EPACK Durable Limited (Avoid)

Highlights

EPACK Durable Limited (EDL) commenced operations in 2003 and is the 2^nd largest room air conditioner original design manufacturer (ODM) in India in terms of number of units (indoor units + outdoor units) manufactured in FY23 through the ODM route.

The company product portfolio currently includes (i) Room Air Conditioners where the design and manufacture Window air conditioners, Indoor units, Outdoor units, Split inverter air conditioners. (ii) In Small Domestic appliances they design and manufacture induction cooktops, mixer-grinders, and water dispensers and (iii) in Components they manufacture heat exchangers, cross flow fans, axial fans, sheet metal press parts, injection moulded components, copper fabricated products, PCBAs, universal motors and induction coils.

EDL commenced its operations with a single manufacturing unit in Dehradun, Uttarakhand in 2003, and has since expanded its manufacturing operations with Dehradun Unit II, Dehradun Unit III and Dehradun Unit IV, Bhiwadi Manufacturing Facility and Sri City Manufacturing Facility.

It has a dedicated R&D centres in Greater Noida, Bhiwadi and Dehradun, which are equipped with various equipment such as endurance test labs for RACs and SDAs. EDL’s R&D centre in Dehradun has also received its ISO/ IEC 17025:2017 accreditation from National Accreditation Board for Testing and Calibration (NABL) for the ‘general requirements for the competence of testing & calibration laboratories’ in the field of testing.

The Company has established long-standing relationships with various established customers. In the Room Air Conditioners segment company’s clients include Blue Star, Daikin Air-conditioning, Voltas, Havells, etc. and in the Small domestic appliances segment company’s clients include Bajaj Electricals, BSH Household Appliances Manufacturing Privat, and Usha International Limited. 

Out of the total proceeds of Rs. 6,400 mn, Rs. 2,300 mn would go towards funding capital expenditure for the expansion / setting up of manufacturing facilities. Rs. 800 mn would go towards repayment and/or prepayment, in part or in full, of certain outstanding loans of the Company and the remaining amount would be utilized for general corporate purposes and Rs. 2,400 mn would go towards existing selling shareholders.

Key Highlights

• The Indian consumer durables market size grew from FY18 to FY23 at a CAGR of 10.1 pct. The overall market size of the consumer durables market for FY23 is estimated at Rs. 1,303 bn, and the market is expected to grow at a 13.7 pct CAGR until FY28. RACs, an erstwhile luxury product, are now becoming an essential product in the middle-class segment. Domestic manufacturing of RAC is expected to grow further at 13 pct CAGR and is expected to reach 14.7 mn units by FY28. EDL is well-positioned to capture this growth.
• The company’s promoters have over 100 years of cumulative experience in the electronics manufacturing industry, and a demonstrated ability to successfully create, build and grow businesses which enables them to capture market opportunities, formulate and execute business strategies, manage client expectations as well as proactively manage changes in market conditions.
• EDL’s business strategies includes (i) Expanding their existing product portfolio, including its RAC and SDA components product portfolio. (ii) Continue to drive operational efficiencies through expansion of its integrated manufacturing capabilities and continued investment in its R&D infrastructure. (iii) Increase wallet share with existing customers and continued focus to expand its customer base. (iv) Explore initiatives to strengthen control over its supply chain.
• The company wants to expand its product portfolio by launching Nutriblender, Hair Dryer, Domestic Air Cooler, Semi Commercial AC Products, Kitchen Chimney, Induction Water Heater, Dual ICT, Tower Fan products. Increasing SDA product portfolio is expected to reduce dependence on RAC products, demand of which is seasonal unlike SDAs.
• Apart from the existing manufacturing capacities the company has planned to set up 2 manufacturing facilities at Rajasthan and Andhra Pradesh. Bhiwadi, Rajasthan project is scheduled to be completed in FY25- FY26.
• Sales of the company has grown by 44.57 pct CAGR during the period FY21-23 while EBITDA and profit grew 56.18 pct CAGR and 102.42 pct CAGR over the same period respectively. During FY23, company reported sales of Rs. 15,388 mn which increased by 66.51 pct YoY while EBITDA rise by 48.9 pct YoY to Rs. 1,025 mn as EBITDA margin declined from 7.44 pct in FY22 to 6.66 pct in FY23. The profit of the company stood at Rs. 319 mn in FY23 which has grown 83 pct YoY. During H1FY24 the Sales/EBITDA/profit came at Rs. 6148 mn/Rs. 369 mn/Rs. 26.54 mn respectively.Sales of the company has grown by 44.57 pct CAGR during the period FY21-23 while EBITDA and profit grew 56.18 pct CAGR and 102.42 pct CAGR over the same period respectively. During FY23, company reported sales of Rs. 15,388 mn which increased by 66.51 pct YoY while EBITDA rise by 48.9 pct YoY to Rs. 1,025 mn as EBITDA margin declined from 7.44 pct in FY22 to 6.66 pct in FY23. The profit of the company stood at Rs. 319 mn in FY23 which has grown 83 pct YoY. During H1FY24 the Sales/EBITDA/profit came at Rs. 6148 mn/Rs. 369 mn/Rs. 26.54 mn respectively.

Key Risk

• EDL has been given permission to use the trademarks ‘EPACK’ and ‘EPACK Durables’, which are owned by EPACK Polymers Private Limited and they may prevent EDL from using them in the future.
• EDL’s RAC business is subject to seasonal variations and cyclicality that could result in fluctuations in the company’s results of operations.

Financials

Valuation

Epack Durable is the second-largest ODM in RACs with a market share of 29%, posting the highest volume growth compared to its peers in FY20-23. Over the past few quarters, key AC brands are raising their insourcing capacity, which is a big negative for outsourcing companies like Epack Durable. At the upper end of the price band, the issue is quoting at PE 68x its FY23 earnings which is at a premium to the peer average of 60x. Thus the issue is fully priced.

Read more: Why Is Financial Advisory Important?

Disclaimer: The views expressed in the blog are purely based on our research and personal opinion. Although we do not condone misinformation, we do not intend to be regarded as a source of advice or guarantee. Kindly consult an expert before making any decision based on the insights we have provided.