Uflex Limited (500148) Earnings Call Transcript & Summary

Thank you, ladies and gentlemen. On behalf of Quantum Securities, we welcome you all to the Quarter 2 FY '21. This is a Con Call of Uflex Limited. We thank the management for giving us the opportunity to host this call. The management is represented by Mr. Rajesh Bhatia, Group CFO; and Mr. Yusuf Nasrulla, Investor Relations. I now hand over the call to Mr. Yousuf Nasrulla, Over to you, sir.

Good morning, everyone, and welcome to the second Quarter FY '21 Earnings Call of Uflex Limited. On the call today, as Ms. Shalini said, we have our Group CFO, Mr. Rajesh Bhatia. Our discussions 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 reflects our opinion only as on the date of this presentation. Please keep in mind that we are not obligating ourselves to revise the publicly released result of any revised 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. Let me highlight a few achievements in this quarter. We have delivered a very strong performance in quarter 2 FY '20/'21, with the highest ever quarterly production, sales, revenue, EBITDA and PAT. We have also commenced commercial production at our Russia Packaging Films plant. For more, I would now like to invite Mr. Bhatia to share some perspective with regards to our company operations and results for the quarter under review. After which, we will open our call to the questions from analysts. Over to you, sir.

Okay. Thank you, everybody. And first of all, I would like to greet everybody happy Dhanteras and wish you all the prosperity and good times. And our good times and our prosperity, the way we have demonstrated in this quarter, pray for that also. So as Yusuf said that historic quarter in terms of the highest ever numbers, everything is in green, whether it's the production, it's the sale, it is the cost structure, whether it is -- then the revenues, EBITDA, PAT. So everything is sort of is outstanding in this quarter. And we had a consolidated sales volume of 111,645 tons, which is up about 19% on a year-on-year basis and about 8.6% on a quarter-to-quarter basis. Consolidated sales value is at INR 2 crores to INR 3 crores, INR 4 crores, up 19% on a Y-o-Y, and up 11.9% on a Q-on-Q basis. Our stand-alone sales volumes at 51,099 metric ton, is up 13.7% Y-o-Y and 17.3% Q-on-Q. Stand-alone sales value is INR 1,209 crores, up 17.5% Y-o-Y and 21.9% Q-on-Q. The packaging is notable because packaging showed 23% volume growth on a Y-o-Y basis and 11.7% on a Q-on-Q basis. Packaging films showed the -- India showed about 5.8% Y-o-Y and 23% Q-on-Q. And overseas, the films business showed 23.5% Y-o-Y and almost 1.4% on Q-on-Q basis. So these are the sales number. Production numbers also are -- production was -- total production was about 25.7% higher on a Q-on-Q -- on a Y-o-Y basis and about 10.9% higher on a quarter-on-quarter basis. Stand-alone sales were about -- up about 14.5% and 19.8% on a Q-on-Q basis. And the packaging production was up 22%. Sales were up 23% in this quarter on a Y-o-Y basis and about 14% on a Q-on-Q basis, packaging was up. Packaging sales was -- in India, packaging films production was up 8% Y-o-Y and 26% Q-on-Q. And overseas sales production was up 36% Y-o-Y and 4.9% on a Q-on-Q basis. EBITDA was INR 473 crores, up 70% Y-o-Y and up 12% Q-on-Q. And stand-alone EBITDA was up 58% Y-o-Y and 21.7% Q-on-Q. PAT was up consolidated 136% on a Y-o-Y and 12.9% Q-on-Q. And stand-alone PAT was 310% to Y-o-Y increase and about 48% Q-on-Q. So overall, highest ever total quarterly production we achieved. In packaging, we achieved the highest ever packaging films production overall, India, Mexico and Poland. In packaging also, we achieved the highest ever quarterly production. Sales were also -- sales volume were also ever highest and sales value was also ever highest in a quarter. And obviously, that translated into highest ever EBITDA and highest ever PAT. Asepto business has also done better. But as I've been saying that this is probably is the only business, which was affected because of COVID. Happy to inform that based on the present situation, we look to be fully sold out from February onwards. So the existing plant capacity is going to be about 100% utilized. We're looking at about 300 million. Anything between 300 million to 325 million pack sales in -- on a monthly basis. And with that happening, I think, the capacity expansion by adding another printing line is certainly becoming a certainty. So overall, a very good quarter to be. In terms of our term debt, we are between now and March 31, what we expect is offshore. We will close it at about $322 million term debt. And India will be about 700 and -- about INR 800 crores India's term debt this will be. And that's where the debt will peak out, which is -- so the total debt, what we expect at the end of the year is about INR 750 crores to INR 800 crores for India business and about $320 odd million for the offshore business. And so we've already drawn about -- offshore business is currently about $314 million debt. So there is hardly anything to be -- the net additions from here till March 31 is going to be very, very miniscule about $10 million. And India, frankly, we don't have any CapEx programs other than some of the normal routine maintenance or some debottlenecking CapEx, which keeps on happening, but there is no other project expansion. The only thing what we are looking at now next year in the next 12 to 15 months is some CapEx to expand our aseptic packaging facility, which is, again, will be less than INR 100 crores kind of CapEx. So this basically sums up our performance for the quarter. And on our completion of our Hungary as well as our Nigerian projects, I think we are on schedule. We're expecting one of them to happen in this quarter. And one, probably in the next quarter. But by fiscal -- end of fiscal 2021, we would have sort of completed all of our entire expansions. I'm happy to inform that all the expansions, all the brownfields and the greenfields, which were done are well within that -- their cost, well within their timelines. And also the quality of the construction equipment, everything is frankly absolutely satisfactory. And so we have no -- any anxiety in terms of the timelines or in terms of the quality parameters of these projects. Obviously, the margins, which are there. The BOPET and the BOPP industry after started to improve from 2016 onwards and the capacity utilization has been gradually increasing in the last few years before 2016. 2012 to 2016, we saw that the prices were under pressure for BOPP as well as for BOPET. But from 2016 onwards, every year, we've been finding that the capacity utilization at an industry level is increasing, which has helped firmed up the prices, help firmed up the margins. And when the pandemic struck, probably we were -- from an industry perspective, we were at a very high capacity utilization rates. And when there was -- they came on additional demand for the packaging because of the pandemic, I think the prices became a bit better, the raw material costs going down, did help. So it was a combination of the prices becoming higher as well as because of the demand stimulus as well as the raw material pricing to our advantage. So it helped improve the margins. But as I have been saying that look in a commodity business to sustain these kind of a margins is always difficult as the new capacity catch up happens sooner than later. But as I've been advising for the next -- at least for about 4 to 6 quarters, we're seeing that the robustness will continue. Yes, there will be volumes growth will become normal as the world returns to normalcy post-COVID and those stockings and things like that would become normalized. So the growth volumes, what we could see earlier for the whole industry may not be there, particularly in the matured and the developed markets. But given our expansion and given -- so for us, for specific we will definitely get to see additional volumes coming our way as we ramp up the capacity utilization of our expansion program. And for both -- it will take care of both. It will be a substitute for imports today being done in some of these territories, like Europe today also imports a very sizable portion of the polyester films. And also, there is some marginal growth volumes there also. But I think what we are trying to do and what we have been doing over the years is we are closer to the customer and giving him a closer solution where his working capital involvement is far less. And that's what has helped us, and that's what has been a proven business model in our case. And that's what we're trying to achieve. So the volume growth will come now only from this new capacity expansion because our existing businesses, we are more or less operating at a very, very high capacity utilization levels. So even if, let's say, with these margins are in a bit of pressure as the effect of the pandemic dies down and as the demand return to normalcy. But we are sure that we're going to substitute then with a higher volumes coming from our expanded capacity, which will ensure, not only maintenance of our profitability and the volumes level, but depending on the price level, subsequently and all that, we will be definitely find that our profitability will only go up in the years to come. I think we should expect as a normal case that it's not a day 1 when the additional capacity that we are setting up are going to be at that level. I think it will be a gradual rise in some of the product categories where we have some value-added products. So the testing of those, approval of those by the customers will also take time. So in about 12 to 24 months' of time, we see a very high capacity utilization coming from the new installed capacities also, which will improve our profitability and sustain our margins. That's basically from my side for this -- that in nutshell explains our performance in this quarter. I think notable is 22%, 23% rise in the packaging volumes. These are because of some of the new product categories like pouching for the soaps and sanitizers, and we are now looking to expand our pouching in a big way in the export markets also. And I think this is what was -- the packaging business was always experiencing reasonable level of capacity utilization. But now with this 23% volume growth also on the production as well as on the sales side in the packaging business. We are now operating even in the packaging at a higher capacity utilization of, say, about 80% or so. So that's a bit more insight into what happened in Q2 and I'm willing to look at any of your queries or any of more explanations you want me to give, happy to do that.

[Operator Instructions] The first question is from the line of [ Shalu Makhija from Investment Research ].

Congrats for the good set of numbers. And I have one -- 2 to 3 questions to ask. First question is, can you give me the breakup of the production of Film business and Laminate business?

Sorry to interrupt, [ Shalu ], your voice is breaking up.

Hello?

Ma'am, your voice is breaking up.

Yes. I want to know the revenue of -- production breakup of Films business and Laminate business.

So historically, we've not been sharing that number. I think I will hesitate to do that. But I am all happy to share my growth momentum there, where I said the packaging is -- we looked at 23% growth in this quarter. But I think for this moment, we are restricting ourselves to only the total numbers and not split numbers between packaging and films and all the other set.

Okay. And capacity utilization overall?

I said -- I already said about 80% in the current quarter.

80%. Okay. And in the upcoming quarters, how much we are expecting utilization?

So we were normally looking at sort of close to a double-digit growth in our packaging business, about between 9% to 11% kind of a growth. Obviously, this growth is on the back of -- the extra growth is on account of that -- of pandemic. The additional product vol, which the company had to launch for the COVID demand, which were largely sanitizers and the soaps for which they required pouching, and that's where we find that the volume growth is more than what normally -- in a normal year, sort of we would expect.

Okay. I just want to know the capacity utilization for upcoming quarters. Like including that greenfield projects also Hungary, Nigeria and Russia also. What would be capacity?

So Russia, Nigeria and all that, they are not packaging. They are only packaging -- they are only films [indiscernible]. Russia, I can share with you. Russia, we had -- you can say, this quarter, we had a capacity utilization close to about 70%.

70%.

In our Russia. See, Russia has to be treated differently from the other projects because Russia project was relocated from U.A.E., and it was catering to that market only. So it took about -- it took us about a little over a year to dismantle and shift the whole plant to Russia because it was only catering to Russia and CIS customers. So obviously, we began with a very high level of capacity utilization because otherwise, these customers we were serving from some of the traded quantity or the quantity, which came out from some of the other plants also. So we kept these customers the Russia and the CIS customers with us. And when we started now in Russia, obviously, we will be serving those customers. We are closer to them. We are serving those customers from the Russia plant.

Okay, sir. And we have like Engineering segment. So how much we expect like to expand this segment? What we are doing for the [indiscernible] business?

So we have no plans to sort of do much expansion into our engineering business as such. Our Engineering business comprises of 2 -- one is the machinery engineering and other is we make, what do you call it, cylinders for the packaging business. So our engineering business per say, we're not looking to make any fresh investments for it to expand capacity.

The next question is from the line of [ Saurabh Sharma ], an Individual Investor.

Yes. Can you hear me?

Yes.

First of all, congratulations on the numbers that the company has delivered. It has been some time coming, but finally, it's quite commendable the numbers that the company has level. The question I had was regarding the cash flow management of the company because finally now the amount of cash flow being generated is decent. I wanted to know what would be the debt repayment schedule? You did mention about the peak debt at the end of March 31 this year. But what would be the debt repayment plan like as to how soon or by when will the debt repayment pick in? And also, if you could touch on the cost of debt, both in India as well as overseas.

So the cost of debt is easier to answer. In India, it's about 10% or so. While overseas, you can say is about -- close to about 4% or so.

[indiscernible]

We have -- sorry.

I'm really sorry to interrupt you. But I also read in the annual report that most of the debt is a variable rate, which means floating rate. So at -- right now, as well as going forward, will the cost of debt substantially reduce because of growth in India as well as globally, the interest rates are trending down? And how soon will that happen?

See, in India, whatever is the transmission of lower interest rate, it's happening through the banks adjusting their MCLR. But please appreciate that the MCLR changes do not happen instantly in most of the cases. As the MCLRs are already fixed for a year, their timings could be different. So somebody could -- something could be from March to next March. Somebody could be August to next August. So that -- so it happens that way. So in India, we've seen in the last 6 months, the MCLRs going down by almost about 75 to 85 bps, and we are -- we will get that benefit. Some of them would have already achieved. Some of them will accrue when the existing MCLR duration of the 1 year will expire. That's how it will be. In foreign, where our debt is in euro based, there, we have Euribor is negative, but our debt is at 0. So Euribor is taken at 0, and then we pay only the margin attached to it. But in a LIBOR-based -- LIBOR plus, yes, LIBOR has gone down 3 months, 6 months, LIBOR has gone down. So that benefit comes to us instantly, and we are utilizing sort of that benefit. On your...

Given an indicative cost that...

Sorry?

Given an indicative cost that we are paying in terms of the interest rate for Euribor and LIBOR?

I already answered that question said that 10% average blended cost in India, and about 4% in the overseas.

The next question is from the line of [ Ojasvi Agarwal ], an Individual Investor.

Congratulations on a very good set of numbers. Sir, I -- hello?

Yes.

Sir, I just want to know if you're capitalizing any interest cost right now?

See we do capitalize only up to the time of commissioning headcounts.

Okay. So okay. So right now, you would be capitalizing for Nigeria and Hungary?

Yes. Yes. For Nigeria and Hungary, we are capitalizing. But for Poland and for Russia, I think the capitalization was done only till, I think, till about last fiscal, not thereafter.

Okay. Okay. So in this quarter, basically, there was no capitalizing except for Hungary and Nigeria?

Yes. Except for Hungary and Nigeria.

[Operator Instructions] The Next question is from the line of Chirag Singhal from First Water Capital.

Congratulations on a great set of numbers. Just a couple of questions across your business segments. First on the packaging films. So have you already started the commercial operations at Poland facility? And if yes, what was the CapEx utilization of it coming today?

So I can give you this answer in -- stating that in Poland from the new facility, we produced about 6,000 tons in this quarter. So if we take it -- which is almost close to 100% capacity utilization. No, no, no, I'm sorry, which is about 50% capacity utilization.

Right. Yes. Now it's more than 50% of utilization.

Yes.

Okay. Understood. Sir, secondly, you mentioned the dates of commissioning for Hungary and Nigeria. So have you already started with the trial then at both the locations?

No, we've not. We've not. We've not.

Okay. My third question on the packaging films. You -- like on the overall basis, you have mentioned in the past that the total maintenance CapEx is close to $15 million. So how much of it is for the overseas operations?

Overseas operations is not much actually, but unless there is some value addition like logs and all that expansion we do. In the film line, there is hardly any CapEx. So a normal film line would not have more than $2 million to $3 million per year as a CapEx. But this year we are doing some value-added products like metalization or [ logs ], I think then we will have. But in an existing business -- in the existing normal line, there's hardly any.

So the majority of the CapEx is for the Indian operations -- maintenance CapEx?

[Foreign Language] Majority of packaging [Foreign Language] It's about say, INR 100 crores per year. INR 100 crores to INR 150 crores per year is a debottlenecking is -- because there are so many processes in that plant that something or the other sort of becomes a bottleneck. Now because of the huge demand in pouching, all of a sudden, the pouching capacity became a bottleneck. While there is a printing capacity to make it. But if you don't have the pouching machines to make this, then still, you can't serve that customer. So we had to import some pouching machines. India, last year, we also did -- we set up a PCR plant where we are buying the used pet bottles and converting them into a raw material for our packaging films business in India, which is in great demand, at least in Europe because everybody is so focused on the recycling now that there is a premium for these products. We also set up a plant for where we collect the used flexible packaging like chips packs and all that. And then we recycle them at our Noida facility and make some granules out of which -- which can be blended with the virgin granules to make any articles of plastic chairs, benches, anything that you want to make. These are -- these can be made from such material. So these are the kind of CapEx plus some bottleneck somewhere holographic or some new features being added. We were short on more because there was a demand, so much demand for the pouches. But the pouches need a cap to close and open them so that capacity became a bottleneck. So in India, there's about INR 100 crores to 150 crore of the normal CapEx, which keeps on happening on a year-to-year basis.

Okay. Understood. Sir coming back to the CapEx utilization at Poland. So when do you expect this to reach 100% capacity utilization?

We want to do it yesterday, but things take time. It's like a child birth, it takes time to grow up.