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TCPL Packaging Ltd
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Gentlemen, good day, and welcome to TCPL Packaging Limited's Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Ms. Jenny Rose from CDR India. Thank you, and over to you, ma'am.
Good afternoon, everyone, and thank you for joining us on TCPL Packaging's Q3 and 9M FY '23 earnings conference call. We have with us today Mr. Saket Kanoria, Managing Director; Akshay Kanoria, Executive Director; Vidur Kanoria, Associate Director; and Vivek Dave, GM Finance of the company. We would like to begin the call with brief opening remarks from the management, following which we will have the forum open for an interactive question-and-answer session.Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentation shared with you earlier.I would now like to invite Mr. Saket Kanoria to make his opening remarks. Over to you, sir.
Good afternoon, everyone, and thank you all for joining us on TCPL Packaging's quarter three and nine months FY '23 earnings conference call. I will begin the call by taking you through the key financial and operational highlights for the period ended December 31, 2022, after which we shall open the forum to have a Q&A session.As you may have noticed, we have delivered an extremely robust performance during the period under review, despite facing macroeconomic challenges. In nine months FY '23, our total revenue expanded by 43% to INR1,082 crores. This growth is primarily on the back of higher volumes and better realizations seen in both domestic and export markets, showcasing our resilient business model.Our Folding Carton and Flexible Packaging divisions both contributed positively to our performance during this period. On the profitability front, the EBITDA came in at INR172 crores in this period, translating into a margin of 16%. In nine months FY '23, the profit before tax significantly improved by 121% to INR99 crores. PAT as a consequence increased 184% to INR86 crores, and the cash profit stood at INR163 crores, which is 90% higher on a year-on-year basis. This big increase in profitability is largely due to scale of operations and favorable product mix.We would like to share that we have also increased our stake in Creative Offset Printers Private Limited to 84% after investing in the recent company's rights issue. Our successful acquisition of COPPL has allowed us to enter the high growth rigid box market and tap into the booming smartphone industry. We are pleased to have onboarded several customers in this segment and look forward to expanding our business with them in the near future. Our business has shown steady growth each month, and we aim to continue this trend in the upcoming fiscal year. Once we reach a certain level of scale, this segment is expected to contribute to -- substantially to margins in our overall business.Regarding our update on the second flexible packaging line commissioned at the start of this year, we are happy to share that it has been well received in the market and has generated significant interest from large clients for big orders. This has led to a positive than anticipated ramp-up in utilization. This positive market response showcases the quality of our products and services and our ability to meet the increasing demand for flexible packaging solutions. Due to this success, the company is now considering plans to add a third line in the same segment in the near future.It is worth mentioning that this new line would be a brownfield line, which will be established at a comparatively lower CapEx as the land and building and other costs have already been incurred in the recent expansion. This expansion will help us to meet the growing demand of our products and services while also positioning us for continued growth. Looking ahead, TCPL is committed to sustainability and has implemented various initiatives to achieve this goal. Globally, the paperboard industry is making a positive impact in promoting environmentally conscious packaging solutions.As a leading player in the sector, the company is taking steps to promote sustainable practices by working with customers to replace plastic food trays with biodegradable alternatives and reducing the use of metalized plastic film, by transferring the metallizes or other similar effects into the paperboard. With the assistance of our subsidiary, TCPL Innofilms, we have started producing eco-friendly PE blown films commercially. As a result, TCPL is well positioned to meet the growing demand for environmentally friendly packaging solution and is dedicated to playing its part in creating a waste-free world.To conclude our focused strategy to growth through diversification has enabled us to consistently outperform our underlying industries. We remain committed to sustainably growing the company in the future, which will help create substantial value for all our stakeholders.On that note, I have come to the end of my opening remarks and would like to now ask the moderator to open the forum for any questions or suggestions that any of you may have. Thank you very much.
[Operator Instructions] The first question is from the line of Gunjan Kabra from Niveshaay.
Congratulations for reporting such a good set of numbers. Sir, first question is, I wanted to note a revenue contribution of flexible packaging this quarter versus the last previous quarter, which is quarter-on-quarter. And the capacity utilization at which the new plant is operating as currently and the old plant also. If you can guide on this.
As you are aware, we are not sharing a [ breakup ] on revenue share. So it is little difficult for me, but the capacity utilization of the flexible now, the old and the new plant is at 90% levels, this is only since the last quarter. And it's operating at very high level utilization. And in the short span of nine months. So that's why we are very excited to look at further expansion in this segment.
Sir, that is very good. Cumulative capacity utilization at 90% or the new CapEx that we did in the flexible packaging is updating at 90%?
Cumulative for the first quarter, it's one plant only, it's not two separate factories. But my point is, it's -- third quarter is higher utilization.
Okay. Got it. And sir, is the new [ case the ] 5,000 tons on the carton side completed, as we were expecting it to be completed by the end of FY '23?
So the FY '20 -- that is on track. So there is a -- new line is already reached, and it will be under installation soon. So we hope that by the end of March, it will be commissioned.
Okay. And also sir, what was the export contribution this time? Like this time was the growth rate of exporters also domestic led. And how are we seeing exports markets for films and cartons board? In the film market also are we planning to export? And how do you see this market?
In the film market also we are exporting, so the percentage of export there is not in line with our overall export as a percentage. Overall, export, yes, last year has declined in the balance sheet was about 25%. And the growth in exports this year has been slightly higher than the growth in overall domestic. So the export is actually getting a higher share of the overall revenue.
And sir, how do we see the export market going forward for next two, three quarters [indiscernible]
We are quite bullish on export market because we have also established an office in the Middle East that is helping our efforts. And in generally, the mood on India is very positive. The exchange rate is also in our favor. The freight costs have come down. So overall, export out of India is currently has more positive than it's ever been in the last couple of years, at least since COVID.
Okay. And sir, also wanted to understand one thing on the film market...
Sorry to interrupt. Ms. Kabra, could you please [Technical Difficulty] there is lot of disturbances coming in.
Okay. Just a sec. Is this better now?
Yes, you can go ahead.
Yes. Sir, wanted to understand in the film market that because it's a recyclable product, sir are we getting any premium for the product against the assembly side we will run in the [indiscernible] for this?
No, recyclable film is only a part of it, that is more of a development and capability, but most of the film used is not treat, not having recycle content. So there is no premium for [Technical Difficulty] yet.
Okay. And sir, on the raw materials front, are we witnessing price decrease in the -- on the virgin side paper also? Because I think the recycle parts, which is 50% of raw material has been -- we have been seeing decline on both prices. So are we seeing any decline in prices on the other raw material mix also?
Yes, the overall paper market is showing a declining trend in the last one month, particularly, both recycle and virgin. But in virgin, the decline is very marginal. And in recycle, the decline was much more.
Okay. So sir the realizations that you mentioned in the beginning of your commentary that we had this quarter was very robust in exports and domestic market. So it is expected to remain almost the same for the next quarter also, right?
Right now, the -- you see in the paperboard segment, prices are currently stable. And China has recently opened up, and that is creating some demand factors around the world. So while the decline in India was more to do with the global pulp and raw material availability. But right now, we don't see any major change, which will happen. And hence, the growth will be maintained in the sense that what revenue run rate we are currently on, it doesn't seem to be any sharp correction to that because raw material price is going down. Because it's been going down gradually over the last few months, and that's already been factored in.
Our next question is from the line of Pavan Kumar from RatnaTraya Capital Partners.
Sir, what would be the utilization of the paperboard? And also on the new flexible line that you're talking about, what is the CapEx expected sir? And how do we see the gross asset turns playing over there?
So the utilization in the paperboard carton is on an overall basis roughly of 80%. And what was your other question?
On the new flexible packaging line, third one that you are proposing. How much of the CapEx that is expected to be done? And what kind of revenue terms can that achieve?
So we are anticipating a CapEx of INR50 crores, which will be incurred during the year '23, '24. And the turnover ratio on that could be higher than 2.5, because it's a brownfield expansion. So there's not much investment in [ building. ]
And sir, when you were talking about the new line being available from March 20 -- from the March 2023. Was this, this line or something else?
No, March '23 is the offset line for paperboard.
Okay. Offset...
Is it paper flexible, your question was...
Okay. I got it. And theoretically, how high can the paperboard utilization go?
It can go upwards of 90%, 92%.
Our next question is from the line of Vipul Shah from RW Equities.
Congratulations, sir, on a fantastic performance and congratulations on a very consistent performance. So double kudos to you and your team sir. A couple of questions from my side. Sir we've seen in the last four to five quarters, the gross margin has actually dipped below 40%, which has never sort of last four, five years, including COVID periods, gross margin was always above 40%. So would like to hear your comments on that.And secondly, sir, on Creative, if I assume that the quarter three top line was roughly around INR12 crores, and it was EBITDA breakeven. When do we see, sir, meaningful increase in the top line in Creative? And will the EBITDA margins of Creative be in line with the company EBITDA margin sir?
Yes, the point about the gross margin historically around 40%, 41%, and this one is 39.3%, 39.2%. So it's a very marginal decline overall, but on a much larger scale. So there's nothing much to talk about that, except that the raw material cost, if we look at, that has moved up from 58%, 57% to 60%, 61%, which is leading to this gross margin slight drop. Actually, our employee cost has gone down because of the scale, which kind of helped us achieve a similar gross margin.So the raw material costs have, in general, gone up. And even though you pass the raw material on as a percentage it increases because you don't get the margin on the increase. So I think that should answer your question on this. But on Creative, as I mentioned in my opening remarks, the -- its EBITDA breakeven net negative and the scale is still very small. I think the next financial year we'll go in settling it down more and getting some traction. Really speaking, I would think that in the year '24-'25 is when we hope to come to a position very close to the parent company, but it's a struggle, it's a new business, new segment. And therefore, it is taking a little longer than anticipated.
And if I may squeeze in one more, sir. Consistently, last two quarters, company has been delivering upwards of INR350 crores in top line, you think, sir, and I think you mentioned also in your earlier comment to response -- in your earlier response to a query. But is this sustainable, sir, going forward?
I mean, at the same time, we've added capacity also, and we do have some headroom there. So even if pricing is corrected to some extent, we can still hope for a volume increase to overcome that. Right now, you've seen FMCG results in the third quarter. I'm talking about our customer results. And you've seen the volume growth has been very low. Generally for India, for FMCG.
[Technical Difficulty] in some companies, that is the reason, sir, we are asking, because we see a general commentary by a lot of companies about there being muted growth or some softness. So is it reflected in your order book, sir, also or you think this is transient?
No. As of now, our order book is fine. It's normal. There has not been any impact of that. But because maybe our market share increase, we've added a lot of new customers, export volume has stayed very stable. So it's a combination of everything. But as I mentioned that, I mean, the Indian inflation is now well within control overall as a country. In fact, prices are being corrected. So going forward, I think in '23-'24, volume growth also should be much better than what it was in '22-'23.
Got it. And again, one more comment I would like to make, sir, is that, fantastic performance resulting into great ROCs and ROEs for the company, sir. Congratulations again and all the best.
[Operator Instructions] The next question is from the line of V. Rangan, an Independent Analyst.
It's a very good performance. I congrats the management. Now it is coming to a very -- turnover becoming higher. The current year turnover will be roughly about INR1,350 crores like that it will come? I would like to know that. Then the interest costs have gone up. Have you increased the gross block this year? How much is the increase in the gross block current year? And then next year, how much you are going to capitalize that?
Well, we've achieved net revenue year-to-date of [ INR1,050 crores ] and a net sale of INR1,030 crores, and the last quarter was [ INR358 ] crores. So we should certainly cross INR1,350 crores. We don't have much doubt in [Technical Difficulty]
I always appreciate the company which is increasing not by the rate by the capacity, because you are increasing consistently, you have correctly balanced and increased the capacity.
Yes, that's fine.
That's very good, actually, because that is a correct position actually, you have done correct way. And I would like to know how many customers you have added this year? And regarding now you will see what is the conversion cycle number of days anything increase, or it standstill like that?
No. All these things are normal and customer added, there are many customer we keep adding. So very difficult to give you a precise number.
Roughly, you can -- now you can comment, because you are in a very better position. I think unless this has sufficient scale, you need not take the orders actually, because if it is a profitable, because you have come to a position where you can bargain and you can correct their price, actually like that? You have reached a [Technical Difficulty] because that is what the -- see company needs to command it, not like just taking order for the order sake that thing I think over that thing.Now regarding the employees, see now very goodly you have put the employee expenses as -- because the volume increase, I think it's going to come down correct, as a percentage of the sales. That's very good. I see the numbers are very good. But what will be the next two years or three years, can you give some projections like that? How many gross block, how much you're going -- because after that, you will be -- the raw material price, you have stated that you are -- it is increasing. Now if you can add how many months you -- raw materials you keep actually? I would like to know that.Then regarding the insurance that INR17 crores you have bought it and what was the written down value of that -- the difference only you pay the tax, or how is that? I would like to know that.
I think you are asking so many questions. But basically, next two years also, we see a good growth. As a company, we have done very consistent growth year-on-year. So we don't see any reason why that trend should not continue. Obviously, we need support of the economy, which is in good shape right now. So we are quite positive. And on the -- this insurance claim, there was no much taken down, because the machine was quite old. So the tax on that is -- there is a certain formula which we are paying, percentage, but lower than the regular tax rate. And I guess, I hope that covers most of your questions, and I would request the moderator to get the next speaker.
Sure, sir. We will be taking our next question now, that's from the line of Pulkit Singhal from Dalmus Capital Management.
Congrats on a great set of numbers. First question was, I was just looking at one of the global players graphics packaging results over the last two, three years, they have increased their total addressable market from $5.5 billion to $12 billion. It's just three years due to sustainability and movement from plastic to paper. In this context, I just wanted to ask two sub questions. One is, whether you're seeing a similar trend within your exports? Because that has been growing now for last four, five years at a very high rate. And secondly, are there any conversations in the -- among your domestic clients, where this trend might benefit you in the near future?
In the U.S., where graphic packaging's majority of sales are in North America. And there, there has been a tremendous shift into paperboard-based carton mainly for the food segment. In India, we don't see any such major trend to counter that because our frozen food and those segments are very different in India. While the overall trend is in that direction, but it's not as focused and specific to that market, and that market is also very small. So it's growing, but it's not that dramatic.And in terms of export inquiries towards that trend, yes, there are some inquiries, some beginning is there. But still, the base is very small to make an impact. So I would say yes, the answer is that it's in that direction. As the overall business, what we do is a very, very small percentage, whereas the big paperboard-based carton manufacturers internationally, food is a very dominant segment in their overall basket. And so that trend gets captured very quickly. In India, it's more FMCG-led growth and food and beverage is a smaller segment.
Understood. So how do we understand the structure of your assets and exports then? I mean, how -- like how do we see this business years down the line? Any trends that are helping you there, because it has been growing at a very rapid pace.
As I mentioned in the answer to somebody else's question, the export right now, the macro picture for India is very positive in terms of export, apart from the freight going down, the exchange rate in favor, raw materials available, the political or rather the image of India is also much better. So almost everybody is looking to explore India as a sourcing hub. A lot of our multinational customers, parents are also visiting and exploring. These things take a lot of time. But overall, the trend is very, very positive and mainly it is to diversify out of China. So we feel that the sustainability is one part of it, but the general export opportunity will keep growing. That's the way we look at it.
Understood. And to that extent, your capacity expansion plans, I mean, do you see any need to do a much higher capacity expansion to capture that kind of opportunity? Or will it be incremental in terms of growth? I mean, so you mentioned about INR50 crores of CapEx in FY '24. Is that a company-wide CapEx you're planning or just for one plant?
The INR50 crore was for the flexible. So company-wise it will be a little more, but in offset, because we just got a new line, we are not looking at any other major expansion. But we keep our -- we reserve our right to do it any time we feel there's an opportunity and -- to take up, we wouldn't let an opportunity go up again, because we don't have capacity. So we'll do it as and when needed, but it's not that you just set up plant and wait for the export to come. Things increases gradually only.
Understood. Lastly, I mean, when I look at the past, you have done 17% kind of margins for a couple of years. I mean, obviously, the situation is very different, now the competitive dynamics is different, you have different segments growing. And my understanding is weighted packaging, whenever it achieves the scale is a higher margin business than your current, I mean, you mentioned this in the past. So is there a reason one should assume there to be any margin risk or can that -- we can increase hereon, if things are going well?
I think the current margin itself is quite healthy. And obviously, our strive is to keep increasing, the scale will also help us. And if raw material costs are not volatile, that is also positive for us. But nevertheless, there is competition. And end of the day, the bottom line is that the volume growth has to be much more in the country. If we are talking of 2%, 3% volume growth as a FMCG sale, then it is very challenging to grow margin. But yes, if the volume growth as a country as a whole becomes more buoyant, then I think rising fee will lift all boats. So it will make a difference.
Our next question is from the line of Resham Jain from DSP Investment Managers.
Congratulations for a good set of numbers and consistent performance. Sir, I have a couple of questions. So first one is in terms of flexible packaging, earlier we used to say that our margins used to be slightly on a lower side since you were operating single line. So after the second line of operations, have the margins now very close to the paperboard margins? Or still there is some difference between the two?
Yes, the flexible margin, of course, earlier the overhead loading on one line was causing that problem. So -- and the second line has started in April, and really the volume has picked up only in the third quarter, and we have seen a big improvement in margin from what it was, but it's still much lower than carton, because of the simple fact that the turnover ratio there is much higher. So we've still got a while to go as we bring in more premium offering and have a more consistent output. I think that the margins will further grow. And however, I don't think they will match paperboard because of the basic structure of the investment to turnover profile in that industry.
Understood, sir. Sir, my second question is on flexible packaging, where the plant is currently at single location, unlike paperboard, where we have multiple locations. So here also, are there -- you feel there is a need to have multiple setup? Or as of today, logistics is not a challenge from a supply perspective to the clients?
Logistics is thanks to Mr. -- our Prime Minister and Mr. Gadkari, a lot of developments is happening on the logistics front, and that will keep happening. So it is less of a challenge because the unit price is high and more material goes into a container compared to a carton. So the freight cost as a percentage is lower. But nevertheless, multiple plants in the future can't be ruled out. But right now, we have a lot of room to grow our current site. So we would like to first do that so that our costs are in better control, and we utilize the current site to its optimum. And then we will -- we are keeping on looking at other opportunities in other geographies like South or North or East. But on the annual immediately, I don't see anything. But you never know if some segment growth somewhere and where we are a part of, we would be happy to look at that location.
Okay. Right, sir. Sir, the third question is on Creative. In your opening remarks, you mentioned that you're significantly bullish on this space and a substantial kind of growth can be expected from this? Obviously, you have just taken over. So you feel that this INR12 crore or INR13 crore run rate which we are doing on a quarterly basis, let's say, three years, five years down the line, what kind of expectation or internal benchmarks you have created for this particular vertical. Just to gauge -- to understand the kind of scale which you can achieve in this business?
I mean five years is too far. But in the, let's say, couple of years, we hope to double our revenue. That is a kind of the minimum we expect. So -- and from there, it depends on how this segment performs and the electronic demand supply. The PLI schemes, which the government has offered suggests that it's a long-term thing. So if the customer base is going to keep growing and India become a big export hub, this segment can keep growing quite substantially. And in the PLI, all these manufacturers have given targets that it is lasting for four, five years. So I see that over the next four, five years, at least the overall industry is going to keep growing. And then how well we perform within that, obviously, will determine how well we do. So the overall segment is certainly bullish.
Understood, sir. Sir, the last one is on CapEx. If you can help with the CapEx for this year, how much you will end up with? And for FY '24, what is that you are planning for?
So this year, the CapEx will be about INR100 crores, and going forward, next year, it will be probably lower than that. But we are looking at opportunities to see where else and what else we can do.
Our next question is from the line of Ramakrishnan V. from Equity Intelligence.
Congratulations for the good set of numbers, consistent performance. Sir, I have a couple of questions. One is on this mobile cover package. So what is our capacity, capacity utilization and where -- what kind of growth we are seeing there? And how is the profitability? And the second thing is see, if we have a competition that MNC company, Huhtamaki. So we have -- consistently, we are doing very well and expanding our business. But they are having -- going through a tough phase last couple of years. So are we gained any market share from them? Or is it a company-specific issue or it's a broad -- any major shift in the segment?
On this Creative I've already answered your questions pretty much in earlier during the call. So there's nothing much really to add. And on -- I don't -- we don't comment on competition issues, but we've grown and market is growing and our overall segment is very large. So I would limit it to that.
Our next question is from the line of Anushree from Alpha Invesco.
Congratulations on a good set of numbers. So I just wanted to ask you few questions regarding the cigarette segment. So if you could comment on what is the -- what kind of growth are you witnessing in cigarettes? And who is our biggest customer in cigarette segment? And also sir, more of players are launching this 10 cigarette boxes, more and more 10 cigarette boxes are being launched. So have you witnessed that smaller pack sizes are driving growth? And what would be the margin difference of realizing difference in the smaller boxes and 20 cigarette box?
Okay. You are very focused on cigarette business.
Yes.
Firstly, cigarette, if you have seen the results of the cigarette producers, the segment is finally showing a growth in volume, and we are servicing all the three cigarette producers in India. Godfrey Phillips is traditionally the first customer we started business with, and then we did with VST, ITC and whoever else makes cigarettes. But there is no such thing about 10s and 20s in terms of margin. And 10 cigarette is not something newly introduced. The 10s pack has been there for a long, long time. And in fact, most of the cigarettes sold in India do come in 10s back. 20s is only small king size segment, which is very premium. So there, the volume is very small, but there is a new 5s pack also, but very, very small volume. So there's no -- but I would say that there is no difference really in the margin of the two. But India is basically a 10s pack market.
Our next question is from the line of Pavan Kumar from RatnaTraya Capital Partners.
Sir, we were talking about bottlenecking -- debottlenecking CapEx on the paperboard side. So when is it expected to come online? And how much capacity will that add to the existing paperboard capacity?
No, we already answered this question. There's not much of debottlenecking issues as of now.
We already answered know, it would be ready in Q -- meaning this quarter.
Okay. And how much will the capacity increase by in terms of percentage?
5% to 10%.
Okay. That's fine. And what is the EBITDA margin bands we should expect over the medium-term, sir, in the business?
Again, this question we have discussed, the EBITDA, as I said has been very healthy. And so we'll be happy if we can maintain similar levels on a higher base as we go along.
[Operator Instructions] As there are no further questions from the participants, I now hand the conference back to the management of TCPL Packaging for closing comments.
So thank you, everyone, and I hope we have been able to answer most of your questions. Should you need any other or further clarifications or you would like to know about -- more about us, please feel free to contact our Investor Relations team or CDR India. We hope to have your valuable support on a continued basis as we move ahead. On behalf of the management, I once again thank you for taking the time to join us on this call. We look forward to more such interactions in the future. Thank you.
Thank you, members of the management. On behalf of TCPL Packaging Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.