TCPL Packaging Limited (523301) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to TCPL Packaging Limited Q3 FY '20 Earnings Conference Call hosted by Systematix Shares & Stock Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ankit Gor from Systematix Shares & Stock. Thank you. And over to you, sir.

Thank you, Raman. I welcome all on behalf of Systematix for joining Q3 FY '20 earnings call of TCPL Packaging. I thank you Mr. Saket Kanoria and the management of TCPL Packaging for giving us opportunity to host this call. I would like to hand over call to Mr. Saket Kanoria for opening remarks, following which we can have a Q&A session. Over to you, Mr. Saketji. Thank you.

Hello, good afternoon, everybody. This is Saket Kanoria here. We are pleased to do our second conference call post our results, which were declared a couple of days ago. And we're very excited to announce that despite adverse market conditions we have recorded a growth of 12% this quarter and year-to-date is 11%. When you can -- when most of you who track FMCG companies will see that the growth of our customers has been in the 5% to 7% range and the volume growth has been even lower and yet TCPL has recorded a 11% year-to-date growth, and -- on top of 11% growth even last year, and the year before that was almost 17%. So our performance has been very consistent and stable. And what is even more exciting is that the quarter ended December, we recorded a EBITDA margin of 16%, which is the highest margin we have recorded in 3 years. The last time we went beyond 16% was way back in 2016, so that's because lot of confidence with respect to margins. And the year-to-date EBITDA margin is 15.07% versus last full year was 13.2%. So there's been a substantial expansion in margin. This is mainly led by, A, scale, and B, lower raw material costs. And the -- however, at the profit before tax level, the increase that is not being shown as much as the increase in the margin, primarily because new plants in Goa and expansion in Haridwar have now gone online. And as a result, the interest and depreciation costs are higher over this previous year, which is eating up a little bit of this EBITDA. But, however, end of the day, the return on capital employed and the return on net worth is quite healthy. Overall, the company has not added any significant amount to its term debt. And as a result, the debt/equity ratio and even the current ratio of the company has improved, better liquidity situation. And you all may have also seen the press release that we gave after the board meeting about the formation of a subsidiary. We are -- today, the biggest theme around the FMCG and packaging world is how do you make packaging which is sustainable from an environmental point of view. And it's all about recycle, reuse and reduce. And, as you know, we are a new player in the flexible packaging industry with a very innovative offering. And in order to expand that, we have tied up with this German company where we are importing this new technology, wherein the -- we hope to replace the traditional polyester poly laminate with the poly/poly laminate with the result that it will be recyclable. And also, in terms of total weight, it can give slight saving. So, overall, we are very excited about this opportunity because we feel it will be a game changer in the days ahead. And in order to claim the benefit of the lower corporate tax, since it's a new unit, we make it into a subsidiary. And besides that, it will be a focused -- by having another company there will be much more focus in that business and it could also look at export and selling films to others. So now I invite questions, and I'm happy to answer the same. Please go ahead.

[Operator Instructions] The first question is from the line of Nagraj Chandrasekar from Laburnum Capital.

A couple of questions here. First, could you give us a sense of what the cash flow generation, the whole CapEx is in the company on an ongoing basis? And if we were to look at that cash flow, how do you see that the utilization that being broken down in terms of further CapEx, for example, the subsidiary you mentioned or potential debt paydowns? And if you could also give us a sense of what your optimal leverage target is? Should we be expecting that to come down or not? Second question is, if we look at this industry on a medium-term basis, are we seeing a shift in market share towards some of the larger players? Is there some kind of consolidation going on in the industry? That will be helpful. And finally, as you look at your decision to go into flexible, which you took a couple of years ago, in hindsight, was that the right sort of area to get into? Is that an area where given the competition, returns on capital, et cetera, that we see in that industry, is it the place where you would want to be putting more capital at work? It would be helpful to get your thoughts on that.

Yes. Thank you. So to answer your questions. In terms of cash flow, as I said, we have not added any significant debt this year. We've had an EBITDA of INR 100 crores in the first 9 months, roughly INR 100 crores. And out of which, we pay interest of INR 27 crores. So we have free cash flow of INR 73 crores. And the total CapEx done or planned to be done in this financial year is lower than INR 65 crores. So we have repaid INR 49 crore of debt in this year, and we take on also about INR 48 crore of debt. So net-net, there's no debt increasing. And going forward also, we don't anticipate any increase in term debt. Of course, working capital debt is based on your revenue growth and the working capital cycle, so that may grow proportionately to the growth in revenue, but nothing beyond that. And in order to maintain this rate of growth, also, we believe that without adding anything significant to the debt we will be able to sustain a double-digit annual growth rate. Coming back to the consolidation. In flexible space, the consolidation is greater than it is in carton, but there are small players and there are large players. There is no doubt that the larger players are growing faster than the smaller ones, so the gap is widening. But we haven't seen that many M&As in the paperboard carton space as such. And as far as flexibles are concerned, we invested in this in November '16, and it took some time to establish it. I think we did have operating losses for 1.5 years. But since then, it has stabilized and done very well. And overall, we are very happy with the decision we took. And I think it has played out, and we are not -- we offer very innovative products, so -- and very high value added. So we are not so much in the normal competition of the basic laminate, and we don't intend to be in that space either. So the step we have taken now, again, for recyclable packaging offering is, again, a step in that direction that we hope to stay one -- a few legs above the competition, not just one step ahead. I hope that answers your question.

Yes. Just one clarification, which is -- so you are saying that over the next, say, 3 years or 5 years, we shouldn't expect the debt to go up, but it's probably not going to come down. And the INR 40 crore, INR 50 crore a year of free -- post-tax free cash flow you generate, you're probably going to be spending that on CapEx to grow the top line, right? Is that a fair understanding of what you're saying?

Yes. Yes. I think in the net debt level, we don't see any reason why we should bring it down beyond this because it -- as a percentage to net worth, it will keep going down. But in absolute amount, it may not go down.

And where will -- where do you see this CapEx being done?

That will be done on a need-to-need basis based on regions where we are growing, where we are not. And we need to constantly invest to keep up-to-date in technology and to increase capacity on an incremental basis.

[Operator Instructions] The next question is from the line of [ Siddharth Agarwal ] from [ Prudent Value Partners ].

Congratulations for a good set of numbers. Sir, could you just speak a little bit more about what has led to the EBITDA margin expansion that we saw this quarter? And do you think that we can stabilize now at the current run rate?

So as I said, the EBITDA margin -- firstly, thank you for your comment. And secondly, as far as EBITDA margin is concerned, as I mentioned, that we've crossed 16% after considerable period of time. And the conditions were quite favorable in this quarter in terms of raw material price reductions and also the product mix that we did. So it is very difficult to say whether we can maintain this quarter-on-quarter. But certainly, the overall trend seems to be that it is better than what it was the last 2 years. But I wouldn't like to hazard a guess of whether this is now going to be the new benchmark because raw material prices are quite volatile and there could be some increase in the near future because there's a huge uncertainty with respect to China and the Coronavirus. What impact that has to the rest of the world is a complete unknown at the moment. It's not that we, as a company, import much from China, but it affects all commodity pricing and -- which right now, we don't have any clarity.

Okay. And sir, now could you also speak a little bit about the sustainable packaging segment, which we are now recently allocating capital to? So, obviously, we are -- we have as our client some of the top players in the country. So how do you see -- from your interactions with them, how do you see the demand on their side and willingness to pay up a little bit more to move to sustainable packaging? And what are our plans to grow in this segment?

So sustainable packaging is today the buzzword, and I think it is a corporate mission of most of our customers, particularly the multinational customers, to respect and care for the environment in a sensible manner. And I think that if any company goes to them with a solution to their problem of waste management that is the top most priority for all customers. And, obviously, currently, they have by value engineering lowered the cost of packaging over a period of time by reducing the amount of packaging they use and constant permutation/combination. So, naturally, if they go toward alternate structure, it could be that there is a small cost increase to start with, which probably in the future will also level out. So I think that there's no choice in this matter because at the end of the day you have to pay for the recycling also and you have to pay for the collection and you have to pay for the disposal. So if you take the total cost of ownership, then ultimately I don't think the -- what we are planning to offer is going to increase their cost. And plus, it fits into their corporate goal, which is to respect the environment and to make a sustainable packaging. So I think we're very excited about this and companies which will adopt such a technology and -- do well with it because it's not just that you buy a machine, it's also to do with the chemistry and to make the right combination of the film and its properties. So there will be a little bit of a learning curve. And it's all about how well you manage that.

And in our flexible packaging setup that we started in November 16 now, so what level of utilization have we reached there? I guess, in that unit also, we are doing more sustainable packaging rather than the commoditized flexible packaging over there.

Yes. We are at quite a high level of utilization in the flexibles. There's not much headroom now. And we are expanding not only in making the film as part of the sustainability thing, but we're also increasing print capacity. So we have a -- we are now at high level. And after this expansion, we will have lot of free capacity, but -- which we hope to utilize fairly quickly because of this offering. And secondly, we don't do that much sustainable packaging there right now because we don't have the raw material for that. Once we have our own film making, then it will be possible to do that.

And this new INR 37 crore proposed FX is for the film part of it?

Yes. It's only for the film part of it. The conversion from film to packaging will be in TCPL and that will be in addition to this amount.

The next question is from the line of Rukun Tarachandani from Kotak Asset Management.

So I'm sorry if I missed this. But have you mentioned the total CapEx amount that is planned for the next financial year?

We are still working on it. We haven't crystallized the total CapEx plan next year.

Right. But is it possible to give some sort of a ballpark? I mean would it be within that INR 60-odd crore kind of a range? Or would it be lower or higher than that?

I mentioned to you that the overall debt is not going to go up. And if it does, it's very marginal, so it will be within the accrual range.

Right. And just to follow up on that, that what we are hearing from most FMCG players is may get to low single-digit kind of a volume growth number. Demand across sectors seems to have softened. You -- because of the CapEx that you've done over the past 2 to 3 years, I'm assuming you have a good amount of spare capacity available. So, in that context, how do you look at further CapEx over the next one year? Is it -- isn't it -- wouldn't it be more prudent to wait it out for a year and let the capacity utilizations increase before ...

Now we are doing CapEx in flexibles, which has nothing to do with the CapEx in carton. So I agree with you that in carton we have some capacity and headroom, but in flexibles, we don't. So our thrust this year is to augment the flexible capacity.

Okay. And this installation of films line, by when do you expect this to be operational?

So it will take another one year. We hope to operationalize it around this time next year. The effect of it will only be felt in '21, '22.

The next question is from the line of Kunal Sabnis from VEC Investments.

Sir, if you could throw some light on the business growth and the industry demand, how have last 2 months been, say, December, Jan? Have we seen a sequential pickup in growth? And, as you mentioned at the start that you grew faster than your clients, how were you able to do that?

So I mentioned that the business growth in the quarter is 11% overall. And we have grown faster than the clients principally because we've added more clients, we try to take some market share within the existing clients. And January also has gone along the expected lines, so not much change. We hope that now budget is over, and I don't know what effect -- impact that will have on anything, but going forward normally May, June onwards the volumes start picking up significantly. So till then, I don't think any major shift is going to happen. And if at all, it will happen only post that.

Got it. And the expansion in Goa and Haridwar, have the incremental lines in terms of utilization broken-even as that particular unit?

I think Goa has done very well because it was on a very small base, and so it has been fairly well utilized. Haridwar is still struggling with the new capacity because it started only in July, August, and it was towards the fag end of the peak season. And last year, Diwali season, the -- was a very subdued quarter. So we have a lot of headroom in Haridwar, and we are trying to expand customer profile there so that we can utilize the capacity we have.

Right. And if I can squeeze a final one. The sequential increase in depreciation and interest has been quite a bit, especially on the interest front. Now if you haven't added term debt...

Yes. I'll answer this question. In interest, this quarter there has been an impact on ForEx loss because we have some export and also ForEx liability. And versus previous quarter, there is a significant change. Last quarter, we had a small earning. This quarter, we had a loss. So that has skewed the interest cost overall.

And what would be the impact of that, if you can share, of the INR 10 crores of finance cost?

Impact of that, it's not -- it's part of the total cost. So we don't really declare the ForEx breakup as such.

The next question is from the line of [ Agastya Dave ] from [ CAO Capital ].

Sir, one small request. If you could post the transcript on the -- either the website or send it to the BSE Stock Exchange, it would be very useful.

It will come anyways. It's a mandatory rule, so it will be posted.

I got dropped twice so I have missed certain things. In case you have answered these, sir, I'm very sorry to repeat the questions. Sir, first, the new facilities, which have come online now, the expansion and the new facility, what is the asset turnover ratio you can expect at peak utilizations here?

We can utilize 1.5 normally. We can go up to 2 also for a slightly older plant.

Sir, and in the newer plant, can we do 2?

Sorry?

Okay, well. In the newer plant, can we do 2x or 1.5 is the better result?

No, 1.5.

1.5. And sir, by when do you expect to reach full capacity? How easy or difficult is it to ramp up?

We've reached full capacity in certain months of the year when the demand is higher. But we have to have some lag always because otherwise, in peak season we get messed up. So we've never done at full capacity throughout the year.

Right. And sir, one last question. The flexible business that you are now building, what's the profile of customers and the products that you have today? And how will that evolve over a period of time? How do you see the -- that business actually panning out a little bit more qualitatively?

So today, we are doing more customers who are related to us in the carton business. We do provide gamut of customers in FMCG, food and beverage and tobacco. Tobacco is a significant percentage of the flexible business. But going forward, and with the technology that we are now installing, we will be focusing more on the generic FMCG and food customers, and not at all on tobacco because that technology is not meant for tobacco. So it will become a more diversified set of accounts. And also, again, the carton business relationships will help because we anyway service all the potential customers in the carton. So it's quite natural that we will be able to offer them our sustainable solution in flexible business.

Sir, what thickness can you address in flexible?

Thickness of you mean film?

Yes. The range of the thickness of the film?