Uflex Limited (500148) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Uflex Limited Q4 FY '24 Results Conference Call hosted by Dolat Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sachin Bobade from Dolat Capital. Thank you, and over to you, sir.

Thank you, [ Muskan ]. Good evening, everyone. On behalf of Dolat Capital, I welcome you all to the Q4 FY '24 Earnings Conference Call of Uflex Limited. I hope you all and your family members are staying safe and healthy. From the management side, we have with us Mr. Rajesh Bhatia, Group President of Finance and Accounts and Chief Financial Officer; and Mr. Surajit Pal, Vice President, Investor Relations. Now I hand the floor to the management for their opening remarks, and then we would have a question-and-answer session. Over to you, sir.

Thank you, Sachin. Good afternoon, ladies and gentlemen. Thank you for joining us today for the Q4 and FY 2024 Earnings Conference Call of Uflex Limited. We will start with a brief statement from Mr. Rajesh Bhatia, Group President and CFO. Following which, we will open the forum for the interactive question-and-answer session. Before we begin this call, I would like to quickly remind everybody that anything that we say during this call that refers to our outlook for the future is a forward-looking statement that must be taken in the context of the risks that we face. With this, I would now request Mr. Rajesh Bhatia, Group CFO, to make his opening remarks. Over to you, sir.

Thank you. Thank you, Surajit. Good afternoon, everyone. Welcome all of you to the Uflex Q4 and Fiscal Year '24 Earnings Conference Call. I hope that you all had a chance to look at our earnings and the presentation we shared. I'll start by outlining some of the key highlights of the quarter. In hindsight, I think this is quite a positive performance in this quarter. We've seen about 8% volume growth, led by higher volumes across all our business segments. We have seen improvement in revenue and EBITDA. I'll call it adjusted EBITDA because there is a lot of elements in Q4 as well as in FY '24 on account of the currency fluctuation and all. So I think we will have to sort of keep that aside and look at operational EBITDA as such. So this quarter, revenue growth was driven by the strong sales performance, growth in sales as well as the margins and which is, in both categories, films as well as the packaging business. Our revenues for the quarter grew by about 4.5% on a Q-on-Q basis, so close to about INR 3,497 crores and 3% year-on-year basis. And the volumes grew by 10.5% year-on-year and 6.8% quarter-on-quarter to about 157,850 MTPA. The Film business grew by 13.7% year-on-year on volumes and 6.3% quarter-on-quarter. Our Value-Added Packaging business, including Flexible Packaging, Liquid Packaging, Holography, witnessed a volume growth of 8.7% quarter-on-quarter and 1.5% on a year-on-year basis. The profitability improved about 6.9% on a quarter-to-quarter basis and 6.3% on a year-on-year basis. And EBITDA margins also improved slightly. For the quarter, we had an EBITDA margin of 13% and EBITDA -- normalized EBITDA of about INR 455 crores. Last quarter, we had an EBITDA of INR 426 crores. The domestic packaging film market still remains subdued in terms of the pricing. The volumes are good, but the overcapacity has led to erosion of the selling prices as well as the margin. And even internationally, because of the excess capacity in India, there is an impact because -- so while there was already an impact of the Europe reeling under the aftermath of the Ukraine war, energy prices going up, but the increased competition from India has also added to the pressure on the realizations over there. And the businesses, in terms of volumes, are coming back. And as I said last time also, and Q4 be of a testimony to that. But still, I would say that pressure on the realization and margins is still prevalent over there. And hopefully, with the rural demand now picking up as we saw at the fag end of Q4 '24, there'll be a possibility of the volume growth, both in Packaging business and Flexible Packaging and Aseptic Packaging, as we enter into FY '25. As we go into FY '25, one of the very important milestone for us is that we've also developed a machine in the liquid packaging, which can do about 25,000 packs per minute -- per hour, sorry. Earlier, we have had a machine which could do only 10,000 packs an hour, fill only about 10,000 cartons an hour. But now, this machine, we are also -- DRUPA, which is currently going on in Germany, we've also demonstrated there. So this will further lead to -- as we are going to have a higher capacity of our aseptic packaging division later this year, I think this machine will further augment our volumes much from 7 billion to 12 billion packs much faster given its speed. And because the competition already had a machine, which could do a much higher number than 10,000 cartons per hour, so we've also now successfully launched our higher-capacity machine for catering to the aseptic packaging customers. Overall, if we see the businesses in U.S., that is North America as well as in Mexico market, I think the Q4 was very good in terms of the volume increase. Overall basis, I think we gained significantly in these 2 territories. It's not only that these territories could be self-sufficient with their own production capabilities, but they also had to import for -- to meet the increasing demand of packaging films in the North America market, which was done by exporting the material from India, from Nigeria and occasionally from other facilities also. So clearly, U.S. market size that we have captured is way beyond our manufacturing capability in that region. And so this is supporting our other investments made in India and Nigeria, which would have otherwise given the demand/supply mismatch in India. That comes very handy in terms of keeping your plant operations at a much higher level. But Europe is also positive. In Europe, the production volumes in Poland and Hungary surged in Q4. Poland went up by about -- close to about 17%, and Hungary was about 60% on a year-on-year basis. No doubt that the Red Sea crisis has also helped us to get the volumes and the margins, some higher margins this quarter. And because -- again, because of the Red Sea, you have the consumer worried about the higher freight costs, higher -- longer time it takes for the consignment to reach from India or elsewhere into Europe and America. So I think that all is helping the local product -- producers to gain volumes as well as to have higher prices. As I had told earlier that in Europe, we had a new contract for power purchase in Hungary as well as in Poland from 1st of January. So Q4, we have been able to reduce our power costs in these 2 territories. And the impact could be as much as 40% versus what was prevailing before this new contract came into view, and this will take care of us in FY '25 as well. And beyond that, whatever is the market conditions, we'll do further power purchases based on that. In terms of Africa business, the Nigeria also expanded. Capacity utilization is about 67% in Q4. And we have captured a very large -- more than 50% of the market there. I think, gradually, we have a higher -- much higher market share given that. As I had said that there was an additional duty imposed by virtue of which the imports had become costlier, and Nigeria has also seen a huge volatility in its currency. So the domestic buyers, obviously, are preferring to buy locally than to import because they can order just in time rather than at least a 90 days window for them to between ordering as well as receiving the material. And the way the currency is behaving over there, I think there is going to be a much higher market share that we will capture in that market in the quarters to come. Again, in this quarter, we were again hit by the currency devaluation in Nigeria and Egypt. Egypt devalued its currency from about 31 levels to about 48 levels, which led to about 49% of currency devaluation, and we had to have a currency devaluation impact of about INR 177 crores this quarter. Egypt had also devalued its currency in March of 2023 also, and which had led to a devaluation impact of INR 150 crores. And this year, again, in this quarter, we're having INR 177 crore of impact. Nigeria continues to devalue. For the whole of FY '24, they have been devaluing. So last quarter, again, they devalued from something, somewhere around 900 to about 1,300 levels, which led to, overall, in the year, in the financial year '24, their devaluation has been about 183%. And the overall devaluation, on account of this, is about INR 871 crores what we had to take in the whole of the year. During the year, we have set up new capacities. We've completed our PCR chips plant in Egypt, which has an installed capacity of 18,000 tonnes per annum. That was done in January. We have also -- on 31st of March, we also commenced the Panipat PET chips resin facility. And later in the year, we'll also commission our same plant in Egypt as well, I think, by the end of Q3. And we will commission CPP plant in Russia, which has an installed capacity of 18,000 tonnes. And later in the year, we'll also commission our CPP facility in Mexico as well later in the year. So in the current year, I think we're looking at completing our PET chips resin facility in Egypt, our CPP films plant in Mexico and our efforts to debottlenecking, which takes the production capability from 7 billion packs to about 12 billion packs a year. Notably, in the current year, we have -- our sales volume in the aseptic packaging have been about 7.4 billion packs a year, which is more than our weighted capacity of 7 billion packs. So in that business, we continue to be impacted by the capacity constraints, so which, in the next season, which begins on January, I think we will be all up and running with a higher capacity and look to better throughput from that business, which will give us additional revenue as well as the profitability. On the debt basis business, for -- as we had said -- guided earlier that the net debt will remain around INR 5,500 crores. The net debt as on 31st of March is about INR 5,569 crores. And we are -- the projects that we have commissioned already towards in Q4 as well as the projects that we're commissioning in FY '25, I think we're very confident that these projects will give us an additional turnover, anything between INR 2,000 to INR 2,500 crores in the FY '25. And the margins also, even if we take the margins in the current range for the various businesses, so obviously, they'll add to the margins as well. In India, in the last few days, there has been a positive impact in the bottom -- BOPP film prices. And we've seen about a 9% to 10% price increase across the industry, which will not only help the domestic markets, but will also help the overseas markets as pressure of exports from India to Europe and America will go down to a certain extent. Because if your domestic prices are okay, the urge to export and the delays and the higher working capital involvement in exporting is taken care of. So we're expecting better prices in the PET -- in the BOPET industry in the FY '25. And I think that would have a significant impact on our profitability in FY '25, plus coupled with the additional revenues and the profitability coming from some of the new projects that we've commissioned in FY '24 and being commissioned in FY '25. I think we can look at, at least, 15% topline growth and also EBITDA. And at the PAT level, because of the additional impact of depreciation and interest, there will be -- we'll have to figure that out. But definitely, at an EBITDA level, there will be contribution. And if you look at this quarter at an operational EBITDA of INR 455 crores, and last quarter, EBITDA of INR 426 crores. So if we annualize these 2 numbers, so we are looking at about INR 1,800 crores of EBITDA from this business. From the existing setup, plus the new investments, which came into being in Q4 and will be effective in next year. The top line number is going up by at least 15% and incremental EBITDA, so I think we should look at overall EBITDA in the range of INR 2,000 crores-plus in the next financial year for sure. And anything which sort of helps us to get the better pricing on the packaging film side, I think that will be an add-on profitability that we, at least, hope that will come our way. So I think FY '24 Q4 -- so Q4 sets a tone for FY '25, which is extremely, extremely positive note, both on the volume and the revenue side. Yes, the margins will also sort of start getting improved with the improved volumes and improved revenues for sure. And as I said that India, we've already seen about a 9% to 10% price hike for the BOPET sales in the recent past. And hopefully, that will get mirrored in the international markets as well. And with the better volumes, with the cost coming down per unit because of the better volumes, I think we are -- we're sure that FY '25, the overall financial performance will improve substantially as compared to FY '24, what we have. Thank you, gentlemen. That's what I had to say about the performance for this quarter. And I'm happy to answer any information requirements or any further clarifications you may want to seek. Thank you. Thank you, everybody.

[Operator Instructions] First question is from the line of Chirag Singhal from First Water Fund.

Sir, just a couple of questions from my end. First, what is the peak sales volume that we can expect on full ramp-up of our overseas plants? Because we have seen more than 100% capacity utilization in some of the plants in the past as well as, right now, Hungary also has stable [ PPTs ] running at more than 100%. So peak sales volume, what should it be for the overseas plants?

I think what we can look at is the better volumes coming from our plants. And see, we, in Nigeria, there is definitely scope. Then we have a scope in Mexico, India. I would say that -- just one second, I'm just opening the numbers. So Mexico, we can do about -- we did about 54,000 tonnes. We can do about 62,000 tonnes, so 8,000 tonnes can come from there. Egypt, PET side, I think we are fine. In Poland, we can do about another 15,000-odd tonnes a year at the full -- taking the full capacity. The U.S. and Russia are operating at full capacity. Hungary, we can do about another 10,000 tonnes a year. And Nigeria, we can do about another 15,000 tonnes a year. So 15,000 tonnes in Nigeria, another 11,000 tonnes in Hungary. Russia is all booked. U.S.A. is all booked. Poland, we can do about another 15,000 tonnes. Egypt, we can do about another 10,000 tonnes. Mexico, as I said, we can do about 8,000 tonnes more. Dubai is fine. India is we can do about another 15,000 tonnes. So total 74,000 tonnes, we can do more, which means that what we did in FY '24 was [ 4,686 ], which is about 15% more output from the existing capacity, is that what we had.

Okay. And this does not include the CPP line of Russia? And you also mentioned the amount of CPP line.

[indiscernible] So they just come up. So those volumes will be on top of this.

Right. So one CPP line in Russia. You also mentioned one more CPP line, right, which we're expecting this year. So that is in which region?

That will be end of Q2 somewhere.

Q2 of FY '25. And that is expected in which region? Like, where are we setting up this line?

Mexico, I said.

Okay. So 36,000 will be incremental? Or is it over and above the 74,000 breakout that you just gave?

Yes.

Okay. Understood. And any time line that you can give, especially on the Nigeria ramp up? Like, have any...

Nigeria, I think, in about a quarter's time, because U.S. market continues to give us additional volumes. So those volumes, given that they have a capacity bottleneck today of 60,000 tonnes of capacity in Mexico and another 26,000 tonnes capacity in -- so sorry, 30,000 tonnes capacity in U.S., so total capacity in that region is about 90,000 tonnes. And if we are doing, on a consistent basis, 120,000 tonnes in that market, could be more also. We are looking at retargeting about 140,000-odd tonnes over there. So that deficit will have to be supplemented by Nigeria, India and maybe Egypt.

Okay. Understood. And any time lines that you can give? Nigeria, you were saying in a quarter's time. So by end of quarter 2, are you suggesting that by end of quarter 2, we should be at full utilization in Nigeria?

About -- we're targeting about -- from 67% to about 85% because there are some constraints as well. So looking at those constraints, about 85%-odd or so is what we're targeting.

Okay. And for the overall volumes, like 74,000 plus 36,000. So for this overall peak utilization, like, can you give some time lines, whether it is end of FY '25? Or by when do you see this will ramp up?

See, I think the only question which, to my mind is, today, one is the India prices, where I see that from the peak, we are utilizing less capacity because the prices are not remunerative. So some of our old facilities where the costs are high, there is no point in operating that. And so we're running at a lower capacity than what we have. So I think India will depend on the pricing. And Poland is -- Europe is dependent on the demand of the PET in the European markets, which has gone up in this quarter. So if you see Q4 for Poland is, on a year-on-year, on a quarter-on-quarter basis also, is up 26% -- 27%. So versus the last quarter, the Poland production is up by about 27%. So it needs to go up again to -- but on the year -- on the full year basis, we were down by about 20% in Poland vis-à-vis FY '23. So there is still a substantial headroom there to take the numbers up. I think there -- I think the pricing improvement in India and the European demand coming back are the 2 factors that will play out there. So I'll keep a tentative guess that we can probably achieve that by Q3 or Q4.

Okay. Understood. Now coming to the substantial power cost savings that you mentioned because of the renewable energy tie-up in Dharwad. So can you quantify what was the savings in FY '24? And on an annual basis, how much overall power cost savings can you expect to achieve?

I think we can expect to achieve about I think 50% of the costs -- sorry, 40% of the savings we can expect over our power costs in Dharwad. So Dharwad, on an overall basis, I think about -- we can look at about INR 35-odd crores savings, maybe a little INR 35 crores, INR 40 crores annual savings in the power cost.

INR 35 crores to INR 40 crores annual savings, and they should start reflecting from the current fiscal?

Yes. So the power supply hasn't started. We are expecting that somewhere in the month of June it will start.

Okay. Got it. Sir, my third question is on the CapEx guidance and estimated net debt. So what are you guiding in terms of CapEx and estimated net debt for the current fiscal?

I think we'll take that in the current -- in the next fiscal. Let's first complete some of these projects. I think we are at net debt of about INR 5,500-odd crores. We have scheduled repayments aggregating to about INR 1,000 crores in this year, plus the new debt coming from some of the investments which are underway. But on an overall basis, I think the net debt level should be about INR 6,000-odd crores. But I'd like to answer this more in a much better way in the next quarter. But I think, on a net debt basis, we'll be about INR 6,000-odd crores.

Okay. And CapEx guidance?

CapEx guidance, I'll give it to you in the next quarter.

[Operator Instructions] The next question is from the line of Kaushik Poddar from KB Capital Markets Private Limited.

Will this year see the end of all capital -- CapEx?

I think, largely, you are right, yes. But as you reach towards the end of your capacities, you don't want to give away your market, sort of, share. And as we said that the Films business, as of now, is -- there is no expansion plan. There's nothing big that is really planned. But once the markets come back, you always look to ensure that you are sort of dependent on those. You don't lose your market share in those markets. Like I said that, today, what we are doing is we are transporting a lot of material from India and Africa into U.S. markets, where we are -- we have a deficit position. Now this deficit position, of course, we don't have anything which is likely at any approval level and all that. But being a business person, if that production -- there is 90,000, and I can sell there 140,000 tonnes a year, I think, on a long-term sustainable basis, it won't be possible for us to keep on meeting that demand from a far-flung area. So obviously, as and when those far-flung areas are able to sell in their preferred markets first, because we didn't make those plants in India or Nigeria to sell to U.S. markets. We made these plants there to sell to the local markets and the surrounding African countries as well. Now just because there is a sort of demand, which is impacted elsewhere, we have this situation where U.S. is being fed from other sources. But at some point in time, I can't say, maybe a year later, maybe 2 years later, there will be definitely a case for the ramping up the capacity there so that you can meet that demand locally. And all these things, again, the freight plays a very major role in some of all these. Now all of a sudden, the freight rates -- like we were taking a lot of material in Nigeria from China. Now in the last 1 month, the freight rates have tripled from China to Nigeria. So end of the day, while you can live with this small abruption there and there, but if they are on a consistent basis, then you look to ensure that you derisk your business to the extent possible. Now obviously, if Nigeria is getting its material at a much higher price, so it will have to sell to the U.S. at a higher cost as well. But the U.S. market may not be able to afford those costs just because the freight rates from China to Nigeria have sort of gone up. So as I said that while these adjustments are possible with a player like us who is a global player, multi-country presence and all that, you can do all that optimization. But in the long run, the endeavor is to serve -- our motto has always been to serve the local market. Otherwise, like many others, we would have also set up capacities in India to serve European or American markets from here, and which many companies do, obviously. They do, but their risk to that business are much more than our risk in terms of the logistical challenges in terms of the freight to those markets, in terms of the working capital deployment to those markets. Because it takes at least 90 days' cycle to get the material over there, and then you sell on the credit. So the credit can go up to 140, 150 days in some of those markets. So our business model has been pretty stable: produce locally, sell locally and in the adjoining areas. So wherever these opportunities are there, like it's there in the America markets, North America markets now, as and when the situation will improve in India, in Nigeria and all that, I think there is a merit in terms of considering investments in that region. I hope I'm clear.

Yes, yes. Yes, that's clear.

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