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

Ladies and gentlemen, good day, and welcome to the Q1 FY '23 Earnings Conference Call of AGI Greenpac Limited, formerly known as HSIL Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ravi Gothwal from Churchgate Partners. Thank you, and over to you, sir.

Thank you, Jacob. Good evening, everyone, and we welcome all the participants to AGI Greenpac Limited, also formerly known as HSIL Limited Q1 FY '23 Earnings Call. Joining us today from the management side, we have Mr. Om Prakash Pandey, AGI Greenpac Limited Chief Financial Officer; Mr. Rajesh Khosla, President and CEO, AGI Glaspac and Garden Polymer; Mr. Sandeep Sikka, Group Chief Financial Officer. Before we begin, I would like to remind all the participants that some of the statements or comments made on today's call will be forward-looking in nature. These may include, but are not necessarily limited to, financial projections or other statements of the company's business plan. The company disclaims any obligation to update these forward-looking statements to reflect future events or developments. Kindly refer to slide number 15 of the presentation for a detailed disclaimer. Now I'll hand over the call to Mr. Om Prakash Pandey, Chief Financial Officer, for his opening remarks. Thank you, and over to you, sir.

Good evening, everyone. And welcome to AGI Greenpac Q1 FY 2023 earning call. We have already circulated our earnings presentation, which is available on our website as well as the stock exchange website. I'm sure you would have gone through the presentation, and we would be happy to take any questions afterwards. As you all will be aware of, we completely divested building product division in our last quarter. AGI Greenpac now has only one business division, which is packaging products. Therefore, all the numbers and competitive figures that we are going to highlight pertains to packaging product business. Now talking about the first quarter, I am happy to announce that we have begun the year on a [indiscernible] with a strong [indiscernible] performance. In Q1 FY '23, company has delivered a strong performance and reported revenue from operations of INR 522 crores compared to INR 293 crores in the same quarter last year, registering a stellar growth of 77.7% on a year-on-year basis. Sales growth was primarily due to better realization and increase in glass container packaging volume supported by robust demand from beer and liquor industries. The company delivered an EBITDA of INR 92 crores, registering a growth of 57.1% on a year-on-year basis and continues to maintain a strong EBITDA margin of 19.6% despite the substantial increase in flow and other input material prices during the period. The margins were driven by higher sales, better product mix and inherent operational efficiencies [ presenting ] the manufacturing plants. Net profit stood at INR 66 crores compared to INR 18 crores in Q1 FY '22, a growth of 257.5% on a year-on-year basis, with a margin of 12.6%. Company has ended debt position of INR 782 crores at the end of June '22. Now I would hand over the call to Mr. Khosla to talk about packaging product and performance.

Thank you, Mr. Pandey. In Q1, financial year 2023, we delivered the great performance on the back of strong rebound in demand from the key user industry. The revenue growth was supported by increased demand from the beer, liquor industry, exports and other allied industries sustainably to our revenues in this quarter. The rise in out-of-home consumption and a reduction in taxes by some state government also contributed to the growth along with the passing of increased commodity prices to the consumer. The company delivered growth on both year-on-year and sequential basis, driven by sustainable demand revival and favorable macroeconomic factors. Glass container capacity utilization during the quarter was 94% as compared to 89% in the same quarter last year and 93% in the previous quarter. We have already begun trial production of our greenfield specialty glass facility of 154 tonnes per day manufacturing unit at Bhongir, Telangana, and we will commence the commercial production in Q2 financial year '23 onwards. I am further pleased to announce that AGI has forayed into the export markets of European Union, Canada, South Africa of its niche products. With the clear strategic roadmap ahead of us, we are confident in delivering sustainable growth and creating a long-term value for our shareholders. Thank you very much, and we are now ready to take any questions. Thank you.

[Operator Instructions] The first question is from the line of A.M. Lodha from Sanmati Consultants.

Sir, congratulations for good set of numbers this quarter also. I have got 3 questions, sir. There was other income element in the March '22, there’s the INR 21.33 crores, which is not in this quarter. Can you tell us, sir, what is the nature of that other income was in March '22 of INR 21.33 crores?

So that was -- we get a number of subsidies from the state government. And one of the subsidy which we -- when we set up the plant is the GST refund. So if you see the notes to the March accounts, it explains there was an odd income, which was credited because we do it, this is a reasonable certainty. So we got some, what you call, that refunds from the government on account of the local sales made. And that was in March '22, the other income -- main component was that.

Sir, we are about to commence the production in the new plant in this quarter. We will get the subsidy on this plant also?

So we will get subsidy, but it takes a lot of time because the.

That's all right. That's all right. That's all right. Because this subsidy belongs to our old plant.

This is for the old investment, which was 5 years back.

Then my second question is sir, power and fuel expenses has gone up steeply from INR 98 crores to INR 123 crores in this quarter. What is the -- what may be the reason for this steep jump in this power and fuel? And what steps the company is taking like green energy, solar to contain the power post?

So if you see this process, it's a fairly fuel-intensive process because what we do is we use raw material or the broken glasses we call as pellet and then melt it using the fuel. As you would recall that almost all the fuel prices have almost doubled in the last 6 to 7 months. But we have a flexibility to use various kinds of fuels. I'll request Mr. Khosla to just elaborate on what are the enablements which we have and how we are -- this process more efficient internally.

The price of fuel and power in quarter one of financial year, the price of power has already gone up. It has gone up by INR 1 per unit. And these are being regulated by the state government, and we have to follow with that. And regarding the fuel part, I think it is a well-known phenomenon all over the world that the fuel prices are just jumping, skyrocketing everywhere. And these fuel prices are directly linked with the crude prices and crude prices were directly linked with the geopolitical situation, which is arising all over the world. So because of that, these things have gone up. So what we are doing in that case, number one, one is a green energy, what we are talking about. Yes, we are already doing a lot of the green energy, almost 18.5 megawatts of solar electricity is being produced by us. And we are doing much more. There are some restrictions of the state government where we cannot surpass that. And we are constantly in touch with the state government to permit us for the further use of the green energy. And once we get the permission, we will be able to do it. Regarding the overall fuel prices to be controlled, a lot of things are happening where the energy audit and other things are being done, where we are trying to reduce the consumption of energy by moving more efficient -- that is an ongoing exercise, and that is a part of the operation excellence thing, which we are doing it regularly. And that is the reason we are able to sustain with our numbers and the numbers in the future also.

Okay, sir. My last question is sir, then I will join the queue. I got 3 more questions but I will join the queue. My last question sir, have we received the full consideration from Somany Home Products for INR 700 crores?

Some part is still pending around INR 90 crores. What has happened is since most of the LCs for procurement of raw material and other things were opened as of the effective date so there is a settlement procedure under the agreement, which is being done and some land parcels are yet to be transferred in our name. So pending that, we think that within the next 30 to 60 days, another INR 90 crores should flow from Hindware AGI Greenpac so that the full settlement happens for the transaction.

In this connection, sir, this time in present, we have not given that debt figure. In last presentation, the gross debt and net debt figure had been given in the presentation. So as per the indication in the last con call, the total loan book of the company would have been INR 560 crores or INR 570-odd-crores, something after repaying the INR 70 crores -- after getting the money from this Somany Home Products. But what I could guess from the opening of the con call, the loan book is more than INR 700 crores. Can you put some light on it, sir?

This INR 782 crores as I said, we will get INR 90 crores more. So it will go around INR 700 crores. So also to consider that we are currently undergoing an expansion plan and the money is being spent on the expansion plan therein both in terms of rebuilding and expanding the capacity so what we do is we use for the long-term money we use long-term loans. Accordingly, the debt component has slightly increased because the term loans at present have also happened during the quarter.

The next question is from the line of Nikhil Gada from Abakkus AMC.

And congrats on a very great set of numbers. Sir, first question is, could you break up this growth into how much will be the volume and how much will be the value growth, please?

So basically, if you see, we've got various price hikes during the quarter. Prices which we have got based on the input price increases range from customer to customer but this is in the range of INR 3,000 to INR 5,000 per tonne. But it is not that all the benefit has accrued during the entire quarter. So when you see the overall price benefit, which is coming to us is around 5% to 6%. And overall volume is around 12% to 13%, so which the overall revenue number grew by 18%, which means that in this current quarter, based on the price increases, some impact, the positive impact of increased realization you will have to see during the quarter 2 of the finance -- in current financial year.

Understood. So when you say 18%, you're saying the sequential growth from 4Q to 1Q?

Quarter-on-quarter.

Quarter-on-quarter. So 5%, 6% would have been the value as in the price hike and the 12% to 13% would be the volume growth. Understood. Understood. Sir, then just on.

I'm saying for the glass.

Got it, sir. And I think that is like close to 90% of the total revenues. Understood. Sir, just continuing on that now since you have sort of close to now full utilization in this capacity and the debottlenecking that we are planning, I'm assuming it would be in the glass itself. So how much more capacity can we sort of gain from this?

So we are rebuilding the furnace.

No, you mean to say in the quarter, what we are mentioning, how much capacity have been added up or how much debottlenecking has been added up or what will be there in the future? So what is the question?

Are you talking about the future opportunity available on the extension? Is that the question? We lost your voice Nikhil. Hello?

We have lost the line for the participant. We move to the next question. The next question is from the line of [ Vivek Gautam from GS Investment ].

Sir, I just wanted to know, why is the ROCE of our company so low and for so many number of -- large number of years, sir? And what can be done to improve it, number one? And is it at our sort of [ a sunset ] industry because of that valuation given to our sector is also quite low. And there was a related party transaction. Is it that also impacting our pricing and valuation, sir, real estate some things still lying with us, sir? And how is the opportunity size for us, sir?

So basically, I think the first question, which you're asking is why is ROCE low. So if you see glass is a very capital intensive procedure. Although today, we are the most profitable company in terms of the container glass because of our internal efficiencies, which we have been able to build over the last 5, 6 years. But still, the glass furnaces require proper maintenance, and you need to continuously repair them, rebuild them. One reason why you are seeing ROCE slightly down because we have recently invested around INR 250 crores into 154 tonne iron glass furnace for which the benefits are yet to come to the P&L. So this furnace is under trial and production. And the benefits will improve over a period of time. Apart from this, there are some additional expansion which is being done as we talked about 100 tonnes per day capacity debottlenecking is being done. So there's a capital work in progress. So these are the reasons wherein the ROCE's right now under pressure slightly. But as we move forward, because you see the EBITDA margins are in a very good trajectory. So we feel that ROCEs should improve over a period of time. Second question, as far as the related party transactions. So almost majority of the related party transactions wherein we initially had the manufacturing plants of building products, which we sold out [indiscernible] has been given away. And today, the only related party front, not the only -- the major related party transaction is that certain land and buildings which were not transferred because of their intrinsic values. We are taking rentals, but these rentals have been approved, and they are based on the third-party valuation, they're on an ordinance basis. They have been duly approved by the shareholders of both the company. So I think this is a broad and not much of the related party transition as it was there as of March '22. So they will now going forward be very less.

I believe our plant is running at a very high capacity and the biggest plant, which is also on the block is also running at a very high capacity. So don't we have the pricing power to have a decent margin, decent ROCE with our customers or the competition intensity is too tough and more and more players are coming in, wherein we are not able to take the price hike and pricing power?

Let me explain you about the pricing power in the glass industry. Number one, glass is one of the packaging materials. We have the alternate packaging material also, for example, cans, for example, PET, for example, Tetra Pak and others also. So beyond a point, if the things are being stretched on the pricing part, then probably there is a chance that glass can transfer back to the PET or any other packaging product, that is one part. Second is majority of our packaging materials, glass packaging material goes to the weaker industry. And weaker industry is a regulated industry. We have the pricing power to market out there, and the government decides the pricing power of that. So there is a big constraint here with the customers that what -- whenever there is an increase in the cost or in the prices, we are not able to pass on to the customers to their consumers, I mean to say, okay? That is another thing. Third is there are a lot of dormant capacities which are available all across India, dormant capacities which are not viable. Beyond a point, if the things are being stretched, immediately, those dormant capacities will become active. And once they become active, then they will be permanently active of any permanent reactive. They cannot die down just like that. So then there will be a lot of lull in the whole market. So all those factors have to be considered when the pricing is being considered or decided or being passed on to the customers.

And sir, how much the investment we require again for making the blast furnaces after every 10 years or before than that? And how much can the ROCE improve to and how much can be the growth rate also in the sector, depending upon there and how is the opportunity size, sir?

So basically, on the glass side, we can reach an ROCE. But there are other like -- we have plastic business and security caps and closures business also, which are I think the business, which is a pet business blasting business. There again, the ROCEs are lower. But on the glass side, we can definitely touch 18% plus ROCE going forward. And with the investment into high-end furnaces, if you will sell a premium product, we further feel that it should move from 18% to 20% over the next 3, 4 years.

In the opportunity side for us, sir? How much in India and exports -- any positive happening to India at both the story of China Plus One story.

Yes, there are a lot of opportunities which are there. But problem is every opportunity, whatever is coming out are being counted by so many global sectors. For example, the growth opportunity or the export opportunity against a China has come up, but the freight rates have gone skyrocket, and they are diluting this opportunity. Then comes the other thing. For example, the opportunities in Europe are very limited because Europe being a compact country where the local transportation is much lower than the ocean transportation. So there the opportunities are diluted there. So we have already assessed our people, our export department is continuously assessing about that opportunities. Yes, there are opportunities which exist in America and that already people are doing that. We are already doing in the -- in my address in fact, I told that we have started exporting in a reasonable manner to the Canada and America and some other countries. So these opportunities are already there. In India, the local transportation is also very high. And that is also which is restricting the thing. The Ministry of Transportation is working out how to make ease of doing business and to make other costs comparatively as compared to China. So once these factors they start coming in our favor, so the export opportunities will go up more and more. And we are in the center of land. We are not port-based company. So local transportation also plays a very big roles, which comes out to be almost INR 5,000 a tonne. And today, it comes out to be almost 16% to 17% of the price. That's the reason.

The next question is from the line of Nikhil Gada from Abakkus AMC.

So what would be the CapEx and how much capacity expansion would happen because of the debottlenecking?

So on the debottlenecking side, the total planned CapEx is at INR 100 crores, and there is a rebuild cost also, which is around INR 60 crores to INR 65 crores, which we'll spend in terms of both rebuilding and making the furnace on a new basis and doing 100 tonne expansion on those with which now the overall capacity on the container lots, right now, it's 1,600 tonnes per day will go to 1,700 tonnes per day and another 154 tonne high-end furnace will come. So that will make it 1,854 tonnes per day once the commercial operation on 154 tonnes also starts, which we are expecting in another 3, 4 months.

Understood, sir. And for this debottlenecking, how much -- how many days will have to keep the plant shut?

Almost 90 days.

And when are we planning to do this?

Maybe early next year, financial year.

Next financial year early. Okay. Understood. Understood. Okay. And sir, the peak capacity that we can achieve is 100% over here?

It can be 103%.

103%. Okay. Understood. Sir, my second question is on the gross margin front. Now that we are looking at like-to-like comparison, last year, 1Q, I think if my numbers are not wrong, we did close to around 80% gross margins. And this year, it is around 68%. So this 12% drop, if you can help explain, I mean, what has really increased the soda ash prices or the sand prices, if you can help us why the impact has been so large?

So basically, all the input prices, material has undergone a change, Nikhil. And percentages here go forward is normal. The fuel price, which used to be about 15% is now running at around 25%, 26%. And similarly, soda ash prices, which last year was almost, let's say, in effect was INR 20 a kilo is not even available at INR 40 a kilogram. So when you read percentages, it will lead to a misnomer. So we run our operations based on overall EBITDA, EBITDA per tonne, the focus is on that. So it's not that when the raw metal prices double, the absolute margins will double. So all these ratios will show the abnormalities of numerator and denominator.

Understood. But in case of -- when we look at 4Q numbers as well, sorry to just get into the percentage terms again, but we are still seeing some amount of decline. And when we had taken the price hikes, I assume that it would have taken care of some of this RM inflation. So just coming from that perspective.

So majority of the price hikes have happened in the quarter 2 -- quarter one of this financial year, not the last. In the quarter 4, in fact, the price increase has happened. And after that, we started negotiating with our customers. And after -- with a lag of 2, 3 months, we started getting upward price increases [indiscernible].

Understood. Okay, sir. So just then in that context, if you could help me with just a full year perspective, let's say, for FY '23, now that the first quarter is done and we have taken some amount of price hikes. Is it fair to say that the last year's margins we could better that? I think it was around 18.5% on EBITDA level.

So I think -- again, I said, we should be around that level. But again, percentages are again on this number because, as I told, when the input price increases, customer doesn't give as a percentage to sale. That will give you at rupees per tonne of glass made.

And secondly, in such a situation when there is an exponential increase in cost and which is simply -- which is a once-in-a-lifetime type of scenario, there, I think we have to protect our margins at [indiscernible] and whether then looking to the percentage because the denominator of the whole calculation is changed now. And in these circumstances, I think it will be very fair to stabilize the market, we are able to pass on the cost. That's all.

Understood, sir. Understood. Sir, and just a couple of questions more. So firstly, since we are starting the specialty glass plant in 2Q or end of 2Q, we had not booked any revenues per se, right, in the specialty business.

Yes. Yes, we have not booked any revenue from that.

Understood. And sir, just then on the export strategy, specifically, you mentioned about it. But is this largely going to be for our core glass containers portfolio or we are mainly looking at it from the specialty glass plant?

No. We are looking from a sustainable portfolio because we have already put our footprint all around the world. We were not exporting for the sake of exporting in any country at any price. We are just picking up the markets which are visible and where it makes sense for us on a long-term basis. That's the reason you might have seen that our export percentage is not very large purposefully. One is there is a local demand, and we have to cater our local demand at the first instance and export is already balance quantity, but looking to the opportunities which are available. So we are booking on and catering to these markets, which are on a sustainable basis. Regarding 154, yes, the opportunities are much more in 154 as a percentage of the total business. And probably, I think once the things get stabilized, much more is about to come.

Understood. So the specific call out in this quarter regarding the export strategy. I mean, because our capacities already we are largely at peak utilization. So just wanted to understand from that perspective, something has changed in the exports market, the reason we are sort of exploring it now? And is it going to be better than what we make in domestic in terms of margins? Just on that perspective?

So these are very short things which are there. Say, for example, like today, because of the Ukraine war, there are some capacities which have gone off because of the Nord Stream stopping of the gas there are some plants which have been stopped there. So there are some opportunities which are coming as a spot opportunity and some opportunities which are coming on a long-term opportunity. So catering spot opportunities with the short prices, which are the, you can say, where you can exploit this situation, and there are long-term opportunities which you have to make it on a stabilized basis. So both these strategies are very different and both the targets are very different. So we are doing in the best interest of the company and working out with all business strategies which can maximize our revenues and profitability.

Understood. And sir, lastly, just 2 questions bookkeeping, if I can ask, please? Sir, then on this CapEx cost of debottlenecking INR 150 crores, INR 160 crores, sorry. So is this going to be largely debt funded or there's some internal accruals will be used for this?

So as a matter of discipline, what we do is generally if the CapEx is there, we take a long-term loan of around 70%, 75% of the total expense. So this helped us maintain a good financial discipline that any long-term investment, which has to be done, has to be funded by long-term booking. At any particular time, but most of our loans have prepayment clause. And like with the slump sale, we just repaid the debt without entering any prepayment financial. So this is a good discipline. I mean surplus, which is generated is parked in working capital limits, which is there so which goes as unutilized working capital.

Understood. And the second on the tax expense. So now we'll completely shift to the new regime, right? So now we'll see 25% tax rate?

Yes, 22%, March 1.

The next question is from the line of [ Darshan Zaveri ] from Crown Capital.