Kuantum Papers Limited (532937) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the Kuantum Papers Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anand Jairam from SKP Securities Limited. Thank you, and over to you.

Good afternoon, ladies and gentlemen. It's my pleasure to welcome you all on behalf of Kuantum Papers and SKP Securities to this financial results conference call. We have with us Mr. Pavan Khaitan, Vice Chairman and Managing Director; Mr. Jagdeep Hira, Whole-Time Director and CEO, Operations; Mr. Vikram Kumar Khaitan, Chief Financial Officer; and Ms. Prachi Sharma, Chief Strategy Officer. We will have the opening remarks from the management, followed by the Q&A session. Thank you, and over to you, Pavan Ji and Vikram Ji.

Thank you. Good afternoon, everyone. It's a pleasure to welcome you all to our earnings conference call for the first quarter of financial year 2027. I would like to thank all participants for joining us today. The paper industry saw a healthy demand supported by education, publishing, office consumption and broader economic activity in the first quarter of the financial year 2027. This enabled the company to sell good volumes in the market and also improve the net sales realization of our products. However, the West Asia conflict intensified cost pressures, particularly across fuel, chemicals and other raw materials, while also affecting freight and logistics cost. This created a challenging margin environment for paper manufacturers even as demand conditions improved. Going forward, we believe the key factors for the industry will be the trajectory of raw materials and energy costs, paper realizations and the competitive intensity from imports. While some near-term volatility may persist, we expect demand to remain supportive. We also continue to see opportunities in higher-value paper applications, particularly as customers increasingly look for sustainable alternatives to plastic-based products. This makes cost efficiency, product differentiation and a greater focus on value-added products increasingly important for us. Moving to Kuantum's operational performance. The quarter saw several important initiatives across capacity enhancement, product development and sustainability. We successfully commissioned the DDS Double Displacement Digester System for wood pulping, which will help optimize pulp quality and yield while reducing utility chemical and overall pulp costs. We also commissioned an advanced native starch system on Paper Machine 2 and Paper Machine 3 aimed at improving paper properties and reducing uncooked starch losses. During the quarter, we installed a state-of-the-art Folio Ream Wrapping Machine to automate the wrapping and packaging of high folio sheets. The system has integrated labeling and stacking capabilities, which will enhance packaging efficiency, streamline material handling and improve the overall operational process of our finishing house. Further, Paper Machine 3 has been shut for the time being for a major rebuild, which will lead to enhanced production capabilities and improved quality in the final product. On the product development front, we successfully produced oil and grease resistant paper OGR, for food wrapping and application on our PM2, adding another high-value specialty and sustainable product to our portfolio. On the sustainability front, the company achieved its highest ever quarterly production of 17.28 lakh clonal saplings in our in-house clonal propagation center during the quarter. We also added almost 1,300 acres of social farm forestry, taking the total area under plantation to about 19,650 acres. With that, I would now like to invite our CFO, Vikram Khaitan, to share the financial highlights for the period under review.

Thank you, sir, and good afternoon, everyone. Let me now take you through the financial performance for the first quarter of financial year 2027. Despite the macroeconomic challenges, operational income for the quarter stood at INR 304 crores, registering a year-on-year growth of 36%, supported by a 35% year-on-year growth in paper sales volume. The paper sales volume for the quarter stood at 42,922 metric tonnes. During the quarter, we were able to command higher NSR in both the domestic and export markets, supported by improved demand. However, the improvement in blended NSR by approximately INR 3,400 per tonne was more than offset by an increase in cost of around INR 4,200 per tonne on a quarter-to-quarter basis, driven by higher raw material, chemical and fuel prices amid the ongoing West Asia conflict. As a result, EBITDA stood at INR 40 crores, broadly stable year-on-year basis with EBITDA margin at 13.2%. Profit after tax stood at INR 6 crores. With this, we can now begin the question-and-answer session.

[Operator Instructions] We take the first question from the line of Jiten Parmar from Aurum Capital.

My question is on the guidance for current year. Are we maintaining it? Or what is the new guidance? And what about EBITDA margins? What is that we think we can achieve?

So I think the guidance clearly is positive. We are upbeat that with the commissioning of our last machine on our upgradation program, which is our PM3 that is going to be coming on stream within this month in about a week or so. With that, having completed the entire upgradation program, we are going to be syncing all our operations and verticals in close coordination with each other thereby getting the benefits of overall syncing of our operations. And obviously, overall profitability is likely to increase. On our EBITDA margins, I should say that even if things go along the way they are, we should be reaching closer to about at least between 16% to 18% by the year-end.

Okay. And what about that? What will be -- I mean, I think major CapEx is over. So what will be the peak debt? And what will be the debt reduction guidance for the next years?

Peak debt, we are currently looking at about INR 760 crores or INR 770 crores maximum. And we have repayments of about INR 170 crores, INR 175 crores for the next 2 to 3 years. And by the next 3 years, we will be at very, very manageable levels of debt under INR 300 crores. It's going to gradually reduce -- keep reducing over the next 1, 2, 3 years.

And what about the raw material sources, the split between waste and wood, if you can quantify that?

So we have a mix of 2 pulps that we use, which is almost 50-50 in content, 50% is agro pulp, 50% is wood pulp. Sourcing for that is primarily all within the state of Punjab or neighboring states. So raw material sourcing is not an issue for us other than the vagaries of sort of pricing, sometimes it's wayward, but availability is not an issue at all for us.

Perfect. And if you can throw some light on -- my final question, if you may please allow. If you can throw some light on what is the situation with imports right now? Are there -- with yuan appreciating so much, what is the situation of imports? I mean, has the import intensity reduced and price-wise, is there any difference or landed imports are at similar prices or something? If you can throw some more light on this, that will be great.

So what we are observing is a diminishing trend in imports, which is a good positive for the industry. And largely, it's the challenge that the world is witnessing in terms of shipping costs, container availability and logistic costs. So I think primary reason is shipping, and that is leading to this situation of diminishing imports into India. Pricing is again, very stable. They are not reducing from last periods. So that, again, is a positive. And I don't see too much competition staring at us from imports of material in the future.

Perfect. I wish you all the best. You have gone on a bold program of revamping the whole machinery and also increasing the capacity. So I wish you all the best.

We take the next question from the line of Madhav Jhawar from SKP Securities.

So my first question is on the pulp capacity that was about to come. Now you mentioned that wood capacity has come in. But what about the agro capacity, which is about to come?

So our pulping capacities, we are at a level of about 200 tonnes each of agro and wood. And that is consistent with our even paper production capacity. That's all that we will need to run all our 4 machines adequately. They are already in place. Pulping capacity resources are already in place.

Okay. And what about the EC clearance? Did you get the EC clearance for the PM3 machine upgradation?

No, that's already been filed, and we are awaiting that very, very shortly.

Okay. And so the raw material costs, for example, chemical costs and all had gone up quite significantly during the war. So has the chemical cost corrected along with any other major chemical or other raw materials that you use?

So there was an interesting sort of trend here that we saw. The escalation was primarily due to the West Asia conflict. And as you would reckon that we did see instances of the war getting declared as over. And we actually saw those prices coming down for a while before they start shooting up again once the trending of the de-escalation and war was over. So they quite remained in tune with the situation of the war. As it currently stands, they are higher than they were in Q4. And -- but I guess they've kind of stabilized at these levels, and we don't see any further rise in the prices of these chemicals and inputs going forward.

And sir, so a lot of CapEx has been done on upgrading the value-added segment of the paper, right? So will that help in, let's say, realization per tonne and EBITDA per tonne?

Yes, for sure. We already have taken the commercial runs also, like initially, I was told that we have produced OGR also, and we are looking on the specialty grade where we can get plus 20% EBITDA on the particular quality.

And how much realization can we expect incremental realization?

On the top line?

Yes, on the topline.

We target around 5% to 6% initially moving forward for the next years. And that will be a base creation for this year. And then we will be more moving into specialty grades of paper.

So right now, last year it was around -- so Q1 was around INR 70 per kg. So you're saying 5% from INR 70 per kg?

That was on the top line, I said. 5% will come from the specialty grades of paper. Because realizing in this market, what NSR will be sustaining is a big task. But again, the EBITDA level on the particular quality, we are aiming above 20%.

Okay. Got it, sir. And one last question. On the raw material side, do you see any price pressure in the good and wheat straw?

Yes. Wheat straw seems to be coming down. And we see next quarter also. As of now, it's a bit stable or lesser, I would say. But going forward, it will come down. And the infrastructure created where we can store the bulk of the agro raw material.

We take the next question from the line of Rajesh Bhandari from Nakoda Engineers.

Yes. Kuantum as such has a very good name in the market. But my only worry from the point of view of the shareholder is that somehow the profits are getting eaten up in terms of interest. And our debt is very, very high. When can we expect that debt reduces and the profit also goes up and interest comes down? And connected with that, what can we expect our turnover by 2028 and 2030?

Yes, sure. The debt will come down gradually in next 2 to 3 years. As earlier, Pavan sir told that during '26, '27, we have a debt repayment liability of around INR 170 crores. But in next 2 to 3 years, it will gradually come down and the peak debt will be around INR 300 crores to INR 350 crores in next 3 years.

So I would add here that this is a step that we took for charting out a growth prospect for ourselves. If you don't take debt, you don't grow. If you want to grow, you have to take debt and you have to bite that bullet for some time. We have to allow all our investments to bear fruition. And once they start giving the returns, as and how the debt repayment happens, the interest cost will keep coming down and thereby allowing us to retain our profits.

Yes, I agree with you, sir. From INR 1,000 crores, you said it is INR 330 crores. In how many years we can expect?

Every year, you take about INR 175 crores reduction in debt.

Okay. Every year, INR 175 crores?

Yes. There is a possibility of even prepaying if we are able to generate higher-than-expected profits for which the situation is positive, we can prepay and get our debt level reduced earlier than later.

But sir, our yearly turnover is approximately INR 1,200 crores.

Yes.

Out of that, and 18% you are saying EBITDA?

Right.

Will we be able to reduce by INR 175 crores per year?

No, INR 1,200 crores is the current top line. We are expecting this to grow between INR 1,400 crores to INR 1,500 crores. So even if it's 18% to 20% EBITDA, we should be getting an EBITDA of close to INR 300 crores, generating that kind of EBITDA every year and enough to take care of our debt and interest repayment liability.

Okay. INR 1,400 crores to INR 1,500 crores by next year or in this year itself?

Next year, for sure, INR 1,400 crores to INR 1,500 crores. This year will be INR 1,300 crores plus.

We take the next question from the line of Anu Parakh from Anand Rathi Shares and Stock Brokers Limited.

So my first question is, our average paper realization is relatively flat on a Y-o-Y basis in Q1 FY '27 despite an 11% increase in the Chinese BHKP prices and weakening of rupee by another 11% in Q1. So can you please provide some color or reason for the same?

So I think I would beg to differ that our pricing is flat. Our NSR has increased by about INR 3,400 per tonne in Q1 as compared to related period. Does that answer your question?

Sir prices are flat on a Y-o-Y basis.

So if you're comparing it with Q4, is it?

Last year same period.

So last year same -- on Y-o-Y basis, it is around INR 4,000 more. NSR is more INR 4,000 on Y-o-Y basis.

Over last quarter, 5% plus and Y-o-Y basis, it's around 7% plus.

Understood. Sir, what should be the ideal paper realization as per you, assuming the Chinese prices settle at $550 to $600 per tonne over the medium term and rupee remains at the INR 95 level?

So I think every product is not comparable to the kind of imports that the country is doing from China. We have our own product profile and everything cannot be correlated to the Chinese import price per se. And the fact is that we've been able to create a big marketing strength for ourselves locationally, position-wise, our sort of depth of market. So because of that, we are able to realize a better price for ourselves as compared to others in the industry. So currently, we are at about INR 68,000, INR 69,000 per tonne level. Ideally, going forward, sensing of how the market is growing and the kind of positivity that -- positive sentiment that we are getting, our price increase is likely to touch and reach about INR 72,000 to INR 75,000 level in the next 4, 6 months.

Okay. Sir, on the Maplitho side, the segment has been severely impacted due to inverted duty structure post GST rate change last year. Do you see any possibility that the government is likely to do any rectification in the GST rate to provide some form of protection to the domestic mills in the coming months?

No, I'm afraid. The government is quite strong in their conviction by sort of having implemented that. I think the industry has to move forward. The fact is that this implication is only and only if you are producing and selling paper for notebook segment. So we have -- we at Kuantum, we've taken a conscious call to reduce, if not eliminate over a period of time, our foray and marketing of notebook paper. So that impact will be negligible for us. And even for the product that we have sold for notebook in the last 6 months, we have added on the loss of GST that we've had on this such production. And we've been very, very clear on charging our customers for the loss that has been incurred by us. So it's not really -- in real terms, it's not really a complexity here. And the fact is that we -- if we are strong enough to charge our customers the loss that we are incurring, it happens to be a win-win case for both.

Sir, you said that the realization has gone down to INR 68 per kg. So whether the paper prices have corrected in Q2 FY '27 as the realizations were around INR 71 per kg in Q1?

Well, I don't know where are you getting your figures from. I wouldn't say they've gone down to INR 68. They've come up to INR 68 from a level of INR 66 or even INR 64.

Yes. Lastly, on the imports, so many countries like U.S.A., Australia, South Korea have imposed tariffs on paper imports from China and Indonesia. So why have we not yet filed the case with DGFT to initiate any investigation on ADD or CVD on copier and Maplitho paper till date?

We have. We have already done that. We are already in close coordination with the government, where our applications for antidumping duty and anti-subsidy duty has already been filed, and it is being keenly being looked at by the government. We are very hopeful that we will get some positive feedback from them and something favorable should be implemented. So this actually arose...

We take the next question from the line of Apurva Anil Sharma from RAAS Capital.

Am I audible?

Yes, please go ahead.

My first question is in regards to -- can you throw some little light about your volume growth for this quarter?

For this quarter, which is Q2 or Q1, which one are you asking?

Q1, Q1, Q1.

Q1, we've seen a growth because frankly, last year, Q1, we had a shutdown of one of our machines, and that led -- for upgradation purposes, and that led to a kind of notional loss of production. But as against even Q4 of last year, we have increased our production slightly, and that is largely due to efficiency of our machines getting better. And we are -- now with the upgradation of our last fourth machine, which is PM3, which is underway, and that is getting commissioned within this month, we should see a bump up in our production and sales volumes going forward.

Okay. Sir, another question. I just wanted to understand the landscape about the ADD so far that has been implemented by the government, one on decor paper and one recently on the virgin multilayer paperboard. Now both these are basis the GSM in the ADD, right? One is from 40 to 130 and the virgin one is from 140 to 450. Now going forward, if we are working very closely with the government in getting the new set of ADDs, would the new ADDs cover the GSMs that Kuantum is selling right now?

Yes, for sure. So what we filed is in the writing and printing paper segment, and that clearly covers all GSMs that Kuantum is making. It is covering all GSMs between 40 and 140.

Okay. And when and if this thing comes, it stays for the time period of 5 years. Am I right?

That's yes. That's what we are expecting.

All right. And sir, in last quarter, you had indicated about the realization going back to INR 69,000 to INR 71,000 per tonne. Are we still on line aligned with that?

Yes, yes. We are maintaining those realizations.

We take the next question from the line of [ Arjun Vinay Tambe from Oreva Crest ]

[Foreign Language]

So what has happened is that the earlier guidance was basis a certain sales realization that we were expecting; those are not staying at that level. They are running below those expected levels. And even furthermore, EBITDA margins are further getting strained by the increased cost of operation due to the West Asia crisis. Nobody could have imagined like a war starting in a part of the world and impacting sort of pricing here in India. But the fact is it is happening. So nobody could have imagined such a situation. All this is collaterals and which is impacting EBITDA margins at the present. But nonetheless, we are looking at figures as they are, and they are conservative figures. We are still ensuring that we take care of all our repayment liabilities on both interest and term loan, even in this very, very competitive time line.

All right. And one more thing. [Foreign Language] that would be done in around FY '28, right?