Uflex Limited (500148) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the UFlex Limited Q1 FY '25 Business 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, Neha, and good evening, everyone. On behalf of Dolat Capital, I welcome you all to the Q1 FY '25 Earnings Conference Call of UFlex Limited. Hope you all and your family members are staying safe and healthy. From the management side, we have Mr. Rajesh Bhatia, Group President, Financial Accounts and Chief Financial Officer; Mr. Surajit Pal, Vice President, Investor Relations. Now I hand the floor to Mr. Surajit Pal, Vice President, Investor Relations. Over to you, sir.

Thank you, Sachin. Good afternoon, ladies and gentlemen. Thank you for joining us today for the Q1 FY '25 earnings call of UFlex Limited. Let me draw your attention to the fact that on this call, our discussion will include certain forward-looking statements, which is predictions, projections or other estimates about future events. These estimates reflect management's current expectations about the future performance of the company. Please note that these estimates involve several risks and uncertainties that could cause our actual results to differ materially from what is expressed or implied. I would now request Mr. Rajesh Bhatia, Group President and CFO for his opening remarks, following which we will open the forum for an interactive session and answer session. Over to you, sir.

Thank you, Surajit. Thanks for the brief introduction, and good afternoon, everyone. I welcome all of you to UFlex Q1 FY '25 Earnings Conference Call. The numbers and the media interactions would be before you -- before I speak to you on this for the Q1 performance. On the outset, I will say that there's been a very positive start to the financial year FY '25, mainly because after many quarters, we've seen an uptrend in the BOPET as well as BOPP prices. Just to bring to your kind notice that since April, in a gradual manner, BOPET prices have gone up by about 30% till end of July, and the BOPP prices have gone up by about 18% to 19% over the same period, and the major increases have come, you can say, after 15th of June. So the quarter that has gone by will reflect only a little bit of that, but the quarters to come by will reflect from here on the benefit of these price hikes. There's been a raw material price increase also like if BOPET prices have gone up by 30%, the raw material prices are up by 8%, and for BOPP also, if the prices have gone up by 18% the price of raw material prices have gone by about 4% during the same period. So the differential is still quite substantial, which will get reflected. If the prices remain the way they are, the margins remain where they are, they will get reflected in the earnings in the quarters to come. Notable is that in India, even on a sequential quarter basis, we have seen volumes going up by 5%, which is very healthy for the packaging service business of us. And overseas, if we see, has largely been flat on a sequential basis. The offtake as well as offtake has gone up just by 1%, which is neither here nor there. So overseas, the total volumes have remained where they are. But definitely, we see that the margins have improved in the offshore business. And the offshore business as such has reported a 13.4% margin vis-a-vis 12.6% margin in the Q4 versus 7.2% margin in Q1 of the same period, Q1 FY '23. So that's where -- that's the heartening story from this quarter, the first quarter's, performance. Coming to the overall package for the quarter, we have more than 12% Y-o-Y increase in the revenues, driven by a 12.4% volume increase. We even had, on a sequential quarter basis, a 5.3% revenue increase. While the volumes were flat on a quarter-on-quarter basis, for overall business, I'm seeing -- I'm now to the overall business. Earlier, I was talking about the packaging sales business as such. And the normalized EBITDA, without taking any exchange fluctuations into account, is INR 465 crores. And our annual EBITDA guidance, which I had earlier said, about INR 2,000 crores, I think there could be an upside by another 10% given the prices today as well as the Q4 when we see the impact of the larger volumes from the Aseptic Packaging division coming into play, and our plant in Egypt for the PET chips getting commissioned, which will ensure that our markets, our plants in Egypt, Nigeria, Poland, and Dubai will be fully fed from this. And still, we will have a 30% surplus, which we can either find the markets, third-party markets, or even if there is a need to supply to our other locations, which are now Mexico and U.S., we can do that. The India PET chips started from April. We capitalized this plant on 31st of March, and the first quarter itself, the capacity utilization achievement is about 65%. And of the -- we sold about 25,000-odd tonnes, of which 30% was bottle grade, which was -- again, we don't consume it ourselves. So that opens up a new vista for the company, which is supplying raw material for the people who make the PET bottles. So that's another stream of income, which is going to get added to us. So depending on as to where there are more margins, we can switch from the film grade to bottle grade and so on. So that's been the -- that's humongous benefit having your own raw material, both in terms of quality as well as the pricing benefit that you get. And Aseptic Packaging, this was the quarter where we recorded the highest-ever production and the sales, equivalent to capacity utilization level of about 120% for the quarter. I think, as I said earlier, we have a higher capacity now available to 12 billion packs, but capacity utilization as at 120% tantamounts to about 8.5 billion packs annualized capacity. So when we have a 12 billion packs capacity available, we'll surely be doing much better volumes in Q4 as well as thereafter in FY '26. We had substantial exports coming out of the Aseptic Packaging business as well, and about 38% is the exports by value what we do currently in this business in the current quarter, and about 62% is sold domestically. This export has helped us to better plan the lean season in India, which starts from, you can say, from middle of August until end of December. And during this while, we can still operate the plant at a higher level, looking at the exports market. But in the peak season, the domestic volumes are always priority for us, because it's a domestic customer who -- even though the export prices are a bit higher, we still have to serve our commitments to the domestic market. And we do that irrespective of even if the exports are giving us a better realization. Flexible Packaging this quarter had not such a good quarter, because as the raw material prices for them increase gradually, because they have a lag with their customer for the price to be passed on 1 month to 3 months' time. So they'll always have a lesser margin during this period, but as the prices stabilize, they'll be fine. Their volumes will also be fine. And currently, because the prices are going up, I remember that all through April, May, June, July, August, September -- August, so July. April, May, June, July. In 4 months, there have been at least half a dozen instances where the prices have gone up for the packaging films, which means that if the price rise is happening constantly, the Flexible Packaging business margins will keep on getting impacted because of the lag, what they have. Overall guidance for the EBITDA, I've already said. This quarter, again, we had a currency loss of INR 180 crores, of which Nigeria was about INR 100 crores, Egypt was INR 30 crores and Mexico was around INR 50 crores. I think this has become quite a normal phenomenon, because as you translate their local currency balance sheets into Indian rupee, that transmission losses do result in these losses, which are more or less notional. But still, because of the accounting standards requirement, you have to account for that loss because of the translation. Because even -- so that way, if you were -- we make even our Indian balance sheet and some other currency, which has depreciated against rupee, you will have those translation losses, but they are, again, largely notional. So to that extent, I think those can not be really attributable to the business performance. We are looking at the emerging opportunity in the recycling PCR in a big way. Times are now coming, and with India as well as the overseas territories taking in new laws with respect to the usage of the recycled materials in the packaging. I think our investments, which we've done in these PCR and MLP recycling, will be utilized and will give us a higher revenue and profitability, and these are coming into play from 1st of April 2025, and we will -- sort of depending on as to how quickly these are enforced in India. Europe is also, in fact, putting a large number to the recycling, that the companies will have to use at least 20% to 30% of the recycled plastics. So that will be the key to look at in the future, in the next few years. Your company already has much better head start than others in this particular segment. And surely, in the next few years, this will gain momentum, and we will look at substantial revenues, and investments may also be required subsequently in this business. No plans as of now, though, but looking at the size of the opportunity that it will grow. Even if it's 20%, 25% of mandation to use the recycled materials, I think this itself will become -- turn out to be a huge business opportunity for UFlex. On the debt side, vis-a-vis March, we are up by about INR 98 crores, largely because of the increase on the working capital side, which is the term that has come down. So the long-term, term debt has reduced, but the working capital has gone up, which is linked to the higher productivity, linked to the higher output, higher sales and also a function of the price of the raw materials and the price of the finished goods. So I think that keeps on fluctuating, depending on the cycle of the prices where you are. But the long-term debt, which has gone to fund the CapEx, has come down slightly during this quarter. As we'll go through the rest of the financial year, I think we are due to complete our PET chips in Egypt, which will probably happen in Q3, Q4 at the best, but certainly before the next financial year begins, I think we'll make this plant operational. Aseptic debottlenecking will happen probably before the season starts in January of '25 now, and the Mexico CPP facility will be commissioned probably in Q2 of this financial year. So I think the benefit of all these can come in FY '26, and surely, the PET chips in Egypt is going to be a big game changer for this entire 3 or 4 countries, which I just spoke about. And as of now, in Egypt, we don't have the flexibility of making the bottle grade chips, but I think with a small bit of an investment there, we can have that flexibility also, given that we have a 30% output, for which we have to find the market. So we sort of like to create that flexibility also as the things sort of progress. That's largely the undertone for the quarter, for the year, has been set by this quarter, which is a bullish tone from here on. In all the business segments, Packaging Films, Aseptic Packaging, Flexible Packaging, the PET chips business doing so well in the first quarter itself, achieving with the initial [indiscernible] troubles. This being a China plant, we imported from China, and given that there is a lot of visa restrictions on Chinese coming and visiting India, which was not there when we ordered this plant, speaks very high off that we could commission this facility, and yes, there were a few hiccups to begin with. But still a 65% capacity utilization achievement in the first quarter of the operations speaks volumes for the quality of the management, the technical people who have been operating and running this plant, and I have no doubt that this plant from within this year will achieve a 90% capacity utilization level. Even at 65% at an operating level, we're profitable in this facility. But as the plant stabilizes as the quality stabilizes, the wastages come down, we'll be much better off in the months to come. Gentlemen, that was my take on this quarter. And again, just to reiterate that, that sets a very bullish tone for the things to come in the quarter, the rest of the quarters in FY '25 and the period beyond that. Thank you. Thanks a lot. Any questions, please? I'll be happy to answer them.

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

Just a couple of questions from my end. So first, on the Panipat PET chips facility. So what is the timing by when we can expect full ramp up? And you mentioned that there were some sales that you did during the quarter. So going forward, what is the mix between captive and expenses?

So [indiscernible] what you are asking. [Foreign Language]

Panipat PET chips facility. I wanted to check what is the time that will take to ramp up to full capacity utilization, and going forward, what is the mix between captive and expenses?

So Chirag, we produced -- we sold about 25,000-odd tonnes this quarter, of which about 30% is -- so if we sold 25,000 tonnes, 70% was the film grade and 30% was the bottle grade. So the bottle grade was sold 100% in the market, and the film grade was sold almost -- you can say 55% was consumed internally and the balance, 45%, was sold externally.

Even with full capacity utilization, the ratio will be the same, which is 40% captive and...

The ratio of the bottle grade will go up, and -- because bottle grade actually started later than -- didn't start on 31st of March, it started later. So because at this level, at about, say, in the last 3 months, our internal consumption has been close to 10,000 tonnes, so which is -- which will remain at that level, and the rest of it, we will find it in the third-party. There could be a possibility to export it to our other plants as well. But again, the freight rates today, we started exporting to Nigeria also, but the freight rates today do not make commercial sense from inland plant based out of Panipat to take it to the port and then from port to Nigeria. So that was not commercially becoming so viable. So we will -- bottle grade, of course, we will sell mostly to the market only, and the [ bright ] would be 50-50 only.

Understood. Sir, secondly, on Asepto. So you mentioned that roughly 62-odd-percent was sold in India. So what is the market share of UFlex Asepto India?

I won't have that number ready.

Because if I annualize this number at 8 billion, 8.5 billion PETs, then roughly 4.5 billion to 5 billion PETs are sold in India, right? And so just wanted to understand if you can...

Lean season, your production, your -- the consumption of at Aseptic [ packs ] are impacted. So when I say on a 120% capacity utilization equivalent to, say, 8.5 billion packs annually, so the market size -- what I'm saying is in the next 6 months, the domestic consumption may be much lower and overall capacity utilization during the lean period may be lesser than 120%.

Okay. So let me take the 12 billion to 13 billion plus capacity that we are planning to reach [indiscernible] debottlenecking, so in that full capacity utilization, like what is the mix between domestic and exports? Like what are we looking at in terms of domestic and exports?

So I think we will look at -- we will look to maintain about 60% domestic and 40% exports.

Sir, coming to the value-added products. So you mentioned in the press release that the value-added products fetched close to 3x more NSR than a commodity grade, and you also mentioned on Hungary that 30% of Hungary output is what you would like to see the value-added product category. So in terms of spreads, [indiscernible] already mentioned it, 3x. In terms of spreads, what is the gap between value-added and commodity grade? And currently, in Hungary, how much volumes are value-added as a percentage of the total output?

Chirag, we'll have to get back to you offline for this detailed ask.

Okay. But this 30% is something that you aspire to be in Hungary or it's already achieved, the value-added products?

I think we'll have to get back to you offline on this. Chirag.

Okay. Okay. Also, you mentioned you signed some long-term PPA in Noida. So could you just quantify what are the annual savings that you're looking at?

I think once we do -- so Noida, we will do about a 70% power tariff. So Noida, about 18 crore units a year. So about 70% of that will be through wind and solar, on which the savings would be about 30-odd percent or so. And in Dharwad, it will be about -- 85% of the power will be through solar, on which, again, the savings will be about 32%.

I think for Dharwad ,you already quantified in the past. Can you just quantify what is the cost savings that you're looking for in Noida?

So Noida, if I look at 18 crore units -- [Foreign Language].

Understood. So my next question is on the unit trend on the spread. So you mentioned that the prices have been going up. The NSRs has been going up. So are these still sustainable in the domestic market? And what is the trend that you have seen in the overseas market? And also if you can share the industry capacity utilization in India, because the spreads ideally will go up, the industry capacity utilization is also improved, right? So what is the industry capacity utilization that you have seen in India?

Industry capacity utilization in India will be currently at about 65% or so, but India industry is exporting a lot from here. And there is about 57% BOPET exports increased from India on a Y-o-Y basis and 27% BOPP increase, so that is what is balancing the whole thing in India.

Okay. And what has been trend in the overseas market?

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

How do you see the demand-supply equation on the packaging film front, both for BOPP as well as BOPET?

So BOPP, there are no issues at least for a year, say, next 15-odd months or so because there is no capacity which is getting added, maybe 1 plant or so. So next 15 months looks to be pretty positive on this. BOPET side...

Are you speaking only for India or for the world, you are speaking of?

I'm talking only for India.

Okay. And how much percent of BOPP films gets exported from India?

So BOPP, I don't have the percentage from India. But I think India, [Foreign Language], India market maybe consuming about 60,000-odd tonnes. [Foreign Language] so about 17% is being exported.

The quarterly production is around 50,000 or 60,000 tonnes, how much you said?

Monthly production could be about 70,000-odd tonnes, of which 60,000 tons or maybe 5,000 plus/minus, don't hold me on to that, would be consumed in India, and the rest is being exported.

Okay. Monthly production, you said is 60,000 tonnes, right?

Yes, sir. Monthly, I said, is about 72-odd -- between 70,000 to 75,000 tonnes, of which 12,000 tonnes is being exported every month, and the rest is consumed in the country. Hope I'm clear now.

Yes, yes. And next one to be BOPET.

So BOPET, currently, the exports are about 22,000, 23,000 tonnes a month. Consumption is about 60,000-odd. Could be 60,000, 65,000, anybody's guess. So if you take 65,000 plus 23,000, 88,000. So 23,000 upon 88,000 is 26%. So about, say, 25% is being exported of the production, and 75% is being consumed locally.

Okay, okay. And so demand/supply imbalance equation in BOPET?

So this balance is out at these numbers, no?

Okay. But any incremental capacity coming, I think, that is what I try to...

No capacity coming in at BOPET.

How much?

Am I not audible?

Yes, it's -- I mean it is getting interrupted in between, so if you can repeat what you said on the capacity front.

No capacity additions are coming in BOPET. There is no additional capacity now getting installed in the BOPET.

[Operator Instructions] The next question is from the line of Aman Kumar Sonthalia from AK Securities.

Sir, my question is regarding that this full price is -- there is increase of around 20% in the Indian market, whether it is the same in the international market also, where our plant is located?

International markets, [Foreign Language] especially in America. But India [Foreign Language] India exports have, as I told you, India PET exports have risen by about 67% in June '24 quarter versus June '23 quarter. So when India is supplying a lot to the overseas, so the prices are remaining in check in the overseas markets.

There is a little bit of increases there.

There's a little bit of increase because India [Foreign Language]

[Foreign Language] around 10%?

[Foreign Language] depending on the market to market.

Okay. Sir, my second question is that is there value-added products [indiscernible] international market?

[Foreign Language], but we've said that, that answer -- the question, we will answer separately.

And sir, we are quite excited. I think I have gone through the speech of the MD, sir. He's very, very excited on this Plastic Waste Management Rule 2022. Sir, [Foreign Language] it will actually happen, or [indiscernible]?

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]. This is not only India. This will be a worldwide opportunity. [Foreign Language]

[Foreign Language]

[Foreign Language]

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Sir, based on your experience, [Foreign Language]

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Sir, you are quite excited about PET chips plant in Egypt. So sir, [Foreign Language]?

[Foreign Language]

[Foreign Language] Sir, last question here. [Foreign Language].

[Foreign Language]

[Operator Instructions] The next question is from the line of Aditya Vora from Share India Securities.

I had a question. You mentioned the fact that domestic BOPET and BOPP prices have gone up by about 25%, 30% in the past quarter, but the same has not been reflected in international pricing. So is there a chance for imports to happen? Or is it economically not viable? Because if there is so much parity in pricing, so is it possible...

India will not import packaging films.

[Foreign Language] it not happen?

No, it will not happen. It hasn't happened ever in life. It will not happen in future.

Right, right. Okay. And one more thing regarding our debt. So can we expect that from '26 end, our debt comes down? Because I think major CapEx [Foreign Language]. So how we you look at that going forward?

[Foreign Language] So obviously, in a growing field, in a growing business, you will have to keep yourself updated all this, whether to the technology or to the capacity because you cannot give away your market share to other people just because you don't want to leverage -- to further CapEx by leveraging yourself.

And just one last thing. [Foreign Language] Who are your end customers will be?

I'll not be able to give that. That's a very confidential information. We'll not be able to give that data at all about our customers and all.

The next question is from the line of Prashant Rishi from Cascade Capital.

Sir, [Foreign Language] there is no capacity which is coming. And in BOPP, there is no capacity which is coming in the next 15 months. But that is the India picture. Can you give an idea globally, especially China, if you have any clue if there's any capacity coming in both types of [ finish ]?

If it's China capacity, we don't keep much track as an organization because that does not impact any of our businesses. But I know the number, [Foreign Language]. So China, that number would be 10 to 15x of that. But China players are so well entrenched in their own markets. Historically, we have not seen them coming to the U.S., to the European, Middle Eastern, Africa markets. But we have seen that wherever China has -- when they have a bit of overcapacity and the bulging of capacity, they have, at best, hit the Southeast Asia market, where we don't have a presence at all. So -- but never ever in the past, they have -- either they have come to India or they have gone to other territories in which we are operating. So if you really ask me our focus on what's happening in China, it's not as much there as our focus would be as to what's happening in the capacities, what are the capacity additions happening in the markets I operate in.

Okay. Understood. Got it. Sir, and the price increase, which has happened in June quarter in both BOPP and BOPET films, after the June quarter, you're seeing it sustain?

Yes, yes. We are seeing it sustain.

Okay. All right. So for next 2, 3 years, at least until any new capacity comes, these prices should sustain or even increase. That's the understanding.

[Foreign Language] Sorry, we [indiscernible] while you were asking a question. So can you repeat yourself?

My question was just for next 2, 3 years, still any new capacity comes in either of the films, the price should at least sustain an increase from current levels as well.

[Foreign Language]

And sir, what is the scale of that capacity? Is it huge capacity coming? Or do you think it will just get absorbed during -- in the growth at that time?

It is a substantial capacity, which is coming on [indiscernible].

Okay. After 15 months. And then in BOPET, it is not coming. So in BOPET, there is a clear runway ahead of...

BOPET capacity additions are over, over, over.

You said, sir, historically, India has never imported packaging films. Is there any particular reason why? Is it never viable for any global importer? Even China, you said, never exports it, sells to India. Is there any particular commercial reason why that has never happened historically, if you know?

I have no idea on that.

[Operator Instructions] The next question is from the line of Yash Dedhia from Maximal Capital.

I just had a question about the international prices on the BOPET and BOPP. So international prices have not gone -- not risen up like [indiscernible] domestic market.

Yes.

So the reason for that, you say, that the export from India is not letting the price go up?

Partially, yes, you are right.

So now since the capacity utilization at India level is almost there, reach its potential, going ahead, do we see international market also behaving like domestic market prices?

The realization from the domestic market will be better. So obviously -- and the domestic consumption increases by 10%, 12% every year. So to that end, the exports will get substituted with the domestic sales.

Yes. And since the exports will be substituted, consequently, the international prices should go up?

Yes.

Okay. So we may see a driver from there as well.

Yes.

And this PWMR rule. So do we see a shift from BOPP to BOPET because BOPP cannot be recycled? So do we see some shift happening from BOPP to BOPET because of that?

You're right. Maybe that can happen. Because BOPP [Foreign Language].

[Foreign Language]

[Foreign Language] So that could be the -- that could be the [indiscernible]. Because [Foreign Language].

[Foreign Language]

[Foreign Language]

So these all capacities are ready to function?

No, they are already functioning. They're saying that they'll get impetus with the law. So today, it is a self-regulation. So when is the self-regulation, then the people who are conscious, there's a certain market for that product, so it's getting that market. But when it becomes a law, it becomes a regulation, not a self-regulation anymore, then probably people will need it more.

Utilization would go up, but -- so do we see upside from capacity utilization as well?

And value will also be -- the margins will also go up.

Yes, margins will go up. And so are we operating on a lower capacity utilization, which we might see increase in volume as the -- so volume and value both play?

We are, because the [ CR ] plant in Egypt, we just started recently only decommission. The plant in Mexico also is not operating at a full capacity. India plant is operating at a full capacity, but that's a small plant. So these 2 plants, Egypt will take care of the European market, and the Mexican will take care of the American markets, the 2 most mature markets globally. So that is where they are set up there. And as the regulation, both self and the law regulation creates more demand, so there is more money to be made through these investments.

Okay. And so we are not adding on more capacity right now?

As of now, nothing. As of now, nothing.

And from then will our debt repayment start?

Sorry?

From when will our debt repayment start?

Debt repayment already started. [Foreign Language]

[Foreign Language] Are we foreseeing then, keep in mind, over and above the [ CD ]?

No, I am not able to understand your question. I'm saying whenever we take the loan, there is a scheduled repayment. So that scheduled repayment is about INR 1,000 crores a year for us, and we will -- we said that in the past, and we say that in the years to come as well. So that is my answer, but I've given you a generic answer, probably. I've not been able to understand your question.

Yes. I am asking whether -- are we interested in paying more than scheduled debt? Because we will be getting more cash profit now since the margins are going up.

There is no plan as of now.

[Operator Instructions] The next follow-up question is from the line of Aman Kumar Sonthalia from AK Securities.

Sir, right now, our capacity utilization is around 83%. So when we can think we will achieve this 100% price?

It's [indiscernible] 83%.

[Foreign Language]

[Foreign Language]

Overall total.

So overall, Mexico -- [ what is ] the capacity utilization improvement [Foreign Language]. So I think we'll be close to -- these are the 2 ones who are not operating at a full level, but are more or less keeping -- I don't think so that there is any...

[indiscernible] Russia is at 63%, foreign is at around 77% and...

[Foreign Language]

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[Foreign Language] [indiscernible] because end of the day, the markets are quite commoditized. [Foreign Language]

[Foreign Language]

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[Foreign Language] capacity limitation in [ India and Mexico. ]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language] [indiscernible].

We have the technology to convert that, and we will set up a small, small plant in different locations for that [indiscernible].

[Foreign Language]

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[Foreign Language]

Thank you. Ladies and gentlemen, we'll take this as a last question. I now hand the conference over to the management for closing comments.

Thank you, ladies and gentlemen, for the engaging questions. We will soon have the transcript of this call on our website, www.uflexltd.com. We look forward to speak to you again in the coming quarters. Thank you, and have a great day.

Thank you. We thank the management of this call. On behalf of Dolat Capital, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.