Uflex Limited (500148) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '20 Earnings Conference Call of UFlex Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Runjhun Jain from Nirmal Bang Securities. Thank you, and over to you.

Thank you, Stephen. On behalf of Nirmal Bang, we welcome you all to quarter 3 FY '20 results con call of UFlex Limited. The management is represented by Mr. Rajesh Bhatia, Group CFO; and Mr. Rajesh Agarwal, VP, President, Investor Relations. I now hand over the call to Mr. Rajesh Agarwal. Over to you, sir.

Thank you, Runjhun. Good evening, everyone, and welcome to the third quarter FY '20 earnings call of UFlex Limited. On the call today, as Runjhun said, we have our group CFO, Mr. Rajesh Bhatia. Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinion only as on the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of the new information of future events. I would also like to emphasize that while this call is open to all invitees, it may not be broadcasted or reproduced in any form or manner. I would now like to invite Mr. Bhatia to share some perspective with you with regard to the company's operations and results for the quarter under review. After that, we'll open the call to questions from analysts. Over to you, sir.

Thank you. Thank you, Rajesh, for the introduction, and welcome, everybody on this call for Q3 results for UFlex. Fairly decent quarter because the margins have expanded, both the EBITDA and the PAT margins. The volume growth in packaging at 11% a Q-on-Q basis -- on a year-on-year basis is very, very encouraging. And as we complete our shifting of the Dubai plant to Russia by the end of Q4 this year. So we are all set to recoup what the volumes we lost because of closure of that plant. Aseptic packaging also in the current quarter, we are looking at a substantial volume as -- in so much as that we feel that about we will have a 70%, 75% capacity utilization in the current quarter for the aseptic packaging business. So all looking very great, positive. The energy in the company is very high given that the existing businesses are doing well, and the new expansions are coming underway, which will get completed in the year -- in FY '21. So overall, we're happy with the 15% margin after long, long, long time, EBITDA margins on a consolidated basis and about 13.5% normalized margin -- EBITDA margins on a stand-alone basis. We had 2 onetime items, which got reported in this quarter. One is our subsidiary UPET where we sold 82% and because we sold 82% so we had to value the -- revalue the balance 18% also. And again, about 3.9% shareholding of our Mauritius entity was transferred to Dubai, which -- and both these transactions resulted in a gain of about INR 67 crores at an EBITDA level. And at a consolidated level, it generated because these are transactions with the subsidiaries. So at a consolidated level, this resulted in a EBITDA gain of about INR 5.5 crores, and the PAT gain is about INR 55 crores on a stand-alone basis, and minus INR 1.2 crores on a consolidated basis as the impact gets neutralized because of the intercompany subsidiary or relationship. So even if we exclude all that on a normalized basis, the stand-alone PAT for the quarter is INR 32 crores, which, in the same period last year was about INR 4 CR. On a consolidated basis, the PAT is INR 85 crores which is -- and the same period last year, it was about INR 54 crores. So obviously a quantum jump driven by the higher earnings, which is basically coming from the higher margins in all the businesses, whether it is packaging, whether it is films and higher volumes in the packaging business in the current quarter. So as we get into the FY '21, we will see our Hungary, Nigeria facilities getting commissioned towards Q1 and/or Q2 and that's where the volume expansions in these locations will kick in. Russia, we hope to start in Q4 and we're maintaining that deadline currently. But let's see, it could be a few days here and there, but largely, we are on route to recoup our lost volumes from our 1 plant in Dubai. The margins for the BOPET as well as for the BOP -- for the BOPET continues to be maintaining with a little bit of improvement over the Q3 of last year, but the BOPP margins clearly have improved substantially when weaken a Y-o-Y basis, which is testimony to the fact that the demand/supply equilibrium is getting established and the prices are becoming better as the excess supplies are got -- get adjusted. So that's in brief the story of this quarter. I would say probably if we would not have lost volumes and all that, because of the shifting of the plant, the margins, given that the margins in the packaging film continues to be good, we could have done still better, but those are the kind of things which you have to plan well in advance. And ultimately, we shifting this plant to Russia will result in better synergy of operations because as we've been advising earlier that this plant was actually sort of earmarked for supplies to CIS countries, largely -- with a very large output to Russia, and we were incurring a lot of freight from Dubai, we were incurring customs when it was getting imported into Russia. And also, in Russia, we will have an access to the cheaper energy cost. And as we've been doing in our other locations where we are close to the customers. So those benefits would surely kick in as we start producing and as we consolidate ourselves. So overall, I think, we will be -- the margins from this plant itself would also expand as we go forward with this. That's basically a snapshot of what we did in this quarter, the numbers are there before you, I explained to you some of the extraordinary things which are there in this quarter, which boosted the EBITDA more on a stand-alone basis and hardly anything at an EBITDA or PAT level on a consolidated basis as these transactions get neutralized on a consolidated basis, but on a stand-alone basis, yes, they do appear in the India balance sheet, which is these numbers we've already published. Notable part, I think, is that in the current quarter, as I said, that the aseptic packaging looks at about 70%, 75% capacity utilization levels, which is -- going into the -- going into the season with that kind of a capacity utilization is surely going to be a huge booster to the earnings in the subsequent quarters, both the top line as well as the profitability. But let's look at this quarter. And then because this industry has also the lean period as well as the prime period, so the next 6 months are really the prime period as summer season kicks in, and the demand for the juices and other liquids go up substantially. And then the -- when the summer ends and we get into the winter or the more wetty season, so that's where the demand for the drinks and all these things also go down. So we'll see at that point in time as to what we are doing. But I think as of now, the positive is what we have to take it forward, and you obviously base your capacity baking -- taking the -- building on the seasonal aspects in this particular aseptic business, and that's what is the norm across the country. So I think while currently we are into half of the Q4 also, but looks like that we will maintain the margins and because of the uptick in the aseptic packaging there might be a better surprise in store for all of us, which I will not -- I'll be not in a position to quantify as yet. Thank you, gentlemen. Thank you being on the call. And that's what I would like to summarize this from the management perspective. And if there are any questions, most welcome to take them now.

[Operator Instructions] The first question is from the line of Kunal Bhakta from First Water Fund.

Could you guide us if there has been any major customer acquisition in Asepto in the previous quarter?

So I think it's very difficult to name and all that because of some of the confidentiality clauses we may have, but definitely, we have 1 or 2 big names in this quarter. But for me, it is difficult to sort of take them on the call because we had some bad experience earlier for this.

Okay. Rajesh, maybe the concentration you could guide, top 5 customers in Asepto?

The concentration is always, the number 1 is the juice, number 2 is the milk and number 3 is liquor. So I think for us, the liquor business is sort of one, which gave us the initial boost and all that. And now it is more of juice and some of the other packaging, including ghee and everything else we're doing also.

Okay, okay. So what is the current exit rate on Asepto?

I think we are looking at doing about 200 million packs a month.

200 million packs a month. This is by which month?

Current month.

Okay, current month. Okay, got it. And with regard to your Poland plant, what is the time line for the financial closure?

I think financial closure is not at all a challenge there given that we have already -- because this existing plant is already debt free. So there is no debt currently on that Poland plant. So the existing banks are more than willing falling over each other to sort of fund that. I think we will have that. We've already closed that based on the in-principal discussions and the approvals from the bank. So that is not an issue at all.

You have already ordered the equipment?

Yes, we already ordered that.

Okay. And you don't foresee what's the time line for delivery? Is it faster or...

So we're trying to -- because we will try to do -- because the Poland plant, as you see, is already doing more than 100% capacity utilization for many years now. So we're trying to sort of expedite that, including if there are some plants which somebody else ordered and they are being delayed and all that, including moving that. So we expect that in FY '21, we'll be able to start that plant.

Understood. And in terms of your packaging division, you mentioned 11% Y-o-Y growth. What is the Q-on-Q growth?

The Q-on-Q growth in the packaging is 4.5%.

4.5%?

Yes.

The next question is from the line of Mohit Agarwal from Karma Capital.

My first question is on the BOPET capacity and all over the world and -- this whole issue of coronavirus now going on in China. Can you give us some kind of nugget, which is disrupting supply or demand of BOPET and how it is going to play out, if you can give us any data regarding the affected region of Wuhan, would that have any concentration of BOPET?

So currently, there is not because China has not been any significant player in the global BOPET or BOPP sort of markets. So there is no disruption on that account and there are no imports into India from China. So there's hardly anything on that account. Rather, some of the people are taking advantage of this -- the supplies may get disrupted and all that and trying to raise this -- the prices further, but I think that will be not -- so while they may have short-term gains because the margins in the industry are already sort of quite reasonable at these levels and if we are able to maintain them, I think that's what we -- that should be the overall objective.

Yes, yes. And the next one is on the -- you announced a new BOPET line. You had already announced the capital before. And correct me, if I'm wrong. My understanding is that in FY '21, all these CapEx announcements in BOPP and BOPET will be on stream. And so I just want to understand that with your -- now you have EBITDA level of INR 275 crores. So a year would be something around INR 1,000 crores of EBITDA. And then you're obviously taking some debt also to fund these expansions. And what's the current debt right now? And what do you see the debt level at the end of '21, considering all the cash flows from the company? And the new debt you will take to set up these facilities. If you can give us some kind of forecast?

So the current debt of the company -- term debt of the company is about INR 2,300 odd crores as at the end of Q3. So I think the current round of expansions we have announced are about -- total is about $240 million. And if we take 70% debt on that, so that would be about $170 million debt, a part of which have already come in on the balance sheet. So if you see QY '19, we had a debt of about INR 1,200 crores which is now INR 2,300 crores.

Okay. So a substantial investment you have already done and that you have taken debt against that?

Yes, yes.

Okay. Can you tell us the cost of debt that you're taking for the European expansion?

I think that would be very, very minimal, I think Euribor plus 2%, 2.5% range.

Okay, sir. And next one is on this whole effort UFlex is doing in terms of recycling, you are now putting up a project in consortium with the industry -- other industry players where you are basically recycling PET bottles, multilayered plastics and all that stuff, and you also announced on the product side a few products like you -- I think last quarter or something you said you were working on the biodegradable films. And so can you share some highlights from there, how that...

So actually I have nothing to add on that in this quarter as the things have got crystallized. And whatever is the natural chronological order in terms of which the things should happen, that is now on its way. This plant, which we will put up along with the industry association through sort of a trust, which -- to which all these -- everybody will contribute towards improving the sanitation and all that. So that will take about, I think, 6 to 8 months to come. And once you have this -- so this is basically putting up a sorter, which will segregate the municipal waste that you receive, and then -- for the plastic MLP, whatever is the waste segregated, so that will be recycled to make the plastic granules, which will then be used in the injection molding machines to make some of the articles of plastic to do showcasing as to how the MLP is to be segregated, how it is to be processed to make what do you call the chips. And using those chips in the injection molding plants to make various items of plastic. So the same theme continues. And on the biodegradable side also, I can only say that some of the customers are on board to test this packaging because they obviously want to take pride in the consumer industry by announcing that they are using the packaging, which is fully recyclable and fully biodegradable. So -- but at our end, there are still some work in progress to go on. So I think in Q1 of the next year only we'll be able to start with a few customers on -- for the few of the SKUs, which will be launched as recyclable and biodegradable.

Just last question on aseptic liquid packaging. So you said 200 million packs is your current run rate right now. So I'm assuming that you will be -- the way you're growing you should be able to double your capacity, like you mentioned earlier, but just require 1 printing machine from 3.5 billion packs annually to 7 billion. I just want to understand sir what is the market size right now of this aseptic liquid packaging. And if we had to assume that you will hit 3.5 billion packs full utilization of your current capacity, how much would that be as part of percentage of total market share in India?

So I would assume that today, Tetra Pak sells about 12 billion packs a year. And when we had conceived the project they were selling about 10 billion. Currently, I think they're selling about 12 billion to 13 billion. And this is about giving them about 18% to 20% volume growth. At 3.5 billion packs, if the -- and there were lot of imports earlier happening from China because Tetra Pak, they were not in -- these customers were not in a league where they didn't have those kind of volumes that probably Tetra Pak -- they could afford and go to Tetra Pak and all that. But when we came into this, obviously, we had to start somewhere. So a lot of these customers also, we have converted them from imports to using local availability and all that. And it helps them in a big way because they can order their monthly or fortnightly requirements and they can order, reorder and all that. So that is what is sort of playing out while we are working for the big customers. In the meanwhile, it was important for us to also substitute some of the imports with the local supply there, which we've done successfully. And we would assume that at a 3.5 million capacity we would be about 23%, 25% market size, overall market size.

Yes, that's a good number.

The next question is from the line of Dnyanada Vaidya from Nirmal Bang. Mr. Vaidya, your line is in talk mode. Kindly go ahead with your question. As there is no reply from the current participant, we move to the next question from the line of Aman Sonthalia from AK Securities.

Sir, what is the current turnover of Asepto in the last quarter, sir?

That's what I said February, we'll do about 200 million packs. So normal each pack is about INR 1.75. So about...

So that means around INR 35 crores.

INR 35 crores per month.

And in the presentation of SRF, they were mentioning that for the coming 3, 4 quarters, there will be pressure on the margin of BOPET. So how do you foresee that sir?

I mean, BOPET margins [Foreign Language] are very good at this point in time. And -- but whenever -- in a cyclical industry whenever there is -- margins are higher, so sooner or later people plan new capacities and that's where -- it again -- the margins are affected, again, given that the supply side then sort of catches up and all that. In India, normally BOPET [Foreign Language] can easily be accommodated. [Foreign Language] that will bring down the margins. But I would assume that if we sustain our margins that would be good.

So our most of the capacity is internationally. So how do you see the margins there?

So I think margins internationally currently are also better than in India in these -- in the packaging films business. That is why if you see India, we have a margin of 13.5% EBITDA margin and consolidated we have a 15% EBITDA margin. So from that perspective, yes, overseas BOPET film margins are better. And if you see other players like Polyplex and SRF also I would -- I have reasons to believe that also that their margins in the overseas plants are also higher.

So internationally, sir, our capacity is also coming in, apart from that, some of the other companies are setting up BOPET plants that are on the board. So will it reset the international margin also sir?

So if you see in Europe, Europe also as of now imports about 14,000 to 15,000 tonnes of BOPET -- of BOPET films. So...

Every month?

Yes, every month. So everybody is looking to -- by bringing the plants into Europe, so everybody is looking to substitute that import markets with the local production. In Europe, the growth rates will not be very high, maybe 2% or 3% range and all that. But there is a huge substitution available where you can sort of substitute imports with the local production. And customer is always happy to sort of take the local produce rather than the imports because the crude prices are so volatile, sometimes what happens is by the time you are now -- you take a position today, and by the time you get your supplies there, so your whole pricing structure has changed. When you are there locally, even if you are a bit expensive and people want -- people are ready to pay a premium for the local production, Make in Europe or Make in U.S.A product, so that's how, frankly, it is working out in Europe. Nigeria is more because with such a hugely populated country already consuming about 3,000 tonnes per month of BOPET, there is no plant there. And 100% is being sort of imported into Nigeria. So I think there also, the consumption is bound to grow as it becomes -- we've typically seen that where the population support is there the packaging industry gets a lot of momentum, and then they need the packaging films and all that. So better available locally, capture that market early before anybody else sort of -- now some of the players went to Thailand, some of the players went to Indonesia, but we couldn't move in there at those times because we were concentrating on the other regions and all that. And today, for -- if we decide to get into these territories, so obviously, there will be some blood bath because as we -- either because if the market is of particular size and there are already capacities, so we will have to fight for them. But for Europe, the strategy is to substitute the imports into Europe. And we will see as to -- and we've done that successfully earlier also through our existing Poland facility also, so let's see as to...

Sir, our Indian operations, this Asepto is doing well. And also, I think that the Holography business is also picking up. So where do we see good margins or better profit in Indian operations?

So I think the -- as I've been saying that existing business in India where we have capacities are only packaging business and aseptic packaging business. So as we do better over there, like a 10% growth -- 11% growth in the packaging on a year-on-year basis and 4.5% on the quarter-to-quarter basis is a very decent number to achieve. We're looking at more exports. So a couple of years, if we are able to achieve this kind of a growth, so even our existing capacities in these 2 businesses would also get fully utilized. So when you peak, when you make a plant, if you look at packaging, if you achieve 85% capacity utilization levels or so, you are happy to get into further investment mode because it takes time also for you to set up the plant. So I think couple of years, next 2 years, we would -- we'll see the market and probably, improve our volumes. And 10%, 11% growth, if we get it on a yearly basis in the packaging business, this exceedingly augurs well for us.

Sir, what was the profit in -- on a stand-alone basis without other income? Without other [indiscernible] income?

[Foreign Language] INR 67 crores is the exceptional onetime items.

Okay. And...

And at a PAT level, INR 55 crores.

PAT level, it is INR 55 crores?

Yes.

What about consol, I think it's negative INR 4 crores?

No, consol [Foreign Language] if you see before taxes, then it is INR 6 crores, INR 5.5 crores, actually. And if we see after tax, it is minus INR 1.2 crores. So there is a positive to this.

And sir, what we expect as a peak debt?

I think the peak debt would be somewhere around -- should be about INR 3,000 crores.

The next question is from the line of Kunal Bhakta from First Water Fund.

I have a follow-up question. Are there any duty tariffs that are currently there in place in Nigeria as far as the imports are concerned?

Because there is no plant in Nigeria currently so there is no antidumping duty there in Nigeria on the BOPET films. But on the BOPP films, where there are already some manufacturing happening in Nigeria, there is an anti -- apart from the normal duty, there is an antidumping also, about 20%.

20% is the antidumping? And what was the normal duty rate?

20% on the BOPP.

Yes, what is the normal duty rate?

I will not know that.

Okay, okay, fair enough. Okay.

So once this capacity comes up there, so obviously we will try to -- because each country wants to protect its local markets and all that and that is where BOPP there has got protection, that is how it is happening.