Mold-Tek Packaging Limited (533080) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Mold-Tek Packaging Limited Q2 FY '21 Earnings Conference Call, hosted by Prabhudas Lilladher Pvt. Ltd. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Charmi Mehta from Prabhudas Lilladher Pvt. Ltd. Thank you, and over to you, ma'am.

Good evening, everyone. We have with us today, Mr. Lakshmana Rao, CMD, along with his finance team. And without further ado, I would like to hand over the call to Mr. Lakshmana Rao. Thank you, and over to you, sir.

Good afternoon, and welcome to the quarterly results conference call. Thank you all, and wish you all a very Happy Dhanteras, and I hope you are...

Sir, this is the operator. The audio is coming very low sir, I would request you if you can just increase the volume of your phone.

Okay. So can you hear me now better?

Yes, sir. That is better. Thank you.

Yes, thanks. So Happy Dhanteras to all of you, and hope this Diwali takes away the corona and give all of us relief from this pandemic. So I'm glad to inform the company's performance in the Q2 is very much back on track. Company is, again, on a growth track. We have achieved 13% increase in the volumes and compared to Q2 of last year. And of course, the better on Q1, it is almost 7x better in terms of profitability and 90% better in terms of sales tonnage volume-wise. So I'm glad to say that people started realizing the importance of packaging in pandemic times, especially of hygienic packaging, where IML plays a major role, the robotic IML operation. And that is where we see a good traction in food and FMCG or even in paint and lubes. Now the drive to go for IML is increasing because it's less dependence on labor and more hygienic and faster turnaround. So these are the things we have been trying to preach the industry. Definitely, some adverse times go, it's not good to have -- has definitely given us an edge in pushing the new technology into the minds of the industry. So that is one of the reasons why I see the numbers are improving in spite of complete write-off of ice cream container sales in the last 6 months, due to COVID, there was a severe drop in ice cream consumption. And that industry has very much battered, affecting our sales of ice cream containers to the -- in the summer. But off late in October number, we noticed some festival demand coming back in those packs also to some extent. But I hope once the pandemic is under control, it will be back on track from next summer, hopefully. So as you all know already you must have read the press release, the PAT is up by 28% and per kg contribution of EBITDA shot up to INR 37.2 per kg from INR 33.5 last financial year. So it's almost 9% to 10% improvement in the EBITDA margin per kg. The raw material costs have come down considerably from INR 90 per kg last year Q2, to INR 80 per kg on average. But as you all know, we pass on majority of this advantage back to clients. So that is not the reason for improved EBITDA. Improved EBITDA is mainly due to cost controls on both maintenance costs, travel costs and staff costs and improved sale of food and FMCG products with higher value addition. And also in general, IML also, though not much growth overall, there is a positive growth in IML utilization. And that has helped in improving the company's margins. And company is just starting the pumps project, which we announced last quarter. The project is just going into commercial production in this month, towards the end of this month. And from December, we'll be starting supplies. We already have Wipro, Godrej, ITC and Apollo Hospitals -- Apollo chain of medical stores. They are with us for the sanitizer and hand wash pumps. So that project was completed in a record time of 4 to 5 months in this pandemic situation. And we work to start in November, but we spilled a bit into December due to heavy rains and Hyderabad has disrupted final stage of construction and erection of missions. But by end of this month, commercial production would start in December onwards until the [ invoicing ]. So that is a positive news on the development side. And some more developments, we have mentioned in the press report. If you notice, there is one new development other than sweet boxes and pumps, the QR code printing IML -- printed IML, the IML itself is something very novel in the country, and it's getting fast accepted, especially in food and FMCG and also in lubes and paint to some extent. Now this QR code printed IML enable complete traceability of each pack wise traceability, which can either start [ iteration ] by unscrupulous elements, which are very much present in India. In the fields, any field you can pivot, mainly lubricants and paints, where it is very prevalent. So there is always a demand from the industry to create some traceability so this QR-printed IML will enable that traceability of last container and where it is sold, how it is sold, what -- and if there is any scheme or any advantages that are passed on to the end user, that also will be printed in the QR code, both on the front and back side of the label. And the label will have a billable area, which gets peeled to reveal the gifter scheme or whatever is there, thereby, very clearly showing a damage to the paints, I mean, IML, that way it can again further save the counterfeiting feature -- I mean, counterfeiting elements. So these are the -- this new development, though it seems minor, it has a lot of implications for MNCs and companies like Asian Paints or Castrol, Mobil, Shell and all these MNCs are looking forward to this kind of solution. And our technical team has developed this and already getting this installed by December. And hopefully, small trials will start from Jan, Feb, which can lead -- again, keep Mold-Tek again back on the -- of course, it's already in the leadership position in digital packaging. And further strengthen our operation and technologically advancing ourselves into they call it packaging 4.0 version. So this is one exciting thing I want to share today. And hopefully, it may take a couple of quarters to implement in the country and get to -- get some of the customers hooked to it. But the initial response with some of the MNCs is very positive. They all want to experiment it and see how this QR code control help them traceability of the last pack up to the end user level and also how it helps in reining in counterfeit. So these are the new developments. And companies -- in spite of the COVID situation, where the whole team here is charged with these new developments and trying to build up a good future for all of us. And as you know, the rates issue also was well subscribed. I can't give more details because the allotment details are have to be filed to SEBI, but it is successfully completed. So now I request organizers to take back, and we'll go through more details for your question and answers.

[Operator Instructions] The first question is from the line of Archana Gude from IDBI Capital.

Congrats on robust set of numbers. I have 2 questions. So firstly, on the industry part, if you can share your outlook, how the paints, lubes and there's some key segments of food and FMCG are doing, and how we should look at the growth, let's say, 3 years down the line?

Yes. The outlook for the paint, lube and food and FMCG is improving very comfortably compared to Q1. Of course, Q1 was completely battered. Everyone was bettered. Starting from July itself, we've seen the rate of improvement. And we thought it may -- it could be a pent-up demand. But as we completed September, even October was very robust. So looking forward to a good recovery in these main sectors, paint, lubes and food and FMCG. As I said, the only industry which got more affected in the food segment is ice cream. Paint and lubes certainly are returning back almost to normalcy.

Sure, sir. Sir, actually, my question was slightly on the longer-term horizon, let's say 3 years down the line, what kind of industry size we should look at in this segment?

Yes. Longer term, I'm sure everybody is positive about India and the growth story and what are all the new reforms the government is trying to bring in. And hopefully, dependence on China might come down and more, and more indignation and maybe export opportunities come our way. So I'm optimistic about the overall outlook for the future. And as you know, Asian Paints is also expanding its set up new plants and budget is setting up new plant next year. Nerolac has set up recently at Amritsar. So the paint industry is certainly looking forward to a 10%-plus of CAGR going forward. But for this dynamic this year itself would have been a fantastic year for this industry. But anyway, we lost almost 7, 8 months, and I hope things will be normal going forward. Coming to lube industry, it's the kind of a mature industry where you can't expect major increment in demand. But there also, we are trying to improve our market share by going with new concepts like this QR code printed IML, whereby -- because lube industry is the one industry, which is very much affected by adulteration and counterfeit elements. So they are very keen to have a system of protecting and facing their containers and safeguard themselves from the adulteration or counterfeit. So going forward, paint and lube, I'm sure it will be -- they will do well. And in our food and FMCG sector, as you all know, more and more packaging food is getting accepted in the household and with the pandemic situation, restaurants closed, and many people are adopting to package foods, either ready-to-use or even ordered food. So we see a lot of traction created from the restaurants branded products. Even small and medium-sized companies are very eager to go for hygienic food packaging with IML technology. So going forward, that industry also would do well and fortunately, all the 3 areas of our line, we are in a position to grow along with them or maybe better than our competitors.

Sure, sir, so that helps. So my second question is, as you rightly said that the paint companies, they are doing really well, and even the outlook looks very optimistic. So say that people plans for Asian Paints with Mysore and Vizag, do you feel that we'll have to expand the capacity sooner than later?

Yes. Just to tell you, the numbers at Mysore and Vizag are very much contributed to our growth in this year. The volumes at Mysore have gone up by almost 40% Q-on-Q and -- or half year to half year, in spite of COVID. And at Vizag, the numbers have gone up by 76%, H1 on H1. That means if you look at only Q2, the growth is phenomenal, 50% growth in Q2 on Q2 and 59% growth in Vizag. So overall growth numbers are good because last year was the beginning year. But in spite of that, even in the rupee terms, we have done a turnover of almost INR 92 crores in the H1, as against INR 35 crores last year from these 2 units. So there is a considerable valuation from these 2 plants in the H1.

The next question is from the line of Ankit Merchant from Reliance Securities.

Congratulations on delivering really good set of numbers. So my questions are related to -- some are little bookkeeping questions. One is the, if you could highlight the right issue and the share warrants, how is that money going to be utilized? And what is the quantum of amount which we are gathering or raising? And second question is related to the paint segment? And if you could also share the volume tonnage across all the categories.

Yes. First, I'll answer about the rights issue. Rights issue, primary objective is to raise funds for the working capital because the working capital numbers have shot up over the last couple of years to INR 83 crores. And also some of the term loans, which have also come to around INR 29 crores. As you all aware, continuously, the company is investing on capital expansion, adding tonnage -- I mean adding machineries and equipment at different locations, spending INR 30 crores, INR 40 crores every year on the CapEx. So while doing so, the working capital is also ballooning. So to control the working capital and reduce the term loan dependency, we have made this rights issue around I think to some INR 70-plus crores. And the issue is fully subscribed and details of subscription will be available only after a day or 2. That is a basic reason for the rights issue. And what's your second part of question, sorry, I missed?

Share warrants, which we are issuing. And what is the quantum of amount in that? And what are we going to utilize that for?

Yes. Yes. The shares and warrants together are INR 72-plus crores, and it is an instrument which has one share and fixed warrants attached rates. And the shares are payable, 25% was paid in the issue that closed yesterday -- day before yesterday. And the balance, 75% of the share is payable within 12 months, and the warrant portion is to payable within 18 months.

Okay. And my second part of the question was related to the tonnage-wise breakup of each and every segment, like paints, lubricants and even FMCG?

Yes. You might have noticed that from your -- the previous question, the paint segment due to the new clients at Mysore and Vizag has shot up reasonably. In spite of that, the percentages stayed stable rather marginally improved in food and FMCG. So for Q2, the tonnage is 4,000 tonnes in paint, 1,640 tonnes in lubes and about 1,350 tonnes in food and FMCG. Compared to the previous Q2, 3,680, 1,420 and 1,100. So paints, food and FMCG grew by around 21% as against last year volumes, last year Q2. Paint grew by 9.5% and lube also by 15%.

Sure. And on the revenue front, if you could share some details?

On the revenue front, the growth in paint is just nominal because though Asian Paints has grown, the rest of the companies in the Q2 have not really grown. So it is almost stagnant. And in the loops grew 15%. It's basically a lot of pent-up demand, which has been shot up in the Q2 when the country started opening up and vehicular movement has started. And the food and FMCG grew by around 8.1% compared to Q2 in revenue terms. And revenue terms are not really things which should follow for Mold-Tek because raw material price adversely affects the pricing. So I always recommend you follow the tonnage numbers. That will give you a correct picture.

Sure. That was helpful. And just one last question related to the EBITDA margins and the EBITDA per tonne basis. So you think this EBITDA per tonne, which we have achieved here is going to be quite sustainable from year on? Because 21.6% as EBITDA margin and 37% as EBITDA per kg. Would be -- wouldn't that be sustainable over the longer term? Is that the right way to take it?

It will be sustainable, I guess, because the capacity utilization is improving. And the product mix is improving towards high end, higher valuation items, like food packaging and IML sales for paint and lubricants. So I feel the first quarter is gone anyway. But from second quarter onwards, we wish to continue to maintain this similar EBITDA margins of around 37% per kg.

Sure. And just a follow-up, can you also give us a breakup of IML and non IML on tonnage part?

Yes. And IML it's more or less like last year. Here, it was 61% last year, has become 62.5% -- 62.4%. So about a 2% improvement over the last year's IML. Non IML has come down in the same way, the other way.

The next question is from the line of Karan Bhatelia from Asian Market Securities?

Sir, can you throw some light on our pumps business and what kind of investment we've done. And so is it similar to the IML realization than gross margin?

Yes. Once the overall investment is about INR 13 crores to INR 14 crores, if you include the minute buildings and other things, we can say around INR 14 crores to INR 15 crores is the overall investment. All the machines arrived only the assembly machines. Some of them are arriving end of this month. And the main machines of assembly will be coming by middle of December. So the capacity at its peak can be 8 million to 9 million pieces per month, which will translate into around INR 60 crores per annum sales at a full capacity utilization. That is the outcome. And the -- in fact, the per kg if you look at it, our EBITDA margins will be definitely better than even food and FMCG given there are more components and less weight, but the functionality of the pump is what makes it reasonably expensive, not very high-value add, but in the region of around INR 6 to INR 8 or INR 9, depending upon the quality of the pump. So -- but the raw material content is hardly -- hello?

Yes. Yes.

Yes. The valuation addition -- the raw material component of a pump, including its consumables would be less than 40% to 50%. So that makes it a little highly -- higher value-added product than our current products.

Correct. Correct. And also, sir, if you can give me volume numbers for Q2 for the 2 new Asian Paints plant, Mysore and Vizag put together in metric tonnes compared to H1?

Yes. For H1 -- for Q2 in Mysore, we did 763 tonnes. This is weight tonnage, and at Vizag we did 527 tonnes compared to 512 and 331. That means 843 has become 1,290.

Right. Right. Right. And rupees and crores in total?

Our rupees in crores, I think it's gone up from INR 25 crores to INR 35 crores. Or rather -- yes, INR 35 crores -- INR 25 crores turnover has become...

Correct. Correct. And last question, if I may ask, sir, what's the CapEx guidance for maybe this year and maybe for FY '22, if you can give some light?

See, CapEx for different products and sustaining the brownfield growth itself would be in the region of at INR 35 crores to INR 40 crores, including the pumps project for this current year, 2021. Probably, yes, we go forward towards the end of the year, there may be some more additions to balance the demand versus capacity. So as of today, it is around INR 38 crores, including the previous year's orders and payments which were made in the current year. But overall, it would be in the region of INR 38 crores to INR 40 crores for the current year. Going forward, '21, '22, the North plant, which we have deferred and may have to be set up. But we don't want to think about it until COVID is completely under control. We can't risk our senior people to COVID in the field. So this year, it will be more or less on the brownfield expansions. And of course, the pump is the new project which we are set up in Hyderabad itself.

[Operator Instructions] The next question is from the line of [ Shanti Patel ] from [ SB Investment ].

My question is, what will be the approximate revenue for the current year ended March 31, 2021? And what will be the probable PAT percentage hereon? That is first question.

Okay. Let me answer that. As you all know, we are working on very unreliable times and situations are simply unpredictable. But of course, things are improving. If the same situation improves, we wish to continue to grow and cover the deficit of the Q1, which we suffered a 40%, 42% drop in revenues. So if these 3 quarters could fill the deficit and we go back to last year numbers, I feel it's a good achievement, and we are on that track, I hope. So that is -- having said that, PAT also, internally, our internal goal is to reach the last year PAT in spite of a severe drop in Q1. But if situation improves and the economy takes off, things can be better. On the contrary, if situation worsens, it could also be difficult to reach this. So let's hope everything is fine, and then we can certainly grow if there is a positiveness in the economy and general pandemic control.

Okay. What about our market share in respect of all the segments?

See, market share in paint will be, in my opinion, organized sector, we must be around 20% to 25% because they all have multiple suppliers. In the case of IML, we are almost single source. There are a couple of players giving 5%, 10% of the needs. But the paint is yet to adopt IML in a big way. So in that segment, our market share, I guess, would be in the region of 20%, 25%. But if you come to lubricants, we are much better, we must be having 45% to 50% market share. Because all the top players believe in Mold-Tek and the containers are much superior in terms of leak resistance and transport worthiness because lubricant is much more difficult to handle than a thick paint. So companies which look for better performance and IML, they come to us. So that's why in lubricants, we have a -- I'm leaving PSUs aside because they go by tendering system. In the private lube industry, our market share must be more than 45% to 50%. Food and FMCG, there are a couple of players, one in North and a couple of them in West, but they have a limited range of products. And definitely, they don't have the edible oil packs, what we have are square containers. So our food and FMCG, as a whole, our packaging contribution is minuscule, very small. But among the recent packaging which has been used, I think we should be more than 50% again in that segment. But that has yet to grow. In my opinion, it's hardly entrenched 5% to 6% of the demand. It has more potential to replace a lot of other inferior products. But it's a time-ticking process.

Sir, this new feature, which we are going to introduce will be effective from each month and what will be the impact on the revenue of the next year, that is '21, '22?

Did that even -- then we introduce something new, it's difficult to get adopted as quickly as we wish. The QR code enable people to trace the containers ensure...

Yes. Perfect. Perfectly right because competitor, they don't have this particular feature definitely, the branders will play -- I mean, the purchaser will prefer our product and pay more because they don't mind paying more, if the set is introduced. And consequently, our revenue must go up. So I...

Yes. I can't predict the future because it's yet to be introduced. Probably, I'll be in a better position to talk to you when we speak over the Q3 or Q4 results time because it is yet to be introduced. It's completed line trials and as a concept, we have already formed it is feasible and shown some videos to a couple of clients who are reasonably excited, but how will they adopt it how will they pay for the initial cost that is still at a very nascent stage. So let me not add any speculation on that. But we are excited that this can also be a kind of a growth trajectory for the company in the coming quarters, maybe not [ an immediate one ].

I hope our competitor don't have this particular feature, correct?

Yes. None of them have even IML as a very established way. They are learning the IML technology, whereas we are going forward into, it was printed IML with QR code, which might take them a few more years to catch up. So that way, we are creating a step ahead for the company. I hope it will be recognized and add value to our products in the coming quarters. But I can't speculate on the revenues and numbers as of now.

But at least this new project, which you have going to be complicated within a short period involving some INR 15 crores investment, there you can...

No. No. No. You got mixed up. This has no INR 15 crores investment...

No not this one. I'm talking about pump only, where you can estimate approximate revenue in the current year? Or no?

In the current year, I don't see major numbers because only 3 months are left in the current year, December to March, 4 months. Probably, we may sell about 20 million or 15 million to 20 million pumps at, say, average price of INR 7, INR 8 so probably around INR 10 crores turnover might be added INR 8 crores to INR 10 crores in this financial year. But next year, it can be reasonably well because all the top brands have shown interest in our pumps and some of them even been given letters of intent to buy. So probably next year, it will be substantial. The peak sale value is in the region of INR 55 crores to INR 60 crores, so let's assume we get about 50% to 60% capacity utilization next year, next full year.

Mr. Patel, may we request that you return to the question queue for follow-up questions. [Operator Instructions] The next question is from the line of Naushad Chaudhary from Systematix.

Two quick question I have...

Can you be a little louder Mr. Chaudhary?

Yes. First one is on F&F side, sir, the realization I see is down, if I see the volume there is around 20%, 20% of volume growth, but in value terms, it's only 8% growth. So what exactly is the reason for this realization per kg going down in F&F?

Yes. The one major reason is the raw material cost is down by INR 10, that is around 12%. That itself is passed on to the clients. So on revenue terms, it looks like it's only 8.13%. And as I told you, the growth has come from edible oil sales, the bigger size compared to the ice creams, which are smaller size and higher value adding. So that also could have indirectly impacted the percentage in terms of rupees. But the main reason is the raw material drop by around 12%.

Okay. And secondly, as we have these right issues now, do you see the interest cost run rate to go down going forward?

Yes. Certainly, that is one of the ideas of going for these rights to reduce our working capital and term loans, so -- which the interest rates costs have been consistently going up in the last couple of years will certainly be controlled or reduced.

So currently, we spend around INR 2.4 crores -- INR 2.4 crores, INR 2.3 crores of on the interest cost. So if you can give any number what this could be going forward?

See, you need to understand that the instrument what we issued is a partly paid and part of it has come -- major parts coming later. So the immediate impact may be marginal, but more impact will come from end of next year.