Kuantum Papers Limited (532937) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 and 9 Months FY '24 Conference Call of Kuantum Papers Limited. [Operator Instructions] I now hand the conference over to Ms. Purvangi Jain from Valorem Advisors. Thank you, and over to you, ma'am.

Thank you. Good afternoon, everyone. My name is Purvangi Jain from Valorem Advisors. We represent Investor Relations for Kuantum Papers Limited. On behalf of the company, I would like to thank you all for participating in the company's earnings call for the third quarter and 9 months ended financial year 2024. Before we begin, let me mention a short cautionary statement. Some of the statements made in today's earnings call may be forward-looking in nature. Such forward-looking statements are subject to risk and uncertainties, which could cause actual results to differ from those anticipated. Such statements are made based on management's belief as well as assumptions made by and information currently available to the management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decisions. The purpose of today's earnings call is probably to educate and bring awareness about the company's fundamental business and financial quarter under review. Now let me introduce you to the management participating with us in today's earnings call and hand it over to them for their opening remarks. We have with us Mr. Pavan Khaitan, Vice Chairman and Managing Director. Without any further delay, I request Mr. Pavan Khaitan to start with his opening remarks. Thank you, and over to you, sir.

Thank you, Purvangi. It is a pleasure to welcome you all to our earnings conference call for the third quarter and 9 months ended for the financial year 2024. Let me first take you through the financial performance of the company for this third quarter, followed by the 9 months ended results for the financial year 2024, after which we will provide the operational highlights. During the quarter under review, the operating revenue stood at INR 302 crores and the EBITDA was at INR 79 crores or 26.33%. The profit after tax for the quarter stood at INR 42 crores with a PAT margin at 14%. Revenue for the Q3 was in line with Q2 and the EBITDA margins for Q3 remained robust at 26.33%. This was despite the temporary shutdown for modification and upgrades of our PM 1 and the 10-megawatt turbine and -- which was alongside a rise in wood material costs. The overall operational efficiencies in power plant operations was enhanced through effective utilization of rice husk waste, which is Khuddi, as an cost-effective alternative fuel, reducing costs by about 50% compared to coal. For the 9 months-ended under review, the company's operating revenue stood at INR 912 crores, which was a small decline of about 5% year-on-year. EBITDA was -- is reported at INR 269 crores, which has grown about 1.6% year-on-year. EBITDA margin stood at around 29.53%, while the profit after tax is reported at around INR 150 crores with PAT margins reported at 16.43%. The yearly decline in revenue can be attributed to various market challenges such as decrease in price and demand pressures, alongside an increased competition from imports. On the ongoing CapEx front, during the third quarter, our PM 1 underwent a comprehensive rebuild with new headbox, wire part, press part, pope reel and the addition of dryers, which has resulted in an increase in paper production from 25 to 40 tonnes per day. Additionally, the upgradation of our TG4 from the 10-megawatt has been -- is now standing at 13.5 megawatts, and this was completed, which will lead in higher efficiency of steam production with lower costs. Both these projects were successfully commissioned in Jan '24. Work has also commenced to produce an additional 20 million saplings in the Clonal Production Center, which will be operational by the financial year 2025. I'm very pleased to share that the Board has approved a revised CapEx project cost of INR 735 crores, an increase from the initial outlay of INR 285 crores. This increased investment will be towards upgradation and modification of existing projects, mainly paper machines with a focus on environmental sustainability, which will ultimately result in a 50% boost in our production capacity. Under this new CapEx plan, we have placed orders for the state-of-the-art shoe press for PM 4 from Bellmer, and this is -- their workshop is in Germany and initiated the procurement of DDS for our pulp mill which has result -- which will result in higher production and pulp yield with lower steam consumption. Thank you. With this, we can now open the floor to questions and answers session.

[Operator Instructions] The first question is from the line of Mr. [ Kunal Tokas ] from Fair Value Capital.

Am I audible?

Yes, please.

Yes. So in recent letter was written by the IPMA's President urging the government to increase the basic customs duty to 25% from 10%. And you have said that the recent quarter witnessed pressures from imports on prices as well as the volume front. Can you quantify the increase that the imports witnessed in this quarter and how that has been going on in comparison to the trend?

So we are witnessing -- we have already witnessed an increase in imports of almost 40% to 45%, and that's quite a substantial volume which is coming in mainly from Southeast Asia. And that is what is sort of adding to the volumes getting sold in the domestic market. Additionally, with the Red Sea crisis happening, there is a shortfall in the outflow in terms of exports. So that is also adding to the volumes getting sold in the country. So in both these accounts, there is a slight additional pressure on market prices because of these additional volumes coming in, and that is what is sort of affecting the market status, so to speak, currently.

The 40% that you mentioned, that was Y-o-Y?

Y-o-Y, correct.

And about the Red Sea crisis, it is difficult for us to export now because of the Red Sea crisis. It will be even more difficult I presume for the Southeast Asian nations to export to that area. And will that be having an effect of increasing the exports to India because they cannot export to those regions now because of the Red Sea crisis? Is that a temporary increase in imports that we are seeing?

That clearly could lead to a temporary further increase in imports. But I would say that even market, per se, the demand is on the rise, though not as big as the imports coming in. So slight unsettlement and uncertain period of operation will be there for a few times going ahead. And I think -- but it all should settle out sooner than expected sooner than later. And sort of the industry is quite well competent, well placed to take on such challenges.

And about that competitiveness, what is the trend of international pulp or paper prices that you have been seeing?

Fortunately, pulp pricing is on the increase, which is a good sign for us. Normally, we see that paper prices follow the trend on pulp. And so paper prices should fall in line and start increasing as well, though that hasn't happened yet. We are still to witness that increase to happen. I'm sure in times to come, that will also be led and have a salutary effect on the market.

So the increase in paper prices would be expected to happen with the lag, right, lagging the increase in pulp prices? And can you quantify the increase in the pulp prices? You said that...

Pulp prices increased by about $80 to $100 per tonne from last quarter.

From the last quarter, okay. All right. And sir, about the CapEx that you have -- revised CapEx you have announced of INR 765 crores.

Yes.

How much of that will be towards your specialty segment?

Well, actually, Kunal, all our 4 paper machines are getting upgraded and they will help in increasing our production capacity by about 50%, which is quite a substantial jump. So from the current 450 tonnes per day, we are targeting 675 tonnes per day of production. And from going ahead, we are -- I think both our PM 1 and 2, which will be -- which -- on which there will be an output of 80 tonnes each. So 160 tonnes each -- 160 tonnes per day of specialty paper there for sure. But even on our bigger machines, some part of that production will also go towards serving the specialty needs. So total of about 25%, 30% of the overall production capacity will be towards the specialty segment, which is, I would say, about 200 tonnes would be the specialty paper production and operation.

[Operator Instructions] The next question is from the line of Rusmik Oza from 9 Rays EquiResearch.

Sir, wanted some more understanding on this bigger CapEx, how the funding is going to be done? And by then, do you feel this expansion will get commissioned? That's the first question.

So it's going to be funded by a combination of bank debt and internal accruals. We've already applied for a loan component of INR 535 crores to the banks and the balance INR 200 crores will be through internal accruals. A lot of -- majority of our projects, which is going to lead to production increase is going to get completed by March of '25, and a few other projects like pulp mill addition and the other sustainability projects will follow soon and will get over in phases between September of '25 and March of -- sorry, in March of '26, that's right. So -- but I think the good part will be within the financial year '24, '25 and we will see a fair bit of healthy increase in production levels going forward, '25, '26. And thereafter, '26, '27, we'll see the full result of this project.

And sir, to bifurcate the growth in the 2 years, that is '25 and '26 actually, what kind of growth can come in for FY '26 and FY '27? What kind of growth after this 50% will materialize in FY '26? And how much will come in FY '27, sir?

We can expect a growth of about almost 60% in '25, '26 and the balance, 40% in -- I mean, completed in '26, '27.

Okay, okay. And the current utilization will be completely optimum, right? Since you're running an optimum utilization as of now.

Correct.

Okay. So sir, the FY '25, probably we could see some marginal growth in volumes and then our healthy pickup could turn over to FY '26 and '27.

That's right.

Okay. And in terms of realization, sir, can you give us some trend how the realizations of your end products has been in the last 3 quarters? And how do you see it going forward?

So there is a kind of a decline. If you are asking about 3 quarters, we were at quite a high in quarter 1, where we returned an EBITDA level of almost 36%, the highest that we've ever returned. Post that, the decline in pricing has been there. It's come down from a level of about INR 85,000 to about INR 74,000 per tonne in the quarter under consideration. And yes, going forward, I think we should be stable around here, not much change. And so it should even out because it's not only going to be a decline, I'm sure it's going to turn around. As suggested earlier, the pulp pricing is increasing, paper prices should see the turnaround happening and average out should come back and start proceeding towards INR 75,000 and above.

Okay, okay. Got it. And will there be proportionate increase in your -- in the power production also when you are setting up this new expansion capacity?

Yes. The fact is that currently, we are producing about 25.5 megawatts completely. And over -- after this expansion happens, our total requirement will go up to about between 28 and 29 megawatts, for which we already have the required infrastructure with us. So there is no additional power infrastructure that is getting created.

The next question is from the line of Bharat Gupta from Fair Value Capital.

A couple of questions from my side. So first, on the order book. So can you just quantify like what kind of order book which we'll be working upon? And how has been the order includes with respect to the new education policy?

So the new education policy has not really been quantified or implemented in its entirety. Only the lower classes up till Standard 3 has been implemented. The standards 4 and above are waiting in the wings. They are likely to happen during the course of the year. So there has been no uplift because of the NEP implementation. So whatever is happening is because of the ongoing market conditions, and there is an ongoing demand that is happening on ground. And we are continuing our trending of collecting all our orders in advance, keeping our machines running. And we are going to follow that practice for sure.

Right. Sir, anything like any instrumental, particularly, with respect to the order books, which we have currently in place with respect to the next fiscal year? Anything if you can drive?

Yes, there is clearly an opportunity with this plastic ban -- single-use plastic ban that has come in. We have already looked at creating some new product profiles to fulfill that demand and serve that demand. So that's what we are working on, and we are hoping that with this renovation on our PM 1 and 2, which will then become more and more suitable to make specialty papers, those order books will get implemented and fulfilled over a period of time over the next year.

Sir, you mentioned about the reduction in the realization results and that we are facing a competition with respect to imports. But like we are based out of the northern side and we are insulated with the whatever happenings, which happened with effect with full pricing. So just wanted to check like going forward as such, with the pricing trend on -- of the pulp on increasing side, so do you think that the momentum will be with respect like momentum and insularity which we have, so that will actually play across and we'll be able to pass on the price increase in the subsequent quarter?

Surely, we -- as you have rightly pointed out, we have an insulation because of our location and more so that we are located nearer the biggest market in the country, which is stationed and located in the North, which is Delhi and NCR. So we do have an advantage there and which we are using to our advantage and being able to get a realization, which is better than most of the other players in the industry. And I think that advantage will continue and we will be able to stave off the competition from imports for a longer period than others and help in sustaining our pricing for longer periods in the times to come.

The reason why I'm asking is primarily driven by 2 factors. One, I think 20% of our product portfolio is with respect to specialty, and we are going to increase it to 30%. So what is the realization in the specialty bit, like how it would be better than the blended realization which we derived?

So normally, we get a realization of about 8% to 10% better than the normal writing and printing grades that we make. So that advantage is going to continue. And we are -- as we are increasing our volumes, that will further affect and impact our down sort of bottom line better. And I think -- but it also has played with overall market pricing coming down. It's not that we will be able to sustain our specialty paper prices to that original levels what we were. Some impacts will be there. Maybe if, let's say, the average downfall in writing printing paper prices is 5%, the specialty paper may reduce by 2% or 3%, not so much. So yes, there is a betterment in terms of pricing that we get on a specialty paper compared to writing and printing paper.

All right. Also sir, with respect to the EBITDA per tonne, so in our previous interaction, you always used to guide that the company is looking for EBITDA per tonne, ranging over INR 25,000 odd. But if I look at the numbers, I know that PM 1 was not operational during the quarter. But still in the previous quarter itself, our number was below 23 -- INR 20,000 per tonne. And this quarter itself, it takes to go to around the similar levels. So any insights like what are the missing links currently with respect to the [ communication ]? And also going forward, what kind of margins per tonne expect on a sustainable basis which you can derive?

So I think what -- to my mind, we've hit out bottom as far as pricing in the market is concerned. So this average level of about INR 19,000 to INR 20,000 per metric tonne of EBITDA that we are maintaining, we can only hope to get better this in the future. With further decreasing costs, what has happened is that even though the market prices have come down, they have been supplanted with a reduction in cost of our other raw materials like wheat straw and fuel and which has helped us maintain these margins going forward. There is going to be further efficiency that is going to be built in by way of these CapExes that we bring in. And with the efficiencies and economy of scale that we get and build into our operation, which is going to better our cost of production, we will be able to offset any further decrease, if and when it happens. So we are going to maintain these margins -- EBITDA margins for sure. And going forward, as and how the market prices are going to turnaround and get better, it's going to have -- go straight to better our bottom lines.

Right. And sir, I think operational leverage also play in because I think currently, we are operating anywhere around 80%, 85% utilization levels.

No. We are 90-plus.

And that is across both specialty and the packaging, sir?

No, no packaging. It's -- we don't do packaging at all. It's only specialty and writing, printing paper.

Writing, printing, sorry. So that way going forward with the incremental capacity, which will be coming in. So I think the number can be, whatever you have guided in the past, So we can adhere to that.

Yes, we are wanting to target similar production capacity levels, which is 90% plus. And that is also -- the 90% capacity is not due to market constraints. It is because of operational constraints. There are mandatory downtimes of machine that we have to undertake. Because of the nature of the machines, we have to bring a downtime to get better efficiencies, change the machine clothing, review and renew our various machine parts. So that's the reason why machines are put into a downtime, and that's why that is what leads to this 90% capacity utilization. Otherwise, if you see machine running, we are operating at 100% of operational hours.

Just for guidance, sir, with respect to the specialty margins. So how it will be better in comparison to the one which we enjoy in the copier or in the printing side?

So our specialty paper margins would be higher by about INR 4,000 to INR 5,000 per tonne.

All right. And the incremental capacity, majorly it is towards specialties side?

Yes. So from the -- no, not majorly. From the current level of about 20% that we are doing, we'll go up to 30% of the increased capacity. So we will be doing about 200 tonnes out of the 675 tonnes that we will be producing in future.

And in the specialty bit, sir, the competition is mainly from the imports, not with respect to any domestic guy? No one is manufacturing that kind of products which we are manufacturing.

No, there are a few people in the industry who are into the specialty segment like ITC, Pudumjee, JK Paper. But yes, imports, the competition from imports are limited because the consumer requirement is very, very specific and it's not easy for it to be fulfilled by imports of paper. Imports of paper is happening normally in larger quantities on bigger scales, and specialty requirements are very, very focused in a timely manner which imports are not able to fulfill. So primary competition is local only, and it is against these -- along with these bigger mills, which is much more organized.

Right, sir. Last question from my side. Sir, with respect to the RM increase, so just wanted to check has it been broad based across timber chemicals or the kind of levels which you are seeing currently. So do think that particular levels will sustain? Or there can be a downwards going forward as well?

You're talking about pricing of raw materials?

Yes, sir, particularly with respect to timber or with respect to chemicals.

So if we see, the pricing in wood has increased a bit. That is because of a seasonability that is there in wood. Currently, it's in shorter supply compared to other periods. But wood availability is likely to increase in the coming quarters. So it's going to have, again, an offset and average out to the yearly requirement and yearly average that we normally operate in. Wheat straw currently is on a lower trend. We have been able to reduce our prices by almost 15-odd percent compared to the last quarter. And that trend is continuing. So we are seeing -- witnessing a reduction in price of our other main raw material, which is wheat straw. Chemicals are normally remaining flat. And I don't see any huge change in the pricing of chemicals and other inputs.

Okay. So the gross margins, which we enjoy currently around 60, 70-odd percent. So the trend will remain on a similar basis in Q4 and in the subsequent quarter?

Well, on the cost front, we are quite competitive. But with the reduction or a change in market prices, it could affect our EBITDA levels and margins going forward. And -- but that would be temporary. So maybe this one quarter could be a little a challenge, but I think going forward, it will be back to normal and better.

The next question is from the line of Tej Patel from Niveshaay.

Yes. So sir, I know you've discussed earlier in the smaller level, just I wanted to get more in detail from you -- but -- so sir, you say that the wood pulp prices have increased Q-on-Q, right? So if you could give us in terms of percentage, how much have increased? And -- it's like it's been 1 month since in this quarter. And how do -- how much wood prices do you anticipate going to increase given the Red Sea situation, currently? And what is the delta between the import price and the price that the domestic people producers are setting? And given that they aren't able to export to other countries because of the Red Sea issue, do you this delta increasing over the periods, given the increase in volumes coming from the imports from the Southeast Asian countries?

So I'll try and answer the question one by one, Mr. Tej. Wood pulp pricing -- wood pricing has increased by about 8% quarter-on-quarter and it is stable at that. We don't foresee a further increase. In fact, it could reduce with wood availability getting better in the coming quarters. With respect to the delta, it's an average that one can measure. It's not something which is all across the board. There are certain quantities which are coming in at lower pricing, but most quantities are averaging around $700 per tonne. And what we were exporting earlier was about $780 to $800 per tonne. And this $700 per tonne translates to about INR 65,000 per tonne locally. And -- but domestic market is averaging about INR 71,000 to INR 74,000 per tonne, which we are being able to manage quite successfully because imports cannot take off -- partake of and fulfill the entire requirement of the country. So we are -- we have an upper hand there, and this delta, we will be able to manage going forward.

The next question is from the line of [ Kunal Tokas ] from Fair Value Capital.

Am I audible?

Yes, please.

Just a few quick questions. You said that the effect of an increase or decrease in international pulp prices, applies with a lag on paper prices. So in your experience, what does that lag period been like? Is it a few weeks or few months or a few...

Normally, it's between 30 to 45 days. But with the uncertainties that are happening across the world with, whatever is happening in the economic front, U.S. fed rates the way they are going, wars going on, one doesn't really know for sure what is the kind of lag that is we are going to experience. But yes, on an average, about 30 to 45 days.

Okay. And are you expending any R&D efforts on developing new specialty products?

Yes, of course, of course. There's a huge R&D effort that is going on. We've already implemented 2 new products which are offsetting the use of single-use plastics. And that effort is going to continue and that is what is going to make up the bulk of our specialty paper products going forward.

All right. And sir, in the last call we hypothesized that the industry might see more consolidation happening with mills closing down or bigger mills acquiring other mills. Have you seen that trend continue in the latest quarter?

At the moment, one has not heard of anything, per se. It's status quo as of now. And -- but I think what one does hear of is that it may continue for the long run. It will continue for the long run. But as and how these deals happen, I think everybody will get to know about them.

Okay. And sir, just a final quick question. I know you mentioned -- you talked about it in your opening comments, but can you provide the time line for the capacity expansion that you are undertaking?

Yes. So a majority of expansion will get completed by March '25 within the next 11, 12, 14 months and the balance, small part will get extended into up to September of '25 till March of '26.

So by the majority, you mean the majority of the 50% increase?

Yes. I think about 60% increase, we should be able to get in and complete by March of '25, the effect of which will be very, very visible in the financial year '25, '26.

The next question is from the line of Ankit Gupta who's an individual Investor.

Yes, I think my question got answered.

[Operator Instructions] The next question is from the line of Rusmik Oza from 9 Rays EquiResearch.

Sir, I want to understand how do we see FY '25 panning out in terms of profitability? Because the new capacity will come up in FY '26, and we're already running at more than 90% utilization right now. That's my first question. And my second question is, how do you try and actually secure the raw material as and when you increase the capacity by 50%? Because will there be adequate availability of the raw materials for meeting this higher production of 50% going forward?

So I'll answer both your questions. The trending on profitability is quite stable. And I think we've declared good results, 26% EBITDA levels plus is, I think, a good robust performance. Going forward with the increase in capacity, I don't see -- it's not a good exercise to collect material in advance because it's a very, very seasonal availability and very, very subject to the vagaries of environment. So you cannot really store this material and because it is open to decay. But I would, on the other hand, say that a good enough availability is there in the market. And whatever is our requirement will clearly be catered to, will be available within the state of Punjab where we operate. There's plentiful of raw material, both in terms of wheat straw, the primary material that we operate in as well as wood supplies. And also the fact that we have -- we've also done a study, which suggests that there is enough and adequate availability of the same. And with the propagation of our clonal saplings and clonal nursery, which we are doing in a big way, we are trending on towards increasing the wood availability in future for ourselves and for the community at large.

Sir, if I may rephrase my first question, sir, is that this year which is that doing 26% EBITDA margin. But next year, will the profit of FY '25 be higher than FY '24? Or will the margins be better than FY '24? That's what I was trying to understand.

Yes. So we are targeting better margins in the financial year '25, '26 with on the back of better operational efficiencies and with some of our capacity increase, a small improvement coming in this year, financial year '25/'26 itself. So on back of -- primarily on better efficiencies and better operationability, we do see a betterment in our EBITDA margins going forward.

The next question is from the line of Imran from Longbow India Capital.

Sir, can you please share the pricing separately for maybe the writing and printing paper and the other paper that you make?

I would say, Imran, that's a little bit of confidential in nature because that's how we are able to create a good marketing plan for ourselves. But suffice to say that there is a delta about 5% to 8% between pricing of writing and printing paper and specialty segment paper.

So specialty would be higher by...

Yes, higher.

What is the percentage.

Yes. Higher.

All right. I had an impression that this especially the cut size paper which is used mostly in offices, I thought it is the highest priced category. But I think, I stand correct here, and the other ones that you mentioned are the highest-priced products, right?

So what you are mentioning, cut size, that is copier that is used in offices, that's not what we identify as specialty paper. That would -- that we take this as retail writing and printing paper segment only. Our specialty paper is exclusive paper going into very, very varied applications. And primarily now the focus will be on to replace single-use plastic ban which has come in and we'll find the rightful replacement of those kind of usages with paper.

Right. And can you at least give a split between the specialty and the other paper that you make?

Yes. We are doing about 20% of specialty paper, and balance is writing and printing. So even under writing and printing, there are various categories like copier, there's maplitho, there's creamwove, there's high bulk paper. So even it's not like 80% is one category alone. There are different, different product portfolios under that category as well, but all under the overall category of writing and printing paper.

Right. And sir, if it is possible, otherwise, you can skip this question. If you can divide the 80% into copier and noncopier, if that is possible?

Copier is about 18%...

18%...

And the balance would be the segments of maplitho, creamwove, high bulk papers.

[Operator Instructions] The next question is from the line of [ Yash Malhotra ] from [ JM Mutual Funds ].

Sir, what would be the kind of aspirational number you're looking for, for specialty, let's say, 3 years down the line in terms of...

Well, as I said, there's upgradation happening. We will be producing about 200 tonnes per day, which is 30% of our capacity. But 3 years down the line, maybe we look at another specialty paper machine which is going to be specifically for this product which could be another further 100, 150 tonnes per day. So that's going to add to this 200 tonnes and make it about 300 to 350 tonnes going forward.

Correct. So it would be fair to assume 20% going to 30% as a percent of revenue?

Yes, that is already going to -- that is already in the works. But as you said, it's going to -- if you're asking a 3-year visionary statement, I say the 200 tonnes could be further increased to about 300, 350 tonnes with the new machine, new specialty paper machine.

Correct. And these also operate at 90-plus percent capacity?

Absolutely.

[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to Mr. Pavan Khaitan for closing remarks.

So thank you all for participating in this earnings conference call. I hope we were able to answer your questions satisfactorily. And at the same time, offer insights into our business. If you have any further questions or would like to know more about the company, please reach out to our Investor Relations managers at Valorem Advisors. Thank you, and wishing you all a great day ahead.

Thank you. On behalf of Kuantum Papers Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.