TCPL Packaging Limited (523301) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, welcome to earnings conference call of TCPL Packaging Limited. [Operator Instructions] Please note this conference is being recorded. I now hand the conference over to Mr. Anoop Poojari from Citigate. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and thank you for joining us on TCPL Packaging's Q3 and 9M FY '22 Earnings Conference Call. We have with us today Mr. Saket Kanoria, Managing Director; and Mr. Akshay Kanoria, Executive Director of the company. We would like to begin the call with brief opening remarks from the management, following which we'll have to 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 TCPL Quarter 3 and 9 Months FY '22 Earnings Conference Call. I hope all of you and your families are doing well and are in good head. I will begin the call by taking you through the key financial highlights for the period ended December 31, after which we can open the floor for a question-and-answer session. We have delivered a healthy performance during the period under review despite the ongoing macroeconomic and operating challenges. For the year -- for the current 9 months ended December, our revenues have expanded by 14.5% to INR 750 crores, demonstrating the strength of our resilient business model. We continue to witness rise in input prices that has impacted our gross margins during the quarter. However, we have been able to limit the effect of the overall profitability by taking appropriate measures, particularly to cut our expenses and implement price hikes. On the profitability front, the EBITDA came in at INR 108 crores, translating into a margin of 14.3%. In this period, the PBT has significantly improved by 37%, as you all may have noticed. PAT has also increased by 45% and cash profit is up 20% on a year-on-year basis. The acquisition of Creative Offset Printers, we have further invested in the company's following on rights issue to increase our stake to 80% post allotment of shares. Looking ahead, we are very excited about entry into this high-potential rigid box space, which is centered on one of the world's fastest-growing smartphone and electronic markets. We believe we can grow the company to a substantial scale over the next couple of years. Furthermore, we are looking at various other cost rationalization opportunities that our plans are nearby. Over the past 2 decades, we have consistently outperformed our underlying industry going through our focused approach towards growth through diversification. So even as some of our key sectors like FMCG are currently witnessing low single-digit volume growth, we are confident of growing at a faster pace as we have demonstrated, and will continue to do so in the future. Moving on to an update on our capacity expansion. I know that there would be a lot of questions in this area. We have made healthy progress at a big expansion, which is currently undergoing in the flexible packaging unit. And we hope that by the end of March, it will become operational. This line will more than double our capacity. In addition, we're also on course to establish one of the first -- world's first state-of-the-art innovative PE blown film line at our facility, which is being executed through a subsidiary company, TCPL Innofilms. We anticipate this unit to drive demand for our Flexible Packaging segment as it's based on recyclable technology. Both facilities are expected to be operational by end March, early April, over the next few weeks. While our film line should be operating at a high level of utilization within the first few months, we expect the flexible line to be optimally utilized over the next 1 year. So to conclude, on the back of various government policy initiatives taken over the past few years and focus on made in India, India is clearly emerging as a major global manufacturing hub. This structural theme will provide a huge impetus to the organized packaging industry, including the sustainable paperboard-based carton and flexible segments. Given TCPL's leadership position in the industry, we believe we are well positioned to tap this opportunity. On that note, I've come to the end of my opening remarks and would now like to ask the moderator to open the forum for any questions or suggestions that you all may have. Thank you.

[Operator Instructions] The first question is from the line of Vipul Shah from RippleWave Equity.

Okay. First of all, congratulations, sir, on an excellent set of numbers to say that the company could deliver these numbers in these exceptionally challenging times is actually a great commendation sir, to you and your team for brilliant execution. So many congratulations on that. Sir, just one question which I had is that these gross margins of the company have now stabilized at around 40%, more or less 40%. If we look at a rolling 12-month basis, obviously, which is a couple of points lower than earlier. But given the whole inflationary environment in -- around, we perfectly understand the same. So just 1 question. As you look ahead, sir, in the future, do you think these 40% gross margins is what the company can sustain going ahead?

Thank you, Vipul. That was very nice of you, and thanks so much. Yes, the gross margin has been at this level in the last -- quite some quarters, I think what we've reported. And we have witnessed a lot of volatility in raw material over the past. In fact, since COVID, I would say. So it's still continuing, though. And so what I would say is that it could get impacted in a quarter or 2 and that again gets corrected because of price lags. So overall, I don't -- we are not overtly concerned about it right now. I hope that answers your question.

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

So my question is on the strategy level, just like we acquired this mobile phone boxes manufacturing company in Noida, and we've almost over 80% so what is the revenue that we are expecting from this unit in 2 or 3 years from today? That is one. And second, there are -- since the packaging is a very, very fragmented business, and we have a private equity player now actually acquiring several such a valuable niche players and trying to make up a packaging major on its own, would we be open to making such acquisitions at like 0.3x sales or 0.5x sales and trying to make up a packaging major also on our own all over India? Because this is -- packaging is a very, very trade intensive business. And so there are several carbonating domain or even in packaging domain which are available at some 1 time still and this could itself create a good footprint all over the country. So are we thinking in those terms?

All right. I think the acquisition -- we expect the mobile phone business to definitely grow. And in a couple of years, we hope to enter 3 digit mark. As you know that right now it is INR 30 crore range, annual range, so a long way to go, but we expect good growth and scale up definitely. As far as acquisition into other packaging companies based on what others are doing, we will do things if it is sustainable from a pricing point of view and also if it's a good strategic fit. But on our own, in any case, we have been growing healthy double digit. So our obviously primary focus is there. And if things come along at sustainable pricing, then we are very open to look at it for sure.

The next question is from the line of Ashit Sink from Neas Investments.

Firstly, sir, I wanted to understand what is the competitive dynamics here? I mean, what is the company's market share? Who are the key competitors? And how has the market share been? Is it growing or declining? If you can comment on that, please?

I believe we have already shared investor PPT, and it's very difficult to tell you our exact number for market share because it's quite fragmented, the business. But obviously, our market share is only improving because, as I mentioned in my opening remarks, our revenue is outstripping the volume growth of our customers. So there is a bit of value and volume. But overall, we see an increase in market share consistently over a period of time.

Okay. And is it possible to mention the sectoral split? So I did see a number of FMCG and F&B clients in your PPT, but do you mention the sectors at how much comes from this sector?

No, we do not mention that, sorry, because that is the data, which we don't -- we have never been giving and that has not been in public domain.

This is Akshay. Just to jump in, basically issue is most of the competition is private and they would love to know a lot more about us. I know it's a bit frustrating for you all. But broadly speaking, we operate in the FMCG, food, liquor, tobacco, pharma sectors. And predominantly, we are supplying to the FMCG and food packaging industries. So that's our biggest segment.

I mean, Akshay, that's helpful. Basically, what I'm trying to get at, as would be seen FMCG companies are commenting on volume growth being slowing down in the recent few quarters. And the outlook also doesn't seem too great. So -- and like TCPL has been delivering double-digit growth. And I mean, I guess, the company will continue to do so. So what will drive that higher growth for TCPL when the [indiscernible] industry is not growing that fast? so that was my question.

Saket here, again, basically, the growth will be delivered by increasing market share by adding new customers. There are lots of new customers, which we still haven't been tapped. And that is 1 very big key factor in this growth number.

Okay.

And also all the underlying industry volume growth is similar. It's not that FMCG is 2% and something else is 15%.

Understood. And sir, last 1 from me. Just wanted to understand how are the contracts with these FMCG companies based? I mean is the raw material completely pass through, or is it like a cost-plus kind of a contract where we get a fixed ROE?

No, it's not 100% pass-through always. There is a negotiation and it is based on market forces. But broadly, for key accounts, there are certain period of time for which there is a costing methodology. And if there is a raw material increase within that period, then it is pass-through.

What would be the key raw material for us in the folding cartons business?

No. Clearly, paperboard is the main raw material.

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

As raw material, are there any further price hikes due in Q4? And do you think the raw material inflation has been fully absorbed whatever has happened in Q3?

Thank you, Mr. Kumar. We were very surprised that there is a now again raw material price ratio. I had thought that with all the massive increases in paperboard prices last year that we have seen the end of it. But again, the shortage of fiber and shipping and coal and same stories, so again, there is now a new trend of increases. So this is most difficult, again, and we have to start the whole process once more.

Okay. So should we -- are there the contracts for Q4 being negotiated? Or would it take time for us to slowly absorb it over maybe 2 or 3 quarters?

So the Q4 to already passed -- the Q4 is already over. And these increases have just been sought by the mill. So whatever impact will come in Q1 next year only. And we are now talking to customers based on latest indications.

Okay. And on the new flexible line, did you say, sir, it will get commercialized in March?

Yes, new flexible line in March, early April.

Okay. And how do we expect the utilization of that particular line to go ahead? And also the recyclable film facility that we are putting in, what time will it take for the whole thing to ramp up?

So as I mentioned in my opening remarks that we feel that the film line should become ramped up quite soon and the flexible line also, over the course of the next 1 year, should be at a very high level of utilization. That's what we expect as of late. Obviously, for the recyclable film, there is a lot of trials, tests at customers to validate that takes some time. But yes, it would take a couple of quarters at the most.

Okay. So overall -- on an overall basis, because of this new CapEx that is coming online, can we expect any kind of operating leverage, positive operating leverage playing out maybe in the next year? And I see higher margins at least at an EBITDA level? Is it possible?

I think operating leverage will materialize because at the end of the day, the expenses are over a wider sales footprint. But margins, I can't comment right now that it will increase further. I don't think it will increase further on this account in the very first year of operation.

Okay. Okay. But next year, are we seeing -- again, our guidance would be double digit, what should I say, revenue growth or would it be higher?.

Yes, definitely.

Can it be higher, sir?

Well, the India also has to grow a little faster. Right now, the India economic growth is very poor.

We will keep growing at some multiple of the customers' volume. But if the customer volume growth is 1% or something, then obviously the multiple will also look [indiscernible]. But I mean, at some point, but still, we grew faster than the industry and what would...

No. But now 1 heartening thing is that COVID seems to be getting over in all over the world. I mean there's a definite drop in cases. People have now overcome this third phase. So with COVID going next year, I think that's a very positive sign for everybody.

Okay. Lastly, can you give us an idea of what your customer base was the last year in terms of number of customers? What is it now?

This is a very difficult question to answer. I can't give you any very solid data on this. But there are lots of customers. And they keep growing all the time. And so there could be small customer, big customer, but -- I mean, we have in the 100. So to give you a number really difficult.

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

Congrats on a good set of numbers during such tiring time. The first question was just on the Flexible segment. If you could mention what was the utilization during the last quarter and how much it's now contributing to revenue?

So the flexible segment in the last quarter was quite well utilized, I think with the high 85% sort of range.

But in general, we don't like to give quarterly rate in the share. We can give you on an annual basis. It's about 15% of the overall sales.

Right. Because it was 15% last year as well, FY '21, So it's broadly growing in line?

carton rate has also grown in the current year. So it's not that they're flexible has grown beyond the carton the share of business remains pretty much the same.

Yes. Understood. And in terms of the export it, if you could talk about how growth is happening this year on a full year basis? And how are you seeing trends for the next 2 or 3 years?

Export has been one very bright part in our performance and is growing higher than domestic -- and we see that trend to continue going forward. Also, as we mentioned about this make in India thing, so that -- and also people are weary of China. So there is markets opening up and opportunities. Obviously, it takes time to establish it. But over the next couple of years, I think we will have many more export opportunities. So we see a healthy double-digit growth in export already on a pretty high pace.

Right, right. And which areas are you seeing more traction within the exports?

A lot on food products, FMCG tobacco.

Then on the new -- the sustainable film line, we see a very good scope especially if we can -- whether it's the film or the converted laminate, both there's a lot of interest that can drive a huge growth. Overall, basically, India is becoming more competitive vis-a-vis the rest of the world, especially China, not only on account of container price difference, but also the raw material and the overall base of the back-end industry in India has grown to a certain scale. And people need a diversification out of China.

So this is quite heartening. And to that extent, it is effectively the current set of products and manufacturing line that could be utilized, right? In the sense, you don't have to do any particular new investment in technology or some different way of doing things to address this market?

Not investment in technology, but you will certainly have an investment in capacity.

And also sometimes there are some small niche machinery or But nothing great. That's not a [indiscernible]......

But main thing is that you have to grow your capacity also if we have to tap that I mean, if we are talking of high single digit or 20% plus.

Right. Where are we in terms of utilization in for the carton business?

So for the cumulative 9 months, the utilization was, I would say, around 70%. But last couple of months, it has been the higher.

Good. And lastly, if you could talk about your CapEx for this year and next year, FY '22 and FY '23?

So CapEx, current year has been on the higher side. Including subsidiary, it is about over INR 100 crores. But next year, we don't see such a number. It will be lower. But we are still growing our plan. We don't have any big commitment for '22, '23. And then, again, in '23, '24, it will be bumped up. So I think it's a fairly moderate amount of CapEx.

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

Sir, over medium term, what would be our target in terms of return on capital because that has been historically pretty low if we look at our overall historical track record in terms of financials?

Our target is always 20% plus. And whenever we are setting up any new CapEx, that is our internal benchmark. So our -- we are always striving towards that number.

And that would be pretax or post tax?

It's normally pretax.

Okay. Pretax, 20%. And what do you think the time line by which we can get to that target if you have any?

No, we don't have any such time line. This is a continuous effort. So we keep trying to perform as much best as we can, and the returns will automatically flow. So this is an ongoing and daily day-to-day challenge.

Okay. And on your paperboard side, what do you think are the steady-state growth rates because I think we are -- we already have a decent amount of market share. So what can be the growth rate if we take the flexible packaging at our new products on mobiles of this whole equation?

So growth rate can hit very high single -- double digit, 18%, 20% because the paperboard volume growth, underlying volume growth, maybe last quarter was low, but on a normal average, it's about 6%, 7%. So we can grow at double that number probably. And then, in addition to that, the new products or new categories rather so that will propel the growth higher.

As there are no further questions from the participants, I now hand the conference over to the management for closing comments.

So thank you, everyone, for your questions and for your interest. I hope I've been able to do justice to queries. Should you need any further clarifications or you would like to know more about us, please feel free to contact our Investor Relations team or CTR. We hope to have your continues support as we move ahead. On behalf of all of us here are in TCPL, I thank you, again, for taking your time to join us on this call. We look forward to interacting with you again soon. Thank you.

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