TCPL Packaging Limited (523301) Earnings Call Transcript & Summary

Gentlemen, good day. And welcome to TCPL Packaging Q4 FY '20 Earnings Conference Call hosted by Systematix Institutional Equities. [Operator Instructions] I now hand the conference over to Mr. Vipul Sanghvi from Systematix Institutional Equities. Thank you, and over to you, sir.

Thank you, and good evening to all the participants on behalf of Systematix. I welcome the management of TCPL Packaging. We have with us Mr. Saket Kanoria, the Managing Director. Without much ado, I will let Mr. Kanoria start with his opening remarks. And after that, we will open the floor for questions and answer. Over to you, Mr. Kanoria.

Thank you, Mr. Sanghvi. It's my pleasure to present our performance for the year ended March 31, which was announced in our Board meeting last week. And I thank you, everyone, for participating on this call and taking your time off your busy schedule. So as you may have seen from our results, we've ended the year of March '20 with the top line of INR 870 crores, that is the net sale and a gross sale of INR 890 crore, which represented a growth of almost 9.3% over the previous year. You may recall that the previous year, we had grown 17% over the year ended March '18. So over the last couple of years, we have brought our growth back on track, which has suffered on the year of demonetization in 2016, '17. This year, unfortunately, we lost the last 8 days because of COVID shutdown. The government announced the national lockdown on the 24. But before that, even we lost on the 22nd on the Janta Curfew. And normally, at the end of financial year, it's a very hectic time for us as well as our customers. And it's not that we lose 8 days out of 31 days of March, which is, let's say, 25%. But in reality, we kind of lose 35% of the March revenue. So we were very confident of crossing a net sale of INR 900 crore. But unfortunately, we had to settle for INR 870 million. And if we had done INR 900 crore, then our growth would have been in about 13% or 14%. Apart from that, the other good development was that our EBITDA margin, which over the last couple of years has been improving, has shown a further increase in the current year. We ended up with 14.7% margin as opposed to 13.28% in the previous year, which you will appreciate that in a year in which the country's overall GDP has slowed, and the demand has been relatively slow, has been -- we have been able to achieve mainly on account of tighter costs as well as better raw material pricing. Besides that, the effect of COVID in our last conference call, also we had covered it after we have presented the third quarter that this is a very big unknown at that point of time, India wasn't really affected by it. But subsequently, all the state governments as well as the central government have taken various steps. So we are still fighting through it. And I think I had given our team an option that either we're going to be a loser or a winner. And I think that we have done reasonably well during this 2.5 months of corona problem. And you will see, in July, when we will declare the June results, but overall, it's not as bad as we thought it could be. So without getting into any further points. I would like to listen from you all any questions. And then while I address them, I guess, otherwise, it would become a duplication of what I need to say. And so I keep the floor open for your valuable questions.

[Operator Instructions] The first question is from the line of Rukun Tarachandani from Kotak Asset Management.

The first question is on the CapEx. In the earlier call, you had highlighted some of the CapEx plans that you envisaged over the coming years. In light of COVID and consequently, banks also being risk averse, is there any change in the CapEx plans? And as of now, what is the amount that you foresee for CapEx for next year?

Okay. Thank you, Mr. Tarachandani. We had a plan to expand our flexible operations as well as add another offset line in the current year. But we are going slow, a, because the construction work of our flexible additional building could not take place as planned due to this COVID shutdown, and now we are going to be hit by the monsoon. So we have decided to only commence that in post monsoon in September, which means that we are deferring the entire rollout of that to next financial year. And apart from that, our folding carton business, we don't envisage any major CapEx in the current year except some balancing equipment and some finishing of some building work, et cetera. So overall, in the current financial year, I would expect a significant reduction in the CapEx plan, and we are only going to do what -- where financial closure has already taken place, and it will be in the tune of INR 30 crores to INR 40 crores versus the INR 70 crore INR 80 crore figure which we had earlier envisaged.

And on the raw material situation, both on the paper boat side and the flexible side, if you can highlight how is the raw material pricing. And consequently, how has been your ability to pass on the same to your client?

So after COVID hit, initially, there was a tremendous panic in the market and because of the shortage of pulp and waste paper in international markets, but then the paper mills have realized that the demand for their products as a whole is not that great. So they had taken up price increases in the late March, early April, and they were quickly reversed in May. So we haven't got impacted on account of that. And pricing on paper boat side at least is similar to what it was pre-COVID. As far as flexible is concerned, there is small movements up and down. But net debt, there is a small reduction, in fact, on polyester and BOPP. So overall, we are not yet impacted on raw material front, but what happens when the entire business is back remains to be seen because there are certain shortfalls in the supply chain of our suppliers. So there could be some temporary increases, but the trend is not suggesting any major shift in raw material costing.

Great. And on the working capital situation on the receivables, are you seeing any delays in payments or any concerns on that end that you might have either an increase in working capital -- in receivable days or probably situation of bad debts or anything of that sort?

Fortunately, TCPL has a very good quality customers. And we -- our bulk of our business is restricted to amongst the better FMCG companies in India, most of them are large FMCGs like Unilever and Nestle, et cetera. So there, we don't see any challenges. Some of the smaller customers who are small percentage of our business, certainly, there are delays due to their offices being locked out, et cetera. But we are not envisaging any bankruptcies or anything like that, amongst them. They are all pretty solid companies. And whatever conversation we're having with them, they are seeking some time, but these are also for relatively smaller amounts. So as of now, we don't have much of a concern. As far as the rest of the working capital is concerned, it's pretty much normal. Our suppliers are all functioning and our inventory levels are normal, there's no change as such in that.

And one last question. On the -- if you can elaborate on the exports for demand, have you been able to gain market share? Or are there opportunities to gain market share in this environment in the exports? And overall, how do you see that piece going forward?

So we are doing quite significant export. Last year, we have grown our export, in fact, 20-odd percent. So we've done well and this year also we see that we will grow export but the rest of the world is also hit by COVID. So it's not that the demand outside India is growing at a faster pace than it is in India. But structurally, I guess, your question is whether there will be more opportunities for export from India. So there has been this conversation that people would like to look at India as opposed to China. But at the end of the day, people will buy what is more affordable and who can provide better service. So when the initial days of COVID, there was a lot of anger around the world, I see that, that is not as strong as it is now as it was then. But certainly, there is a talk of some companies coming to India to manufacture, which will present opportunities for people like us to sell to them locally, which may be for export eventually. But I don't think that there's going to be any major structural shift from European or American or other countries wanting to buy goods from India as opposed to getting it from wherever they were getting. But nevertheless, there is a pretty good export performance, at least at our end. So overall, I think we're quite satisfied there.

[Operator Instructions] The next question is from the line of Nitesh Jain from Birla Mutual Fund.

Sorry, I didn't get your organization name.

Sir, I'm from Aditya Birla Mutual Fund.

Aditya Birla. Okay.

So Mr. Kanoria, basically, I mean, the question here, the relevant one is what is the state of the operations for TCPL as a whole now? In the sense, for example, say, suppose last year, if you were doing at the same time, INR 100, assume. So at what level have we reached in terms of the current sales run rate? I mean when the lockdown is opened and the government is asking factories to open -- and I read your COVID update, which you submitted on the stock exchange, wherein you mentioned that most of the plants, 6 of the units, sir, you have already started. So I mean if you can give some update on this, where are we, say, compared to the similar period last year?

All right. I think our team, as I mentioned in my opening remarks, has really met the challenge, and we really suffered a lot in the month of April because the factories got graded approvals, and it took some time. Also that time, there was a lot of restriction of labor. But in May, we performed quite well, and we hope to -- half of June is already over, and I think we're on track. So now we are coming to an 85% to 90% plus level. So overall, this quarter, we will compare to last year's first quarter, I think we should end up with about 80% on an average, even though April was very poor.

Okay. Got it. And sir, you -- in the beginning, you mentioned about the some deferment of the flexible unit expansion. This is the same that INR 35 crores CapEx which you had planned?

Yes. Yes. For the recyclable package.

Yes, yes. Which was supposed to be in a separate subsidiary.

Subsidiary. Correct.

Okay. Okay. So this will be handed over to...

Building work will start this year, but no machinery will be received this year, and we have pushed it back by about 6, 8 months to next year. Just to be conservative also so that our -- the second wave, third wave, God alone knows what will happen, so we'd rather keep the cash flow paramount.

Great. And lastly, when I see the -- I mean, the company's balance sheet as at March 31, 2020, so I can see some amount of increase in both long-term borrowing as well as the short-term borrowings from INR 728 crore to INR 151 crore and short-term borrowing is INR 140 crore to INR 160 crore. So can we assume like if the CapEx intensity is only INR 20 crore, INR 30 crore this year, then you would be paying a significant amount of debt reducing in current financial year?

Yes. So what's happened is that if you see the balance sheet of last year, March '20, overall, our current asset has grown from INR 290 crore to INR 330 crore, and the current liability has grown from INR 303 crore to INR 320 crore. So actually, our current ratio has improved quite significantly. And in the current year, overall debt will not go up, it will go down actually. Last year also, the long -- the term debt has not gone up. It is the working capital, principally, which has gone up, and that is primarily due to higher inventory in hand. So this year, there will be definitely a reduction in overall debt.

And sir, very lastly, again, on the -- I mean, the first one. In terms of the business environment, for the clients that you cater to say in FMCG or, say, alcohol or cigarette or pharmaceuticals. There's the inquiries that you are getting right now, is it -- has it reached the previous COVID level, or you see significant softness in the business?

Yes. This is a very difficult question to answer because very few people know what's really going on. What's happened is that the -- in the April, all customers have suffered and consumers in panic were buying a lot of product. As a result, the entire supply chain has got emptied out, and they are filling their pipeline in May and June. Now question is that what we are producing in May and June, whether consumers are consuming it or it is going into pipeline filling or it's a bit of both? I can't give a exact answer, but it is bit of both to my mind. So certain categories of basically food products, packed food, things like biscuit, chocolates, baby food, soaps, toothpaste, sanitizers, creams. These demand is maybe even in some cases better than pre-COVID. And even, for example, tea. But other products like liquor, you mentioned, there, it is very bad because they didn't get approval for a long time. They only opened in May in -- that too in a limited way. And a significant sale of liquor is in bars and restaurants, which is not there right now. So we see a drop in demand in liquor, same with tobacco. But an increase in demand for FMCG and food products. So -- and now liquor and tobacco will grow, but they are not yet at COVID levels -- pre-COVID levels.

[Operator Instructions] The next question is from the line of Ankit Gor from Systematix.

Sir, my question is more on a flexible side. Sorry, I missed your initial commentary in terms of delaying some flexible CapEx. But more so, if you can give some color on that? And secondly, on our overall CapEx scenario, even in our folded carton business.

No. What I said initially is that this year, we were originally plan to add one line -- printing line as well as in a subsidiary the blown film recyclable packaging for flexibles. So we have deferred the investment in that, except for the basic infrastructure creation to next year. So we have postponed it. However, flexible demand at the moment is quite strong because of the packed food, atta, rice, et cetera. But yet to be conservative, we have postponed it. And as far as the carton is concerned, there will be some balancing equipment and all that being invested in the current year, but no capacity increase as such.

Okay. In a way, our base business of flexibles, do we going to install a one more line in this year or that we have to...

No, I said, we are going to push it back to next year. This year, there will be no capacity increase.

Okay. And secondly, on terms of clientele side, what sort of visibility we have for product launches? Have we seen some delay in product launches? Or do we see that product launches will come in next couple of quarters or it will take much more time. What is your experience here, sir?

So I would say that in this time, customers have basically focused on their existing brands and bulk selling brands more than trying to make new variants, et cetera, in order to simplify the system since everyone is working with a lot of stress. So the launches of new brands or variants of existing brands have definitely been pushed back, and they are focusing on their mainline products and largely bigger bulk pack. So I think that in the festive season, they will be probably looking at introducing newer brands of variants. Right now, it's more produce as much as you can.

Right. Sir, on a flexible side, just wanted to understand this thing a little clearly. The BOPP and BOPET spread. Does it really play a role in our overall margin because now BOPP spread has gone up or BOPET spread has -- are expected to come down. In that case, does it really matter in terms of profitability for TCPL or it is just more of a pass-on thing?

Yes. Ultimately, it's a pass-on thing, but certainly, a lower pricing does help because the lag effect we get benefit, and which we are getting benefit in the current time because net debt, it has dropped. Because the raw material price of the BOPET people has reduced significantly.

Right. Sir, in that case, overall, raw material film would be a major part of our overall raw mat in flexibles.

Not so much because we are not doing a lot of film-based flexibles. We do a lot of paper, aluminum foil, hand film, but I mean, okay, if there is a marginal benefit.

[Operator Instructions] The next question is from the line of Ashok Shah from RFC (sic)[ LFC ] Securities.

Sir, generally, we used to declare 20% as a distribution as a dividend. So current year, 10% of the profit has been distributed. So are -- does it give the indication that next year is not expected or are you conservative?

This question was debated at length in the Board. And basically, we said that every stakeholder in the company should do some sacrifice. For example, employees, we have not given them their salary increases this year. Directors have lowered the commission as a percentage of their profit. And shareholders, we have proposed a lower dividend basically to conserve cash in the company and to be better prepared for the second or third wave or any possible further shutdowns, et cetera. So it was just to be conservative and nothing else. As far as next year is concerned, I hope that things will smoothen up and we will get back to our policy. We are not changing our policy at all, and we would expect to maintain that going forward.

Great. And my next question is regarding the -- can you just give me some indication of CapEx done during the last year and planning to do in the current year and also the same way...

I have covered the CapEx question a few times.

No amount. I just wanted to know amount.

I don't think we need to -- last year, we've done about INR 65 crores.

Okay. On -- and the debt repayment done during this last year.

That you can look at the balance sheet, you will get the data.

[Operator Instructions] The next question is from the line of Vipul Shah from R.W. Equity.

Yes. Sir, we were actually trending after the longish period. We were actually trending quite well in terms of the EBITDA margin in quarter 2, quarter 3. Of course, everybody understands the impact of COVID, which -- and you also have articulated in your opening remarks about the possible loss of revenue and consequently, gross margin, which has flown down into the EBITDA. But would it be fair to assume that starting quarter 2 onwards, we would probably trend back to the earlier EBITDA margins of quarter 2, quarter 3, which we were clocking last year.

I think it's a very good question. And you're absolutely spot on. I think there's no reason why we will not trend at the same amount because, in fact, this COVID has taught us a lot of things. And I believe as a company, we'll be more efficient and more productive, and we will be able to cut costs at various places. So unless the -- we cannot ramp up output because of either low demand or some lockdown or something, I would think that the margin will get back.

[Operator Instructions]

I guess there's no further questions at this stage.

Sir, we have questions in the queue. The next question is from the line of [ Ayush Jalan ] individual investor. Please go ahead.

Congratulations on a good set of numbers. I just wanted to ask, could you, sir, give us a breakup on the FMCG part of the business versus alcohol and tobacco part of the business, please?

Yes. This data is very sensitive, so we don't really share this breakup.

Okay. Because I just want to try and get a sense of -- you are saying that the growth in FMCG is good right now, while, obviously, due to the circumstances, alcohol and tobacco is muted. I just wanted to get a sense of what the capacity utilization would be? Or are we expecting going forward...

I indicated that in the first quarter we'll be hitting around 80% of our regular versus last year level.

And going ahead, sir?

Going ahead is a very big question. So if things go well, we'll get back to normal. If the current trend continues, that is subject to no further health issue, I think we are on an upward trend at the moment.

As there are no further questions, I would now like to hand the conference over to Mr. Vipul Sanghvi for closing comments.

Thank you, Mr. Kanoria, for giving us an opportunity on behalf of Systematix. We thank you once again. Thanks for all the participants.

Thank you, everybody. It's our pleasure to have initiated this call and thank you, Systematix, and we look forward to the next time perhaps on Zoom. All right, thank you.

On behalf of Systematix Institutional Equities, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.