Kuantum Papers Limited (532937) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I'm Samia, moderator for the conference call. Welcome to Kuantum Papers Limited Q2 H1 FY '25 Results Conference Call. [Operator Instructions] Please note this conference is being recorded. I would now like to hand the conference over to Mr. Tanuj. Thank you, and over to you, sir.

Thank you. Good day, ladies and gentlemen. On behalf of Ventura Securities Limited, I welcome you all to Kuantum Paper Limited Q2 and H1 FY '25 Earnings Conference Call. The company is represented by Mr. Pavan Khaitan, Vice Chairman and MD; Mr. Vikram Khaitan, the Chief Financial Officer of the company; along with Ms. Prachi Sharma, VP, Corporate Strategy. I would now like to hand over the call to Mr. Pavan for opening remarks, post which we can start for Q&A session. Thank you, and over to you.

Thank you. Good day, everyone, and welcome to our earnings conference call for the second quarter and first half of the financial year 2025. Let me first start off by thanking our host Ventura Securities for hosting today's earnings call. I will be taking you through the operational highlights, following which Mr. Vikram Khaitan, our CFO, will take you through the financials. The second quarter of the financial year 2025 under review was a challenging period for the paper industry. We faced high levels of imports, which put pressure on domestic demand, leading to a decline in market operating prices. Despite these headwinds, we managed to maintain healthy EBITDA margins of almost 22% for the Q2 and 23.64% for H1 '25. Our operational income saw a year-on-year decline of 6.5% in the quarter. This was mainly due to a drop in the net sales realization by INR 6,000 per ton. Looking ahead, we are hopeful that demand for writing and printing paper will pick up by Q4 and the resultant NSRs will improve, especially with the publishing season and the anticipated release of government tenders. At our manufacturing facility, we have made some key upgrades. We installed a chip washing system at our pulp mill, which is helping improve pulp quality and yield by removing dust and sand from the veneer waste chips that we use as raw material. In August of 2024, we also commissioned a dedicated clarifier for canal water treatment, allowing us to treat water more effectively for our operations. As part of our Project Nirmaan initiative focused on Industry 4.0 integration. We successfully installed online sensors and control logic for the wood bleach section, marking a significant step forward in terms of automation, AI and efficiency. Finally, we are pleased to report that the financial closure for our mill expansion project is completed, and we have placed orders for all major equipment of our paper machines, DDS system for the pulp mill, landfill and other related utilities. We are on track to complete this project by March 2026 and are excited about the improvements that this will bring to our operations. We have relaunched Konquer copier paper with a fresh and vibrant packaging. It's a premium quality A4 paper product designed for higher performance and excellent print clarity and has found a good offtake in the markets. Now I will request Vikram Kumar Khaitan, our CFO, to brief on the financial performance of the company.

Thank you, sir, and good day, everyone. I would like to provide a summary of the financial performance for the second quarter and first half of the financial year 2025. For the quarterly review, operating revenue stood at INR 279 crores, which declined by around 6.5% year-on-year, with EBITDA reported at INR 61 crores and EBITDA margin of around 21.8%. Net profit for the quarter was INR 30 crores, and PAT margins were reported at 10.7%. On half yearly basis, operating revenue was reported at INR 560 crores which declined by 8% on year-on-year basis, and EBITDA was INR 132 crores, with EBITDA margin of 23.64% for the period. Net profit was INR 68 crores, with PAT margins reported at 12.17%. With that, we can now begin the question-and-answer session.

[Operator Instructions] Our first question comes from [ Kunal Thakker ] from Fair Value Capital.

A few questions, sir. First, you've talked about how imports have affected the industry and domestic prices. So if you can compare imports to, say, a 5-year average of the historical average and also how have the imports been in Q3?

Yes. So I think last 5-year average, if you see the imports in the current year are more than that. Imports are showing an increasing trend over the years, and the increasing trend continues for the Q3. I think these are on account of kind of favorable output that we are witnessing in the exporting countries and the way they are able to export and create a market for their product in India. I think it will all turn around and balance out with the demand for this paper increasing. As I said, government tenders are going to be launched in the country, and of course, the printing and publishing segment will restart and start demanding the paper products in future. So I think it's going to balance out in the succeeding quarters, and we are going to see a better operational part for paper industry around the corner.

Are these imports at lower prices compared to domestic prices? Are these happening because exporters are selling at sort of taking a margin hit? Or is it because of an oversupply in the global pulp capacity, which is allowing the global paper mills to produce paper at much lower prices compared to the Indian mills?

Yes. So I think you're right on the fact that these are getting imported at lower pricing, but not because an overcapacity is leading to lower costs. I think we are taking more of a marginal costing into consideration and are operating at much, much lower margins. They are being able to sell their overruns in our country, and not being able to maintain their margins, but maintaining through higher volumes.

So they are trying to play out the economies of scale factors there?

Yes. Yes.

Okay. And are there some considerations of negotiating with the government to have a tariff for duties imposed on these imports by the industry?

Yes. IPMA, which is our organization which we have for the industry, we have initiated an anti-dumping investigation into imports, and we have approached the government to sort of take this initiative and have this verified and look at how we can balance it out. And this notification, sort of we've submitted and this come out on 30th of September 2024, and I think some bit of work will be required before we see some kind of results coming in.

And sir, if you could also explain if there is a price differential in retail prices in the inland areas of India and the coastal areas, which might be more affected by imports?

Yes, that's correct. You rightly said that the coastal areas are impacted more because there, the landed cost of these imports, which are already on the lower side, do not take much of a freight cost or increased cost to get sold in the coastal areas. By the time they turn up and come up in the northern sector, northern part of the country, which, by the way, is the biggest market for paper products, Delhi and surrounding areas support almost 40% of the paper consumption in India. And by the time it comes up here, up north, there's an added freight cost of almost 7% to 8% in the cost of paper. So that comes as a relief to us. We are operating more so in the northern parts of the country, where, again, almost 45% of our production gets sold, and we have a kind of a delta in our favor and working to our advantage in the northern markets.

Another factor mentioned in the press release for the muted performance was -- and this factor has also been mentioned in some articles is the rapid increase in the price of wood raw material. What is the trend there? And what is the outlook there?

So I think wood is not really seeing a declining trend in pricing. In fact, it's either stable or seeing an increasing trend. It's the agro raw material, primarily wheat straw, which is showing a declining trend and helping and aiding in reduced cost of operation. That situation is something which is likely to continue, and it's going to help in maintaining reduced costs for us as well. But the wood raw material, unfortunately, is on a higher stabilized rate, and that is primarily because of the huge advent of the MDF and board industry, which is also procuring huge quantities of wood for their product. So we are in competition to them for securing our wood raw material supplies.

And do you think that situation is likely to persist for 1 or 2 years more?

Yes, because unless an additional supply of wood gets created, for which we are also making quite an effort, we've started our own social forestry program. And we have already reached a level of 20 lakh saplings, and by next year, we will reach 40 lakh saplings, and it's only going to grow. We have targeted reaching 1 crore saplings in the next three years, which is actually going to help improve the wood supply in the area and help keep the pricing in our tempered state.

And Indian paper mills can also work on imported wood chips, right, to produce pulp?

Yes.

So is that still not priced?

Yes. I think you're very right on that. The industry, which is located in the coastal areas, will and is, I believe, clearly looking at importing wood chips. And so that will sort of set off and reduce the impact on wood availability and -- or reduce the impact of higher pricing on wood availability, and that should help the industry per se.

Just a last question, sir. What is the capacity outlook in India for the industry? How much capacity is getting added beside yours?

So as I understand, there is no much addition in the writing and printing paper segment. The segment which is attracting most capacity addition is the craft and packaging segment, where we are not at all a player, and that's seen a lot of investment and a lot of capacity enhancement, largely because of packaging requirements are enhancing, getting enhanced quite a lot, because of e-commerce and all such e-commerce and retailing increasing to higher levels. But writing and printing segment is on a stable ground, and I think we will be able to reap better benefits being where we are. And we are also increasing our capacity by about 50%, which will happen over the next 18 months or so, and we'll be able to sort of operate that and offload that in the market very successfully.

And why don't you think the craft and packaging paper segment is attractive? Many other players are going there.

Well, actually, we focused ourselves on the premium segment. Kraft, for me, for us is a lower value-added segment, and so we know our paper trade of writing and printing paper far better, very well, and we would like to focus our energies over here. And that's where -- and in fact, there are offshoots and tailwinds coming in by way of single-use plastic ban leading to a huge opportunity in specialty paper segment catching on in a big way. And we are -- this investment and addition and modernization to our plants will allow us to look at this food wrapping segment in quite a big way. And currently, our specialty paper, which is about 18% to 20% of our entire production, we are targeting that it will increase to 30% in the coming years.

Our next question comes from Jiten Parmar from Aurum Capital.

My question is on margins for the remainder of FY '25, that is the second half. I think previously, we had thought that we will be able to do around 25%, 26%. But this half year -- can you hear me, sorry?

Sorry, I didn't get you.

Now can you hear me?

Yes, please.

So regarding margins, I think our previous guidance was that we would be able to do around 26%. But with half 1 at around 23%, do you think we can make up for that? Or are we going to lower the guidance for current year? And also, my second follow-up question on that particular margin front is that FY '25, how does it look? I know it's a bit far out, but are we going to go lower? Or are we going to go back to the 28%, 29% margins which we use there?

Jiten-ji, 28%, 29% seems to be not in the reckoning at all. Performance for the H2 is largely going to remain muted because of these kind of headwinds of imports and lower-priced imports coming in. I think what will offset is in future, with demand growing gradually but continuously and surely, that should help in offsetting this larger volume import, and we should be able to maintain our margins for at least FY '24, '25 at about between 22% and 24%. And if I may say that we are amongst the highest, if not the highest EBITDA returning company in the paper industry for H1.

Yes. Yes. Definitely. I think the company has done a good job about that compared to all the other players, which I'm tracking. Now my next question, so I mean the question is, how long do you expect this situation to continue? Is it like a couple of quarters? Or do we look at like kind of a 1-year phenomena for this thing to last where things change? And how dependent are we on the anti-dumping duty coming on? How important it is for the industry?

Well, I think we should see a kind of a reversal and betterment by Q4. Q3 may not happen, but by Q4, the reversing trend for the better should start happening. And I think we should look at a better future '25, '26 onwards. In any case, for us particularly, we are not so reliant and dependent on anti-dumping because we've been able to create a specific network of consumers for ourselves. And in any case, the imports are affecting the coastal areas, and the industry is located and the market is located near the coastal areas more so, and the impact is lesser in the regions where we are located. So in any case, we've got a shield against the imports coming in. And the twin situation and the twin status of both shielding from imports and the kind of network that we have, the impact for us is lesser, and we are being able to maintain a premium on our pricing vis-a-vis our competitors in the industry. And I think that is something which we will clearly retain going down into the future.

Great. So if you can throw some light on what is the demand growth which we expect in the coming years for writing and printing in India, especially also with [indiscernible] coming into picture and so on. So what is the anticipated demand growth? And how much is the capacity addition? And what is the capacity utilization of the industry-wise, if you have those figures?

So writing and printing, the normal grades growing at a consistent CAGR of about 6% to 7%, which based on the current volumes is not a small volume. It's a decently large volume, and it's giving a good opportunity for the industry players to grow. On top of this, if you add the opportunity that industry is sitting on -- from the specialty segment, which is the food wrapping segment, the growth could be almost 20%. And the industry currently is working on how to create the rightful barrier coatings to be applied to paper, enabling it and making it conducive for food wrapping purposes. If you imagine, I'll just give you an example that the biscuit industry today, which uses plastic for its packaging, if we are able to make a dent out there, we will not be able to meet the demand.

Absolutely. Absolutely. So yes, I think work is going on there, but I think a sustainable solution is still [indiscernible] for that. Yes. So you are saying that, I think, holistically, if you look at the kind of demand which our products can have, would it be like more towards 8%, 9% or 10%, if you combine both the opportunities?

Yes, sure. Absolutely. Why not? And I think if the government's focus on promoting education is still on a high, and with increasing outlays in the education sector with more and more schools and educational institutions opening, I think the demand is going to remain. It's going to only increase. Even if it's gradual, it's going to increase.

Our next question comes from Bharat Gupta from Fair Value Capital.

A couple of questions, sir. First, with respect to the increased amount of import which the country is witnessing, so just wanted to understand like primarily, which are the countries to which the import is currently happening across the region? Because you will be doing around the Red Sea issue, which is happening, so do you think there is a good amount of divergence which is happening in the country, particularly from the Southeastern countries?

Yes. You're right on that. Majority quantities are coming in from Southeast Asia, primarily Indonesia and China also through Indonesia.

And sir, like post the U.S. elections as well, like with the expectation of a tariff hike, which I think probably will be a major focus by U.S., so don't you think the increased amount of imports are likely to continue, with China dumping on the people, particularly with respect to the Indian market?

Well, I think that is only time will tell. No doubt, tariff import indicators are already there in the U.S., but U.S. has no way out. It still is a country dependent on imports. And because the costs are so associated, it will end up increasing costs for its population there. The cost of wages there, the cost of workers there, the salary component on U.S. is still much higher than in other parts of the world, and so they don't produce everything and they are dependent on imports. So even if tariffs increase, it's going to translate into higher costs for the citizens of America. So I think the balance, what it is today, is not going to get disturbed to a larger extent. A small impact here or there may occur, but it's not going to sort of offer much.

And sir, even if China continues to dump in the Indian market, so for a company like us, the particular mood comes in with respect to specialty, or like because we are [ basically ] in the demand side, so we are not that much kind of impacted?

Yes. Our focus is going to get sort of reflected and deflected in terms of creating specialty papers, sort of taking on the opportunity which is created by the single-use plastic ban and the opportunity of creating food wrapping paper, and the kind of network that we already have and have created that will continue to support us positively.

Right. Just on the margin trend, sir, like with respect to the specialty, what kind of EBITDA per ton metrics do we generally follow there versus the likes of the writing and printing side?

I reckon that the specialty segment will give a better EBITDA margin of between 5% to 8% as compared to writing and printing paper.

And sir, last question. Like in terms of the order book positioning, so can you quantify how big can the opportunity be with respect to the [ natural vegetation ] policy and also with respect to the plastic replacement? Because I reckon some companies which are like -- they are also coming up with the bioplastic, which can be substitutable for the plastic-oriented kind of a product. So for us, how big can this be an opportunity?

So we are working very, very successfully towards that. We are maintaining our policy and ethos of collecting orders in advance and running our machines on order to produce -- use to order, I mean. So we collect enough orders and keep our machines running. That is a situation which continues for us, and I don't think there is going to be any change in that going down into the future. As far as -- you mentioned bioenzymatic plastics replacing plastics coming in. That's the technology upgrade that I already mentioned that the industry is on the verge of creating the rightful product, creating the rightful barrier properties to creating a product which would be amenable to food wrapping grades and food wrapping paper. And as and how these kind of success is coming, that is going to create the rightful opportunity and rightful volumes for us as an industry.

Right. Sir, with respect to the overall market size, which is there, because 40% of the paper consumption, as you mentioned, happens in the NCR or the northern region. So with respect to whatever the opportunity is there, what kind of a market size are we currently working upon? What can be a suitable amount of target market for these kind of products?

At the moment, it's in a very, very nascent stage. It will all depend on how and when a successful product is created, how does the consumer sort of accept that. As I'd mentioned earlier, only one industry, the biscuit industry in India, is so large, that if they start accepting and our product starts working well with that industry, we do not have enough capacity in India to fulfill their needs.

And sir, last bit, like in terms of moderation, are you seeing some sort of a moderation out there in the imports? Because I think some of the companies have also referred that Red Sea crisis, which were there because of the container availability issues, are getting resolved. So are we seeing less amount of imports, particularly with respect to the months which we have witnessed post-September?

Well, the impact will be there, but not on account of the Red Sea crisis, because that is one situation which may take longer to resolve. The reason why imports could get impacted is because of our submissions and dialogues, which have started with the government, to look at imposition of anti-dumping and the situation of anti-dumping in the country with respect to paper.

Our next question is from Sanjeev Damani from SKD Consulting.

Sir, actually, I joined a bit late around 12:15, so I could understand from the questions that were asked by the participants. Sir, I wanted to know mainly about the consumption of parali. Our company has started using parali in our processes of making paper. So I mean, I want to clarify whether it is used for burning or in the boilers or it is also used as a raw material for making pulp?

Mr. Damani, actually parali is not at all a good fiber for making paper. This was used in the early '80s only, and we stopped using parali for the last -- we've not used for the last 30 years because wheat straw, which is the alternate agro material, is the rightful material for making paper, and we are making full use of that material for making paper. Parali is a good component for burning as fuel in the boiler, but you have to have boilers specifically designed to enable you to use parali. We don't have that at the moment. We are using biomass and a little bit of coal. We are using rice husk, so not parali, which is rice straw, but instead, we are using rice husk as a biomass in our boilers, and that is what is giving us the required efficiencies.

Sir, I'm given to understand that parali is being used as fuel, I mean, as a burning material. So can we make some adjustment? Is it feasible, if we start using this, saving our energy costs?

Mr. Damani, as I said, boilers have to be specifically designed to use parali as fuel. Our boilers cannot be adjusted. No kind of adjustment will allow us to use parali. At an appropriate time, I think in the next round of modernization and expansion when we do and we need to increase our fuel requirements and steam and power requirements, that's the time when we will look at setting up a parali-run boiler.

Actually, I also wanted a confirmation, I'm given to understand that many paper industries are now using parali as fuel. So I mean, do you endorse this kind of boiler? Can they make some savings using this as raw material?

My information is not many industries are using it because they are all traditional industries already having boilers based on biomass, which is rice husks and coal. There is only one paper industry here in the state of Punjab which is using parali-based boilers, and yes, it does make sense. I think it's more so sugar industry and distilleries which are using parali-based boilers for fuel and using parali as fuel.

Got it, sir, I know [ you said ] that you are very strong on the northern market, which is not affecting pricing, because you mentioned in the last conf call about. So sir, I mean, are we going to raise the prices by INR 2, INR 3 in coming months or after November? Because these are good season which are starting.

Yes. We will not shy away from raising our prices, the money, sir, as and how the market allows us and the environment improves. And I assure you, we are going to be first off the charts to increase our pricing.

Sir, last question is regarding one thing which was mentioned in some of your earlier calls that you are doing some research work in Europe, so is there any good development on that side, sir?

Research in Europe, for what purpose?

I mean are we setting up some facility there? Or have we acquired something there in Europe? Am I wrong when I recall this that you are trying to get some technology and make use of it for reduced cost?

No, no. I'm sorry, we are not looking at -- European technology is being adopted to upgrade our machines. Our paper machines are getting upgraded from technology bought out in Europe. But yes, and we have concluded we have sort of processed buying of these technologies to upgrade our machines. That has already happened. That's in progress.

Our next question comes from [ Rohit Kapoor ], Individual Investor.

First of all, I would like to congratulate you on your strong results, especially considering the challenge that paper industry is facing with the issues like dumping. So I have a few questions to better understand the company's performance. I noticed that paper prices were reduced in Q2 compared to Q1, yet your top line remains relatively stable. So could you please clarify whether this is due to an increase in volume? Or did you manage to maintain consistent pricing in Q2?

Yes. So we are right there. Our volume is the same. We are already running to our 100% capacity, which was there in both Q1 and Q2. So the reason for our top line remaining almost constant is because we were able to not allow the decline in market operating prices to affect us. And through a judicious product mix that we've maintained, we were able to maintain the similar realization for ourselves in Q2 compared to Q1.

Okay. And what is the guidance for Q3 in terms of volume? Is there any decline expected? Or the prices will remain stable?

Volume is not going to decline, Rohit. We are going to maintain our 100% capacities, both in production and sales. However, market operating pricing could see a muted [indiscernible] and come down somewhat. Only time will tell by how much and by when. So I think Q3 is going to be muted, but I think we're going to see an upswing and a reversal starting in Q4.

Okay. And could you please share the current total capacity of your existing machines, [ like the ] consolidated one? And I understand there are some modifications going on. And what would be the proposed capacity after that?

So we are currently operating at 450 tons per day, and we are planning to increase it by 50% and go up to 675 tons per day.

[Operator Instructions] Our next question comes from [ Ranjan Jain ] from [ Perisher ] Advisors.

Just a follow-up on the earlier question. You said that volumes are not likely to come down, which is a very encouraging thing, but now we are in the middle of the quarter 3, do you see that the pricing pressure on sequential basis also, you see that this is happening, and that is why you think that the Q3 could be a little muted?

Yes, it's largely mainly due to the pricing pressure that we could see a further reduction in the profitability going forward in Q3. But yes, volumes, we are very, very confident are not going to fall. We have enough strength in our network to be able to sell our entire production. And I think going forward, Q3 could be a little different, but Q4 going forward should see a reversal towards the positive.

And what would be your view on the raw materials prices on a sequential basis. Is it going in line with the market pricing? Or they are still stable and only the pressures there on the prices?

I think by now, pricing are largely bottoming out. There is not much scope for pricing to go further down. Maybe a few percentage points here or there. So I think we've reached the bottoming out in terms of pricing in the market. One can only look for and look forward to a reversal and a price increase in Q4. In terms of raw material also, the wheat straw pricing is performing well for us. It's on the lower side compared to the previous years coming in, and that is what is helping us keep our and maintain our costs in control.

We have a follow-up question from Kunal Thakker from Fair Value Capital.

So when we first talked, you said that the exposures of paper from Indonesia, China, they are taking a hit on the margin. And you also said that the situation will be eased only when demand catches up with supply. So this leads me to believe that there is an excess capacity situation in Indonesia or China. So is that true?

Yes. It's not extra capacity. They have been supplying to the Indian market in the past years. They've only strengthened their positioning here and are being able to upload more paper here into India because I think markets for them evaporated. They were earlier supplying in big volumes to both Europe and U.S.A. Europe as a market probably saw a huge decline because they are shifted to more gadgetory methods and electronic modes for their reading purposes. And I think that is what is the reason why they are deflecting all those volumes into India. Even Africa and Gulf is taking a large volume gain from these countries as exports, so I think this region is taking the fallout of Europe declining its consumption in paper.

And so I assume that there wouldn't also be any capacity additions there in China or Indonesia?

No, I think it's going to be very, very tricky for more additions to come in. I think it's only the packaging segment which could look at an increased capacity, because with e-commerce coming in, in the world and in global operations, demand on packaging paper will certainly increase. And with differential grades coming in and trying to make a space for themselves, that quality of paper could see an increase in capacities.

Is there any threat from South American players like Brazil? I think they have a good plantation industry over there and pulp capacities as well.

So that is -- Brazil is largely known for creating pulp, not paper, and I think an increase in pulping capacities would eventually help us in keeping a control over our costs. Pulp costs could see a reduction, and that is only going to help the industry, not be a detriment.

[Operator Instructions] There are no further questions. Now I hand over the floor to Mr. Pavan Khaitan from the management team for closing comments.

Thank you. 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 so much, sir. Ladies and gentlemen, this concludes your conference call. Thank you for your participation. You may all disconnect your lines now. Thank you. Have a pleasant day.