Uflex Limited (500148) Earnings Call Transcript & Summary

So the working capital is separate, which is difficult to predict depending on the raw material, the other prices. So that depends on raw material -- as I said that, before the call that some of the working capital that today in the U.S., in Mexico, in Poland, it is totally -- utilization levels are really low because there's so much of cash being flowed in all these jurisdictions. So actually, depending on what the raw material prices are, but the endeavor is to not use a very high level of volume. India, as I said, about utilization level of funded limits are about 75% or so.

Okay. Okay. Understood. All right. I'll get back in the queue.

The next question is from the line of Shanti Patel from Shanti Patel Investment.

Sir, my question is, are we -- our profit margin in respect of various verticals, will it continue or increase in the remaining period? And secondly, what is our market share in respect of various verticals in India? I'm not talking international, in India.

See, in India, in the packaging -- flexible packaging business, we are #1, I think, our market share. So there are organized markets. There are unorganized markets there, which are locally, the small regional brands and all that. So while we have -- we don't have any information available for the unorganized market. But the organized markets which are -- where the numbers are known, I think our market share should be close to about 22%, 23% in that. And in the packaging film business, we are the largest BOPET seller in the country. BOPP, we don't have much of a presence. Our India -- our capacity of BOPP is quite less. India, we do only about 30,000 tonnes of BOPP; while overseas, we do about 120,000 tonnes. So India capacity is fairly less. In the aseptic packaging business, we are #2 because there are only 2 players. And Tetra Pak is obviously the market leader there, and we're very small in that. So if that's, say, about a 12 billion packs market, you can say for the whole year, so we'll do about 3 billion packs a year over -- or in that particular market.

And sir, what about the margin? Are we going to maintain margin in the respect of all these verticals, taking international turnover also? Overall?

True. As I said -- as I earlier said that at this point in time, looking at the pricing, the margins, the demand, supply 18% to 20% margin is what seems what we can foresee in the...

Because I have been told that BOPP margins are going down.

BOPP margins are going up.

Got you. Going up. Okay so...

It's gone up in Q4. They have gone up in Q1 of FY '22. BOPET films margins are -- have come down in the Q1 over the Q4 of last year.

The next question is from the line of Mithun Aswath from Kivah Advisors.

Yes, my question is more in terms of, in the last couple of quarters, in the last 1 year, we've seen margins appreciably be higher for most of the packaging companies. I just wanted to know about what is the sustainability of this and what has changed in the marketplace. Has there been consolidation in the industry? What is your sense? Because we are obviously much higher than what we have been on average over the last 7, 8 years, so just wanted your thoughts on that.

So, I think, for that, you'll have to go back to the year 2010, '11, where the packaging films -- the film -- packaging films, which are used for packaging, the margins skyrocketed and the payback period for the investment came down to as little as 2years' time frame. So that's the genesis of where a lot of capacities got installed during that period. And then since 2016, '17, there was sort of underutilization of capacity leading to erosion of the margin. So that was a period during which the margins were very low, which normally are not. And the payback periods for the new investment became as high as '10, '11 years kind of stuff. Now since then, 2017 to 2020, there have been not significant capacities have come up. The capacity expansion has been very, very rational, which has led to higher capacity utilization of the existing facility and with the growing capacity utilization level across the industry. So that gave a more pricing power to the industry as such. So typically, I would not say that the pricing, if the margins are, say, 10%, 11% kind of an EBITDA margin, that's a low margin. So 21%, 22% are a bit of a higher margin. But 18%, 19% is the kind of a margin one should be happy with on a long-term basis. So yes, you will find, again, that when there is a bunch of capacities, you will find the margin sitting. But if you take a sort of a 10-year kind of an average and you are at between 18% or so, I think that should make you happy to be in the business.

The next question is from the line of [ Darshini Shah ] Shah from BALAJI Investment.

The question is, sir, there is a good cash flow. Sir is this possibly not negating...

Ma'am, I'm so sorry to interrupt, but your audio is not clearly audible. Ma'am, we are not able to hear you well. We're requesting you to please use the handset mode, ma'am.

[Foreign Language] So I think it's a general issue that when you say hello, we must immediately respond and say that we can hear you. So then that is the -- so you don't know whether we are audible or not. So I'll request you to kindly immediately prompt them that we can't hear you.

Sure, sir. I'll do that. Also, Ms. Darshini Shah, if you can hear us, we are unable to hear you, ma'am. Requesting you to please dial back from a different number and you can join back in the question queue. The next question is from the line of Chirag Singhal from First Water Capital.

Sir, just one more data point on the Hungary. Sir, what was the CapEx utilization for the newly commissioned plant? And what is it currently? Like are we seeing a faster ramp-up because of the robust demand?

Yes, Hungary ramp-up has been quite good. So nobody's on that part. I think the momentum in BOPP helped us during this initial start-up period. So there we're doing pretty well, Chirag.

Okay. So what is the current capital utilization, sir?

[Foreign Language]

[Foreign Language] Q1 because we have the data set for Q1. So Q1, what was the capital utilization?

70%.

70%. Okay. That's good to know.

[Operator Instructions] The next question is from the line of [ V.L. Ajay Kumar ] from Uflex. As there's no response from the current participant, we take the next question from the line of Sunny Gosar from MK Ventures.

Congratulations on a good set of numbers. I have 2 questions. First one is, assuming all our plants operate at optimum capacity, what is the quarterly volume run rate that we can look at versus the current run rate of say about 1.35 lakh metric tonne? What is the peak quarterly number that we can look at?

We can go to about 1.60.

So we have about 25%, 30% room on the current quarterly base?

Yes.

And this includes the Dharwad plant? Or Dharwad will be in the base line?

No, no, no. All those new expansions are separate.

Okay. Okay. Sure. My second question is out of the, I think, INR 1,000 crores or INR 1,100 crores CapEx between Dharwad and aseptic line plus Dubai, what would be the split between FY '22 and FY '23? And does this also include any maintenance CapEx -- this number includes the maintenance CapEx?

Maintenance CapEx is always different than the growth CapEx. You know that. And the maintenance CapEx, you know that INR 150-odd crores average you can take on an average basis.

Sure. So sir, what would be the split of this INR 1,000 crores between FY '22 and FY '23?

I don't have that. I don't have that.

But any color you can give in terms of the quantum of split, whether it will be front ended or back ended in that sense?

Back ended. [Foreign Language] So FY '23 [Foreign Language].

Right. In terms of the outflow will be more FY '23. I was just trying to understand from a cash flow perspective, like how much cash flow will get -- will be required for CapEx in FY '22. And that is why the split would have been quite helpful.

The next question is from the line of Subham Agarwal from Aequitas India.

Sir, firstly, I just wanted a bit more understanding on the margins. So you did mention that in Q1, BOPP margins were higher, and BOPET margins were lower. But what is the current state of affair? Has the margin gone higher in BOPP? And what's the trend in the BOPET right now?

I'm unable to comment on the current state of margins given that it is a quarter which is running. So I'll find it difficult to share the current thing. But overall, I can say that for the industry, it's the same trend which is there in Q1 and likely to be in Q2 also.

Fair enough. Sir, secondly, I wanted to know your view on the current demand/supply situation globally. So -- and considering a lot of lines are expected to come up in the current year in BOPET and few more lines are expected in BOPP also. So going ahead, what's your view or 2 bits on the demand/supply situation that we may see?

There is not much which is happening in FY '22 on the capacity expansion side. But FY '23, yes, there'll be new capacity which will get commissioned, including ours -- our capacity as well as Dharwad. So there may be a bit of impact on the demand-supply at that point in time. But overseas markets are pretty -- looks to be not in much of oversupply or any capacity ramp and expansion issues and all that. So India in FY '23, we may have an oversupply situation which will depend on -- and the freight rates are, frankly, doubled or even tripled in the last 1 year or so. And with the supply chain issues coming out of the pandemic, so for using in low-cost jurisdictions and exporting to where the consumption centers are, I think there'll be challenges in that model given the much higher freight rates and also the supply chain situation from there. So I think '22, a little, looks like there are no capacity expansion, in fact, coming into play.

Great. Great. And sir, lastly, on the Nigeria bit, so are we expecting the commissioning happening in this quarter itself?

Yes, yes, yes.

The next question is from the line of [ Tarun ], an individual investor.

Just had a question regarding the cash deployment strategy of the company. With respect to the profit that we are likely to generate in FY '22 and assuming that around INR 500 crores we are likely to spend on CapEx, which -- out of which, Mr. Rajesh, you have already mentioned around INR 400 crores will be with additional debt. So what are we going to do with so much cash that the company -- surplus cash that the company is going to generate in FY '22?

So I think what has happened is, one, I said that what we've done is we -- we're not utilizing our working capital. So if you see Q4 and the current quarter, there has been a substantial increase in the raw material costs, increase in the prices, which means that, overall, your investment in working capital is going up a little. And frankly, at this stage, we've not drawn on any of the facilities, though that is in our plan. So what we've used is our internal cash to pay up for some of the initial advances and the land that we've acquired or the other initial expenses which we are doing. So towards the later part of the year, we will see that in terms of our commitments on those lines, because overseas lenders, there are always commitment charges to be paid, depending on the cash flow scenario, what's deployed in the working capital, what are the costs associated with that, we take a closer view as to the need to draw down on the debt in FY '22 itself or maybe postpone this to the next year. But as of now, all investment, what's happening in these facilities is all -- is more or less internally funded as well as the whole increase in the working capital cycle, which has happened in the last 2 quarters. And despite that, our liquidity position is good. As I said, that working capital utilization is extremely low.

I get your point. I mean the volatility in raw material price is one of the variants. But sir, we're updating. If you see for 2022, if I look at the total cash flow from operations that you are likely to generate INR 1,400 crores, that is a massive number. Around INR 1,000 crores profit and D&A of around INR 400 crores, so INR 1,500 crores of net cash that you will generate, assuming that the raw material prices remain more or less where they are. And given the outlook that we have on the raw material and crude oil prices, we don't see that moving around 50% from where we are right now at least over the next 6 to 9 months. Plus you have around INR 650 crores of cash that is lying on the books. So INR 2,000-plus crores of cash, that is a massive number. I mean there should be some policy, some guidance in terms of what you're internally planning to do with so much cash. It's approximately around 50% of the market cap of the company, sir.

No. But as I said that at this stage, what we are doing is only whatever the cash is being deployed in the working capital and in the CapEx project is all being largely funded by the company itself. Towards the end of the year, we'll take a call as to what do we do in terms of availing the various financing tie-ups we have for this. And that call, we'll take it probably in the third quarter or the fourth quarter of the year, depending on what are the business dynamics. At this stage, very difficult to say anything, but I just told you currently how we are keeping -- how we are utilizing the cash.

Sir, just last question. The cash that is lying on the books of the company, what are you doing with that cash? Is it invested in some kind of debt mutual fund? Or where exactly is that money found? And what kind of return are we generating [ from ] it?

Partially, it is deployed in the short-term instruments or bank deposits. But because we don't keep it, so the ideal is to keep lowering your working capital -- working capital requirements. To that sense, you have that opportunity to reduce your working capital or to pay for cash advances to the customers in terms of getting some price benefits. That's what will be optimized first.

Sir, if I may ask 1 last question.

Yes. Yes, please. Please.

Sir, typically, if I look at this industry as a whole, packaging industry in India as a whole, I can just draw it out into 2 buckets right now. So one is Uflex and general poly and the other is Cosmo and Polyplex. So basically, I'm comparing in terms of how the market is pursuing these 2 buckets of company. How they are valuing this company. If they look at Polyplex and Cosmo, they are trading at INR 10 plus [ P ], while Uflex and general, I will not comment on general right now. You can look at the numbers on your own. But Uflex is trading at around 4x price to earnings. Sir market [Foreign Language] just market has concern about 2 broad things: one is if the company is highly leveraged, or there are questions on the corporate governance of the company. I presume in terms of leverage, you have clearly indicated in previous calls that you have no intention to pay down debt because it's cheap debt, and you want to load the balance sheet with leverage and make the best use of that, that we can't question anyway. What are you trying to do in terms of, if at all, there is a perception in the market in terms of governance standards? Basically, it's arriving from what you have been doing in terms of distributing the cash to the shareholders. I mean last year, we generated around INR 800 crores cash. You paid around INR 15 crores -- only INR 15 crores to the shareholders. So what is the measure, what is the Board's thinking in terms of, if at all, there is a market perception about governance standards or question marks around that? How are you trying to address that and make sure that minority shareholders of the company are rewarded for their trust in the company? So that's the last question from me.

See, I don't think so that, first of all, I did answer earlier on the call as to what's happening in one of the competitors. And I would not like to get into that because they are currently looking at divesting. The promoter is looking to divest that. And I said that the exit valuations are always different from the other valuations. As one other company which you named has also said that they will expand into FMCG, which is totally unrelated line of business, I think coming to the corporate governance side of this thing, I don't think so that there is anything which is different between us and some of those companies. Rather, I would say that the kind of steps we've taken in the last few years in terms of having EY as an internal auditor, and we also decided now to have BDO as our statutory auditor for -- in the Uflex. So I think all these are positive. Now at what stage the market take cognizance of that or you as a shareholder to find that, and this is more typically -- I've seen that the mentality in your community is also if SBI is trading at X and Bank of Baroda is taking a different multiple, you guys trying to find out the reason as to why there is a valuation mismatch. And if there are no demerits, so the valuation catches up to -- or the alternate security is catching up to that. All the market states -- so I have no reasons to say that why should we be less than some of our competitors in terms of [ O&Ms ] or the debt numbers and all that. But you are the guys who invest, and you're the best judge by themselves, looking at quality of earnings, the quality of the management discussion and all that as to what's the way and called it. And if all of you collectively feel that, no, we find this as a better place because while the packaging films, it may be still a commoditized business, but the packaging business is -- yes, it's a B2B, but that commands different valuations. Or you feel that, no, that business margins are not so great at this point in time. And then the margins will improve in that sort of business, that's the time to look at that. I leave it to your fine judgment. But on the government side, on -- and on any other parameter, I think we may be better than some of many of the other industry players are not worth than that. In terms of our distribution of the cash, I think it all is a matter of whether you want to grow or you want to use -- distribute that cash back to the shareholders. I think we undertook a very major expansion, the kind of what was unheard of in the U.K., 2 or 3 -- 2 years back, where we would have spent close to about $400-odd million in terms of setting up these new facilities. And then the additional working capital that these businesses required initially during the sustenances. So -- and the debt level to EBITDA numbers, even without all these capacities, that information that the full debt's strong, it's still between -- it's still less than 2:1. Our net debt to EBITDA as of March 31 was 1.8. So I think overall, the business is good. I have -- I'm part of this organization now of more than 4 years. I mean, coming from my previous organization at Jindal Steel & Power or Dalmia Cement or Reliance or the DCM Group and all that, so I really don't find that there is -- you should be concerned about any of the government issues. You don't become and you don't remain the largest player in your business category -- howsoever small that business may be, if you are not committed to that business, I feel that even if you are polishing shoes, if you are not committed to your business and you're not on it 100%, you can't be a market leader in that. And we are market leaders in India, the market leaders globally. We got into new product lines such as aseptic, and we proved ourselves there also. So I think it's really up to you guys to actually think of maybe -- there may be some area or perceptions are -- you guys may still have from all of those and think positively. And I mean think beyond any governments or other issues. We're trying to do our best in terms of addressing -- if there were issues there, some of our auditors on the internal or the external side or probably not to your liking, we've addressed those concerns. We have a fairly independent Board. There's only one person from the family on the Board. So we're performing. We're the market leaders in many business categories. Rest, I have to leave to all of you guys to make up your mind in terms of where you want to invest. And if you foresee value, obviously, you will invest. You will not invest because you like Mr. Bhatia or somebody else in the observation. You will invest only if you know that you'll grow your money over and again.

Just to add, sir, we, as individual investors, are small players. I mean it has to only come from management action in terms of how they perceive their company to be, how they value their company. Just in terms of, if you look at your peer, Cosmo did the same thing last year. They did a huge buyback. Not a substantial one, but they gave a clear indication to the company, to the market, to the market participants that the market is not valuing them properly. This is what they believe is the true value of the company, and they showed the market what the true value of the company is. And we have seen what has happened in the last...

Polyplex did that. Polyplex did that. Polyplex.

No, sir, Cosmo did the buyback. Polyplex has done around INR 200 of share -- they have paid INR 200 share dividend in last 1 year. 2021 sir. That's a massive number. So that's the one area that I wanted to highlight to you. That's all from me, sir.

Okay. And I can only tell you that both these names that you mentioned, they have their own set of issues in terms of the succession and others and all that. And I always told you that the exit valuation is always different from the valuation at which you remain in the business. So the main flat you said that, until about a year ago, I think they were not trading at these sort of levels and all that. And maybe the market smells something else happening in these companies. And that's where the numbers are -- have changed all of a sudden in the last 1 year.

We take the last question from the line of [ V.L. Vijay Kumar ] from Uflex Limited.

Sir, my question was, every time, every quarter or last year, INR 1,600 crores of amount has gone for depreciation. That's a huge amount. So what this thing, this amount like this, sir? And this time or this quarter also, INR 127 crores depreciation is taking place. And every time we are trying to go for CapEx, CapEx, but there is no interest coming down or depreciation coming down.

Depreciation never comes down. Depreciation is a charge where you have already invested in the assets, and then it's a statutory rate of depreciation that is going to apply to your asset base and that remains for there. At least, when you set up the assets for the 20 years-odd or so, even if you depreciate the asset at 5% or so, so this charge is always static. So it's not a case of only with Uflex. It's the case with every company. So unless you sell off your assets, this is a charge which is going to be there till the time the asset is on your books. So I really don't understand the question. But...

Sir, the interest part is always constantly maintaining. Since now we have only 4 places, we have increased the product -- trying to increase the production by this thing. That is Nigeria. Egypt, Poland and the other places, what is the other place, sir?

Hungary.

Yes, Hungary, Poland, Nigeria.

Egypt.

Egypt. So there are only 2 places you have mentioned, sir. What about the Nigeria, they have done this quarter? The other one place, sir? Egypt, there is no production, sir?

I think you were not on the call. I mentioned that Egypt may -- we, including the new plant, the capacity utilization levels are pretty high, at about 85% or so.

Yes. Sir, this thing. The other one, sir? Other 3 -- 2, that is Poland and...

I said all that. I mentioned all that already and I would not like to repeat that.

Sir, the interest...

You can -- when this is uploaded on the website, you can have all that volume.

Okay. Okay, sir. Sir the interest part is constantly maintaining, like, slowly -- it is either going up or the interest part is coming down. But we are not trying to reduce it drastically, whereas in other companies like Cosmo or Polyplex or any other company, their interest, suppose they are making profits, the interest rates are coming down drastically, financial costs. We are always maintaining like that. What could be the reason, sir?

So because we are the ones who only put major capacity expansion program like that and we have taken on the debt to finance those investments. So if you see last 3 years, our debts have gone up because of substantial investments made in new CapEx plan. And that's where the interest rate has gone up. Because if you see other -- some of the other peers, they -- I don't think so. Anybody in the industry in the last 2 years undertook the kind of expansion that we took, setting up 4 greenfield or brownfield and 1 relocation, and all these cost money. And as I explained that the markets have also helped us, that capacity utilization levels across even the new investments look today pretty decent at this stage, even to begin with. And it has done us well in terms of -- and those are reflected in about -- close to about 40% increase in the top line and 35% increase at the PAT level.

Thank you very much. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Yusuf Nasrulla for closing comments.

Thank you, everyone, for joining us today, and we look forward to staying in touch in future quarters. Have a nice day.

Thank you.

Thank you. On behalf of Uflex Limited, that concludes this conference. Thank you all for joining. You may now disconnect your lines.