AGI Greenpac Limited (AGI.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to HSIL Limited Q3 FY '21 Earnings Conference Call, hosted by Antique Stockbroking Ltd. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Manish Mahawar from Antique Stockbroking. Thank you, and over to you, Mr. Mahawar.

Thank you, Neerav. On behalf of Antique Stockbroking, I would like to welcome all the participants on the call of HSIL Limited. From the management, we have Mr. R B Kabra, President and CEO of Building Materials -- Building Products business; Mr. Rajesh Khosla, President and CEO, AGI Glaspac and Garden Polymer; Mr. Om Prakash Pandey, CFO, HSIL; and Mr. Sandeep Sikka, Group CFO, on the call. Without further -- without taking further time, I would like to hand over the call to Mr. Kabra for opening remarks. Over to you, Kabraji.

Thank you, Manish. Good afternoon, everyone, and welcome to the Q3 FY '21 results conference call of our company, HSIL Limited. I would like to wish everyone a happy new year, and hope you and your loved ones are staying safe and healthy. This is the first time we are hosting this call after demerger of the company's businesses in FY 2018. On this call, I will start by providing you a brief overview of the company, demerger, our outlook for next phase of growth, followed by results highlights. Then I would pass on the call to Mr. Khosla to discuss the financial performance in more detail. We have already circulated our earnings presentation, which is available on our website as well as stock exchange's website. I hope you have had the opportunity to go through the presentation, and we would be happy to take any questions afterwards. Now about the company, HSIL Limited. HSIL, as you all know, has a long history of over 6 decades, marked with innovative products, excellence in manufacturing processes and customer centricity. The group expanded rapidly across multiple business verticals with each of them having distinct capital requirements, nature of risks, competition and human skill set requirements. So in FY 2018, the Board of Directors of the company took a conscious decision of demerger of the company by creating distinct entities for different business undertakings, thereby ensuring sharper focus and better alignment of each to its customers. These companies were post-demerger: HSIL Limited now focuses on manufacturing and supply of Packaging Products and Building Products manufacturing; Somany Home Innovations Ltd. on marketing and distribution of consumer products and the retail division; and Brilloca Limited is marketing and distributing the building products -- the products of the Building Products division. The scheme of demerger resulted in dedicated and specialized management focus on respective businesses, which will drive growth, improve competitiveness and achieve cost and operational efficiencies. Now we, HSIL Limited, are a leading packaging and building product manufacturing company in India. We have presence in 2 business verticals: Packaging Product division, which comprises of glass containers, pet bottles and products and counterfeit-resistant security caps and closure segments; and the Building Products manufacturing division comprises of sanitary ware, faucets and plastic pipes and fitting segments. Company has 11 of -- state-of-the-art manufacturing plants and boasts of advanced and best-in-class technology and equipment for efficient manufacturing. Mr. Rajesh Khosla will explain the various businesses, verticals and other developments for the quarter. I now hand over to Mr. Rajesh Khosla, please.

Thank you. Thank you very much, Mr. Kabra. Good afternoon, everybody. So I'm Rajesh Khosla. So I'd like to explain something more regarding the packaging business. So packaging business continues to be and will be the major growth driver to the company. We have 3 segments in the packaging business: glass containers, pet business and counterfeit-resistant security caps and closures. And all these 3 segments are witnessing a good traction in the market, and there is a good demand in the market. We are a preferred partner for the various industries we serve as a whole, beverage industry, pharmaceuticals, foods and other such packaging industries. We being the second largest glass container manufacturer in India, and we are operating right now 2 plants situated in Telangana today. We have expanded our capacity from 150 tonnes long back to 1,600 metric tons per day over the last 25 years. HSIL growth dynamics are fully aligned with the fundamental underlying growth profile of its customers, and there are multiple growth drivers for the packaging industry today. There is a growing consumption of spirits, beer and so many other beverages, resulting in the increased demand of the glass bottles and glass containers. Usage of glass packaging in food and beverage industry is increasing and catching up with the western world from time to time. Institutional clients as well as the end customers are preferring product security, a demand addressed by counterfeit-resistant products. The company is constantly transforming itself, and we are expanding our presence by exploring new local and export markets, introducing innovative products, widening geographical reach and diversifying revenue streams. At the same time, we are committed to adopting and investing in environment-friendly technology. And sustainability forms a core pillar of our growth strategy. The various initiatives undertaken by us on green building design, renewable energy, waste treatment and other have been highlighted in our presentation. These not only reduce our environment footprints, but also help in attracting and engaging with ESG-conscious institutional clients, cost saving and increased efficiency and productivity. Now moving to the -- our performance during the quarter. In quarter 3 FY 2021, we saw beginning of normalization of the overall economic and business environment after a challenging first half of the year due to the onset of health pandemic COVID-19. In Q3, we continued to deliver both sequential and year-on-year improvement in key financial and operational performance indicators for the company. Our total income for the quarter was INR 548 crores, registering a growth of 10.8% on year-on-year basis and 24.7% on quarter-on-quarter basis, driven by improved average realization, strong recovery in volumes, underpinned by robust demand from the alcoholic and beverage industry. We, at HSIL, are proud of the resilience and perseverance demonstrated by the HSIL team during these challenging times. In conclusion, I would like to highlight that our state-of-the-art manufacturing process supported by the growing clients, industries and differentiated product mix will fuel the next phase of our growth. We look forward to exciting times ahead of for the company. I would now like to hand over the call to our CFO, Mr. Pandey, to discuss the results in detail. Thank you very much, and have a wonderful year.

Thank you, Mr. Rajesh Khosla. And a very good afternoon to all the attendees. I will quickly go through the financial highlights of the quarter. In Q3 FY 2021, our total income stood at INR 548 crores compared to INR 494 crores in last year, a growth of 10.8% on a year-on-year basis. The revenue growth was supported by improved average realization and recovery in volumes. Revenue from operations of Packaging Products was INR 361 crores, a growth of 15.2% on year-on-year basis. And during the quarter, 46 new products were developed and 13 new products were commercialized. Revenue from operations of Building Products reported INR 179 crores, a growth of 29.8% on year-on-year basis. EBITDA for the period was INR 101 crores with EBITDA margin improving to 18.4% as compared to 15% in Q3 FY 2020. The margin improvement was driven by improved capacity utilization level coupled with optimized sourcing of key raw material. EBIT for the period was INR 70 crores, with EBIT margin of 12.7% as compared to 8.5% in Q3 FY 2020. In Packaging Products, EBIT margin improved to 17.6% in Q3 at FY 2021 from 14.2% in Q3 FY 2020. PAT was INR 36 crores with PAT margin of 6.6% in Q3 FY '21 as compared to 3.2% in Q3 FY '20. And adjusted PAT margin were 5% in Q2 FY '21. It should be noted in Q2 FY 2021, there was income tax write-back of INR 14.7 crores, which resulted in higher reported profit after tax during that period. During the quarter, we have also completed the buyback of 75.9 lakh shares for an amount aggregating to INR 63.9 crores. We have currently utilized 91.32% of maximum buyback size, excluding the transition cost as well as the regulatory provisions. We continue to make investments in avenues that will drive future growth. Our capacity utilization remains high across manufacturing plants. And to expand our capacities, we have outlined INR 320 crores to 2 manufacturing facilities. Project 1, with capital outlay of INR 220 crores for manufacturing specialty glass at greenfield facility in Bhongir, which will have a capacity of 154 tonnes per day. The product manufacturers will be focused on exports to U.S., Australia and European countries. Project 2, with capacity outlay of INR 100 crores, to increase production capacity from 38,000 tpa to 48,000 tpa for plastic pipes and fitting business at Sangareddy plant. Both the projects are expected to be completed by September '22. Thank you very much, and we are now ready to take any questions.

[Operator Instructions] First question is from the line of Ronak Vora from AUM Fund Advisors.

It's a good set of numbers for the quarter. I just wanted to ask you, so currently, in the Building Products division that we have, are we only going to do the manufacturing over here? And then the distribution and branding would be done by Somany Home Innovations?

So as a part of the demerger exercise, the entire Building Products business has moved from HSIL to Somany Home Innovations and its wholly-owned subsidiary, Brilloca. And HSIL today has only manufacturing plants relating to sanitary ware, faucets and the pipes. All the products which get manufactured in sanitary ware, faucets and pipes here are transferred to Brilloca. And the transfer pricing arrangement is approved by the Board, the shareholder. And the underlying benchmarking has been done by one of the bespoke. And this benchmarking is also considered based on the industry market trends. So going forward, if you see HSIL, a major chunk of business will be the packaging business as far as the overall growth -- yes. And Building Products division will -- we call it now Building Products manufacturing division, will be focusing on manufacturing like an OEM for a third party.

Okay. So -- and Somany Home Innovations, there will be no manufacturing that will ever be done, okay?

Yes, that company is a different company. So we are here for HSIL. So we'll take questions only for HSIL in this one.

Okay, sir. No problem. And on the packaging division, what kind of growth do you see in FY '22?

What type of growth? The growth in the packaging industry is directly proportional to the growth of the economy, which we are going to see. And we hope so that on a conservative side, it will be something around 10% to 11%. On the upper side, it can go up to even 15%. Because the way the projection has come from IMF to this bank where the India is supposed to grow at 11.5%. So we can expect on the upward trend of 15% also, if everything goes well, with the numbers which has been shown by IMF. Otherwise, on the lower side, it can be -- low side can be to 10%.

[Operator Instructions] The next question is from the line of Deepak Poddar from Sapphire Capital.

Sir, just wanted to understand the sustainability of the margins that we have done this quarter are at about 17%. So any kind of comment on that would be helpful?

Sustainability options.

Okay. The sustainability margins, which has come in Q3, they are basically come from the fundamentals of the business rather than for -- from any of the onetime issue nor onetime advantage we have got it. So these are practically from the fundamental point of view. Though still the economy has not opened yet fully, and we have been able to recover only because we have been supplying to the -- all these glass packaging industries, and we have got a growth from there. In the times to come after the COVID period, where we expect that the people will be more inclined towards the hygiene, people will be more inclined towards the packaging of the -- their, particularly food products, more inclined. And we are trying to go more like westernized countries, where everything is packed. Processed food industry is going to go up. So this type of growth whatever has come, you have seen that it will be maintained, and it will be sustainable.

Isn't that the growth we are talking about that's kind of maintainable? Because we have seen a decent growth of about 15%, right, this quarter, Y-o-Y. So this INR 540 crores as a top line can be taken as a base where...

I can say, let's say, from an -- my company point of view, so there are 2 types of growths which are there. One is from a demand side of growth, which is basically the market growth, the demand side of the growth. So that part, there is no issue at all. There will be a growth of, say, 9%, 10%, which I just answered before. And if you are talking from a supply side of growth, like say, how much we can deliver to that market? Yes, there are some -- we have a capacity. And right now, we are running with a capacity close to around 85%. So there is still a gap of 15%, and we can grow 15% easily at any point of time once the market starts absorbing. And after that, we have our plans to grow from the infrastructure point of view, from the CapEx point of view also. So that will take care of the growth in the future. But yes, 10% to 15% growth should not be a problem, and -- if the economy and everything goes well.

The next question is from the line of Rakshit Sethi from Fair Value Capital.

Good set of numbers. Just a couple of questions. Firstly, with the glass packaging business. You just mentioned about plans for further CapEx. Could you just give a little more details on what sort of CapEx for glass packaging we can look at over the next 12 to 18 months?

Okay. The one CapEx, which we have just started is 154 tonnes of the furnace, which is cosmetic and perfumery and clear-glass furnace, which we are -- it is under implementation. And that is going to give us an edge in the high end of the market. And we are going to grow on that. Besides that, there are other debottleneckings and all, which are continuous process, and it will carry on.

Do you have any presence in the vials section of the market?

Okay. I think your underlying idea is whether our vials are being supplied to the COVID vaccine or not it. Am I right?

Correct.

No. We are producing the vials. The vials which are used in the COVID vaccine are tubular vials in Type 1 type of glass. So we are not manufacturers of this type of glass and this type of tubular thing. But yes, we do produce the vials, and it goes to the vaccine manufacturing for the other type of pharmaceutical products, but not with the COVID-19 vaccine.

Does Piramal Glass produce these kind of vials?

No. Piramal Glass, they produce Type 1 of vials, but they are not producing tubular vials. Because there are 2 type of vials, which is modular (sic) [ molded ] vials and tubular vials. The COVID-19 vaccines goes for tubular vials. So though they are in Type 1 glass, but they are not into tubular vials.

And we are not in Type 1 either?

No. We are -- right now, we are not in Type 1.

But any plans to enter that section? Hello?

Yes. You go ahead.

So any plans to enter that market? Or not right now?

See, since we are in the glass business, so we always look to the all possible potentials in the market. So at this stage, opening up a strategy of the company saying we are entering is very difficult to say. But we are always looking ahead with all type of possibilities in any type of glass business, glass packaging business in -- today and in the future. And since we are just moving in the ladder -- upper ladder, where we are going to enter into cosmetic, perfumery, high-end type -- high-end clear-glass. So that is certainly going to be there in next few months, you are going to see us.

When do we expect that to come on stream?

We expect that in the next year, which I can say '22 -- June '22, something like that, we should be operational.

Okay. Now for the Building Products side of our business, could you just give us a little more details on what kind of capacity utilizations we are currently at for various segments, for example, PVC, CPVC or other products? And what are our current estimates of CapEx for all of these subsegments in Building Products?

The overall...

So the capacity utilization for sanitary ware plants is around 85%, where we have 2 plants, as you know, one in Bahadurgarh near -- in Haryana, near Delhi, and one plant in Bibinagar, near Hyderabad, in Telangana. Both plants put together in the Q3, the capacity utilization is around 85%. And for the faucet plant, which is in Bhiwadi, Rajasthan, the capacity utilization is around 65%. Because last year, we enhanced capacity from 2.4 million pieces per annum to 3.6 million pieces per annum. So this was the -- in the quarter 3 for sanitary ware and faucets. For pipe, the capacity utilization was around 82% in the Q3. When you talk of capacity enhancement in sanitary ware, we would be investing around INR 35 crores going forward in next 18 months for putting up 2 furnaces, one at each plant, and also enhancing the casting capacity. This is over and above the maintenance CapEx, which are around INR 5 crores, INR 6 crores, which happens in both the plants. Faucet plant, there will not be much CapEx because we expanded capacity only last year and the enhanced capacity is available. For pipe, Mr. Sikka, you can tell the plans what we have?

So pipe, overall, we have reached -- we had a capacity of 30,000 tonnes. And as we are continuing investing, now we have been able to debottleneck some capacity right now. We are operating at around 36,000, 38,000 tonnes capacity per annum. And capacity utilization during the quarter 3 was in excess of 80%. So as we move forward, we feel that we should be short of the capacity in the pipe side. And that is why the Board of the company in the last Board meeting had approved a capital expenditure plan of INR 100 crores for further enhancing the pipe capacity, which will ultimately take us by middle of next financial year to a capacity of around 48,000 tonnes.

When do we expect this additional capacity to come on stream? In the next 2...

Again, somewhere between June to September 2022.

Okay. That's very helpful. Just one last question from my end. So -- when you put all of this together and when I look at the debt, I think it's increased from last financial year, I think, of around INR 890-odd crores to about INR 990-odd crores. What is the level of debt on the book that we are comfortable with? Where do we -- can we expect the debt position on the book to be say within -- say FY -- end of FY '22?

So FY '22, maybe if you see, this year, we have a debt repayment of about INR 52 crores. And next year, the repayment is another INR 90 crores, INR 95 crores. But with all the CapEx which we are doing, our strategy has been that we don't make short-term -- we don't utilize short-term money for long-term funds. So we'll take long-term debt, but any incremental profits, now, you can see in quarter 3, we earned almost INR 100.7 crores of EBITDA. So all this will now start contributing towards the cash flows. And these cash flows will be utilized in the first stage towards payment of short-term debt, and ultimately, have a comfortable cash situation. So when you see our debt on a long-term basis, you also have to see the surpluses which are there on a net debt basis. We feel that by March '22, onetime, a debt may increase by another INR 150 crores to INR 200 crores because of the CapEx which we are doing on the glass side, and also the CapEx which we are doing on the pipe side. But it will lead to an incremental EBITDA, which will subsequently bring down the debt substantially.

Okay. And what -- currently, what -- at what cost are we raising both short-term and long-term?

So our weighted average cost is around 6.5%, and this includes a mix of a long-term and a short-term. And short-term funds are slightly cheaper. And long-term funds come to us around 7.75% to 8%.

[Operator Instructions] The next question is from the line of [ Zaki Nassir ], an individual investor.

Congratulations on good set of numbers. My question also would be on the debt part, sir. It is around INR 900 crores. For a company of our size, that looks slightly floated. So in the next 3 years, what would your assessment be on the level of debt, sir? That is my question number one. And question number two relates to the Building Products division, whereby you have segregated the brand into Brilloca and let the manufacturing be in HSIL. Don't you think that's a slightly complex arrangement and it could have been made simpler?

So I'll answer first question first, and then take on the second question. So if you see historically, this business of packaging is a capital-intensive business. This business historically used to have low return on capital employed. But with all the efficiencies, with all the investments which we have made in terms of additional value creation into the business, we have been able to demonstrate that we are in a different lead in terms of efficiency, customer service, quality. And all of the same -- all the figures are actually resulting into a very high level of EBITDA numbers. Nowhere in the industry in the glass packaging side you will see these sort of the numbers. And it's not only now for this quarter, if you track us for last 7, 8 quarters, we have been above the industry. But given the complexity of this industry, it requires some capital investments. But good part is now since our margins are coming up, you will see a lot of debt payment happening over next 2, 3 years. And our strategy, I've been talking about it, that we take long-dated debts, so that cash flow comfort is there in the organization. So over next 3 years, we feel we'll pay off a debt of around INR 300 crores to INR 450 crores, which is a normal repayment for the old debt. And we may contract a similar level of debt for the future CapExs. So more or less, the debt level should remain other than March '22. March '22 will be one exception wherein the debt will increase. By March '23, we feel the debt level should stabilize around INR 1,000 crores, but with the incremental EBITDA, yes. Like if I just try to extrapolate, we had -- almost had INR 101 crores of EBITDA, and we just said, annualized. So we are on a run rate of around INR 400 crores EBITDA, which should ideally grow by around 20%, 25% with the -- all the capital expenditures which we are doing. And that should lead to a substantial -- I'm giving a long-term guidance. I'm not giving you a quarterly guidance here, please note. And that should lead to a substantial debt repayment in the next 3 years. Okay. Then coming to your question of Building Products, the demerger was the call. Actually, when we were meeting various analysts and investments at that particular time, the question was why the glass business is there? Why the company doesn't sell out? So we have now created this vertical, which is an excellence of manufacturing vertical. That's our theme. And that's what we have been trying to communicate to the market. So this vertical will excel on the manufacturing and demonstrate it both to our customers and all the stakeholders that how we can create value on -- out of it. And outsourcing from -- for any of the consumer products as a building material is now a norm, like even in the other company like Brilloca and Schell, like Schell doesn't manufacture anything, everything is outsourced. Brilloca also, we used to import a lot of sanitary ware. We used to outsource a lot of faucets. So we have a transparent mechanism. We have -- we are communicating that mechanism to everybody so that everybody understands the rationality of the entire transaction and also the business provided.

So sir, suppose HSIL gets manufacturing from some other branded company. So you would consider doing that in HSIL?

HSIL is independent of other companies.

No, no. Suppose HSIL gets some -- maybe some foreign brand comes and tells you to manufacture sanitary for them. So HSIL can do that, right, sir?

Yes, yes. HSIL is free to do that, provided that it should not sell any of the designs or any of the brands, which the other company owns. So HSIL can...