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

Ladies and gentlemen, good day, and welcome to the AGI Greenpac Q2 FY '23 Results Conference Call hosted by Dolat Capital Markets Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sachin Bobade from Dolat Capital Markets Limited. Thank you, and over to you, sir.

Thank you, Lizanne. On behalf of Dolat Capital, I welcome you all to the Q2 FY '23 Earnings Conference Call of AGI Greenpac. Hope you all and your family are staying safe and healthy. From the management side, we have with us Mr. Rajesh Khosla, President and Chief Executive Officer; Mr. Om Prakash Pandey, Chief Financial Officer; and Mr. Sandeep Sikka, Group CFO. So now I hand the floor to the management for their opening remarks, and then we would have question-and-answer session. Over to you, sir.

Good evening, everyone, and welcome to the AGI Greenpac Q2 FY 2023 earnings call. We have already circulated our earnings presentation, which is available on our website as well as on the stock exchanges websites. I'm sure you would have gone through the presentation, and we would be happy to take any questions afterwards. As you all may be aware that we completely divested the building product division in quarter 4 of FY 2022 under [indiscernible]. AGI Greenpac is now a focused Packaging Product company. Therefore, all the numbers and comparative figures that we are going to highlight pertain to Packaging Product business. Now coming to the quarter 2 of FY 2023, the company delivered a strong performance and reported revenue from operation of INR 513 crores compared to INR 309 crores in the same quarter last year, registering a stellar growth of 66% on a year-on-year basis. The sales and profitability improved on a year-on-year basis on account of improved efficiencies. The company continued to maintain a strong EBITDA margin despite a sharp increase in input prices, rising inflation, and an increase in global interest rates. Q2 FY '22 includes a onetime receipt of an insurance claim amounting to INR 16 crores, which was nil in Q2 FY '23. Further, the currency fluctuation caused a foreign exchange loss of INR 6 crore in Q2 FY '23 compared to a gain of INR 0.2 crore in Q2 FY '22. Once the impact of one-time receipt of insurance claim and foreign exchange loss is neutralized, the adjusted EBITDA is INR 93 crore in Q2 FY '23, registering a growth of 59% on Y-o-Y basis with a margin of 18.1%. Net profit for Q2 FY '23 stood at INR 34 crores, with a margin of 6.6%, and the net debt position of INR 819 crores at the end of September 2022. After 30 September 2022, the company has been awarded LOI from [indiscernible] of Hindusthan National Glass Limited. The company has given its acceptance to LOI. Due to the confidentiality clause, we cannot discuss further on this matter. Now I will hand over the call to Mr. Khosla to talk about the Packaging Product business operational performance.

Thank you, Mr. Pandey. Good afternoon, everybody. In quarter 2 financial year 2023, we saw growth in production, sales volume and revenue during the quarter on the back of strong demand from the key user industries. The revenue growth was supported by the increase in glass container packaging volume of 58% compared to quarter 2 financial year 2022. The demand from the beer and liquor industry contributed around 74% to our revenue in this quarter. A rise in the out-of-home consumption and reduction of taxes by some state governments also contributed to the growth along with the passing of increased commodity pricing to the customers. The glass container business continues to see strong traction owing to improved realization, better product mix, increased sales volume, and improved efficiency. Further, our glass container plant capacity utilization during the quarter was 93% as compared to 76% in the same quarter last year. Further, AGI is successfully penetrating the export markets of Europe, Canada, South Africa for its niche product, also evolving consumer behavior with preference shifting towards quality, safety and premiumization of products, and the new development in the industry will create the exciting times ahead for the packaging industry. And with this, we are confident in our delivering sustainable growth and creating long-term value for all our stakeholders. Thank you very much, and now we are ready to take any questions. Thank you very much.

[Operator Instructions] First question is from the line of Zaki Nasser, an Individual Investor.

Yes. Mr. Sikka and the team of AGI, congrats on a very, very good performance for the Q2. Sir, 2 questions from my side. One is, would the Q2 include the additional 150 tonnes per day capacity in Telangana or that will start in the next quarter, sir?

So in this Q2, the new 154 tonne furnace is still under trial-run production. We have started shipping material to various customers. And since these are all high-end customers, the quality validation process is underway. And we feel that it should take another 2, 3 months, so that we finally get into the commercial production. So production is on, but the effect of sale is not being reflected into P&L. Part of the cost, which are relating to working capital and other things, like interest has increased, the total inventory has increased. So that elements are reflecting and the costs are reflecting into P&L, but not the sale and the margins there.

Okay. So could we safely assume that it will be the last quarter of the current financial year, sir?

Yes. I think commercial production should start in December or early January. Rajesh, if you can... . Yes. Next question, please.

Yes. And my next question would be, sir -- I mean, congrats on bagging Hindusthan National Glass. What would your plan of financing this would be, because it entails INR 2,150 crores approximately. So how do you propose to finance this transaction?

We can't talk much on this because of the underlying confidentiality, but primarily, it will be funded by debt initially from our side, but we'll see over a period of time we raise equity, and beyond this, it will be very difficult for us to make any comments because we have underlying confidentiality clause on this.

And sir, until when would the whole transaction get over? It will take another 2 quarters, sir?

So this is a process which is being run under IBC and under the NCLT process. We have been issued LOI, after which bankers are expected to file with NCLT. And then it is the jurisdiction of honorable NCLT Kolkata how much time it takes to give the final order, but expect it...

Sir, and you don't think that this debt will act as a drag on the combined balance sheet, sir? I mean, of course, you would have done the basic work, but...

No comment right now, please.

And sir, about fuel cost, sir. I mean, I see that you have managed the fuel cost pretty well. Some of your thoughts on this angle?

So I'll request Mr. Rajesh Khosla to take this. Rajesh, you are there?

Mr. Sikka, I'm here, I'm not able to hear the question properly. Can he repeat the question, please, again?

Sir, about the fuel cost, I see that in this quarter you have managed the fuel cost pretty well. I mean what are your thoughts on this going forward, sir?

See, as I think we have been informing all of our stakeholders, that AGI Greenpac has been using the multiple fuel system. And in recent past, so in last 3, 4 years, we have developed a system where we can use different type of fuels and a mix of different type of fuels, whichever is economical. So in this quarter also, there has been an opportunity of natural gas versus furnace oil versus LPG versus other fossil fuels. So we have taken a right mix of those fuels and tried to lower down our cost with the opportunity which existed in the various fuel markets at that particular point of time. Yes, I understand that there is a huge volatility of the fuel, particularly in the natural gas. But fortunately, we are there in the multiple fuel system, and we have taken that opportunity very well.

Thank you, sir. And best wishes for the remainder of the year, and congrats to team AGI.

The next question is from the line of Vibha Batra from FairConnect Business Advisors Private Limited.

My question is, again, on this proposed acquisition. I think I missed your response. Did you quantify the borrowings or upper limit on borrowings that you would have because of this acquisition? Or it was a qualitative remark?

No. Basically, right now, we are constrained on talking anything. So we have just given that we have accepted the LOI. We have informed the stock exchanges. And the initial acquisition...

But considering that the -- even the June quarterly numbers are available, because I think they have a listed debt, would you want to kind of qualitatively guide the investors that when you are considering this acquisition, obviously, in terms of top line, the company is quite significant. How would your return indicators move in terms of ROCE? And does it give you a significant advantage in some strategic high-value segment, or you're going to get into high-volume games? Some qualitative remarks would be helpful.

My apologies. Literally, we are bound by the confidentiality there. So I think we have disclosed what we have to do as far as our listing requirements, but I think investors will have to wait to get all those questions over a period of time. This is an NCLT process and there are conditions in the bid document wherein we can't talk about the deal.

Okay. And you've considered the impact that it could have on your credit rating in terms of debt coverage, and other indicators are too early to speak about.

Yes, we are aware about everything, the points which we are raising, but it's difficult for us to comment right now. Please appreciate that point.

Sure. And my other question is that if we were to look at September '22 numbers, you said there were some one-offs -- in September '21 numbers. But if you were to take normalized run rate, what kind of EBITDA can one expect? And you had some foreign currency losses. Would those be repeated? Or you have taken some hedges? Or how does one kind of look into future. What is the top line EBITDA impact, maybe? Sorry.

Yes, guidance generally on a medium to long-term range rather than the short-term range. But I think we spoke about foreign exchange losses, which the rupee has certainly depreciated. We have 2 ECBs in our balance sheet. One of them is hedged and the other one is not hedged. So one is hedged between 70 to 90 cost spread. But mark-to-market happens there also. But whenever we are settling, so anything between 70 to 90 is getting settled at INR 70 in terms of cash payment. But in terms of the accounting standard requirements, we have to mark the market to the loan and the hedge value is getting adjusted into the other non-EBITDA items as such. So what we can say is that you see very recent historical data. There has been a steep increase in the input prices. But the company has been able to pass on a substantial portion of that to the customers, and we are still negotiating for the customers. So the EBITDA guidance over the last 2 quarters, I think you can hold for next few quarters. And we feel that, that EBITDA should continue to get maintained over the next few quarters on the same basis.

Okay. And your interest and depreciation would remain at the same level because even interest expenses have gone up this quarter? Or is it because of the currency depreciation?

Currency depreciation goes into, as I told you, into EBITDA. Interest is primarily that the interest rates have increased. And also when you see year-on-year comparison, last year we had done re-lining of one furnace. And also, we had done some improvements in the furnace that we have better efficiency. So there are certain CapExs which have been done. As a result of which the depreciation has increased, and also interest has increased. So interest is both on the CapEx as well as on the interest rate effect. I think most of our loans, the non-ECV loans, they are linked to repo rates. So since repo rate has been increasing, so is the interest rates.

Okay. Okay. But sequentially, there is a very significant -- although depreciation hasn't gone up much, but interest costs have gone up very significantly. So that's what I was looking at, not year-on-year, but sequentially.

For this segment, if you see our results is that overall working capital deployment, although not changed in the number of days much, like the number of days variation is around 10 days. But since the input price material and input value of material, including the selling prices have increased substantially...

Yes, yes, absolutely right, okay.

Working capital is higher.

The next question is from the line of Tanay Shah from Dolat Capital.

So sir, in your comments, you have mentioned that you have passed on commodity price increases to the customers. Can you provide some more color as to how much has been the increase in your raw material prices in terms of energy and soda ash, et cetera? And how much of it has been passed on? So how much price hikes you have taken in, say, last 6 months and last 1 year kind of period?

If you see our average selling price almost a year back, so when we do a year-on-year comparison, our average selling price was ranging between INR 27,000, INR 27,500 per tonne, which was then INR 35,000 a tonne. So you see the delta is almost 28%, which is Y-o-Y.

So you said this quarter is INR 35,000, right?

Yes, average. And I'm giving this for the glass, which is primarily the key business.

Sure, sure.

And similarly, if you see the movement in the overall oil pricing, the average is coming again somewhere around 50%. But apart from this, there are other materials which we are using, like soda ash surprised the world. In fact, at one particular time, it went as high as INR 50,000. Now it is at odd INR 35,000. So there is a substantial input. So it's very difficult to benchmark line-by-line item, but I've given you a broader guidance as to how the pricing movement is there. So one thing is there that customers in the market, they are ready. They have understood that there is an input price increase, and they have accordingly accepted the...

I'll add on, Mr. Sikka, one more thing. It is, with quite a few number of customers, we have a clear understanding of passing on the cost, whether it goes up or goes down. So whatever advantage of this understanding there, and that is the reason we are able to protect our margins.

Understood. So you have agreements in place already with the customers linking your selling price to the raw material costs. Is that correct?

Yes. We have understanding, we have arrangement. We have the contracts affordably.

And that is for almost 5% of our tonnages.

Understood. Understood. And sir, just one last thing was, from 1st October, natural gas prices have been increased again substantially. So has there been any price hikes post 1st October from our end, customers?

As I informed you in my last answer just now, we are a company which is using multiple fuels. If the natural gas prices or any other prices of the fuel, they are going beyond the other one, the other fuel takes care of the change. And as far as pricing is concerned, we are very clear with the customers, whatever increase or decrease in the prices come up, only those can be passed on with whom we have contractual understanding.

Understood. So would you able to provide some color as to has there any increase post 1st October with the customers? Any price increase?

Since the prices or the cost is very dynamic, which has been happening for the last 1 year, 2 years. So what is happening, this has become a very continuous exercise now. So still the matter is under discussion with a few of the customers for a few of the items for which the things have gone up. So right now, it is not a one-off situation in the earlier times. It is a continuous exercise which is going on. It can go up also, it can come down also both the ways.

The next question is from the line of [ Aditya Dhaval ], an investor.

Sir, I wanted to know the volume tonnes and realization. Can you give me the breakup of glaspac and PET enclosures?

Can you go again with the question? You want the volumes and the realization?

Yes, yes. Specific volume and realization for 3 whatever we have, glaspac and plastic enclosures.

So basically, if you see glass volumes for this quarter, it is 1,15,200 with a sale of INR 350 crores. This is for selling right free and that INR 35,000 is selling price not INR 350 crores. And as far as other materials are concerned, they form a very small part. So if you see like 85%, 88% of turnover is linked to the glass itself. So we have not disclosed separately, because primarily we are focusing on the glass right now.

Okay. Fair enough.

And Secondly, Mr. Sikka, in the case of plastic and polymers, the pricing system is the raw material plus conversion. So the polymer price is the main driver of the prices in the case of other businesses.

Okay. Okay. And regarding this 154 tonne furnace, right, I think it is taking more time than expected from last year. So any challenges we are facing and why this has become somewhat delayed? Can you throw some light here?

No, there are no such challenges. It's a normal process. As you know, glass making and decoration is an integrated process in this particular business. Our glass making has already started. It has started delivering the results also. But the decoration, it was expected that it will start last month only. So now, with the integrated operations, the materials have started going to the customers under validation. And I hope so in the next few months, 1, 2 months, all those validations will be completed, and then the things accordingly will be commercially produced. So we do not face any unprecedented challenges. As normal operations they happen, if it's just like that.

Okay. That's fair enough. And so regarding the long-term perspective, we had signed for short-term water. Medium term, we have 154 tonnes furnace. But right now, we have acquired HMG, and we have this division coming. And where do you see, in the longer-term perspective, 5 years perspective, right? So there are several value-added products we can go ahead. So have you thought through and what is the other line of CapEx that the company is taking? Can you throw some light here?

One small correction. We have not acquired HMG, we are in the process, which is available in the public domain. Secondly, as a normal company, all the companies they work in a line where they can go for more value-added products. And same AGI will like to do that. Now which are the value-added products and how the market will behave? It all will depend upon the future and once the acquisition is complete and the market opens up and then only those things can be made. But yes, there is a huge opportunity in the market for all those value-added products and our company would like to tap all those. At this stage, it will be very difficult for us to give some numerical numbers to those opportunities and the value creation numbers.

Okay. Okay. The last question I have, in the last quarter, you have mentioned that there should be some price increase that has happened to the customers. But when I see quarter-on-quarter numbers, the packaging division, it has some odd INR 472 crores and INR 32 crores supposed to be in others. So I see there is a drop in the revenue number and the realization. So is the realization has been dropped or, because I see year-on-year or quarter-on-quarter, the volume percentage you're talking about is 93% capacity utilization. So I was expecting that there should be some increase in the number quarter-on-quarter, but it has not happened. So can you explain this point?

Mr. Sikka, can you just tell them the numbers, because I don't think so...

Yes. So if you see year-on-year comparison, last year same quarter, we had 94,000 tonnes sales. This year, we had done 116,000 tonnes sales, as I told you. Quarter 1 sales was higher at 143,000 tonnes. So that is why this -- so basically, if you see that quarter-on-quarter, the realization, the quantities are lower, but year-on-year, it has increased. So there is some seasonality involved into the businesses because at different times, beer gets sold or some liquor gets sold. So this is due to the seasonal impact. So what I've given you the guidance on -- not the guidance, actual numbers on what was last year and what is this year. So that is it. Overall, selling prices, like in Q1, was somewhere around INR 31,000, INR 32,000. So which is now at INR 35,000.

Okay. Okay. This clarifies.

The next question is from the line of Sreemant Dudhoria from Sree Capital.

I have a few questions Firstly, specifically on the price increases, you mentioned broadly about 28% increase in NSR over the last 1 year. But in the last quarter, how much was the price increase? That is the first point. And secondly, how much further price increase is required to absorb fully the RM inflation?

So basically, if you see, year-on-year 28%, and sequential quarter, we are at around 9%. But we still -- on the future thing, as Mr. Rajesh said that we have to keep monitoring how the price fluctuation happens on the input materials, because almost 60%, 65% of our sales is linked to the input prices now with our customers. So we have to see how the things pan out on the cost side.

It's a very volatile market. Just for your understanding, and just quoting from the public domain information. A few weeks back, there was a scarcity of the gas and natural gas in Europe and people were talking of the skyrocketing prices. And all of a sudden, there has been a news which is circulating in the market that Europe is already full with the gas prices and the gas prices are dropping like anything. So these type of news and information and a situation which is existing and which is adding up in a very short term, they are driving the prices and all. All the customers, and they are all well aware, well educated, and they have the understanding of price increase as per the actual market increases there. And that is what we have been understanding and we have the contracts with them. So the price increase or decrease will depend upon how these markets will go up and down accordingly. And it is too difficult for anyone, including us, to say how these things are going to go because there are multidimensional things which are moving on in the global market.

Thanks for the detailed explanation, sir. So a follow-up on this is, in the likely event of the industry consolidating, because 2 large capacities would be under a single company, especially in the organized market, do you think that the container glass industry will now have a better pricing power over and above the price increases that we are getting just because of the raw material inflation. Your comment on this?

So basically, the speculations are linked to the proposed acquisition. So our apologies, as we have talked again and again. Since we are bound by the confidentiality, we would like to avoid this question for this particular moment.

Sure. I was talking about from the industry level. Will the pricing power...

Please appreciate that we have a confidentiality clause which can impact us.

Sure, sure.

More high-end services will be offered in the market, more value-added products will be offered in the market in the times to come because once the industry consolidates. These are the normal practices all over the industry across the products.