Uflex Limited (UFLEX.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Uflex Limited Q1 FY '26 Earnings Conference Call, hosted by Dolat Capital Market Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sachin Bobade from Dolat Capital Markets Private Limited. Thank you, and over to you, sir.

Thank you, Anushka. On behalf of Dolat Capital, I welcome you all to Q1 FY '26 Earnings Conference Call of Uflex Limited. Hope you all are staying safe and healthy. From Uflex management team, we have with us Mr. Rajesh Bhatia, Group President and Chief Financial Officer; and Mr. Surajit Pal, Vice Chairman, Head of Investor Relations. Now I hand the floor to the management for their opening remarks, and then we would have question-and-answer session. Over to you, sir.

Thank you, Sachin. Good afternoon, ladies and gentlemen. Thank you for joining us today for the Q1 FY '26 Earnings Conference 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 are 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 question-and-answer sessions. Over to you, sir.

Good afternoon to everybody, who's on the call. Let me just give you a brief about how the quarter went, and then we'll have the Q&A sessions. So as you would have seen from the numbers that the revenues are up by about 6.5%, close to about INR 4,000-odd crores, INR 3,922 crores for the quarter, driven by a volume increase of 7.9% on a year-on-year basis. And the packaging bit has grown by about 11.7% on a year-on-year basis. And volumes, I'm talking about the volumes and the packaging films has grown by about 6.8% during the Q1 on a Y-o-Y basis. This volume number does not include the PET resin production, which is happening at our Panipat and the Egypt plant because otherwise, the numbers would have not been comparable. When I talk about the 7.9% sales volume increase, that excludes any PET resin sales, which are happening largely from India. On a PET resin production, I can share some numbers with you, which is in India, we achieved a capacity utilization of 97% during the quarter. And in Egypt, we achieved close to about 75% capacity utilization, which is very good for the first quarter of operations. Key highlights for the quarter are that this quarter towards the end, around third week of May, we saw -- we -- unfortunately, a very large player in the packaging film industry had an accident at its plant and that changed the industry dynamics a bit. So the exports from India to Europe have come down. And the local availability of the BOPET and as well as the BOPP films has also gone down with the result that the demand supply is more balanced now, which has led to better margins post this event happening and a full reflection of that, you'll see in the subsequent quarters, the additional margins which are there because of this supply side not being available now. Having said that, we've also seen an increase in the import volumes also. But still, I would say, on the -- in the overall context, while the BOPET sees a very marginal increase, the BOPP part has seen a substantial increase and the gross value addition has risen considerably during the quarter post this event. In terms of the other markets for us, the overseas markets, because we've had this huge ongoing issue of the tariffs so a lot of back and forth happening, whether it was Mexico or Canada or some of the other countries. Our advantage is that we are present in 8, 9 different geographies, and that gives us a bit of a flexibility as to if we are exporting to U.S., which is the best in terms of the lowest impact because of the tariffs imposed by the U.S. And happy to state that our large part of our exports from Mexico to U.S. are covered under USMCA, and there is a nail duty as of now. And that will ultimately -- if that remains so, that will ultimately give us an edge over the other countries who were selling to U.S. because everybody else is facing some sort of tariff on the exports to U.S. There is a bit of a negative news on India that the export -- the tariffs announced by U.S. on Indian products are higher than expected, especially the additional -- the secondary tariff of 25%. I think we're pretty sure that, that part will be taken care of. And even if there's no resolution found before the '27 -- the deadline of '27, we feel that, that should be -- that date will be extended to -- so that whatever U.S. and Ukraine and Russia wants to achieve to end this war. So the time will be -- time allowance will be there to take care of any delays therein. The other part of the tariff of 25% is also there. So one of the packaging we export from India to U.S.A. So that will get impacted by this. So -- but if the tariffs are about between 15% to 20% range, final tariffs on this also, I think we'll be at a level playing field with the other countries, who are supplying to U.S. and that will sort of put us almost at par with the other countries. In terms of the guidance for this year, I think there are the CapEx plans, what we had in terms of expanding the aseptic packaging capacity from 7 billion to 12 billion packs that has got some delayed. We were expecting that to start from January, the commencement of the season for 2025 calendar, but that has not happened. And despite that, we had -- as I said, that we had on a Y-o-Y basis, 18% extra volume in this quarter for liquid packaging. So that should happen anytime soon. The latest could be in H2 -- early part of the H2, but we could have it early than that also. The aseptic packaging greenfield expansion of 12 billion packs at Egypt is also likely to get commissioned in FY '26 so is the WPP bags, which are used for the pet food industry, is also at an advanced stage of commissioning. And then we have final one, which is our recycling facility in Noida, where we are expecting that given the government initiative that 30% of the recycled content in the rigid packaging and 10% in the flexible packaging. So that recycling capacity will come very handy to take care of these -- the requirement of the products emanating from this government guidelines. On the whole, the margin for this quarter has been slightly lower same period last year. We had a 12.7% EBITDA margin, but this quarter, it is 12%. Again, the India business has done well, but somehow because of the tariff uncertainties and because a lot of companies had stopped their material requirements well in advance so we've seen some impact of that. And hopefully, this is just a passing phase and we -- this will get sorted out in the next couple of quarters as to what are the final tariff policies of the U.S. I don't -- and as I said earlier, if there are tariffs on other countries and not on Mexico, obviously, we'll definitely see our margins improving overall in our U.S. business because we may have some headroom to increase our prices in U.S. and still get the benefit of the USMCA to export to U.S. Again, one of the key features for this quarter is that we don't have any unforeseen in terms of exceptional losses for any foreign exchange. Last quarter, same period was about INR 180-odd crores. But this quarter, we don't have any such exceptional losses. So we're expecting that next year, we'll have the benefit of all these new investments getting commissioned. And by a reasonable estimate, we expect that these can add up to INR 3,000 crores of additional revenues at a reasonable 85% capacity utilization levels and will -- should give us about INR 600 crores of -- add about INR 600 crores of EBITDA because here, we are talking about aseptic, we're talking about WPP bags, we are talking about the recycling, which are likely to generate a higher EBITDA than the conventional packaging films where you look at about 11% to 13% kind of a margin range depending on where you are in terms of the cycle in the business. And -- but these products, definitely, we've been telling you that even in India in aseptic packaging, we -- our margins are much better than margins what are there in the packaging or the packaging films industry. So overall, I think a decent quarter, and we are looking to consolidate this year. And then next year, when all these investments are available for producing, then we good to add a substantial amount of revenues as well as the profitability to our business. I think that is what -- there has been some increase in debt also during this quarter, as I said, that the ongoing CapEx, which has been approved by the Board. The total amount is about INR 2,000-odd crores, out of which as on 30th of June, we've already spent about INR 1,100-odd crores so balance INR 900 crores is what is expected to be spent in the current year as well as in the Q1 of FY '27. So then that will take care of our -- the investments that we've already announced to the market. I think that is what I wanted to convey. So India, the market dynamics definitely have changed post that unfortunate loss at one of the very large players and so that will also change the dynamics in the export markets as well. We're clearly seeing that the volumes from India into the European export markets and the U.S. export markets will come down and -- which will give you a better pricing power in those jurisdictions. And India, of course, will definitely see better margins going forward on a consistent basis because a very large capacity is now off the table, which will take time to build. That's what I had to convey during this investor's call, and we are open to any Q&A. Whatever questions you have, we'll try to reply to the best possible. Thank you.

[Operator Instructions] We take the first question from the line of Chirag Singhal from First Water Fund.

A couple of questions from my end. First, the aseptic expansion, this seems to be getting delayed. Now the expected commissioning is in H2. And I think you have mentioned estimated outlay of $24 million, and that has already been incurred. So what are the challenges that we are facing in commissioning? And are you expecting a further delay?

No, we are not -- see, ultimately, the idea was if we can complete it by December '24 or early part of January, you will get the benefit of '25 calendar season. Now if that is not happening, then whether it happens today or it happens 2 months later, this is not going to be a very substantial difference in terms of what the volumes or the selling because now in the off-season, we're not constrained for the capacity. You are constrained for the capacity only in the peak season period, which is, say, from January to August. And so now any benefit of this will come only in the next calendar -- so '26 calendar onwards -- from January onwards, it should start. So we can -- we are close to achieving a commercial run for this. And it should happen quickly -- more quickly than that, but the message that I'm going to convey is even if it gets, say, done tomorrow itself, it's not going to give you any additional revenues and the profitability.

So for the full year, FY '26, what is your guidance on total volumes in Asepto?

Asepto in the -- we had earlier given a guidance of about 10 billion packs, okay? So in the Q1, we have achieved about 2.3 billion packs, which is April, May, June. So I think we will look at somewhere around 8 to 8.5 billion packs -- between 8.5 to 9 billion.

Okay. Understood. Now my second question is on the -- you have mentioned -- I'm on this capacity utilization slide. And I can see that in a couple of regions, we have -- the capacity utilization has dropped on a sequential basis. So in Dubai, Nigeria and Poland, we have seen -- and even Mexico, we have seen a sequential drop in the capacity utilization. So if you can highlight the key reasons? And for the full year, how do you see the overall capacity utilization across all geographies?

So I think as you rightly mentioned, these 3 are -- have not performed as well on a sequential basis. So Nigeria is the worst impacted, where the impact is because of the tariff being put by U.S. Nigeria has finally come on a 19% tariff basis. And earlier, it was -- when they had -- U.S. had put similar reciprocal duties on each country, they were at 10%. So I think because U.S. and Mexican, both production units are not able to cater to the demand in the U.S., in the North America and the South America market. So this business will pitch in, but we're still trying to see as to where we can optimize this. Like, for example, in Egypt, there is a 10% duty exporting to U.S. So I think eventually, when everything will get sort of more settled, we'll see at that point in time about Nigeria. But clearly, this quarter, Nigeria underperformed because U.S. had already stocked well in advance. Our customers had also stocked well in advance. And then this duty came by virtue of which we decided to just keep the things a bit low during the -- while this all gets settled down. Poland has typically been impacted because of exports happening from India. And as I said that post -- from June onwards, this trend has reversed a bit. In June, the exports from India into Europe were much lesser. And that impact will come in the subsequent quarters, and we think that, that will give us some pricing power in Europe. The third is Dubai. Now Dubai is not much -- there's no significant impact as such. It could be that the plant may be under a shutdown during -- a planned shutdown during this period and all that. That would be the only reason, but there is no specific reason for Dubai because Dubai sells its products only in Middle East. So there are -- there is nothing as such on the Dubai basis. But look at something, Hungary has done well as compared to sequentially as well as on a Y-o-Y basis. India has done well, and India is expected to do better in the coming quarters as well. So Egypt has done better in this quarter on a sequential basis. So I think overall, Nigeria will get sorted and Poland will get sorted in the next couple of quarters.

Overall for full year, what kind of production volume I should work with? So in this quarter, you have done totally 127,900 tons in the films section. And in the previous quarter, it was a similar number. So for the full year for the film division, what is the total production volume that I should work with?

Somewhere around 132 something per quarter.

132 per quarter? Okay.

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

My question is related to the BOPP margin in Mexico and Hungary, since I think a lot of import was happening in Europe from India. So after this fire in India in the Jindal plant, do we expect that the dumping from India will come down and the margins in Mexico and Hungary will -- Mexico -- sorry, Egypt and Hungary will be better going forward?

So India [Foreign Language] exports, they are happening only from -- only to Europe. So India is not exporting to Egypt at all. So I don't know where that information is coming...

No, no. I think from Egypt, I think we were exporting to -- that is confined to Egypt only or [Foreign Language] BOPP.

If exports to Europe. And from India, there are exports to Europe. So with this unfortunate incident, the exports to Europe in the month of June versus the month of May have gone down. So I think they are likely to go down in the subsequent month as well. So let's see the impact of that in the current and the next quarter, but definitely, this will give some pricing power to Europe.

BOPET -- when this overcapacity situation in BOPET will get over all over the world? I think there is overcapacity not in India but it's overseas also.

Overseas, in the specific jurisdictions, there is no significant mismatch. It's only that because there is a significant mismatch is there in India so India is exporting to these countries. And with the rupee depreciating against the euro, I think -- so that is, again, helping the Indian exporters to drive better margins, while exporting and then keeping the demand-supply equilibrium balanced in India. So BOPET [Foreign Language] before any meaningful impact of the demand-supply balancing could be seen.

Okay. And sir, next question is regarding -- related to this flexible packaging business. So after a long time, I think we are seeing a good turnover growth and [Foreign Language] going forward?

So this quarter for flexible packaging business, the volume grew by about 7.4% on a Y-o-Y basis, okay? For liquid packaging, as I said, they grew by 18% and holographic film, they degrew by about 5%. So -- but that is not a very substantial business. So the volume growth in the packaging -- flexible packaging business is good. And the margins have also been better in this quarter on a Y-o-Y basis. So hopefully, that momentum is there. And now if we -- with the new announcements by Honorable Prime Minister that they'll lower the GST slabs and there is increased demand for the food and other consumables and all that. So obviously, it will impact the packaging demand as well. So hopefully, we'll see a better demand for this. But having said that, in the flexible packaging, we don't have -- we've not done any investment in the last few years. So in terms of what we can do in terms of additional volumes there maybe very limited, maybe then the strategy would be to move up the value chain and reduce your exposure on the low value-added products and all that and do more pouches and other products -- similar other products rather than doing a roll form and all that, but we don't have much capacity over there, which we can utilize to improve our volumes, revenues and profitability.

So there is a very -- a lot of clarity there in the recycling business. So whether we will see significant uptick in this business going forward because INR 40,000 is a reasonable quantity, but I don't think it's a very major quantity. So where we see this business to grow going forward?

40,000 [Foreign Language]. 40,000 is just an initial number to test the water and to see how serious the regulations are in terms of implementation. And these sort of paramount policy things takes certain time to stabilize and then the results are seen. [Foreign Language] because you BOPET, you have poly, you have BOPP [Foreign Language]. But having said that, then there are companies who are already taking action in terms of finalizing their strategy as to how do they want to achieve this and all that. [Foreign Language] We have the production capability and by the time the things get more crystallized in terms of how the government reacts to any underperformance in the current year because there is not much of the product also available, so the company can also say the product was not available locally, so we couldn't do this and all that [Foreign Language] this is -- but this is a sustainable business end of the day [Foreign Language] but it is going to be there and this will become a formidable business for the industry.

And for Uflex also?

Obviously, for Uflex also, it will become a formidable business.

And sir, do you think that this BOPET margin [Foreign Language] now things will improve here onwards?

BOPET margins [Foreign Language] we're seeing higher imports from Southeast Asia and China also. So I think that keeps the prices in check that I see. I think...

[Foreign Language] I think they will think twice before importing any BOPET or BOPP. Do you think -- is it right?

[Foreign Language] there's any merit. So that will give a price advantage to the local manufacturers for sure, but [Foreign Language]. As you said, [Foreign Language] but this was checked by higher imports in this quarter from Southeast Asia and China.

And sir, one last question [Foreign Language] whether industry is asking the government to implement BIS in packaging films [Foreign Language].

Industry is doing all that can be done to ensure that the local industry remains viable. And -- so they'll do everything, don't worry about it.

We take the next question from the line of Saket Kapoor from Kapoor & Co.

Sir -- firstly, sir, we have mentioned about this virgin PET chips business, and we have outlined some capacities for AGF and Indian capacities at Panipat. So firstly, if you could just explain, is it only the EPR part of the story, which we are playing through this segment? And what is the revenue contribution going ahead when these will be running at full utilization levels?

So 2 things over here. They were initially planned during the COVID period -- later part of the COVID period when the demand-supply situation was so bad that getting the raw material PET chips for our packaging films was becoming a very, very challenging thing. What had happened was during the COVID period -- so in the industry structure, if you see, all those people who make resin for the PET bottles, they have always some surplus capacity where -- which they want to optimize using, they produce the film grade PET chips also. Now when the demand for the bottles also went up during the COVID period, so they didn't have this surplus available. And that is the time players like us who didn't have any capacity -- internal capacity to -- for this raw material, we started suffering badly in terms of availability as well as in terms of the price. So that's when we decided that we are a very formidable player. We are globally #1 or #2. And we just can't leave business to the market. So we have to have a better handle on our raw material. And so that is where we set up the plant in India and then in Egypt. Now we also knew that when you are producing at these plants, so since most of the capacity is going to be utilized internally, it will not add to any revenues, but it will add to your profitability. It will also give you a certainty of the raw material quality because earlier you were procuring from various sources, whichever was the cheapest and quickly available. So that would have given more certainty to this business. So that was the whole intention. But in India, we've also kept a provision that if we want to convert these into a bottle-grade chips also, so we have a provision in the plant for doing that. And depending on the market prices, bottle-grade chips [Foreign Language] we buy this raw material from the market and produce the bottle-grade so that we get better margins over this. [Foreign Language].

[Foreign Language].

[Foreign Language].

[Foreign Language] 18,000 metric ton CPP plant in Mexico that will ramp up for quarter 1 and 2. So in terms of its revenue contribution, what should we look at it on an annual basis? And also, sir, we have spoken about CapEx and commissioning of, I think, the 4 projects about the Egypt one, debottlenecking at Sanand, then the WPP for Mexico and already you have spoken about the Noida [Foreign Language] what kind of revenue addition are we expecting from these CapEx when they are streamlined?

So I think I had already said that in my call [Foreign Language] we've seen in the past that it takes a bit of a time, but yes we'll be ready to serve the market from -- in FY '27. WPP [Foreign Language] having said that, the total planned CapEx for all these 4 investments is about INR 2,000-odd crores. And we've already spent about INR 1,100 crores as -- up to 30th of June.