TCPL Packaging Limited (523301) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to TCPL Packaging Limited Q3 FY '21 Earnings Conference Call hosted by Systematix Institutional Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ankit Gor from Systematix. Thank you, and over to you, sir.

Thank you, Nirav. Good morning, everyone. On behalf of Systematix, I welcome everyone on the call of TCPL Packaging to discuss Q3 FY '21 earnings. On the call, we have Mr. Saket Kanoria, who is the Managing Director of TCPL Packaging. Without taking much time, I would like to hand over the call to Mr. Saket Kanoria for his opening remarks. After which, we can have a Q&A session. Over to you, Kanoriaji.

Thank you, Ankit. It's a pleasure to host the call along with my son, Akshay, who is the Executive Director; and Mr. Dave, who's our General Manager, Finance. So welcome, everybody, and thank you so much for your time. We are pleased to meet you all here today, virtually. And also, we are very pleased to announce our results for the quarter ended December 2020. When we met last, it was the end of July when the COVID was raging. And as you may have noticed at the end of the first quarter this year, the company had a revenue which was 21% lower than the previous year. But now after 3 quarters of performance, we have narrowed that gap down. And year-to-date, we are minus 2.7%, which we are quite happy about. And we expect by the end of the year to make up this gap and have a small growth in this year. We've been fortunate to be in the packaging business, which was allowed to reopen pretty soon after the lockdown because we were supplying to essential services. And overall, the market has been quite positive since then. Though we have seen a drop in demand post Diwali this time, but we expect now things are picking up because there has been a very big inventory correction at our customers' end. So overall, I would say that we are pleased and fortunate that our performance has been pretty much up to our mark. And in fact, on 22nd March, if somebody had asked me that -- around this time would we be in this position, I would never expect to be in this position. The other thing which you may have noticed is the increase in margins in the current year. So last year, that is '19/'20, our margin had improved over the previous year, and that trend continues into this year as well. If you notice the EBITDA margin of the company in this 31st December quarter, has gone up to 16.25%; in September, it was 15.8%; and in June, it was 14.3%; whereas whole of last year, it was 14.7%; which was over 13.2% in the previous year. So this increase in margin has been very, very heart-warming. The only thing we have suffered is a little bit of higher tax spend due to less capitalization during the current year. But overall, if we can maintain this higher margin, then it obviously stands us in good stead in the long term. So I would now request you all to ask questions and make it as interactive as possible. And I guess there will be a lot of questions which will be common, so I can then take those. So over to you.

[Operator Instructions] The first question is from the line of Kunal Sabnis from VEC Investments.

Congrats on a great set of numbers. Sir, I have 3 questions. Firstly, on the gross margin. Sir, as you mentioned that our margins have been better Y-o-Y and gross margins have been pretty stable in the 43%, 44% range, which is pretty good. What I wanted to understand was what has driven or maintained this at the current level, considering there were some raw material improvement. If you could throw some light on that? Plus if you could say, if we are able to pass on, and what would be the expectation going ahead? The second question is on the other costs. As was expected in the lockdown that certain costs were lower. Is the catch-up completely through? Or do we expect some catch-up still to be done in quarter 4? And finally, on the revenue, if you could just give a sense on as you mentioned at this year, you will close a little higher than last year. If you could give some sense on the following year? What can -- what should we expect?

All right. Thank you, Kunal. So you're right, the raw material price has been soft in the first half of the year. We are seeing it increase now in the third quarter and more so in the fourth quarter. A lot of the increases that have happened have already been passed on and some are yet to be passed on. So there will be a little bit of lag that, in fact, we may see in this last quarter. But we expect this raw material pricing to stabilize around March, April. And then we should get a benefit of the lag at that point of time. So it will kind of neutralize, I think, over the next 6 months. The other point was on the other cost as well. So yes, in the lockdown, a lot of costs were curtailed, but also revenue was curtailed. And I think quarter 3 played itself out. I don't see any significant change in overall overhead costs going forward as opposed to what we did in quarter 3. So I think from a margin perspective, that should not be much of a factor. And revenue next year, we expect quite a growth -- significant growth well into the double digits on revenue side because we have the capacity now and we are doing revenue at INR 80 crores monthly rate as a bare minimum. So we hope to cross revenue of INR 1,000 crores for sure in the coming year.

Great. Just an extension of the third question on growth. Any [ set of SKUs ] do you see going forward to fund this double-digit growth? I mean, any particular industry that double by this?

Akshay, you can answer, this.

Kunal. So on the sector thing, basically, there's a lot of low-hanging fruit we see because this year's performance in certain sectors has been very poor. Like very discretionary spending, higher value item spending, Diwali gifting, all of these things were quite subdued in this year. Even post the first quarter when things started to pick up and open up, still a lot of the very discretionary kind of spending was quite subdued. And that is really what has held back our growth this year. So even if that comes back to 2019 levels and no growth on 2019 levels in those kind of areas, that itself will drive a lot of the growth for 2021. So a lot of mean reversion yet to take place, which will help the growth. And secondly, we have done some CapEx prior to COVID. So those capacities will also kick in and benefit us. And overall, the FMCG market seems to be growing now. So as long as the volume growth is reasonable, we should also grow to that extent or if not more.

[Operator Instructions] The next question is from the line of Vipul Shah from RW Equities.

Yes. I just wanted to know what would be the capacity utilization in this quarter? And in one of the earlier calls, we had mentioned our new film line will be operationalized by February '21. I mean, obviously, this was pre COVID, but where are we in terms of the new film line?

All right. Thank you. Capacity utilization in the quarter, we would expect it to be around 80%. And the film line we had postponed due to construction being stopped. So now we are expecting it to start around August or latest by September in the current year.

[Operator Instructions] The next question is from the line of [ Rahul Soni from SMIFS Limited. ]

Yes. Sir, 2 questions from my side. One thing I want to understand, how is your revenue concentration among your clients? And secondly, what kind of volume growth you are expecting for the next financial year?

So the revenue split is not something which we declare. But essentially, I would say that it is almost all the segments are now growing. So the share of business of any particular segment has not witnessed any change as such. It's marginal 1% or 2% here or there. And volume growth, we expect next year to be at least over 10%, which would lead to a revenue growth of 15%, 16%.

Sir, my question -- Ankit here. My question with regards to the increased paper prices. How easy or how difficult for us to pass on those prices to a customer? And how are paper pricing are reacting now? And if you give some sense on outlook as well?

Yes, that's a very good question. Basically, the fortunate thing is that the paperboard prices have gone up too much too soon. So all the packaging companies are affected by it and therefore, nobody has the capacity to bear this. And hence, the price increase with customers is going through reasonably smoothly. So we expect to pass the whole thing on. And one of the reasons why this pricing has been so volatile this time is demand from China, then waste paper collections in the world which has been messed up due to COVID and also shipping rates. So we expect that all these things to normalize in the next few months. So let's say, from April onwards, we think that the pricing will start going down, though it may not get to pre-COVID level, but certainly lower than what they are now. So then things will be come easier at that point of time because especially craft paper, which is used for corrugation, there, the pricing has really gone very, very high. And that is mainly due to lack of waste paper for the craft mills. And things are getting normalized because the cycle is now changing. But again, Europe is in the lockdown. U.S. is coming out of it, though. So this has to stabilize. But we still expect that things will only get better going forward.

[Operator Instructions] The next question is from the line of [ Saket Kapoor from Kapoor & Company. ]

Sir, firstly, sir, as we are conducting this conference call to educate investors and the analyst community, I could not found an investor presentation, along with the invite being updated at your site or at the exchanges. So correct me if anything that is available? And -- or would request for the same going forward so that things which you are explaining us could be elaborated and articulated much better way in a PPT presentation also, sir.

[Foreign Language] Thank you very much. I think your suggestion is really a good one and makes a lot of sense. So we will certainly consider doing it from the next time.

Yes, sir. And including that -- yes, sir, you were telling something, sir? Hello?

[Foreign Language], continue.

Sir, and including that with the corporate video, explaining the processes and the scope of work also because your verticals which we are able to observe from your website, do speak about this BAT being a key player -- being a key customer of your, sir. So sir, as you have told that the corrugated sheet prices were higher and the raw material -- therefore, the raw material prices were higher. If you could explain us, sir, what constitute our raw material basket and where -- which are our key suppliers, sir?

I'm sorry, which customer you talked about, BAT?

BAT, I think, so sir, for the cigarettes player you have mentioned on your website, the tobacco packaging, folding cartoons and flexible packaging, I'm referring to your website. So sir, scope of work [Foreign Language] and raw material basket [Foreign Language]?

So we have 2 basic verticals. One is paperboard packaging, which is paperboard cartons and the other is flexible packaging, which is film-based laminate. So in paperboard carton, the key raw material is paperboard, coated paperboard and craft paper, whereas in film-based laminate the key raw material is polyester film, aluminum foil, and also some paper, thinner gauge paper. The raw materials generally tend to be 55 -- anywhere between 50% and 60% of the product price. And the main raw material, which is paper, in case of carton and film, in case of laminate, is obviously 80% of the cost. The rest is ink, adhesive, foils, et cetera. So I hope that answers your question.

Sir, everything is sourced out? Or do we have any integration.

No, no, everything is sourced out.

Everything is sourced out. So we are only acting as a converter then?

Yes. Yes, we are acting as a converter. And that's the case with almost every packaging company who would -- generally, packaging companies will source base raw material, which is more like a commodity product, and then they would print and do value additions and make the packaging out of it. You will really see a packaging company which makes paper, for example. I think, apart from ITC, who have their own in-house packaging division and paperboard-making division, there is no other paper mill which has carton making division. As far as film is concerned, Uflex makes the polyester film, and they also do the laminate, so they are integrated, but there is no other flexible packaging player who does both. So it's very rare that you would be in downstream as well.

Okay. And in the film, it is the BOPP films that are...

BOPP and polyester and also PE films. And that PE film is something we are setting up. So ultimately, we will be able to make our own film from granules, and then we will be able to print and supply the finished product. So there, we will get more integrated in the years to come.

Okay, sir. On the CapEx front, sir, if you could throw some more light, what kind of CapEx have we done over the last 2 years and what is in the pipeline? And how are the -- how margin accretive are the CapEx going to be as for your understanding?

So CapEx this year has been quite low because, again, of the pandemic in the first half, there was not that much CapEx. So I would say that we are expecting to end the year with the CapEx, total CapEx of not more than INR 55 crore. Next year, it will be higher, maybe about INR 80 crore. So this is well within our means. And therefore, the total debt will, in fact, see a decline in the current year. Next year, it should be pretty much the same level or slightly lower. And I didn't understand margin accretive or the CapEx...

Yes, sir. Whatever CapEx we are doing, we must be -- please continue, sir.

Yes, we are setting up this CapEx, which we have planned in the current and next year are in the existing plant. So there is no greenfield investment as such. And hence, the ratio of its revenue to the CapEx being done is quite favorable. It's when you set up greenfield that the CapEx goes up very significantly.

It is more and more machines that we are installing. That is what the CapEx is all about?

Yes. Yes. More and more machines.

Right, sir. And over the last few years, I mean, if you take 2016 or '17 onwards, how much has the CapEx been done, sir? And everything is commercialized or something -- or we have something in the capital work in progress?

No. I mean, let's say, from the year '16 -- let's say, from -- if you take '16/'17, '17/'18, it is -- we've done about INR 175 crores in 4 years, INR 175 crore or INR 180 crore and everything is commercialized. There's nothing capitalized -- I mean, nothing pending to commercialize.

Okay, sir. And on the top line of INR 870 crore for the last financial year, which was last quarter was maybe affected with COVID, this is what the optimum level we are operating, [Foreign Language] I wanted to understand the topline...

The other gentleman, that we were at 80% capacity utilization, roughly. So in our current capacity sense, we can do more than INR 1,000 crore, but business is becoming a little seasonal also. So the quarter before Diwali generally see a bigger revenue than other quarters. So you can't run at 100% all the time. So there has to be a little bit of lag. But yes, we do have some headroom in our existing capacity, and it also depends a lot on product mix because you may produce a more valuable product, less valuable product. So it's very difficult to say that how much maximum you can do.

And sir, on the long -- on the debt part, sir...

I'm sorry to interrupt you.

Yes. Yes. I'll come in the queue, sir. Not to mention also.

The next question is from the line of Nitesh Jain from Aditya Birla Sunlife Mutual Fund.

So I mean good set of numbers. And looking at 9 months, almost flattish revenue itself is a good achievement, I would say. My question is, sir, on -- I have 2 questions, rather. One is on the industry side. So if I look at this year, has TCPL grown faster than your competition, your 3, 4, I mean, organized people as well as the entire industry? This is point number one. I don't want any quantification, but directionally, you would definitely know that whether you have done better than the industry or not. This is point number one. And point number two is, the company always has a 25% dividend payment policy. But last year, due to COVID, you paid only INR 4 dividend. But assuming now COVID is behind and things are looking up and say a company delivers INR 35 EPS, will we go back to 25%? And can we expect INR 8.5, INR 9 type of dividend per share this year? These are my 2 questions, please.

Yes. Thank you, Nitesh. So directionally, I would say that we have done, from best of our understanding in the paperboard carton space, better than the industry. We started out quite quickly after the -- during the lockdown, in fact. And customers also perceive that we are more reliable and hence, we even gained market share. So definitely, I would say that we've done better from the understanding we have like top line, we're almost flat. I think very few our competitor would be in the similar range. So I think there's the 7%, 8% gap certainly. As far as the laminates are concerned, we are a small player. So I wouldn't say the same thing there. So that division has also grown, but so have the bigger poise in the industry. But I think we've kept pace over there because we also have a limited capacity there. As far as dividend policy is concerned, our policy has always been to pay 20% and we have been doing that consistently. This year was a little lower, you're right. But going forward, we will pay -- we will continue with that policy. There is no rethinking on that at all.

Fantastic, sir. And can I ask 1 more question? Basically, what is the net debt as at 31st December, I mean the quarter end versus the March number? Basically, I want to see how much the net debt has gone up. Net debt is basically your total debt, long-term plus working capital minus any cash on the book, so that can help me with this.

So the long-term debt is a little lower than the opening number. On 1st April, it was INR 195 crores; on 31st December, it was INR 183 crores. So it has gone down by INR 12 crores. And the working capital has stayed pretty much the same.

Fair enough. And sir, lastly, we have seen continuous, I mean, improvement, which is a good thing in terms of the EBITDA margin, you mentioned in the opening remarks as well. Now the question here is I want to see what is the -- basically the genesis of this margin expansion. Would you say that is it only because of this lower raw material prices? Or you think that on the cost side, structurally, I think the management has done something tremendously good in terms of pricing as well as on the fixed cost also, so that these margins are sustainable? This is my last question.

So it's a mixture of various things. One is raw material costs. The other is job mix. And the third is reduction in the cost base also. COVID has taught us a lot to be more efficient. In terms of number of employees, also it has gone down. So I think it's a mixture. I can't say that it is one thing. But as I mentioned earlier in the call, the third quarter, we've done what we had to do. So even in third quarter, the margin is higher. So it's -- there, it's not about the cost overhead, but it's more about the raw material and the job mix. So certainly, it is -- I would say, we are more efficient today than we were 1 year ago.

The next question is from the line of Bharat Sheth from Laksh Capital.

And congrats on the steady set of numbers. I have a couple of questions. One is that you just mentioned that you have done approximately around INR 170-odd crore CapEx in the last 3, 4 years, and you have a INR 80 crore CapEx guidance for the next year as well. So the thing is that what is this CapEx? I mean, this next year, INR 80 crore CapEx is in which plant, and it's basically brownfield or greenfield? That's number one. Number two is that I have seen that we have a lot of repayments coming up from 2021 onwards, '21, '22, some of our term loans are maturing. And I've also seen that recently, there was a release by you to the exchanges that -- I mean, ICRA has withdrawn the rating based on company's request. So what is the rationale of withdrawing that rating request? And -- I mean I have thinking that our entire CapEx is being funded by the debt. So what's our -- what's the guidance on that going ahead? Are you planning to reduce the debt going ahead? And I mean, how the things are going to look like next couple of years going ahead?

Yes. Thank you. So this INR 80 crore next year largely is in the flexible packaging space and some extent in the carton. And the repayment schedule over the next few years is not something we are perturbed about. I think it's well within our earnings. And it's pretty much the similar levels in the current year and the previous year. And as your question on the credit rating. So we have been rated by a new agency this time, CRISIL versus ICRA, and therefore, ICRA has removed and they have got a better rating in fact by CRISIL. It's 1 notch higher than what it was earlier.

Okay. Okay. And since you have done so much of CapEx in last 3, 4 years, and you are continuing with that in the next year as well. So is there any -- I mean, I'm sure that this should translate into a good revenue, top line growth going ahead. So if you can give some long term, I'm not asking for next year, but if you can see where you can see your top line in the next 2, 3 years. And is the strategy -- another question is on the strategy, are you going to continue with the same kind of CapEx in your existing field or -- I mean, do you foresee so much of demand going ahead? And how is the strategy and vision of the company for the next 2, 3 years?

So we have already outlined that in previous calls and also in the Board report that our cash earnings, the CapEx is not higher than that. In fact, the current year, the CapEx is much lower than the actual earnings in cash. So even going forward, we hope to continue the same trend, so that there is saving in the balance sheet, either staying in cash or in some other way. But essentially, we don't foresee any increase of any significance in debt.

Ratios?

Yes, the ratio will keep improving day by day in terms of current ratio or equity debt ratio, which -- the debt equity even today is very comfortable. So I hope that answers your question?

Sure. And any guidance on the top line for the next 2, 3 years?

Yes. So next year, I already mentioned. And historically, the company has been growing around -- anywhere between 15% and 18% annually. And our CAGR has been somewhat similar. So we -- our target is always to get to that level of annual growth. But of course, it depends on so many factors, but double-digit growth to maintain, I'm sure, it's something which we should be able to achieve.

The next question is from the line of [ Jai Shroff from Fast Capital. ]

Congrats on good set of numbers. I had a couple of questions. First, on the export side. I think last con call, you had mentioned that while domestic had suffered in calendar of '20. Exports had done pretty well. So what is the trend there? And how do you see that going ahead? And second is, in terms of industry consolidation. So we have a lot of competition from maybe small and unorganized players. So what -- I mean due to this COVID, are we seeing some amount of consolidation, which is helping the organized then?

Thank you. Yes, export was what sustained us actually in the first quarter. And even now this year has been pretty good from an export perspective, the rate of growth in export is higher than domestic. And whether that will remain forever, I'm not sure, but export is here to stay, and it should do quite well. Long term, a lot of multinational companies are looking at sourcing from India or certainly they're exploring sourcing from India. So I mean, overall, it should be okay. Only currently, the problem is the international shipping delays and the freight has gone up very high. So temporarily, export is not much better margin perspective than domestic. But otherwise, it's a big focus area for us. And industry consolidation, during COVID, of course, some companies have really suffered a lot in terms of their cash flow, et cetera. So we do expect the weaker companies to look at merging with stronger companies and all. And that will happen. But let's say, in the last 9, 10 months, we haven't really heard of anything that happened as such. So it takes time, but I guess, in the medium to long run, it will start. The industry will see a lot of this.