TCPL Packaging Limited (523301) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the TCPL Packaging Limited Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and thank you for joining us on TCPL Packaging's Q1 FY '22 Earnings Conference Call. We have with us today Mr. Saket Kanoria, Managing Director; Mr. Akshay Kanoria, Executive Director; and Mr. Vivek Dave, GM Finance of the company. We would like to begin the call with brief opening remarks from the management, following which we'll have the forum open for an interactive question-and-answer session. Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentation shared with you earlier. I would now like to invite Mr. Saket Kanoria to make his opening remarks.

Good afternoon, everyone, and thank you all for joining us on our earnings call for the first quarter ended 30 June '21. I hope in these challenging times, all of you and your families are keeping safe and are in good health. I will be covering the business highlights and financial performance for the quarter, post which we will be happy to take your questions and suggestions. As some of you may know, TCPL is one of India's leading producers of sustainable packaging solutions for customers across industry with a 15-year net sales CAGR of -- in excess of 17%, we have consistently outperformed our underlying industries or customers on the back of our strategic approach to growth through diversification. To date, TCPL is one of India's largest folding carton manufacturers and converters of paperboard. This whole segment contributes to approximately 85% of our revenue and the balance comprises of the Flexible Packaging division. While we are a smaller player in this relatively new segment, we believe among our marquee large customers, we have successfully positioned ourselves as a highly innovative player providing versatile and sustainable solutions. Over the years, we have actively expanded and diversified our operations to service a wide range of packaging products while consistently adding new clients and growing our share of business in existing customers and markets. I would also like to point out an interesting fact that came to our attention recently, that out of the 6,000 listed companies on the Indian stock exchanges, there are only 105 companies that have managed to grow each year for the past 10 years. I'm proud to say that TCPL is one of these 105 companies on the list. But not only are we on this list for 10 years, but in fact, we have been growing each year for our entire history of the company, which is in excess of 30 years. So I wonder if they made a list of companies, which have grown each year for 30 years, I would think that there would be a very small number. Coming to our quarter 1 performance, we started the fiscal on a steady note despite the second wave of the COVID pandemic, impacting demand in the first quarter. Total revenues expanded by 33% to INR 226 crores and of course, the increased growth rate year-on-year basis was primarily owing to last year's low base. With last years learning, we all had -- we had all the necessary protocols in place that allowed us to maintain productivity at all our facilities while adhering to all the regulations and safety standards. During the quarter, we witnessed notable raw material inflation that impacted our gross margin. However, operating leverage and better cost management enabled us to report a higher EBITDA of INR 30 crores, which was up 29% from the same period last year. This translated into a margin of 13.4%. We are taking adequate price hikes to cover inflation and anticipate our margins to revert to normal levels in the upcoming quarters. Our profit before tax grew to INR 9.5 crores and our cash profit was strong at INR 23 crores during the quarter. On the operational front, we are making healthy progress in establishing our second flexible packaging line at Silvassa that will more than double our existing capacity. Furthermore, TCPL Innofilms Private Limited, a wholly owned subsidiary of TCPL, is setting up a state-of-the-art innovative PE that is polyethylene blown film line, which is being imported from Germany. This film is based on the machine detection orientation technology and will be not only environmentally friendly but produce recyclable packaging. At present, most flexible packaging is made of multiple polymers rendering it nonrecyclable. However, TCPL aims to use single polymer while still satisfying all barrier and functional requirements, aiding in the transition to recyclable packaging. Given the growing trend towards sustainable and recyclable solution, we anticipate this product will garner a healthy traction going forward. Both facilities will be commissioned this fiscal. So normalization in demand, combined with these expansion plans, should provide a notable impetus to our growth from next year onwards. To conclude, we have delivered a resilient and consistent performance in an unpredictable environment. Going forward, on account of our technological advancements in the packaging solutions industry. We believe that organized large players like us are well positioned to tap the growing demand for sustainable packaging solutions from brands across various industries, including FMCG and food and beverage. As our results documents were shared with you earlier, I hope you've had an opportunity to glance through the financial numbers. I would now request the moderator to open the forum for any questions or suggestions that you may have.

[Operator Instructions] The first question is from the line of Faisal Hawa from H.G. Hawa & Company.

Sir, sustainability issues amongst packaging, especially are coming into a lot of scrutinies these days...

Can you repeat your opening point?

Yes. So sustainability issues, especially the packaging, are coming into a lot of scrutiny. And we are in a very good position in the sense that we already supply to most MNCs and large Indian corporates. And we may be asked to now shift our packaging towards sustainability and to really be more environmental friendly. So are we in a position to really pivot and do research development, really engage with our customers and even collaborate with them to change materials or to even change, in many cases, our machineries to cater to this demand, that is one. And secondly, sir, in view of a lot of M&A activities and private equity and venture capital activities taking place in the second wave -- in the unlisted space, particularly with Parksons, which are very similar compete to yours. How are we looking at enhancing our shareholder value? Because ours remains a very illicit stock and very few mutual funds are also present. So is there some view on how to enhance the shareholder value?

Right. Thank you. So the sustainability is a very big word. We like to focus more on recyclability. And packaging is all about recyclability and sustainability is a subset of that. So I just explained that we are getting into this new technology wherein we can make recycleable flexible packaging. But a large part of our business is paperboard based, which is anyway, the most sustainable material that you can get. So I think we are very well positioned from this aspect, and we have, in fact, taken significant advanced steps towards maintaining leadership in this area. And as you rightly said, this is certainly going to be a plus and focus for most customers going forward. As far as private equity active investments in some unlisted companies that will always keep taking place. I don't think that, that is an essential ingredient for us to enhance shareholder value. Your question is a bit contrary because...

Participants, we seem to have lost the line for the management. Please stay connected while we reconnect the line for the management. [Technical Difficulty] Participants, thank you for patiently holding your lines. We have the line for the management reconnected. Over to you, sir.

Yes, I'm very sorry. I don't know what went wrong with the line. It got disconnected. So I was talking about the private equity investments in this space. And we don't see how that enhances shareholder value by inviting them into our company. Shareholder value really will, I think, play out when -- as we consistently perform, consistently grow and have a higher return on equity and on investment and the liquidity of the stock, obviously really depends on how much interest there is in the market and how many people recognize the performance of the company. Hello?

Mr. Hawa, are you done with your questions? There seems to be no response from the line of Mr. Hawa. [Operator Instructions] The next question is from the line of Vipul Shah from RW Equities.

Sorry, I got disconnected in the opening remarks. So I'm asking if something has been covered, I apologize for it. So my question is basically, last 2 quarters, we've seen our gross margins have been under pressure. I mean, I don't recollect in the last 12 quarters, our gross margins going down below 40%, but -- so is this commodity inflation -- and as you -- I believe you mentioned that you've taken price hikes. So -- but is this commodity inflation now sustained in our gross margins? Or you think you will be -- the company will be able to deliver gross margins which we have been delivering historically?

We believe that we should come back to a historical margin. This post-COVID period has seen tremendous volatility in raw materials and particularly in the last 6, 8 months, there has been a lot of international freight costs which have gone totally out of control. And obviously, is passing on such volatile input cost takes some time and when you pass on one element and another one goes up. So there's been this constant pressure. But I think that we should see an improvement in gross margin going forward.

The next question is from the line of Nitesh Jain from Aditya Bula.

So basically, I want to ask you about the TCPL Innofilms, which is the new line of -- relatively a new line of business which the company is going into via a 100% [indiscernible]. Basically, if you can elaborate like when you commission this -- I mean how has been the pre-marketing strategy? Has there been good inquiry? Or do you have the orders? This is relevant in the sense how quickly we can ramp up this plant? This is the question number one. And number 2, how big is the opportunity for this innovative single polymer packaging, flexible packaging. I mean, can this kind of project -- can this product cannibalize the existing flexible packaging, where there is a mix and match of the metal and the polymer and which time we recycled. So how has been the initial dialogue with some of your customers about it? If you can talk about this opportunistic landscape for TCPL Innofilms, it would be really helpful.

Yes. Thank you. So as we speak, we have imported a couple of containers of this film, and we are doing tests at various customers for various different product applications. So far, we get a very encouraging feedback and response. The product seems to work well on packing lines, et cetera. But it's still early days because a well-established product, if you want to change the structure of the packaging, customers have to subject it to extend its shelf life and a lot of testing for both barrier and functional requirements. So it's a journey, and we have started that well in time so that before our machine comes, if we can get 3, 4 approvals, then at least we have some commercial application to go with. And over a period of time, we can ramp up its usage. But in the meantime, obviously, the equipment is capable of making regular PE film. So it's not that the equipment will be idle. We have also received a lot of export inquiries for this. So we are quite confident that ramp-up will happen fairly quickly, but the value-added MDO ramp-up may take up to a year to completely fully utilize it. But as far as the opportunity is concerned, we really believe that there's a huge opportunity because the recyclability is the name of the game. And the government so far, regulation is not talking about single polymer film being a mandate. They have just introduced, as you may have read, a ban on single-use plastic items by -- completely by next year. So they've given the industry time to fit in for about 8, 9 months. We expect that even for the flexible packaging, similar sort of guidelines which mandate single use -- single -- I mean sorry, recyclable packaging will come in time to come. And once that happens, then the opportunity becomes massive. Just for you to know, we are setting up a plant capacity 4,500 tonnes a year, and the polyester film business, which goes into thin film application, the kind of film that we are talking about is roughly 500,000 tonnes a year. Now I'm not saying that the entire 500,000 tonnes can be converted to this. The certain functional requirements will always require polyester. Certain ethic requirements could require polyester, but very big opportunities there. Because one line of ours does 100 of the polyester market. So there is a very big headroom for growth. And obviously, companies which are first mover and those who have already done the hard work will get that opportunity earlier and quicker than other companies because already, we are making a name and most companies amongst our customer target is aware that we are in the midst of setting up this equipment and technology. So there's a big opportunity. Yes, Akshay, plesae add.

So if I can come in here. See, we have already present in most major brand owners in the carton space. And obviously, in flexible packaging, we're a lot smaller player. But given that we already have the introduction in carton, and now these players have a very strong reason to look at us. We feel that we are well positioned, first point. Second point is most of these large MNCs that you would have heard of the household name, they have commitments to their shareholders and to their governments where their companies are incorporated to move most of their packaging to recyclable packaging in the next 4 to 5 years. So there's a massive opportunity there. And last point, which I'd like to apply is recently in Europe, there's been a lot of action on this recyclability of packaging. And today, there is a massive tax of 20% to 30% of the value of the product of the flexible packaging in Europe if your packaging is nonrecyclable. So I mean you can even offer a packaging that's 20% more in price and the customer would have no choice in Europe, but to go for it. Because this other alternative is to pay this hefty tax. So we find that even if we start, we can fill up our line probably with exports, so it may take a little time. But there's a huge opportunity. And ultimately, all this will come in India as well. So I just -- I think that should give you enough of an idea.

No, absolutely. That's wonderful to hear. And a related question here is that then should we believe that say suppose by the end of this year or the middle of next year, when you have the product approval and product commercially being supplied to some of these MNC companies and let's believe now that it gets well accepted. So from a longer-term strategy, will the [indiscernible] onto the capacity of -- on this side. And while the folding carton business can continue to grow at, say, 12% to 14%. I mean, the top line growth of some of the FMCG companies or the pharma companies. And the delta growth can come -- higher growth can come from this line of business. Is this the plan there in your mind?

Nitesh, absolutely. This is like on top of our normal growth rate. If you see our growth over the past so many years has been in high single digit -- double digit. So I mean the packaging, let's say, folding carton itself, there's an opportunity to keep a double-digit growth going. And this is on top of that. So this will accelerate our growth significantly. And as far as ramping up this capacity is concerned, it really depends on how quickly we can penetrate and substitute the other alternatives. And we will certainly not leave any stone unturned, but to capture the potential once it gets adopted.

The next question is from the line of Pavan Kumar from Ratna Traya Capital.

Sir, if I look at your numbers, broadly, we have done around INR 200 crores of CapEx in last 3 years -- yes, INR 220 crores to be precise. So these -- how much of this particular CapEx has been in the flexible lines? And number two, of the CapEx that we have done in the flexible lines. Is it fungible with the recyclable component that you are talking about? Or some of it is the normal flexible packaging and some of it is recyclable. How does it work?

So last 3 years, we have not done any significant CapEx in flexible line. This year, we are doing. Last 3 years, it has -- mainly only in carton and the investments we are doing now in the flexible line also allows it to do recyclable. So that is the main thrust of this CapEx.

Basically, this -- just to clarify a little bit, basically the Innofilms will be manufacturing the film, which will be this recyclable film. And then the flexible package division will be converting that film in to finish laminate. So the idea is that we have a separate entity making the film and a separate -- I mean, within TCPL itself, taking that film and then converting it into finished products. So the investment in Innofilms is obviously 100% for this only. And then the regular TCPL packaging flexible capacity addition will convert this film or it can convert any other film or substrate. But obviously, the point is that we should utilize in-house packaging.

Okay. And what is the CapEx on Innofilms and the packaging line?

So Innofilms, we're making a budget of INR 35 crores. And the total CapEx for the year, including that is about INR 100 crores.

All right. And when we are looking at asset turns on top of this INR 100 crores CapEx, should we look at it -- we should be looking at only at the INR 65 crores, which is not there in Innofilms, right?

Yes. That's right. You're absolutely right.

Okay. And can it deliver at 2x asset turnover, sir? Or will it be higher? What can be the...

No. So if you see historically, our asset turn is about 1.5x because we are never fully utilized. We have some equipment or the other under commissioning or recently commissioned. But stand-alone, once you have invested and you run at a high level of utilization, then the asset turn can be 2x.

So in flexible packaging, usually, your asset turn is more like 2x and then folding carton usually, it's more like 1.5x to 2 depending on how many lines you have. But basically, in folding carton, usually, you have a little bit lower asset turn, but a higher gross margin and in flexible packaging is the other way around, but both could give you an ROCE of 20%. That's our -- usually our target. So our blended average, we look at like 1.5x to 2 and then a ROCE of 20% plus.

Okay. And when we are talking about ROCE of 20%, this would be pretax, right?

Yes.

Or post tax, how does it work?

No, pretax.

Okay. So what we are essentially saying is for our business, when we are -- when we would be operating at full capacity, we can generate a pretax ROCE of 20%?

No no, if we are running at full capacity, we'll get a post-tax ROCE of 20%. But the point is that this is the moving target.

Or we can utilize fully in 1 location, then we are doing CapEx in another locations or in 1 business, then we doing CapEx in another business. So that wheel keeps turning. But ultimately, that asset has to do that kind of a return in our calculation.

Yes. And one final question, sir. It is -- if I look at your last 3 years, then we have done around INR 224 crores of CapEx, but our incremental revenues that have come into the system are maybe in the range of, say, INR 200 crores. So should we assume that there is a prospective, I mean unutilized capacity of around INR 200 crores lying in the system?

I mean, this -- out of the last 3 years, 1.5 years, we've suffered COVID. So this is a major factor, which has not allowed us to achieve our potential. And certainly, we have -- we can do without any further CapEx. If we spread the asset, we can do more than INR 200 crores of revenue on existing capacity.

Okay. And post this addition of this film line, our revenue per potential at full capacity can go to INR 1,300 crores, INR 1,400 crores. Would that be the right understanding?

Yes, at a high level of utilization.