Huhtamaki India Limited (509820) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q3 CY '23 Earnings Conference Call of Huhtamaki India Limited, hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjesh Jain from ICICI Securities. Thank you, and over to you, Mr. Jain.

Thanks, Nirav. Good afternoon, everyone. Thank you for joining on Huhtamaki India Limited Q3 CY '23 Results Conference Call. We have Huhtamaki India management on the call represented by Mr. Dhananjay Salunkhe, Managing Director; Mr. Jagdish Agarwal, Executive Director and Chief Financial Officer. I would like to invite Mr. Dhananjay to initiate with the opening remarks, post which we will have a Q&A session. Over to you, sir.

Yes. Thank you. Good afternoon, everyone. And this is our third investor call, and this is in line with our promise and -- what we made in last 6 months ago that we would like to engage with various stakeholders. And I'm again, happy to be here to kind of take you through to the last quarter as well as year-on-year performance, what are our strategies and then, of course, engage with you on various aspects of what we are doing. You would have seen -- before we start any further discussion, let me have a disclaimer of our safe harbor statement that whatever we discuss is not have anything like a forward-looking statement and so on. So that's -- I would like to put it on record. Coming to the performance of the Q3, what came out very clearly that our performance in terms of bottom line, that is EBIT, PBT and EPS, improved significantly quarter-on-quarter as well as year-on-year. That is basically giving a very strong indication of our strategic positioning, what we have taken in terms of driving the sustainable business. However, the overall volumes continue to be challenging. At the same time, you would observe that quarter-on-quarter, there is a slight improvement in the volumes. And they are clearly falling in line in terms of the strategy that we have made for our long-term sustainable growth. Now our investment in terms of operations and technology continues to be a focus area, and that's something which I will put a little more insights when I come back after handing over to Jagdish for the financial update. So overall, we are going in the right direction. And that is, as we said earlier as well, this is going to be backed up by our important focus on innovation and offering sustainable packaging solutions to the industry. And that motivation, that inspiration is coming from certain aspects where we are getting recognized for the awards for the best packaging. And last quarter, we received 3 awards from IFCA Star Awards 2023. So we received award for recyclable bulk bag for having their exceptional drop resistance. We got our award for certain specific tactile effect on a pressure-sensitive label and soft touch. So certain focuses what we are giving on innovation are clearly also recognized by the industry. So while I come back to you with more details on our innovation, I will hand it over to Jagdish Agarwal, our CFO and Executive Director, for taking us through to the financial highlights, and then I will come back again. Over to you, Jagdish.

Thank you to you, Jain. Good afternoon, everyone. Again, a pleasure to present the financial performance of Huhtamaki India Limited for the third quarter and the year so far. However, before presenting the same, considering that the holiday season is about to begin in India, I would like to start by [ greeting ] everyone on this call safe and happy holidays. And [indiscernible] in the festive of light, I hope it brings happiness and hope to one and all. Let me now move to the business performance of Huhtamaki. As regards to the key financial indicators, the volume continued to remain under pressure in Q3, impacting the top line on Y-o-Y basis that we only started seeing improvement on a quarter-on-quarter basis. However, the bottom line has saw significant improvement for both Q3 as well as for 9 months YTD. And this is a result of continued focus on operational efficiency, mix and partially due to the stabilization in the input prices. In spite of top line contraction by almost 15% in Q3 on Y-o-Y basis to INR 4.4 billion, the EBITDA has really doubled to INR 488 million in third quarter. For 9 months, while the value top line has sunk by around like 15% to INR 18.96 billion, the EBITDA decreased by 15% to INR 1.48 billion. EBIT for the quarter at INR 379 million compared to just INR 40 million is [ high ] on Y-o-Y basis. Similarly, profit before the tax for the quarter stands at INR 304 million against a loss of INR 47 million year-on-year basis. On 9-month basis, EBIT has improved to INR 1.1 billion, again, up from INR 636 million, and PBT has improved significantly to INR 862 million as compared to INR 399 million. Other than the items cited just now, the improvement in EBIT and PBT is also driven by lower depreciation. So as you all know that we have changed our fixed assets useful life from Jan 2023, that is a positive impact on our depreciation charge for the 9 months by INR 228 million. And for the third quarter, it has impacted positively INR 88 million. Net profit for the quarter at INR 323 million has improved to 5% of sales. If you look at Y-o-Y basis, it was a meager [ 0.01% ] or INR 0.4 million on similar quarter last year. For the 9-month period, net profit has improved to INR 822 million from INR 328 million. This represents 4.3% of sales as compared to 1.5% in the corresponding period in the previous year. However, this is partially driven by one-off reversal for uncertain tax provisions of past periods in a couple of quarters in this year. EPS for the quarter stands at INR 4.27 per share, substantially higher on Y-o-Y basis. And for 9-month period, EPS has changed at INR 11.16 per share, again, significantly higher on Y-o-Y basis. As Dhananjay talked about that when we compare our results either on a Y-o-Y basis, on a quarter-on-quarter basis, extremely improved performance, except the top line. Moving on to the debt and liquidity position. Net debt has reduced by [ INR 1.82 billion ] on Y-o-Y basis. And this result has helped improve overall liquidity. Debt equity ratio at around 0.3 is an improvement over 0.4 so far in the last 3 quarters. Short-term borrowings have significantly reduced on account of prepayment of lower drawdown [ solar ] lines. Liquidity is strong as we have [ sizeable ] limits, which are mostly unutilized at the end of the quarter. Working capital is a standout this year, with all the boxes getting tipped into green. The receivables are decreasing, inventories reducing, the payables are a tad higher mostly because of our higher outlook of our capital expenditure. The overall cash position has improved greatly and as a consequence of the improvement in net cash flow position from operating activities. To sum up the financial performance, I would like to say that we are on the right trajectory and all the measures taken in the past year also have now started yielding results, which is apparent from the improved financial profile of the company on almost all the parameters. Also, I want to highlight key points before I hand it over to Dhananjay. Key focus areas where we are focusing, all of them is our operational efficiencies. We continue to focus on the footprint optimization, cost optimization, supply chain resourcing optimization, efficiency and overall process optimization. This is now the core of our strategy, and we believe this will enable us to remain focused and drive responsible profitable growth. The #2 point which I want to highlight is the corporate governance and risk management. Our commitment to strong corporate governance is in line with [ letter ] and intent of law and regulation and is second to none. Our Board of Directors provide a robust oversight, which helps ensure that our business decisions are aligned with the interest of the shareholders. I would like to place on record my gratitude to entire Board in this regard. And personally, it has been a great learning experience for me interacting with the highly knowledgeable Board, helping us [ in our vision ] as well. And the third point is to have sustainability. The increasing importance of sustainability is not lost on us, and we are cognizant of our facilities to use our [indiscernible] with a positive contribution to the entire ecosystem in which we operate. blueloop is one of the strategic initiatives in this direction to begin the first choice in sustainable packaging solution. And this is the core of our 2030 strategy. The company has always been committed to stakeholders, focused on technology-enabled innovations and operational performance and realization of value for its product by engaging constantly with our customers. We appreciate your continued support and investment in our company. With that I'll hand it over to Dhananjay.

Thank you, Jagdish. So you mentioned about our innovation and enterprise-wide blueloop solution or branding. I would like to kind of expand this further. So just to everyone, if your presentation is open in front of you, I'm referring to a few slides, and this is about Slide #8, you can go to the blueloop. In last investor calls also, I kind of given a little bit background about what we are talking about here. The blueloop is nothing but the -- our entire offering in terms of sustainable packaging product solutions. And the blueloop is basically enterprise-wide brand, which is aligned with our 2030 strategy, where we are aspiring to become a first choice in sustainable packaging solutions, which will be driven by our investment in technology and the aptitude for operational excellence. So what is our 2030 vision? By 2030, we are really looking from packaging converter, which is our core business definitely, to move to the -- not only from a packaging converter to the packaging technology innovation leader and sustainable packaging solutions provider. And how would we do that? By introducing game-changing technology and solutions with the world-class efficient manufacturing and supply chain footprint available world globally. And these products will be available to our global customers. What are the products which we are talking about? We are moving from a complex and nonrecyclable products to mono-material laminates, which are designed for recycling. And in this area, we are offering 4 streams: The mono-material based laminates, polypropylene-based laminates, paper-based laminates and then PET-based laminates. And basically, those are essentially -- mono means 1 material, which enhances the recyclability. Though these products are simple, as I said, they are mono material, and most of them come with waste reduction and -- which means very important step for environmental reservation, which is CO2 reduction, and of course, they are recyclable. While all these offerings are from this product, very important thing what they ensure that it ensures the protection, which is required for food packaging and the packaging of daily essentials in terms of barrier properties. As I said they're recyclable and then in a market like India, we also cannot ignore the affordability of it. So they are affordable in terms of competitive pricing against the transformative alternatives. So last time we talked about the investments which are upcoming in our Silvassa unit, and we are very close to starting the equipment. So as the new equipment starts, we are also parallelly and equally focused on developing the strong projects pipeline, which are working with our customers in terms of -- and those are in domestic market, those projects are also in international markets. We are also studying various packaging machines available in our customer lines to ensure that our blueloop offerings also work on their machines, so that it enhances and it enables the smooth transition to the new product offerings. So Jagdish talked about the -- how are we really putting our strategy in place to make sure that we have a sustainable business. While I spoke about innovation, which is sustainable packaging products, and we are also equally focusing on making those sustainable products sustainably. And that is where the sustainability is coming in picture and very important from our -- achieving our 2030 strategic vision. On sustainability part, we are focusing on climate actions, we are focusing on sustainability by design. In terms of our infrastructure, we are talking about how do we preserve the -- or conserve the resources. So on climate actions, we are working on reducing our electricity consumption, optimizing consumption. We are looking at the -- reducing the wastages by introducing new ways of working and then using the renewable resources or the natural resources for the energy. Our new structure, building in [ Ambernath ] plant, I think we have -- we will be -- already launched that, is already Silver LEED Green Building certification. So all these actions are going to help us to create that sustainable business model sustainably. So on that happening, and we really appreciate your patient hearing and looking forward to engage in a conversation where we can take questions and answer to your satisfaction. So thank you very much. I appreciate your support to Huhtamaki India and back to the [ operator ] to kind of start the question and answer.

[Operator Instructions].

Can I ask how many people are there on call?

So we have around 80 plus. [Operator Instructions] First question is from the line of Aditya Khetan from SMIFS Institution.

Sir, my first question is, sir, of the sequential growth of 6.6%, so this is led by your realizations or by the volumes?

So sequentially, if you see quarter 2 to quarter 3, I mean it's a mix of both. So we have definitely improved our volumes in certain pockets, where we had taken the strategic position. Yes. So the volume growth is around 8%, whereas -- because realization, I would say, we had to cut because the commodities started going down. So in fact, we have to kind of pass on the certain raw material changes to our customers. So it's like driven by volume growth.

Okay. And sir, what would be the sustainable tax rate, sir, for CY '24 and CY '25?

Can you repeat your question?

Sir, what would be the sustainable tax rate? Tax rate, sir, which we can take for CY '24 and CY '25?

For financial year '24-'25, right?

Yes, yes.

So we opted for [indiscernible] so we are into the 25% tax regime. And at this point of time, we have a visibility that we'll go into the tax bracket unless it's some -- new [ regime ] comes and then we'll have -- like in this year, we had certain reversals of uncertain tax position that as in favor to us. Otherwise, we'll be into the 25% tax bracket. We would expect to continue that.

Okay. And sir, what would be the current utilization of our plant? The current run rate?

So we have various footprints. So we have a [ flexible ] manufacturing, we have a pressure-sensitive label manufacturing and at various locations. So utilization ranges from 55% to 65%, depending upon the various locations. But overall, I would say, around 60%.

60%, last quarter also, was the same figure. So this quarter also, like roughly, we are at almost at that level only?

Right.

Okay. And sir, this blueloop brand, I believe -- so this kind of -- so there are many materials or products of the similar, you can say, type like the blueloop. So how is Huhtamaki differentiable in terms of their like brand and quality into this brand? And currently, sir, as you have mentioned earlier also that around 20 to 25 products are sold by this blueloop brand. So what is the number like the next 2 years only we are targeting to take this around from 20%, 25%? And how this will improve your margin trajectory, going ahead?

So I think you have asked many questions at the same time, like 3, 5. So I'm trying to remember. So first thing is that the -- overall, blueloop is basic -- by the way, I mean, Huhtamaki is clearly known as a leader in industry product quality and service, and that remains. With the help of blueloop, it would be -- we will be offering certain products, which are basically in a mono material category. And those are the investments that we are making. So in layman terms, I would say, without getting into too much technical, there is a new film manufacturing process called MDO, which is machine-direction orientation or oriented. So that process will be used by Huhtamaki, which is common across -- but we have our own patented formulations to improve on the product offerings. And that is why we have created the -- created our brand, which is called blueloop, which is basically a circularity -- like design for circularity because it enhances the recyclability. And the last point that you asked, if I remember correctly, was how the margins will play along. So basically, as you see that we are definitely getting into a film manufacturing as well, which is kind of a backward integration, so there will be no combination of film margins and conversion margins. So there is definitely potential.

Okay. And sir, this current margins, so currently, sir, we are witnessing that majority of the commodity prices, with the rising crude, they have started to move up. So do you see any sort of impact in the coming quarters in the margins? So current margins of like 6.5% to 7% can be maintained or there could be a risk on to the downside in the crude price that goes -- moves up or stay at the current level?

So see, as we work -- has to work very closely with our customers, and there are mechanisms. So essentially, I would say, like when we see in last few quarters that prices are going down, we have to pass it on to our customers very transparently. Similarly, upcoming, only thing is if it doesn't happen very quickly. We have certain mechanisms placed with our customers, which kind of, I would say, protects us on both sides. When it goes down, customers get protected; when it goes up, we get protected.

Okay. So this margin can be maintained? Like that's what just I wanted to know.

It depends. Always -- this is basically how -- it's like not only play, right? It's raw material, productivity and then the capacity utilization and all these aspects. 4, 5 levers, they are coming together, right? It's only not about the crude oil or only [ film ] prices. So it's the whole [ game ].

Next question is from the line of Nilesh Shah from Arrow Investments.

Congratulations on a good set of earnings and operational efficiency, despite lower sales. So congratulations for that. I have a couple of questions. My first question is that we have shifted 3 plants, small-sized plants to different larger facilities. So what do we intend to do with the existing old infrastructure that we have? That is the first point. Second, if you can throw some highlight on what we decide to do with the proceeds of the sale of the Thane Land if and when it happens, is there any clarity on how and by when we can conclude the deal? And the third, since we are doing backward integration and starting to manufacture the new films, what is the kind of production capacity that we are looking at setting up? So that will be my three questions, please.

Okay. So the first question -- maybe I'll also invite Jagdish to answer on a couple of them later. So these 3 small plants that we consolidated in our larger plants, so out of 3, 2 plants we had leased out, so we have kind of surrendered the lease according to the terms and conditions. And then we have 1 plant, very small infrastructure available. Of course, we are taking a view in terms of our network optimization plan. We will take a call [ basically ] what is required to be done with that small infrastructure. Process of the land, definitely, I will invite Jagdish later. Before that, I'll just answer the production capacity. So what we have invested now is, per se, miniscule of what our overall requirement of our film. So we will be definitely looking at -- and that's why we keep on saying that network optimization, it will be one of the key strategy, going forward. So right now, we have invested in 1 plant, which will be adding somewhere around 10% to 12% of our requirement of the films, which we buy from outside. And then [ on the basis of ] the overall business case, we keep on evaluating the further capacity additions.

In terms of number of volume in metric tons or anything of that sort, is there a number that we can attribute to that 12%?

Not really, Nilesh -- I'm sorry, is it Nilesh, right? So look, our products are basically are a combination of 3, like in the square meter, then the grammage, and then it forms [ tonnage ]. So it purely depends upon the product mix what we make. So our products also are ranging from 70 microns, 50 microns or 60 microns to 120 microns and even some tube laminates like products are basically 200 microns. So it depends purely on product mix available. So it's very difficult to give a number such as a tonnage or so.

Just to add on to that, are we looking at only our self consumption or are we going to sell this blueloop technology films to other manufacturers as well?

So clearly, it's a self consumption to be -- that's -- in fact, that's going to be this patented technology. And at this moment, it's clear that it is for self consumption. But yes, we will be exploring the franchise model, not selling to any technology but franchise model because as an overall ecosystem in India and not only in India, elsewhere, customers definitely would have a certain requirement from their purchasing policies. So that is where we will be exploring those options. But at this moment, it's clear that it's a self consumption, but we may explore franchise model, going forward, later on but not now.

Nilesh, sorry to interrupt you, I will request you to come back in the question queue for a follow-up question.

Well, I think if he had a question on these proceeds of Thane Land, I think with due fairness, maybe Jagdish can answer that.

So thanks, Nilesh, for asking that question. We still are into deliberation stage. And as of now, we have not firmed up at how we are going to utilize that money. First, our endeavor and focus is that we want to close the deal and do that announcement. And definitely, we will come back once we'll have that firm commitment in place.

I request all the participants, please restrict to two questions per participant. [Operator Instructions] Next question is from the line of Bharat Sheth from Quest Investment Advisors.

Sir, can you elaborate a little more exactly on this Silvassa new facility that we'll be starting, is made for what exactly? Is it for backward integration of the film? Or it is -- and second thing, when you said that's MDO, when we will introduce this blueloop? So how other machinery and other plants will be able to take it up or again, we need to refurbish those plant or replace the plant? If you can give a little more color on that?

Sure. So this investment in Silvassa is basically for manufacturing of the films, which will be typically blueloop film line as well as MDO, which is the machine direction-oriented film manufacturing. So this comes as a essentially a film, which will be definitely used on our existing machines, so there is no need of adding any further infrastructure in terms of [ renting ] or conversion, okay? So there is no need. In fact, our interior is that we are developing these films in such a way and our products in such a way that, in fact, when we go to the marketplace with our customers, and that's what I indicated that, we are proactively taking trials at a customer packaging machine, so that they also do not have to change any infrastructure at their place in terms of machines or in terms of accessories and in terms of productivity. So that's how our endeavor is.

Okay. And sir, this film is different from this BOPP or it's the same kind of a film?

So as you said, BOPP, it's a Biaxially oriented polypropylene. So it's a one type of film. So there are 100 types of films, right? So here on this machine, this is basically meant for PE, polyethylene base and which will be essentially mono material and so on. So that's how it is.

Okay. And when do we expect and what could be the potential asset turn, if one can -- and how much investment we have made in this plant?

So investment, this is basically we -- at this moment, we are just in the process of investing. So not able to give an exact number. And we are looking at next quarter for some start-ups.

So it will be a trial run or commercial with...?

Yes, it's kind of a -- because it's a new technology, patented technology. So the gestation period or trial periods are slightly higher. But yes, we are looking at kind of a start. And then there are certain already commercialized the product portfolios, which we do it from -- either from our imported -- because elsewhere in the world, they've already started. So we import and then -- so there are certain products which already validated for customers, which will be like commercialized here.

Okay. And any color on the asset turn of this investment?

Not really because, as I said, we are just introduced or invested in that. So it will have to be kind of going forward. It depends upon how we are able to convert our customers, right? Yes.

And lastly, is it fair to understand that will be converter or -- film manufacturing as well as converter also? As well as we may be selling to other converter. So this will have a -- wherever we do convert, we have this film margin as well as conversion margin. And wherever we sell to third parties, it will be a margin of the film, correct?

You can say that.

[Operator Instructions] Next question is from the line of Saurabh Patwa from Quest Investment Advisors.

Am I audible?

Yes.

Yes, you are.

Sir, just wanted to -- your thoughts on a few things. One is when we see your 9-month number or even if we see the third quarter number and compare that with the pre-COVID year which is 2019. The revenue number remains -- looks similar. However, the EBITDA margins are compared very sharply. Of course, part it is also linked with your gross margin compression. But -- so the first part of the question was that how much scope you believe there is still there left in terms of gross margin improvement? And secondly, you also highlighted that the mono material has a single layer that means it does have a lower volume. So structurally are we going to see lower volumes and higher realization?

You want to take 2019?

So okay, so I mean since it's a -- the moment you talk about it, it looked like that we are talking about a forward-looking statement and which is -- which we normally don't talk about that. It's very difficult to say that what kind of a room we have, what kind of margins we are going to have in future. But if you look at our last few quarter performance, and there is a good improvement, and there are reasons for that. It's not about that we have -- the input prices are softening and all, but there are a lot of strategic initiatives and a lot of long-term initiatives, which as a company we took to ensure that we're even competing in the market that talk about official efficiencies, that talk about footprint optimizations. That talk about looking into each and every spend what we do into the company. And having said that, if you compare that 7.6% EBITDA what we have in this quarter, third quarter 2023. And if you compare the same, it was at 3.3% on third quarter 2022. So there's a significant improvement if we talk about that compared to last year and this year. And we believe that our endeavor is that we want to remain like if we talk about our aspirations for 2030, we are saying that we would like to grow very aggressively in top line. At the same time, we have aspirations to be in a double-digit gross margin -- double-digit EBIT margins. That's our journey and that aspirations we have. Now in between, it's very difficult to comment on any number. But I think that talk about our intent and that talk about our performance, what we had in the last couple of quarters.