing customer relationships: Increased contribution from existing customer relationships across different product categories.
The Hisense partnership: Revenue generation from the Hisense partnership is expected to commence in Q2 FY'26, contributing to the top line.
Expanding into new markets: The company is actively exploring export opportunities and expects to commence exports to new territories, including the US, in the coming quarters.
Source: Link to Earning Call Recording
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