Business Analysis 18: Epack Durable Ltd
Epack is the 2nd largest RAC ODM in terms of number of units with 24% market share in the Indian RAC ODM/OEM market
One sector that is an apple to our eyes is the manufacturing sector. Right now, India has very low manufacturing to GDP ratio at about 16% as compared to other emerging or developed countries on an avg. There are several sub industries in the overall manufacturing industry. One of them is Electronic Manufacturing Sector, in short EMS.
And the business I'm going to discuss is Epack Durable. As you know, the company is just one year old in the capital market but has caught eyes of several investors and fund managers.
Epack is the 2nd largest RAC ODM in terms of number of units with 24% market share in the Indian RAC ODM/OEM market. They have 3 manufacturing facilities and 4 R & D centers. Right now, most of the revenue like 80-85% comes from the sale of RACs and their components and the rest from small domestic appliances.
Their clients include some prominent names such as Voltas, Haier, Philips, Godrej, Daikin, Havells, Bosch, Bajaj, BlueStar and so many.
Background integration helps them with substantial cost optimization. Product business contributes 98% of the total revenue of which AC product business contributes 86%.
Capacity (By units)
Indoor - 1.60 mn
Window Air Conditioner - 0.62 mn
Mixer grinder - 0.62 mn
Outdoor units - 2.05 mn
Induction cooktops - 2 mn
Water dispenser - 0.11 mn
Room coolers - 0.25 mn
Management is targeting 50% topline growth by FY25 and 5000 cr by FY29. As we know, India has one of the lowest AC penetration with 8-10%. Also washing machine penetration is also lower than the global average at 14-15%. So there's a huge headroom for a fast growing economy like India. As the country's purchasing power increases, AC penetration will also increase.
Now, the problem is the high concentration of the AC revenue although management guides it will go down from 85% to 70% in the coming years. As soon as their upcoming new products start to reflect on their revenues, concentration mix will be managed. Their upcoming products are fully automatic washing machine, room oil heater, air fryer, hair dryer, induction water heater, tower fan etc.
With a bunch of products in the pipeline, there will be a bump up in the topline in the coming years. Their Sri City plant only can deliver 600-700 cr topline and 1000 cr in the next 2 years. So apart from low penetration, what else are fueling the business of Epack? Let's look at the overall macro trends.
Industry Overview
1. Local sourcing increased due to China+ strategy
2. Govt PLI scheme
3. Domestic manufacturing of RAC has grown at 22% CAGR from 3 mn units in FY18 to 7.9 mn in FY23. It will increase at 13% CAGR and reach 17.7 mn units by FY28
4. Indian consumer durable industry reached 130300 cr in FY23 and will reach 247800 cr by FY28 growing at 13.7% CAGR
5. Indian heat exchanger market valued at $1.38 bn in 2023 and will reach $3.10 bn by 2030 growing at 11.5% CAGR
6. Indian PCB market valued at $5.4 bn in 2023 and will reach $21.3 bn by 2032 growing at 16.5% CAGR
7. Indian RAC market is growing at 15.1% CAGR between FY23-FY28
8. Induction cooktop market in India is growing at 6% CAGR over the next 5 years
9. Indian mixer grinder market is growing at 7% CAGR over the next 5 years
All these numbers give us enough confidence to bet on the Electronic Manufacturing Industry. But we must remember, like after good days comes bad days also. Epack is also vulnerable to some problems. Issues like strong competition, raw material prices volatility, revenue mix concentration, shifting govt focus, and above all , expensive valuation could drag the stock price at any time.
Valuation
Currently most of the businesses in this industry are trading above 100 PE. Even they are trading at much higher than their asset value. The stock has fallen around 30% from its peak. Remember it's a growing business. So, if a business is growing at a faster pace and the stock price is falling like meteorites, then one should look at such businesses given there's still sustainable growth intact. Staggered investment might help us keeping in mind the price may fall further.
So, we need to ask if Epack can deliver this type of high growth rate for the next few years or not. If not, then stock price may fall further. If yes, then there's still upside left. And I think its peer is targeting 25-30% CAGR growth over the next 5 years, then Epack will also have scope there. The company has invested heavily as compared to its peers. Where Epack has income from investing to revenue around 25%, its peers like PG Electroplast, Amber Enterprises has around 14-15% to their revenue. And the management, not just the management but the whole industry seems to be highly optimistic about the industry.
Also, let me remind you the management of Epack is targeting to achieve 5000 cr topline by FY29. So the milestone is set, management is executing well, there are tailwinds in the industry, govt focus is on increasing manufacturing sector contribution to 25%, low penetration, everything is there. Epack should do well in the coming years given the tailwinds are there.
Thanks for reading
Take care
Rabi
Disclaimer: I'm not SEBI registered. This content is for educational purposes only. Do your own diligence.