TCPL Packaging Limited (523301) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to 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, Mr. Poojari.

Thank you. Good afternoon, everyone, and thank you for joining us today on TCPL Packaging's Q2 and H1 FY '22 Earnings Conference Call. We have with us 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 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 this earnings conference call for the period ended September 30, 2021. I trust all of you and your families are keeping safe and are in good health. I also like to wish you a very happy Diwali and a very happy new year. I would like to start to take you through the operational and financial performance, after which we will open the forum to have a question-and-answer session. As India has emerged from the effects of second wave of pandemic, several end-user industries have witnessed a challenging operating environment. In this backdrop, we believe that TCPL has reported a very steady performance. During the quarter, revenue stood at INR 253 crores against INR 245 crores in the previous period. And the EBITDA stood at INR 36 crores, translating into a margin of 14.6%. However, during the half year ended September, our revenues have turned INR 479 crores as against INR 415 crores in the previous year. EBITDA has also stood at INR 67 crores, translating into a margin of 14.1%. So while gross margins have been impacted owing to rising raw material prices, we have been able to minimize the impact on EBITDA margin by managing operating costs. We continue to see raw material inflation in the ongoing quarter. However, we are working with our customers to undertake adequate price hikes to normalize our margins. Profit before tax and cash profit has stood at INR 15 crores and INR 29 crores, respectively, during the quarter and the same for the half year has been INR 24 crores and INR 51 crores. In a key development, we are also excited to announce that we have entered into a definitive share purchase agreement to acquire 60% stake in a small company called Creative Offset Printers Private Limited. The completion of the transaction is subject to satisfactory accomplishment of certain conditions precedents. This acquisition is a strategic decision aimed at broadening the company's product portfolio and strengthening its long-term growth prospects. With this acquisition, TCPL enters the high potential rigid box categories that we focused on one of the world's fastest-growing smartphone market. COPPL manufacturing facility is strategically located at Noida, outside Delhi to target one of the largest mobile manufacturing up in India. As both companies, that is us and COPL, have production facilities in close proximity, TCPL expects to benefit from significant synergies such as cost reduction and optimization. This segment is also largely unorganized, so it is our strategic intent to grow by leveraging our scale and institutional capability. Further, the promoter of COPPL, Mr. Rohit Khanna, will continue to remain in the leadership position under the guidance of the Board of Directors. I would like to take this opportunity to welcome the existing promoters, Mr. Khanna and Ms. Dhillon and the senior management and look forward to working together to achieve larger scale in the future. To conclude, our expansion plans in the flexible segment are progressing well and will be established by the end of the fiscal. As we look ahead, we believe the momentum in demand is improving and will further strengthen with rising vaccination coverage, better economic indicators and supportive macro such as good monsoon. So additional capacities, along with pickup in demand momentum, should enable us to deliver strong growth rates in the coming years. Overall, we believe TCPL is well poised to capitalize on the rising demand for sustainable packaging solutions from leading brands and would support our endeavor to create value for all stakeholders. I would now request the moderator to open the forum for any questions or suggestions that you may have. Thank you very much.

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

So there is a LinkedIn post of a promoter who says that we have entered into a cupstock manufacturing facility at Goa with the directors. So how will the revenue of this be adjusted? And is there any conflict of interest in this? That's the first question. And secondly, sir, how do you see the entire sustainable packaging storage playing out? Will it go to new disruptive player who will change design, where -- who'll really adapt faster to the existing business of -- most of the corporates or will we be also able to be [ guided ] in terms to get that business?

Yes. Thank you. Your line hasn't been very clear. But from whatever I could pick up, I will try and answer the question. First thing is that you're right, there is a LinkedIn post on the new joint venture that the family has -- is entering into with a foreign company for manufacturer of printed paper cups. So there is absolutely no conflict of interest with TCPL. In fact, TCPL will get additional opportunity as a result of this venture because the printing will be done within TCPL itself, and it will also create opportunity for other carton volumes, which the customers might have. The pricing of job work or anything will be all at arm's length relationship. And the reason for entering it into a private company as opposed to as a subsidiary of TCPL is that it's a very small joint venture. And given the size and scale of this, it was felt that we are part of a listed entity, then it would create more issues. And hence, it has been kept separate. And also the partner, it's running a private company and was not very comfortable in aligning with a public limited company rather than a private company. So that was the main thing. But essentially, it's a very small investment. And hence, it's been kept, and we will be very clear about the fact that the pricing and any other commercial considerations will be done in a manner that is beneficial only to TCPL. As far as sustainable packaging is concerned as you may know, we are setting up this new plant as a subsidiary, TCPL Innofilms, which is going to make these recyclable films, which will go into making laminates which we supply to customers. There is obviously a very strong focus to move to single polymer packaging as opposed to the multiple polymer currently being used because then it can be recycled. And I think we are on track. We have done various trials with 10 new segments, and the results are encouraging. So we feel quite confident that this can create a lot of value going forward. And this is a totally disruptive technology because until now, nobody has been able to successfully produced single polymer packaging across [ broad ] of various end-user categories, for example, shampoo sachet, which is currently produced with polyester and polyethylene. Our disruption will be to convert it to purely polyethylene without sacrificing on barrier or aroma or aesthetic property, which until now has not been done. So any disruption, it takes some time, and there is some unknown, but I think we are quite confident that we will be successful.

If I may ask one more question, what will be the units of peak revenue once we achieve like, close to like 85 million to 90 million capacity utilization? Then how soon can we expect that to happen, the sustainable packaging, this [ Spectrums ] line?

So the revenue -- you see there are 2 aspects. One is that we're going to make a film. So the film at 85%, 90% would be about INR 70 crores to INR 80 crores, and we expect that to ramp up within 6 to 8 months. But then from that INR 70 crores, we will make a laminate, which we'll convert. We make printed material. So there, we can expect a further 50%, 60% value add. So we could cross over INR 100 crores.

In one financial year?

Sorry?

In one financial year?

In one financial year, yes.

[Operator Instructions] The next question is from the line of Pavan Kumar from RatnaTraya Capital Partners.

Sir, first of all, on the acquisition. So how much...

On the what, sorry? Affirmation? Acquisition?

On the 60% stake acquisition of the company that we have acquired, on that, how much debt is there on that balance sheet? And number two, what is the kind of profitability or margin for us on that particular balance sheet?

So the company has about INR 12 crores bank debt and some private borrowings, which we will repay because they're going to freshly infuse further equity. And the margin, it's a reasonably decent margin business. We expect to achieve high double digit.

Okay. Okay. And what would be the -- I mean, what do you think is the revenue potential of that particular acquisition in terms of whatever capacity is already there without us infusing any capital?

So right now, they are running at a rate of about INR 35 crores a year. In the past also, they have achieved highest of -- in the same range, and we believe that we can increase that by at least 50%. And with very small CapEx, we can more than double or even triple the revenue. And the infrastructure of the company is very nice. They've got adequate space and a good solid infrastructure. The proximity to customers is a very big benefit that they have because they are located in Noida, which is a big hub for mobile phone manufacturing, not only is there Samsung but there are other Chinese companies like Vivo, OPPO, Xiaomi and more companies coming. So the main thrust of our strategy was to have a facility in Noida, which is close by to these customers and do just-in-time delivery and also JIT inventory system. And these are high-value-add boxes because there's a rigid box. If you buy a smartphone, it comes in a retail box where there's a bottom and a top, and you open the box and it's got a high-quality print finish. So there is a huge potential because India has done this production-linked incentive scheme where the mobile phone manufacturers get a lot of benefit by manufacturing in India and exporting to the world. And with the uncertainties around China today, a lot of markets are now opening up for Indian companies, and so there is a big growth in this segment. And we felt that it would be very synergistic to our operations because at the end of the day, bulk of the processes are common. And so we can leverage that. And we have Haridwar factory of ours, which is quite close by, which has a lot of capacity. So we can do some back-end work there. Because when you supply the mobile phone boxes to a customer, you have to supply it in a fully formed state. So you are actually selling your transporting [ aid ] and hence, it needs proximity. At the back-end work, you can do part of it anywhere. And it can be -- it can complement the front end nearby. So in a way, it's a very win-win situation both for COPL as well as for TCPL.

Okay. And how much -- what do you think would be the time line for us to say for this particular entity to contribute meaningfully to, say, 10% of the revenue?

Look, right now, some conditions precedent have to be satisfied, which is I don't think a very onerous thing. In the next 10 to 15 days, we will actually invest the money and acquire the company. And after that, obviously, we start managing the operations, et cetera. So I would say that in the next few months, we look forward to bringing it to its full potential. I mean they're already doing reasonably well. They're having a turnover of INR 3 crores, and the [ ODA ] expects us to grow from here. A very big plus factor is that they are an old and established supplier to Samsung, which is, of course, the most reputed mobile phone manufacturer. And they have a very good equity in Samsung, so we hope to leverage this and go forward.

Okay. Okay. And can you disclose how much might be the capital infusion that might be required to get this entity again up?

Capital infusion is not very much. I don't think -- it will be less than -- in terms of CapEx, I think you're asking this question. So the CapEx required to bring it up to a slightly bigger scale is in the range of INR 5 crores to INR 10 crores.

Okay. That's clear. And sir, one last question of mine. In our existing lines of business, of the capacity that we already have in terms of flexible and in terms of -- that there's packaging capacity, paper packaging capacity, what is the -- what do you think is the steady-state run rate of growth going forward? What do you think is the potential of the industry? Maybe if you can just give us an idea about that.

So these last 2 years have been very volatile due to COVID, and the market is going up and down quite significantly. We've had 2 very big waves. And hence, I would say that volume growth of the customers is high single digits, 7%, 5%. It could be anywhere between 5% and 10%. So we would expect to grow in volume a little better than that and in value much better than that because it's very inflationary at the moment. I would say that we would expect to grow in double digits for sure.

Okay. Okay. Okay. And this year, we are not expecting much growth, I'm guessing?

No, now I think -- I hope the worst is over. And if you see the performance, so far, we've grown 15% half year. And I think going forward also, we would hope to achieve decent growth.

[Operator Instructions] The next question is from the line of Pulkit Singhal from Dalmus Capital Management.

First question is on the flexible line. If you could -- why is the contribution in the INR 250 crores turnover? And how much would that have grown on a Y-o-Y basis?

The flexible line out of this INR 250 crores, is about only INR 35 crores.

INR 35 crores. Okay. And the growth? And the growth on a Y-o-Y basis would have been in flexible?

Growth on a Y-o-Y basis is not significant. In this quarter, it's pretty much flat because if you remember last year, the first quarter was very poor, but the flexible business really came back very strongly when there was restocking in the second quarter. Whereas in this year, it has been more stable. So that's why this year, the second quarter over last year second quarter, there has been a very marginal increase in revenue.

Right. Right. And how do you expect this -- I mean I know you're doubling the capacity here. So this INR 35 crores quarterly run rate -- I mean this is almost INR 140 crores. I mean, is this expected to double in the next 1 or 2 years? Is that how you [ project that ]?

Much more than double in 1 or 2 years because we are adding a lot of new capacity. But as I mentioned earlier in the call, it is partly additional capacity and partly disruptive technology. So it will open up opportunities for us in segments which we are not there today, and we obviously hope to add a lot more customers because of a better capability. Also, we have our old blown film in house, which many customers need for qualifying you. So in that sense, there is a very big opportunity ahead of us.

Right. And sir, if I look at the core business, I mean, it has only grown 3% Y-o-Y this quarter, even if I were to exclude flexible. I think most FMCG companies have reported double-digit growth in terms of at least the top line and high single digits growth in terms of volume. So what explains this low single-digit growth, which I think also includes inflation in the RM prices. So on a volume basis, my sense is we have degrown in the core business. Is my understanding correct?

Yes. So you're right. I mean, in volume also, we have not degrown as such, but there has been very small growth. And looking at our customers, also -- the growth has only been 5% to 7%, I would say, on an average. But a lot of this is also inventory sales. Basic point is that this year after the second wave, consumption has taken a hit, and production has also taken a hit at our customers' facilities. And as a result of which, the buoyancy what we saw last year after the first week, that kind of buoyancy we have not seen in this year. And you will notice that there has been price hikes our customers have taken, which have depressed their margins also. So there is a -- obviously, the inflation is definitely playing its part in subduing demand growth overall.

Right. So are you saying your growth is a lead indicator in a way for the FMCG growth? I mean because their growth has been in high single digits to low double digits, but you're -- I mean you're predicting there's a slowdown. So I'm just wondering why...

Yes. I mean it could be -- certainly, it is an indicator. No doubt about that. And definitely, the buoyancy is not as good as it should have been.

Right. Right. And will you -- yes.

The thing is that post second quarter, the Diwali week or the Diwali period has been quite good with all the reports we get. So hopefully, now demand has again revived. And if this sustains, then it augers well for the near future.

Okay. But would there be an element that you would have lost market share with some of your customers?

Not really. No, I wouldn't say we lost any market share.

Okay. And in terms of RM price inflation, where are we right now in terms of percentage Y-o-Y? And why is it not get reflecting in the ASP growth? Because if your volume growth is not negative, that means ASP growth is still around 1%, 2% maybe. But my understanding was raw material price inflation is much higher. So why is there a dissonance still?

So RM pricing, as there was an inflation in March, April period, then it was fairly stable. In fact, it went down in the July, August. And again, now since October, there is further inflation. So the whole effect of it has not been fully passed on. If you see our quarter results, our RM cost as a percentage of sale is almost 4% more than the previous period. So we have taken a hit because of the lag effect of passing on. So we haven't been able to pass on the whole impact yet because there are have been series of increases. So when we go to a customer with one increase and another increase comes, then again, you rework the pricing. So that has caused this kind of a lag.

Right. Right. And so in this year, I mean, given that your first 2 quarters are closer to 40% kind of gross margin, is that how we should look at things going ahead? I mean because of the high RM price value.

The price now looks -- appears that way because we have achieved 61%. That is 39% gross. I think in the current scenario where the price -- RM is going on upward trajectory, this seems to be a fair margin to play with.

The next question is from the line of Vipul Shah from Ripplewave Equity Advisors.

Congratulations on a good set of numbers in a very challenging environment. So part of my question was actually answered by the previous participant. Nevertheless, I will take this opportunity to just make an observation that calendar '20, calendar '19, our gross margins have been actually trending higher, about 43%, 42%, 44% sometimes on a rolling 12-month basis. Whereas calendar '21, we've actually struggled and to at least come up with at least a 40% gross margin number as well. This quarter has shown some signs that we are actually trending back, but is it fair to assume that this new project we -- now that we will be sort of looking at a 40% sort of a gross margin on a sustainable basis?

Yes. I mean right. That is exactly what I just said. Because right now, raw material has not stabilized. The market is very volatile. As a result of which, there is a lag effect. And hence, the margin has got impacted to a certain extent.

But the point, sir, I'm just trying to understand is that with the lag effect, pricing which we implement and which, over the years, we've seen it on a sustainable basis, we've been able to maintain our gross margins. Is it sort of fair to assume as we look ahead, sir, I understand that the pricing environment of our RM is quite dynamic as I would say. But should we say, sir, 2 quarters down the line, [ look at and say ], we should be back to a 43%, 44% sort of a gross margin, which we actually have done quite sustainably in calendar '20?

Well, we can't give you certain assurance at this stage. When we -- when the market is so uncertain, it's not easy to give this kind of an assurance.

This is Akshay. I just want to step in. In the past, we have never seen this kind of raw material inflation. Paperboard especially is a very stable commodity. The maximum kind of swing one season a year is INR 3, INR 4, maybe maximum 5%, 7% at the most. And that's also a big event. Whereas in this last 1 year, the price of like a recycled paperboard has gone up in very, very high double digits. I mean pretty much every component of our cost is up in very high double digits. So in such a scenario, it's very difficult to say what will happen next. I would have said like if you ask me 3 months ago that where is the raw material price going, we would have said that it's certainly coming down from here, and it can't go up further. But in fact, the reality was the exact opposite. So it's very challenging to say because there's so many new factors like China and this global container shortage. I mean people don't know where it's going to go next.

The next question is from the line of Pavan Kumar from RatnaTraya Capital Partners.

Sir, what is the current utilization of our paperboard capacity and also our flexible line capacity? And when is the new capacity expected to commercialize on the flexibles?

The flexible side, new capacity will start by the end of the fiscal year, which is February, March. As for the current paperboard, we are in the range of between 70% and 75% utilization.

And the flexible line?

Flexible line up to the September quarter was also 65%, 70%. But now it is moving up.

Okay. So Q2 was relatively very big from what you said.

Yes, Q2 was big.

Okay. Okay. And sir, for let's say -- for clocking additional volume growth. So is it like -- so what are we currently envisaging in the sense where we have to pull in more of the new customers who can bring us volumes or do you think the current volumes from the customers are good enough to take care of let's say double-digit 10%, 11% growth on our current portfolio?

No, new customer acquisition is a constant factor, and all the time there is an attempt to add customers in all sorts of categories. There's a lot of new startups, which keep coming, the food and other things. So you have to keep attempting new customers, and existing customer volume growth obviously is always the bread and butter. So we need both. I mean we can't just sit on one set of customer because you might lose a certain SKU because it's not doing well or they may discontinue it. So you can never say that -- which brand is going to succeed or which one is not.

Okay. Okay. And say, 1, 1.5 years by the time our volumes settle down in our new facility also, can we look at margins somewhere around the range of maybe 15% to 17%? Is it a possible scenario?

So if you see our historic margins have been fairly stable. So I think on one hand, we will be looking at growth and the other hand protecting of margin. So it will be in the similar range, I think, going forward also. I mean we hope that we've seen the worst of this raw material inflation, which has been a very big disruptor across the industry.

[Operator Instructions] The next question is from the line of Pavan Kumar from RatnaTraya Capital.

Sir, what can we -- since we are saying we might not see much of traction on the, what should I say, the EBITDA margins, what can be the growth potential? Can we expect some growth between maybe 20% or north of that incoming maybe not from this year but from maybe next year and I mean maybe over the medium term maybe?

My friend, historically, we have grown 18% to 20% over 20 years. So our basic instinct is to try and grow at that number, but the economy has to support us as well. So I mean, I don't like to make -- many of our competitors make these grand plans that will be so many thousand crores by this year and this much by that year. I mean you don't even know what's going to happen tomorrow. So we keep trying our best, and we come with a comprehensive performance. That's all we can promise you. And we don't intend to lose any share of business or market share, and we intend to gain. After that, what happens is very difficult to predict. But 20% is a fabulous number if any company can achieve that over a long period of time. 1 year, anyone can do, but it has to be sustained.

And related to that question, do you think our base has gone to -- come to that level that maybe now 18% to 20% will be very challenging? Or do you think that it might still be doable?

I mean I don't know how many companies are doing that kind of growth year-on-year on an average basis. And those days of 20% growth, the economy was growing. Right now, Indian economy is not growing. It's a very marginal growth. So the stock market growth is much higher than the economic growth. So we need economic growth to take place as well. All the -- now basic ingredients are in place, except for the inflationary situation which the country is witnessing. If things come in control, then yes, why not?

Thank you very much. I now hand the conference over to the management for closing comments.

So thank you, everyone, for being with us today. I know it's a first day after a long holiday for Diwali, so really appreciate your time. I also hope I've been able to answer all your questions to your satisfaction. And of course, if you need any further clarifications or you would like to know more about us, please feel free to contact our Investor Relations team or CDR India. So we hope to have your valuable support on a continued basis as we move ahead. On behalf of all of us at TCPL, I, once again, thank you for taking out of your time to join us and look forward to interacting again with you all soon. Bye-bye.

Thank you very much. On behalf of TCPL Packaging Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.