China Being Infosys ??

Greetings!

Another week into earnings season with IT disappointing the markets yet again while ITC outshines yet again! This week, we’re going to cover an analogy that you’ve probably not heard of and a stock that you probably haven’t heard of either but is all around you.

An unrelated, yet cool fact: A New York City bagel shop called H&H has come up with a cream-cheese-filled bagel, a product that actually helps customers save tax! Basically, in NYC, baked goods are exempt from tax but if the bagel has something spread on it like a sandwich, it is taxed at 8.875%. Circumventing this by innovating on a crowd classic, this bagel shop just saved its customers some money.

Well, onto the actual newsletter!

NIFTY 50: 17,624 (-1%)

NIFTY 10Y Benchmark G-Sec Index: 2,128 (0%)

Founder’s Recap

China Being Infosys ??

We’ve been positive on China since the beginning of 2023. The view was driven by simple reasoning. While the world is at the risk of dipping into a recession, China’s is at the beginning of an expansionary phase, which will be fuelled by domestic consumption, fiscal stimulus and a supportive monetary policy.

China’s GDP projections however appeared quite tepid, with the government expecting 5% growth in 2023. That seemed to disappoint the markets, and put a pause to the rise in Chinese equities. But we reckon the lower-than-expected projections are more like the game Infosys used to play back in the day - guide low and deliver high.

A few data points over the last month have only substantiated our Infosys analogy for China.

1. China’s exports jumped 14.8% in US dollar terms in March 2023, compared to a year ago, whereas economists forecasted a 7% fall
2. Retail sales grew 10.6% in March 2023, the biggest jump since June 2021
3. Manufacturing investments rose 7% during the first quarter of 2023, pumped up by higher factory output
4. The property market is finally showing signs of a bounce back, with prices swelling at their fastest pace in 21 months
5. The economy grew by 4.5% in the first quarter of 2023, outstripping expectations of 4%

Clearly things are picking up, and many, including Goldman Sachs now believe that China’s GDP will outpace its own expectation of 5%, and instead grow by 6% in 2023. This is steep compared to the 3% growth clocked by China in 2022.

In any case, while the world is slowing down, China is rising. And valuations seem extremely supportive of a strong positive move on Chinese equities given the fact that valuations are at a discount to its own 5/10/15 year averages.

In our all-weather portfolios, we’ve taken exposure to Chinese equities using the Nippon India Hang Seng BeES. However, there are some other options available as well: Axis Greater China Equity FoF, Edelweiss Greater China Equity Offshore and Mirae Asset Hang Seng Tech ETF.

Market Stories

Propack Your Portfolio: What is EPL All About? ??

Colgate, P&G, Unilever, L’Oreal, ITC, Patanjali, and Himalaya - apart from being renowned brands in their respective fields, they are also tied by another commonality - the need for tubes! Whether it is toothpaste, face cream, ointment or even certain foods, all these companies source the tubes that they sell the products in from one company - EPL!

With a 19% global market share in the tube industry, EPL has been a monopoly for decades, making its investors 5x from listing to date - but what else makes it special?

1.EPL is Everywhere

A 19% market share doesn’t do justice to the quantum of its dominance, but if we look at it segment-wise, it paints a more robust picture:

Clearly, it has managed to “squeeze out” the market in its favour, thanks to 21+ plants across 10 countries, making them global leaders!

But EPL isn't just about quantity. With 75 patents under its belt, it is constantly pushing the boundaries of what's possible when it comes to materials, technology, and processes, maintaining quality throughout - with some cool features like incorporating braille, see-through, glow the dark and embellishments!

Furthermore, since sustainable packaging is all the craze, EPL quickly tapped into the same, with the highest number of recyclable laminated tubes in the world! This now makes up 10% of its total product portfolio and will be a growing segment as the company continues to innovate!

2. Blackstone’s Touch

One of the largest private equity firms in the world has placed its money on EPL too, having acquired 75% of EPL for a whopping Rs 33.4 billion, or US$ 470 million!

Within the first year of ownership, Blackstone recruited a new CEO and revamped the entire senior management team. These changes paid off almost immediately, with Blackstone selling 23% of EPL's shares in 2020 for Rs 18.9 billion, or US$ 252 million. This impressive move yielded a 106% IRR - more than doubling its initial investment, within just a year!

But Blackstone isn't done with EPL just yet. It still holds a majority stake in the company, with 52% ownership. This shows Blackstone’s commitment to EPL and also signals that it still sees a runway for growth.

3. Rebounding Demand

The pandemic slowed down EPL, but that in no means depicts a stoppage! Although revenue from China has reduced by 8% YoY in 3QFY23 due to pandemic restrictions, things are looking up as the restrictions have been lifted soon, and there is a sharp rebound expected to be driven by pent-up demand, and supportive policy initiatives.

And with the East Asia Pacific (EAP) region accounting for about 23% of EPL's revenue, there is expected to be a significant rise in demand.

To capitalise on the demand rebound further, EPL has identified another fairly untapped market. Brazil is an exciting next step for EPL as its rapidly growing market provides huge opportunities. The tube opportunity in Brazil is large, with its >210 million population.

EPL has already set up a new subsidiary in Brazil and is setting up a greenfield facility in Brazil in strategic locations, entering the market with its global brand name and manufacturing capacity to disrupt Amcor’s reign (the current largest producer of tubes in Brazil).

4. Reducing Costs

Polymer and aluminium foil is the most crucial materials required by EPL to make their tubes. The prices for both polymer and aluminium foil rose 75% and 108% respectively from FY20 to FY22. Yet in the last nine months, the prices have been cooling down and are expected to continue doing so.

• The prices of polymers have dropped from Rs. 140 per kg to Rs. 110 per kg in the last nine months (a drop of 28%). The drop will likely continue to pre-COVID levels of Rs. 80 per kg
• Freight is a major expense for the company. In FY17 the freight costs were Rs. 66 crore and it grew at an 8% CAGR till FY20, but then grew at a 34% CAGR from FY20 to FY22 going up to Rs. 150 crore in FY22. The good news is freight costs have moved back to the pre-Covid level, leading to margin expansion across regions.

EPL's ‘Zero Waste to Landfill’ program has been successful in reducing the company's waste disposal costs. The program has resulted in a 25% reduction in waste generation and a 15% reduction in waste disposal costs.

The company’s backward integration strategy has not only increased the company's operational efficiency but also resulted in significant cost savings. By engaging in an end-to-end process that involves manufacturing plastic laminate sheets and converting them into tubes in-house, EPL has been able to reduce lead times, improve product quality, and lower costs.

5. Diversification

EPL's dominance in the oral care segment is undeniable, but that's not the only area where it's thriving.

In FY11, EPL started the Personal Care and Beyond segment (PBS), which began with face care, and has since diversified into hair care, food, OTC medication, home, eye care, hand cream, hygiene products, and prescription medication - really took that “beyond” seriously!

In the decade that followed, the PBS segment recorded a 15% revenue CAGR while oral care recorded a 10% revenue CAGR.

By FY18 the revenue split was 60% oral care and 40% personal care and beyond segment (PBS), and is currently 53-47, as seen in the chart!

It's clear that EPL has been able to capitalise on the increasing demand for beauty and personal care products, as well as the growing need for pharma packaging solutions.

Valuations

All of this has nudged us to project a CAGR of 12% in revenue, 20% in EBITDA, and 34% in PAT from FY23-25, valuing the stock at a PE of 19x FY25E EPS. This gives it a target price of Rs. 210, with the potential of 31% upside!

Overall, EPL has demonstrated its resilience in the face of challenges. With its impressive growth trajectory, and promising future prospects, this company won’t leave any gains on the table, much like how you don’t leave even a bit of toothpaste from your Colgate tubes!

We’ve spoken about this and much more on our podcast Common Cents by Rupeeting so do check out the latest episode by clicking below!

What’s up with Rupeeting?

We wrote a piece for Tickertape, which you can find on their blog. It’s an insightful 6 minutes simplifying investing in cyclical stocks. Based on tried and tested frameworks, we’ve highlighted two opportunities that are expected to result in an upswing in cement, and metals, over the next year.

Click on the image above to read it!

What has really?cool themes, makes money and is available at the click of a button? Our portfolios, of course! Pick your weapon of choice against inflation and market forces with our diverse set of portfolios that you can check out below!

https://rupeeting.wealthdesk.in/

At Rupeeting, we are on a mission to make wealth for everyone. We do this by giving you good investment products and making you aware of what your money is up to. Invest with us and become the most knowledgeable investors around. Spread the word, and let's all become wealthy!