Concall AI

EPACK Durable Limited — Q2 FY25 earnings call

Call held 13 Nov 2024

Management summary

Epack Durable reported strong revenue growth in Q2 FY25, with operations revenue increasing 112% YoY to ₹377 crores, driven by robust AC demand. Despite a net loss of ₹8.5 crores in the quarter, H1 FY25 saw a significant 452% YoY net profit increase to ₹15 crores. The company is diversifying its product portfolio with new lines like washing machines and coolers, and expanding capacity, including a new facility for Hisense, to achieve a $1 billion revenue target over the next five years.

Highlights

Q2 FY25 Revenue from operations: ₹377 crores, up 112% YoY.
Q2 FY25 EBITDA: ₹9.6 crores, up 25% YoY, with a margin of 2.55%.
Q2 FY25 Net loss: ₹8.5 crores, compared to ₹6 crores net loss in Q2 FY24.
H1 FY25 Revenue from operations: ₹1,151 crores, up 87% YoY.
H1 FY25 EBITDA: ₹62 crores, up 66% YoY, with a margin of 5.34%.
H1 FY25 Net profit: ₹15 crores, up 452% YoY, with a PAT margin of 1.29%.
AC business contributed 70% of Q2 product revenue, growing 187% YoY.
Company targets minimum 15% ROE/ROCE within 2-3 years and 17% in the long term.
New Hisense facility in Andhra targets $1 billion revenue over five years, with production starting June 2025.

Key financials

2 periods

Q2 FY25

Revenue from Operations
₹377 Cr
YoY +112%
EBITDA
₹9.6 Cr
YoY +25%
EBITDA Margin
2.5%
Net Loss
₹8.5 Cr

H1 FY25

Revenue from Operations
₹1,151 Cr
YoY +87%
EBITDA
₹62 Cr
YoY +66%
EBITDA Margin
5.3%
Net Profit
₹15 Cr
YoY +452%
PAT Margin
1.3%

What they filed

Q1 FY27: revenue up 33.8%, net profit down 47.8% against the same quarter last year.

₹ Cr · quarterly

Line item	Q2 FY25	Q3 FY25	Q4 FY25	Q1 FY26	Q2 FY26	Q3 FY26	Q4 FY26	Q1 FY27
Revenue	377	377	643	662	213 −44%	428 +14%	591 −8%	886 +34%
Expenses	368	354	572	608	214	398	567	833
EBITDA	9	23	71	54	-1 −111%	29 +26%	24 −66%	53 −2%
Margin	2%	6%	11%	8%	0%	7%	4%	6%
Other income	5	5	6	6	6	3	3	2
Interest	14	12	14	16	20	13	11	20
Depreciation	12	12	12	13	14	14	14	17
Profit before tax	-12	4	50	31	-29 −142%	5 +25%	1 −98%	18 −42%
Tax rate	-27%	28%	25%	27%	-22%	49%	97%	33%
Net profit	-8	3	38	23	-22 −175%	3 +0%	0 −100%	12 −48%
EPS	-0.88	0.26	3.93	2.39	-2.31	0.27	0.00	1.23

How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

Product Business (Q2 FY25)
98% Contribution to Total Revenue
Air Conditioners (Q2 FY25)
70% Contribution to Product Revenue1.87 decimal fraction YoY Growth
Non-AC Business (Q2 FY25)
30% Contribution to Product Revenue

Guidance & targets

Revenue

Overall Revenue Growth Revenue · Current year (FY25) · High confidence 50%+

In terms of overall current financial spending, as we have been mentioning in the past also, is to maintain the same spend that the company will be growing at 50% plus for the current year as compared to the previous year.

— Ajay DD Singhania
AC Business Revenue Growth Revenue · Current year (FY25) · High confidence 50%+

AC business will definitely grow at 50% plus for us.

— Ajay DD Singhania
Overall Revenue Growth Revenue · Next 2-3 years · High confidence 40-50%

Yes, perfect. And now from here on, at least for the next two to three years, a 40% to 50% revenue growth and EBITDA margins remaining steady at 8%. So, this is a doable task, right? Yes, absolutely.

— Ajay DD Singhania
Hisense Partnership Revenue Revenue · Over next five years · High confidence $1 billion

This alliance aims to generate $1 billion revenue over next five years serving both India and global markets and leveraging our manufacturing expertise to drive innovation in home appliances.

— Ajay DD Singhania

Profitability

EBITDA Margin Profitability · Current year (FY25) · High confidence 8%

From 8.12% today

The guidance on margin remains the same. We have been maintaining that last year we achieved a margin of 8.12% the EBITDA margins and we are targeting to achieve similar kind of margins around 8% for the current year as well.

— Ajay DD Singhania
EBITDA Margin Profitability · Next 2-3 years · High confidence 8%

Yes, perfect. And now from here on, at least for the next two to three years, a 40% to 50% revenue growth and EBITDA margins remaining steady at 8%. So, this is a doable task, right? Yes, absolutely.

— Ajay DD Singhania

ROE/ROCE

Return on Equity (ROE) / Return on Capital Employed (ROCE) ROE/ROCE · Within 2-3 years · High confidence Minimum 15%

So, first of all, the company is extremely confident and positive that we will achieve ROE, ROCE of minimum 15% in time to come, very shortly, within a span of two to three years, for sure.

— Ajay DD Singhania
Return on Equity (ROE) / Return on Capital Employed (ROCE) ROE/ROCE · Next three years · High confidence Minimum 17%

Next three years, if we're talking about continuing the same pace of growth and meeting the target plans what we have shared just now, we are looking at an ROE, ROC of minimum 17%.

— Ajay DD Singhania

Capacity

Hisense AC Capacity Capacity · Over next 3 years · High confidence 1.5 million units

And the estimated capex over next three years for AC business is around INR 240-odd crores. So we said $30 million, so that's almost INR 240 crores is what we are estimating in investment to create a capacity of 1.5 million air conditions over next 3 years.

— Ajay DD Singhania

Capex

Hisense AC Capex Capex · Over next 3 years · High confidence INR 240 crores

And the estimated capex over next three years for AC business is around INR 240-odd crores. So we said $30 million, so that's almost INR 240 crores is what we are estimating in investment to create a capacity of 1.5 million air conditions over next 3 years.

— Ajay DD Singhania
Existing Facilities Capex (fine-tuning) Capex · Next few quarters (2-3 quarters) · Medium confidence INR 40-50 crores

So a max of INR 40-odd crores, INR 50 odd crores is what we're looking at in terms of investment in the existing facilities.

— Ajay DD Singhania

Capacity Utilization

Sri City Plant Utilization Capacity Utilization · By end of this year (FY25) · High confidence Minimum 30%

From 10% (H1 FY25) today

So, by end of this year, the overall capitalization what we are targeting should be a minimum of 30 percent from Sri City in this year.

— Ajay DD Singhania
Sri City Plant Utilization Capacity Utilization · Next year onwards (FY26) · High confidence 60%+

And next year onwards, we definitely look to further improve it to at least 60% onwards and then improving it from the overall contribution level.

— Ajay DD Singhania

PLI Income

Total Contemplated PLI Income PLI Income · This year (FY25) · High confidence INR 37.5 crores

Whereas this year, the total contemplated PLI income is going to be INR 37.5 crores of which the company has already accrued INR 21 crores in H1 of this year.

— Ajay DD Singhania

Asset Turn

Current Asset Turn Asset Turn · Current · High confidence 3.25 to 3.5

Yes. So, currently the company's asset turn is between 3.25 to 3.5. That's the current asset turn.

— Ajay DD Singhania
Target Asset Turn (diversifying into new product segments) Asset Turn · Future (implied) · High confidence Minimum 4.5

With the way we are diversifying into new product segments, we are targeting an asset turn of minimum 4.5.

— Ajay DD Singhania
New Company Asset Turn Asset Turn · Future (implied) · High confidence 5 to 6

And the new company's asset turn would be anywhere between 5 to 6.

— Ajay DD Singhania

Risks & concerns

BIS certification expiry for plain copper
medium

Industry facing challenge as current domestic capacities are insufficient; company is making representations to the government to extend timelines.

Analyst acknowledged
Underutilization of Sri City plant
medium

Sri City plant was only 10% utilized in H1, dragging down performance, but new product lines (small home appliances, washing machines, coolers) are being commissioned to improve utilization to 30% by year-end and 60%+ next year.

Management acknowledged
Customer concentration (one major customer setting up own manufacturing)
low

While there will be some impact, the company's current scope of business with the customer continues, and diversification efforts are bringing better growth.

Analyst acknowledged

Areas of evasion (1)

immediate short-term plans for consumer electronics beyond EMS

Q&A highlights

3 direct

Margin compression and funding growth with low ROE/ROCE Direct

First of all, like you can see in the results, yes, there has been an extremely strong growth in demand and revenue. However, on the margin side, I think if you look at H1 to H1 of last year, you will see that the margins have been fairly stable. So there is no degrowth in margins as such. Obviously, when you compare Q2 of last year to Q2 of this year, we might see some dip in the margin which is actually because of the increased contribution of sales from air conditions. So air conditions being a slightly low margin business, can support slightly low overall margins.

Directly addresses investor concern about profitability despite growth, explaining the Q2 margin dip due to product mix and reiterating H1 stability. Also clarifies funding strategy using IPO proceeds.

Asked by Amarnath Bhakat

Hisense partnership capex and funding Direct

The overall capex, like I mentioned is INR 240 crores over the next three years for setting up the air-conditioned capacities. There will be further investments required once we decide on getting on with other appliances as well. So, the current estimated capex is almost INR 230 to INR 240 crores only for air-conditioned lines and capacities. This currently has been done 100% by EPACK Durables in a new subsidiary company, whereas there is no investment. So, this does not include any investments from Hisense. This is the total investment.

Provides clarity on the scale and funding of the significant Hisense partnership, confirming EPACK Durable's sole investment in the new subsidiary for AC capacity.

Asked by Anshul Jethi

Raw material import content and pass-through mechanism Direct

So, Mr. Amarnath, there are actually two ways to look at it. First of all, if you look at the component side of especially air conditions, the company manufactures 75% by value of component in-house. So, essentially, what we don't manufacture is only the compressor. So, that is one part of the answer. Having said that, the other way to look at it in terms of, because especially for the heat exchanger, the copper and aluminum are still imported. So, if you look at from that point of view, almost 45% to 50% of raw material is imported. And equivalent of almost 50% to 55% is domestic. ... So, any change in commodity forex is a complete pass-through to most of the larger brands. So, all the key customers, if we talk about who contribute on the 95% of overall revenue, we have an arrangement whereby all the commodity fluctuations and forex fluctuations are passed on. And obviously, like you said, there's a time lag of a quarter in this. So, yes, it's a complete pass-through.

Details the company's import dependency for raw materials and confirms a full pass-through mechanism for commodity and forex fluctuations with major customers, mitigating margin risk.

Asked by Amarnath

3 min read 7 chapters

Detailed narrative

Strong Q2 Revenue Growth Driven by AC Segment

Epack Durable reported a robust Q2 FY25 with revenue from operations reaching ₹377 crores, marking a significant 112% year-on-year increase. The AC business was a primary driver, contributing over 70% of total product revenue and achieving an impressive 187% YoY growth. Despite this, the company recorded a net loss of ₹8.5 crores for the quarter, attributed to the higher contribution of lower-margin AC sales and initial underutilization of new facilities.

H1 FY25 Profitability and Margin Performance

For the first half of FY25, Epack Durable's revenue from operations stood at ₹1,151 crores, an 87% YoY increase. EBITDA for H1 was ₹62 crores, up 66% YoY, with an EBITDA margin of 5.34%. The company achieved a net profit of ₹15 crores in H1, representing a substantial 452% YoY growth, with a profit after tax margin of 1.29%. Management noted that H1 margins remained fairly stable compared to the previous year, with the Q2 dip being a seasonal product mix effect.

Strategic Diversification and Capacity Expansion

The company is actively diversifying its product portfolio and expanding manufacturing capabilities. New product lines for small home appliances, washing machines, and coolers are being set up in the Sri City plant, with utilization expected to commence from Q3 and Q4 FY25. This diversification aims to improve overall capacity utilization, which was only 10% in H1 for the Sri City plant, targeting a minimum of 30% by year-end and over 60% next year.

Hisense Partnership and Future Growth Initiatives

A significant development is the partnership with Hisense to manufacture ACs and home appliances in a new Andhra facility, targeting $1 billion in revenue over the next five years. EPACK Durable plans to invest ₹240 crores over three years to create 1.5 million units of AC capacity for this venture, with production starting in June 2025. Additionally, a strategic tie-up with Panasonic for component manufacturing further strengthens the company's position.

Margin and Return on Equity Outlook

Management expressed confidence in achieving a minimum ROE and ROCE of 15% within 2-3 years, with a long-term target of 17%. The company aims to maintain an EBITDA margin of around 8% for the current year and the next 2-3 years. Current asset turn is between 3.25-3.5, with a target of minimum 4.5 for diversified segments and 5-6 for the new Hisense company, indicating efficient capital deployment.

Raw Material Sourcing and Pass-Through Mechanism

Epack Durable manufactures 75% of components by value in-house, reducing import dependence. However, raw materials like copper and aluminum for heat exchangers are still imported, resulting in 45-50% of total raw material being imported. The company has a complete pass-through arrangement for commodity and forex fluctuations with its major customers, covering 95% of overall revenue, with a typical time lag of one quarter, effectively mitigating raw material price volatility risks.

PLI Benefits and Debt Management

The company has accrued ₹30 crores in PLI benefits from the last year, which is receivable. For the current year, the total contemplated PLI income is ₹37.5 crores, with ₹21 crores already accrued in H1. Regarding debt, the increase in gross debt by ₹100 crores in H1 was attributed to the company's intentional decision not to discount debtors, utilizing lower-interest bank working capital facilities instead of higher-interest customer discounting. The ₹230 crores from IPO proceeds remain unutilized and are earmarked for future capex.

This is an AI-generated summary of a publicly available earnings call transcript.

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