Kuantum Papers Limited (532937) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to Kuantum Papers Q2 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Navin Agarwal, Head Institutional Equities from SKP Securities Limited. Thank you, and over to you, sir.

Good afternoon, ladies and gentlemen. It's my pleasure to welcome you on behalf of Quantum 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'll have the opening remarks from the management followed by a Q&A session. Thank you, and over to you, Pavan.

Thank you, Navin. Good afternoon, everyone. It's a pleasure to welcome you all to our earnings conference call for the second quarter and first half of the financial year 2027. I would like to thank all participants for joining us today. This quarter is traditionally the lean season for the paper industry, which was further impacted by a surge in cost of inputs. While domestic wood prices have softened due to improved availability, higher costs of agricultural materials and fuel costs, along with the impact of the West Asia war on chemical costs continue to exert pressure on margins reinforcing the importance of operational efficiency and cost optimization by the industry. Moving to Kuantum's operational highlights, we achieved a key milestone in our ongoing modernization program with the successful commissioning of PM3 on 28th August 2026, completing the rebuild in a record 59 days against the planned shutdown period of 65 days. The upgraded machine incorporates advanced technologies including a film press, high table, table vision, web break monitoring, a state-of-the-art calendaring system and an automatic starch cooking module. These enhancements are aimed at improving production efficiency, strengthening process control and delivering superior paper quality, further reinforcing our manufacturing capabilities and product competitiveness. We are proud to share that with this commissioning all 4 paper machines have now been successfully upgraded and modernized in line with our mill upgradation plan. The plant also made meaningful progress in the fine tuning and optimization of the double displacement digester system for wood pulping. The system has improved wood pulp yield by 1%, while we have seen a reduction in steam consumption from 1.8 metric tons to 0.8 metric tons per tonne of pulp. These improvements have enhanced strong material utilization and reduced energy consumption, strengthening our cost efficiency and overall manufacturing performance. At the plant level, we achieved our highest ever monthly copier paper production of 4,482 metric tons in August of 2026, reflecting our ability to cater to market demand for high-quality paper. During the quarter, we also undertook a major overhaul of our 20-megawatt turbine generator and 1 30-ton per our boiler with the objective of enhancing equipment efficiency, reducing energy consumption and ensuring reliable sustainable plant operations. Additionally, under our total cost management initiative, we implemented a single vendor chemical solution across both agro pulp mill and hardwood pulp mill, delivering cost savings and further strengthening our focus on operational efficiency and cost optimization. On the product development front, our research and development team completed the development protocol for PFAS-free 4rGSM oil and Greece resistant paper for 4 grain purposes. And this paper has been commercially launched in the market in Q3. This strengthens our specialty paper product portfolio and supports our focus on developing value-added products for the evolving customer requirements. Sustainability continues to be integral part of our long-term strategy. During the quarter, we achieved our highest ever clonal saplings production of 17.93 lakhs stapling. We also added about 2,300 acres under our social farm forestry program during this quarter, taking our total plantation coverage to over 22,000 acres. These initiatives reinforce our commitment to developing sustainable sources of raw materials and responsible resource management. Going forward, our focus remains on maximizing the benefits of our upgraded manufacturing infrastructure, driving cost efficiencies and expanding our value-added specialty paper portfolio to support sustainable, profitable growth. With that, I would now like our CFO, Vikram Khaitan, to take you through the financial performance for the period under review. Over to you.

Thank you, sir, and good afternoon, everyone. Let me now take you through the financial performance for the second quarter of financial year 2027. For the second quarter of financial year 2027, operational income is today INR 279 crores, declining 8% quarter-on-quarter. This was primarily due to planned shutdown of 1 of our paper machine lines for upgradation and modernization, which impacted both production and sales volume. EBITA to date 35 crores with EBITDA margins moderating by 84 basis points to 12.4%. This was primarily due to lower net selling realization during the seasonally lean demand period coupled with higher raw material and fuel costs amid the ongoing West ACR conflict. Profit after tax for the quarter stood at INR 2 crores with paid margins at 0.8%. Now coming to the performance for the first half of financial year 2027. Operational income grew by 16% year-on-year to INR 53 crores EBITDAR 75 crores, broadly in line with the previous year. However, higher depreciation and finance costs impacted profitability with profit after tax for the period stood at INR 9 crores with paid margins at 1.5%. Going forward, our focus remains on improving operational efficiencies optimizing costs and strengthening profitability through operational improvements. With this, we can now begin the question-and-answer session. Thank you.

[Operator Instructions] The first question is from the line of Saania Jain from Care PMS.

Just 1 question on the side of cost. Could you clarify the amount by which the cost has increased specifically because of the West Asia war?

Well, they have impacted cost of chemicals, particularly sulfuric acid, which -- for which the resources come from West Asia. And I think the impact is close to about 2-odd percent on sales if you take the entire chemical composition for the operation.

That is on a quarterly basis or a monthly basis?

Quarterly.

Okay. And because of that, the fuel costs would have also increased. So that would have increased our costs of manufacturing of bringing in the raw materials. So does this 2% incorporate that as well?

Yes. So the fuel cost primarily has been on the increasing trend and the impact is going to be around 3%, 3.5%.

Okay. And what would have been the release that we would have got from the wood cost decreasing?

So overall, if we see on the contribution level and on the financial terms. Overall, both agro and growth, we have been able to reduce overall cost and consumption by around 15% to 17%.

[indiscernible]

[indiscernible]

Okay. Could you quantify that number?

Absolute number? I'm sorry, we won't be able to exhibit right now. This is more of a trend line that we are suggesting at the moment.

[indiscernible] to the margin that you're looking like? Because as you mentioned, quarter 2 was a lean quarter. So the core will be a better quarter. Do we think we will be able to pass on any further price increases?

Yes, Q3 certainly is looking a bit. There are tailwinds suggesting that there would be a price improvement. However, looking to the Q2 performance even despite passing through a lean period, we were still able to sell whatever we produce. We were still operating to 100% capacity utilization, because of the way we have been able to make our market presence felt and we are able to collect orders in advance for our production lines.

So did we take any price hike in quarter 2?

Quarter 2, no, only towards the end, which didn't really have any impact on the Q2 financials. Q3 will certainly be better in terms of price realizations for us.

Okay. Do we have any numbers or percentage of how fast you plan to increase or pass on the price hike?

We are expecting prices to increase in the range of 7% to 11%.

Next question is from the line of Purva Saveri from Ionic Wealth.

Just wanted to better sense on the industry side. How the industry is looking at post for the paper are for the imported pulp as well. What is the price of the right now, which we are also importing. And can you also give a broad sense of how do you see for the next 1 to at least next or next 2 years down the line, how do you see the wood prices trending going forward? That would be from my [indiscernible].

Yes. So over 2 years, we are looking at incremental increase on -- globally, I'm talking about globally, the pricing going up, which are at present in the range of 3% to 5%. And we could see the trend is moving up as a global scenario is coming down. And similarly, as Pavan said, we are looking at increased realizations as well in the domestic market. If we talk of imports, we are -- as , we are looking at some support from the government bodies also putting the dumping duties across all grades, which will be benefited by the industry.

Also, I think imports are pretty much stable at the moment. We haven't seen an increase in imports happening, which they normally occurred in the last 2 years, they have subsided to quite an extent because, again, because of the gulf for situation and cost of freight and sort of cost of freight remaining at a high level. So that clearly has impacted and dented the volume of imports coming in and which I feel is stable and not impacting the industry unfavorably.

And sir, regarding the good prices, which is price, I think it's around INR 12,000 a tonne. Sir, how do you think -- how do you see that going forward, sir, for the next 2 years?

We clearly see an increase in availability of wood material, which should help him positively assessing and impacting the pricing of that product for us. Wood as a raw material should be more available in future and the pricing at least being stable or lowering but certainly not increasing. And I think supporting that would be our own sort of clonal sapling increment that we have been able to achieve, and we are going to sort of target achieving about INR 1 crores sapling annually in the next 2, 3 years.

Next question is from the line of Utkarsh Nopany from Anand Rathi.

Sir, my question is that like we are seeing that the paper imports in India has gone down to a multi-month low level because of the increase in the ocean freight rate. And you have mentioned that we have taken certain price hike of 3% to 5%, and we expect more price hike to happen in near pressure. So whether those price hikes are temporary in nature, do you think so that we can see a rollback of such price on the ocean freight rate normalizes? Or do you think so these price hikes are going to sustain at least for the next 2, 3 quarter period?

So no, I feel that these price hikes are going to be sustained at least for the next 2 quarters, primarily because the second half of the financial year normally is considered better for the industry, where all the fresh demand from all kinds of sectors for paper consumption sectors come in. So the price hike is going to be more sustained over the next 2 quarters. And as you said that the imports have come down, but so have exports have also seen a downturn from India to various parts of the world. Again, the impact is because of ocean freights going high. So whatever was getting exported earlier is finding its way into the domestic market from the Indian players. There is a kind of a stability on the demand and supply situation as far as paper industry is concerned.

And sir, like, do you believe that the recent price increase that we have taken is sufficient to cover the cost inflation pressure, which we are seeing in [indiscernible] or in cold bot like in the H2 FY '27 versus what we have seen in the H1 FY '27?

Well, this is a constant, I would say, competitive nature of the industry. We can't really foresee whether what is enough, how much further cost impacts can come in because the both move very, very differently. It's certainly not a cost push industry where pricing can be increased if your costs increase. So those are happening at their own level and pricing increase is happening at another at the market operational forces level. The bright side is that prices have increased. And as I'm saying that they are likely to remain on an upward end for the next 2 quarters at least.

If you can guide, what would be the share of the start cost as a proportion of our revenue? And what would be our margin guidance for H2 FY '27?

The starch cost would be no more than about 2%, 2.5% of the entire paper cost. So there are many other factors, starches only 1 component, which is the cost which is rising. There is a lot of other chemicals like sulfuric acid I mentioned in my opening statement, raw material costs like we store, they are increasing. Fuel cost is increasing because coal supply is in a shortage kind of status, most of the coal in India is getting supplied to power plants. So leaving the industry to be getting their supplies only from the open market, which has increased fuel cost for us. So there is a lot of differential factors at play. Costs have risen on differential terms. We are making everything -- making sense out of everything by getting the best output doing our cost optimization and preparing our products accordingly and getting the best realization possible from the market for our products.

What would your margin guidance for Q2 FY '27, so if you can guide?

I think it should be in the range of about 14-odd percent.

Next question is from the line of Madhav Jhawar from SKP Securities.

Congrats on the good set of number. So my first question is on the CapEx side, post CapEx, what will the official capacity in Q3 and Q4 and what is the production run rate going forward in this year and FY '28?

So we should be able to produce marketable quantities -- finished quantities of close to 600 tonnes per day. And I mean going forward, the optimization, though we have the capacity to produce 675 tons as well, that's what the project implementation was for. But that's on an anchor GSM of 64%. Market doesn't -- the market trending suggests it's moving lower and lower, and a lot of our orders are coming in at 52, 54 and 58. GSM. So even though we are being able to charge a higher price for these lower GSMs, the product mix that we have defined for ourselves, restricts are production, which is optimized at the level of about 600 tonnes per day.

Got it sir. And so there was this IP. I'm getting the 75 crores INR 50 crore -- INR 79 crores CapEx, which we had earlier, which is now on [indiscernible]. Now I see your other CWIP of around INR 139 crores. So what is that about?

So these are only efficiency initiatives, which were defined along the way. I mean in such a large product project implementation, we found that there were certain other auxiliary items that needed to be installed to get the rightful efficiencies, and that is what accounted for this amount that you are seeing. And also Currently, there are 2 environment requirement projects that are in the state of getting implemented, which is the lime kiln and the CCG operation for handling all the gases that emanate from our operation. So those are what is under implementation.

Okay. Got it. Got it. So what will be the full year CapEx in FY '27 and what kind of repetition are we going to look at by the end of this FY '27, '28?

So CapEx has completely been covered. There are no further amounts that we are going to foresee for CapEx in the future, in the near future. I mean we've completely and exercise our options. And I'm saying proud to say that we have successfully completed the implementation. As far as depreciation is concerned, Vikram, do you have [indiscernible]

Yes, around it will be somewhere around INR 80 crores per year.

And can you please throw some light on the weak car prices. So earlier, there was some start the Sanjeet production has been the highest. So what is your take?

Yes. With pricing remained dicey as of now, primarily because of unpredicted rains in the area and that too happened during the harvesting time of pad. So there is a bit of a till the first use is over and we see it coming normalized post [indiscernible].

Okay. Okay. Yes. So you think [indiscernible].

So I think currently, there's a bit of an aberration. But post Diwali, we see the wheat straw pricing coming down. Right now, the entire labor force is involved in getting the rice crop harvested. So there is loading and unloading sort of availability of labor force for loading and unloading of vehicles is not there. So temporarily, there is a kind of a cash situation, which is driving up pricing. So this higher pricing cannot really be accounted for as a normal situation, which is why because it's temporary. And post Diwali, we'll see with straw pricing normalizing.

And sir, last, I had 1 question. So as you earlier mentioned that coal availability is a bit of a challenge. So are we getting our tools efficiently in the open market? Or is there prices over there as well? And what percentage of our power empower mix is coming from old?

Normally, we are at 15% coal and agro. Availability is not a concern. But yes, the allocated coal coming from the sanctioned. There is a concern because that has been directed to power sector primarily. Availability in the open market is there. Only price competitiveness is a bit higher.

Next question is from the line of Niteen S. Dharmawa from Aurum Edge.

Am I audible?

Thank you. Yes.

Yes. So first of all, communications for completing the expansion in record time, I just wanted to understand, you mentioned that last time that our revenue guidance remains INR 1,300 crores for the financial year '27, and now with this -- some production stoppages due to expansion. Where are we now? And are we on target for this and also wanted to understand the specialty mix now versus 25%, 30% target that we had given earlier.

So yes, we are heading towards achieving our annual targeted sales value of INR 1,300 crores plus we are going to be achieving that. As far as specialty paper portfolio is concerned, we are currently at a level of about 17%, 18%. And going forward, we will be sort of touching our target of 25% to 30% in the next years or years time, 12 to 15 months' time. Because a lot of R&D is required to establish the rightful production and product quality specs on our machines. So we don't want to do it in a hard manner. We will be taking our time to come out with the rightful product, rightful cost and create the rifle market for it.

Okay. And what of the September, October volumes and PM3 utilization? And has the environmental clearance EC come through?

So you see we have applied. It's in the advanced stages. We are likely to get the relevant approvals soon enough, sooner than later. As far as PM3 in operation in October, it's pretty stable. I mean, we come to establish it at an optimized level very, very soon, which is complement to the entire team. And we are on our way to executing and implementing that completely.

Okay. And so what is the annualized savings from this PCM contract? We said that for the chemical, we have 1 big contract now rather than a smaller one. And how long is the vendor lock in and will it not expose us to a signal vendor supplier risk can cause pricing leverage later?

Not so in that case because both the lines have different vendors. But we already have all the vendors portfolio and the chemical supplies coming in. Earlier, we have tested them, but the best 1 wins. And assumed cost saving would be around 1.5% to 2% on the overall chemical consumptions.

Okay. And can you also quantify the quarter 2 impact of the PM3 shutdown that is from 29 January to 25 October on production volume, revenue how much of the margin gap to the 16% to 18% guidance shutdown related and how much is cost?

So around the production loss was around 6,300 tonnes approximately that's primarily coming from P&C. And at the EBITDA level per tonne, approximately 43 would be cost on the top line.

Got it. And what is the remaining INR 139 crores of capital work in progress, CWIP and why did payables jump?

So 139 is primarily the balance part of the projects that have been outlined earlier primarily towards environmental projects like Limekiln and CCG. So they are getting implemented in Q3 and that's what the outlays for. And I mean they are happening as per schedule, and they will be spent out of the CWIP amounts.

Got it. Got it. Also wanted to understand you mentioned that now the demand scenario looks quite robust. So how confident are we for the current quarter and the next year. Current quarter will be too early because we've already gone through 2 months of the quarter, so it won't be justified. But I wanted to understand for the subsequent year, the next year, that is financial year '28, do you see this is going to spill over next year as well? Considering the global challenges that we have?

So my personal opinion is that we should see a far better performance in the next year financial year '27, '28 I think the uncertainties cannot be there for so long. They are going to get balanced out. Even if the war situation remains or any uncertain disturbance comes in. By now, the economies and the markets have, by and large, absorbed the impacts of such uncertainties. And going forward, the way we are positioned, we are quite confident that with our enhanced capacities and efficiencies of higher productions, we should be able to compact even further and come out with a more robust performance going forward.

Next question is from the line of Samarth Singh from TPF Capital.

Just you mentioned ADD and the anti-subsidy applications covering the 41, 40G writing and bidding people, so where do they stand procedurally? And what is the time line for preliminary refining?

So the good part is that the relevant government departments have taken our representation on board. They have listed out for determination and sent it to various other departments for the comments basis, which they will be able to define the way going forward on how and when to implement the antisubsidy duty or the antidumping duty structure. And normally, once this happens, it takes between 3 to 6 months for successful completion.

Got you. Okay. And the second part, you mentioned on reduced imports due to higher freight rates. So is my understanding correct that the higher fee freight rates due to the war have been a net positive for the industry and for our business.