This AC, Refrigerator Maker Stock Gained 53% On Strong June Quarter Results

Epack Durable Ltd. has been in focus ever since it reported its first-quarter results. The company listed in February this year, but the past five days have seen the stock rally 30%, with the past month aiding gains of 53% for shareholders. What is behind the positive momentum, and could there be more rally?

What Does Epack Durable Do?

The company, which operates in the EMS space, manufactures room air conditioners and small appliances, with the former segment accounting for roughly 80% of its current revenues. Its clients include Voltas, Haier, Philips, Godrej, Daikin, Havells, Bosch & Siemens, Bajaj, Crompton & Greaves, Blue Star etc.

Since the air conditioner business is cyclical, the company has diversified into the small appliances segment, which includes mixer grinders, water coolers, and induction cooktops. They also manufacture major components for air conditioners.

Strong Q1 Results

The company’s Q1 financials showed bumper growth as heatwaves across the country saw a surge in demand for air conditioners, fans and coolers. The introduction of new products was another factor in boosting growth.

Net profit almost tripled in Q1, led by higher capacity utilisation and operating leverage. Going forward, the company expects margins to be driven by backward integration of parts.

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New Plant Commissioned

The company has commissioned a new plant in Sri City, Andhra Pradesh. This will complement the company’s existing plants in Dehradun, Uttarakhand, and Bhiwadi, Rajasthan. The new plant marks the company's entry in South India and is expected to improve the capacity of existing products. It has also increased product capacity by 50%.

Last fiscal's financials were impacted due to a lacklustre Q1 in 2023, compounded by the fact that it was the second consecutive year of a poor show on consumer durables.

Acquisition Of Stake In EPAVO

The company increased its stake in the joint venture with Ram Ratna Wires Limited, called EPAVO, from 26% to 50%.

The JV is in the business of BLDC motors, which is used in air conditioners and fans. This is a strategic investment for Epack, and the company mentioned in its earnings conference call that this JV was focused on product developments over the past two years, and it was now ready to scale substantially. For the past fiscal, they recorded revenues of Rs 26 crore, and Epack expects multi-fold growth of this venture.

Production Linked Incentives

The company is eligible to receive Production Linked Incentives (PLI) for its air conditioner segment. While speaking to NDTV Profit, Ajay DD Singhania, managing director and CEO of EPACK Durable, said the company was compliant with PLI conditions for FY24. They expect PLI of around Rs 30 crore.

Upcoming Products

While speaking to NDTV Profit, Singhania said the seasonal nature of the AC business was one of the key reasons for diversifying into small appliances. While they already manufacture mixer grinders and induction cooktops, they plan to venture in fully automatic washing machines, room oil heaters, air fryer, tower fans, induction water heaters and hair dryers in the coming quarters.

Shareholding

The promoters currently hold 48% stake in the company. The ownership of FIIs is below 1% for the June quarter.

Among domestic institutional investors, India Advantage Fund owns 10.33%, along with insurance companies like SBI Life, HDFC Life and SBI General Insurance owning between 1 and 1.8% stake each.

Valuations

The management of the company has guided for 40-45% growth this year, which is much higher than the 25% growth expected for the industry. Currently, the company has no analyst coverage, but due to the recent upward swing, the stock is expensive on price to earning basis.

Using the management guidance of 40-45% growth, one can estimate the company’s revenue to be close to Rs 2,000 crore for this fiscal year. As shown below, this translates to net profit of Rs 51 crore, making the price to earnings ratio 68x for FY25.

It would be important to see if the company can double its revenues in the next three to four years with the new product line and and higher capacity utilisation of the Andhra factory. Doubling of revenues is not new in the EMS industry, hence valuations from a long-term perspective should be considered.

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