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Uflex Ltd
Earnings Call Analysis
Summary
Q2-2024
UFlex reported Q2 revenue at INR 3,389 crores, marking a decline of 11.9% year-on-year but a 3.5% rise from the previous quarter. EBITDA increased by 33.6% sequentially to INR 406 crores, although it was down 17.7% from the prior year, with margins at 12% compared to the previous year's 12.8%. The company saw an earnings turnaround with a profit of INR 63 crores after a loss of INR 416 crores in the last quarter, due to exceptional currency devaluation in Nigeria. H1 revenue fell 15.5% to INR 6,668 crores, and H1 suffered a loss of INR 353 crores, contrasting the previous year's profit of INR 555 crores. Volume growth in Packaging Films was up 6.6% quarter-on-quarter, with Flexible Packaging increasing 21%, signaling some recovery. American markets showed improvement, but European demand remained sluggish due to energy costs and higher interest rates. Overcapacity in India pressured pricing margins. The company is focusing on strategic projects, including PET chips backward integration in Panipat, with expected completion by early April, and capacity expansion in Aseptic Packaging to be achieved by September '24.
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Ladies and gentlemen, good day, and welcome to the UFlex Limited Q2 FY '24 and H1 FY '24 Results Conference Call hosted by ICICI Securities Limited. [Operator Instructions] I now hand the conference to Mr. Ashwik Chan from ICICI Securities Limited. Thank you, and over to you, Mr. Chan.
Thank you. Good evening, everyone. On behalf of ICICI Securities, I would like to thank you all for taking the time to join us on Uflex Q2 H1 FY '24 Result Conference Call. From the company's leadership team, we have with us Mr. Rajesh Bhatia, Group President and CFO, UFlex Limited. We would open the call with opening remarks by management, followed by a Q&A session. I would now like to hand over the call to Mr. Rajesh Bhatia, Group President and CFO, Uflex Limited, to make the opening remarks. Over to you, sir.
Thank you for joining the call. Uflex Q2 earnings -- earnings. I think the results are all before all of you. Just to summarize the things. This quarter, we had a consolidated revenue of INR 3,389 crores, which is down 11.9% on a Y-o-Y basis. But up about 3.5% on a quarter-to-quarter basis -- on a quarter-on-quarter basis.
The EBITDA for the quarter was at INR 406 crores, which is up about 33.6% on a sequential quarter basis. But on a year-on-year basis, we are down 17.7%. Q2 of FY '23, we had an EBITDA of INR 493 crores. The EBITDA margin for this quarter, we were aspiring is 12% versus 9.3% in the June quarter. From the last year, it is still down by about 80 bps, due September 23, EBITDA was at 12.8%.
And at an EAT level, we have recorded a profit of INR 63 crores in this quarter versus loss of INR 416 crores in the last quarter, June quarter, which was basically on account of INR 382 crores of exceptional item emanating from the currency devaluation in Nigeria. And this is against INR 191 crores in the September '23 -- FY '23, September Q2 quarter. So we are up 115% -- we are down 67% on a year-on-year basis.
For the half year, the revenue is INR 6,668 crores. down by about 15.5%. EBITDA 41.8% to INR 710 crores. And EAT is for the H1, it is loss of INR 353 crores, down by 162%, versus INR 555 crores of PAT in H1 on FY '23. On the business side, I think the positives for the quarter is that Packaging Films volumes are up 6.6% on a quarter-on-quarter basis. And while, on a year-on-year basis, we were down marginally by about 0.6%.
The Flexible Packaging business has been very encouraging, and we are up 21% volumes on a quarter-on-quarter basis. And even on a year-on-year basis, we are up by about 7%. Liquid Packaging, we are up year-on-year slightly by 0.2%, and the broadly in our Packaging business and Aseptic Packaging business, we continue to do very well. So India EBITDA, if we take the stand-alone EBITDA, we have achieved a better performance in this quarter versus on a year-on-year basis.
And hopefully, as we've said that -- the markets in America are much better this quarter versus Q1. And we expect that by Q4, the volumes will pick up. The Europe remains an area of uncertainty, driven by the lack of demand because of the issues relating to the energy cost, as well as the EMIs, higher interest costs. And that's where the markets in Europe are still suffering from a very, very low demand.
India, also, while the demand is good, India has the issue of certain overcapacity at this point in time, which is driving the pricing margins and the pricing down. But being an integrated player, I think we have reported a pretty decent performance for this quarter, much better than the Q1 with the EBITDA margin at about 12%.
On the project side, I think there are 3 key projects, where we have backward integration into the PET chips in India at Panipat and which is about INR 587 crore CapEx investment. Which we plan to achieve the commercial production by the end of this fiscal or early part of the April.
And in our Egypt facility, we achieved the commissioning by end of FY '24 or maybe slightly earlier than that, that is the plan there. The Aseptic Packaging, bottom debottlenecking, will -- I think, we'll achieve by end of September '24 towards end of September '24. And that's where -- which will expand our capacity from INR 7 million to INR 1 million tax -- billion, INR 12 billion tax.
So overall basis, India performance continues to be robust, driven by the volume uptick in the Packaging Films our Flexible Packaging and Liquid Packaging businesses. And in India, even the volumes on Packaging Films business also continues to be good. The margins are the bonds which are impacted. And overall, in the global market, where we are only doing the Packaging sales business, there is a silver lining, which is there in the Americas market. And we push more volumes there, but European market still continues to be sluggish.
So that's in a nutshell the quarter, which ending September '24. And the nothing much to sort of add on this quarter, except that we -- what we are seeing is if Q1 was the lowest point in this. I think Q2 has shown much better numbers where the EBITDA is up healthy by about 270 bps to 12%. And in terms of the absolute amount on a sequential quarter basis, EBITDA is up about 33.6% to INR 406 crores.
So that's the narrative from our side on the business, and we're happy to address any any queries, any questions that investors may have.
[Operator Instructions] The first question is from the line of Chirag Singhal from Fort First Water.
So firstly, I wanted to understand, as to what has led to the sharp increase in the overseas operations, EBITDA margins? So if I see on its financial basis, our margins in the overseas business has increased by roughly 70 bps.
Okay. So I think that is driven by about about 6.6% volumes increase also. In the Egypt market and in the Nigeria market, there has been a duty imposed of 30% additional import duty has been imposed. In the Egypt market, where the dollar is shortage and while the local manufacturers sell in the local currency, so they get a price advantage. And generally, overall, in the U.S. with the volumes also increasing, there is a better pricing this quarter. And overall, that has led to the much higher margins in the offshore business.
Could you be 30% adjustment import duty, this is in both Egypt and Nigeria?
Yes, in only Nigeria.
Only in Nigeria, okay. And is this imposed in Q2 and only on PET or has this been imposed even on BOPP?
No BOPP, it was already there. because BOPP, there were plants in Nigeria already. So BOPP, but PET, ours is the first facility over there. So that has been imposed recently.
Okay. So there were no aberrations or any one-offs in the overseas operations during Q2. Am I right?
No, no. There is no one-off or anything, which has been there.
How does the trend look going forward?
So I think we expect that -- the America markets will continue to improve in Q3 as well as in Q4. The Europe market, I think we'll be able to give a better guidance only towards Q4, America positive that we see that with the interest rate now getting frozen or on the path to go down I think we see the better demand in the coming quarters in that market.
All other markets, including India, continue to be strong on the volumes. In fact, a very small margin, India, again, we produced the highest ever Packaging Films in India. When I compared with Q1. But there has been a better volume, which has been achieved in the overseas markets, as I stated and a better margin coming from both Egypt, as well as our Nigerian facility.
Okay. So the reason I was asking is because when I look at the peers, obviously, we are not operating in the same geographies. But when I look at the peers overseas operations, the EBITDA increase on a sequential basis is not as high as like what we have reported. So just want to check for any one-offs.
So there are no one-offs in there. It's all regular.
Understood. Secondly, what led to a reduction in the stand-alone business margins again on a sequential basis?
So stand-alone business margin on a standalone -- on a sequential basis is basically because, this is a lean quarter for the Aseptic Packaging. So that seasonality comes into play in this quarter.
Okay. So for the second half, based on a recent interview, you are expecting the margins to further improve in Q3 as well as Q4. So the improvement will mainly come from the overseas business? Or you're expecting the overseas business to kind of stabilize, where we are currently and the Indian margins should improve. So where is the improvement going to come?
So I'll just elaborate on what I had said elsewhere. So we are expecting that in Q3, if we can maintain, the overall the same 12%, 12.5% margin. And definitely, we will have better volumes coming from the Liquid Packaging business because that's what the season -- that's where the season begins. .
In the winters, the Liquid Packaging, seasonality drives the volumes down as compared to Q4 and Q1. So Q2 and Q3, their volumes are not as much as you find them in Q1 and Q4. So Q4, definitely, the margins will get boost -- will get a boost with the higher volumes coming from the aseptic packaging business. And Flexible Packaging is already doing well. You've seen 21% Q-n-Q growth in the volumes and a 7% Y-o-Y growth also in the volumes over there.
And so driven by these 2 factors, as well as the uptick that we've seen in the Q2 in the U.S. markets, I think we be confident of achieving a better growth in Q4 at least. Even if you maintain the Q3 at the same level.
Okay. On the [ effector ] side, you mentioned 60,000 tonnes capacity in the PPT. So on an equivalent basis, how much will this translate in a number of packs?
It will be -- I'll have to get back, but say around on 1.5 billion packs.
Sorry, 60,000 would -- 60,000 tonnes will translate into how much in billion packs?
In billion pack, it would be about 1.5 billion.
No, we are already having 7 billion pack capacity, right? So what i'm trying to understand is...
Quarter, for Qaurter, I'm saying.
Okay. Okay. Okay. All right. So that is -- so INR 60,000 or would be roughly 6 billion packs is what you are saying for the full year?
I think, I need more...
1.5 billion packs, that is lower than 7 billion, like we have already got 7 million packs online. So ideally -- so how come you are seeing 6 billion packs?
I think I'll have to get into more insight on that before I reply to you on that -- and the tax conversion and all that, I'll have to talk separately on that.
Okay. And we have also delayed the commissioning of the sector expansion related to our schedule by end of this year. Now we are expecting it to complete by Q2 of next year. So what has led to the delay?
So there is equipment, which is coming later in August, and that's where now we are expecting that will get commissioned by September or October.
Okay. Understood. And was there any volume contribution from Dharwad during Q2?
So volume add-on from the Dharwad is at the same level what we had -- so that's where I said that in India on the production volumes in the Packaging Films business, there is a slight uptick in Q2 versus Q1. Not much further additions coming -- being contributed from the Dharwad in this quarter versus the Q1.
Okay. Okay. And just wanted to understand on the Packaging -- Flexible Packaging segment. So we mentioned that 20% or increase in the volumes on a sequential basis. Now sometime back, we launched the [ Teams ] product also in the same segment. And traditionally, we have been laminates focus and then we started producing some different products, which are, let's say, a little bit higher value added. So as of today, what is the mix in terms of, let's say, laminates and teams and media have been value added, if at all you are doing?
So if I were to split between our value added and the laminate, the laminate production volume this quarter was up 14.5% on a quarter-on-quarter basis on a sequential quarter basis. While the value add, which is more of a Holographic film and all that, there, we almost had a 27% increase on a quarter-to-quarter basis -- on a sequential quarter basis.
Okay. On the blended basis, you are seeing a 21% increase.
On a blended basis, so that -- on a blended basis, It as 21%.
Okay. And what all products are included in this value-added segment?
Sorry?
Which all products are included in the value-added segment?
I'm unable to hear you.
Can you hear me now?
Yes, better.
Yes, I'm saying that what are the products that comes under this value-added segment? So you mentioned Holography Films and maybe ...
So whether it laminates or the [ south ac ] and all that, that we all calculate undertake -- under laminate, Holographic films and all that, that we take under the value-added laminate products.
[Operator Instructions] The next question is from the line of Kaushik Poddar from KB Capital Markets Private Limited.
In the presentation, somewhere you have said that your aspiration is to have a capacity of something like 1 million tonne. And I see you are operating something like 250,000 or 275,000 tonne per quarter or maybe I think you are doing something like 6 lac tonne per quarter -- 6 lakh per year. So where are you exactly on your capacity expansion? And what is your capacity utilization right now?
So capacity utilization is given in the investor deck for each plant. It's already there for each facility, each geography and all that. So you can see that.
Yes, that we're currently doing on an average about 600,000 tonnes a year, which sizes of the Packaging, Packaging Films, assessed all put together in terms of NT. Now currently, we are not sort of -- while the aspiration is to do 1 million tonnes, as we said earlier, but the timing of that is still not sort of decided. And presently, there are issues in Europe, America, India. So I think once the clear picture emerges only then any view can be taken on any further capacity expansion.
Okay. So on average, you see -- your total capacity is something like 800,000, 780,000. So your operating weighted average basis around, say, 75%, right? .
Yes.
Okay. Okay. And on value-added thing, are you thinking of any new line? I mean...
No, we are not thinking of any new line on the value added. We may do some small steps in terms of adding some of the machines for the forward value-added product, there is no CapEx capacity that we are looking for forward.
And the expansion new pet plans that you are setting up in India as well as in Egypt. That is the final expansion. You're not thinking any other expansion right now, right?
As of now, other than that, there is nothing on the angle.
Okay. And can you please speak of your net debt level that you're expecting, say, next year and year after that?
So as I said that we currently have a net debt in this quarter of INR 4,750 crores. If you see in India, we have not added any long-term borrowings. Whatever was added has been paid, largely. And I think with about INR 500 crores, INR 550 crores amortization payments each year. So to that extent, the debt will keep on coming down, every year.
While there will be some more debt added in respect of the new plan that we are -- the PET chip plant that is being added. But I think amortization, considering the I think the net debt will remain probably at the same level within INR 5,000 crores.
Within INR 5,000 crores. Okay. And say, '26 onwards, it should start reducing, right, because you don't have any other expansion or a new project.
Yes.
Okay. And your amortization is coming to something like INR 550 crore, INR 600 crores?
INR 550 crore, each year.
[Operator Instructions] We'll take the next question from the line of Kiran Shah from Isha Securities Limited.
Sir, I have a couple of questions. And before that, I would like to congratulate on a great set of numbers.
Sir, the first question would be like could you please throw some light on the initiatives of the business? Like what are we planning in that --
Sustainable initiatives, the first and foremost, what we have done in India. And again, in Mexico is that we've set up the PCR plants. So post-consumer recycle way, which is largely affect bottles, we select and we convert that into PET chips, which is used in the making of BOPET films. We have -- we've done that. We have also set up multilayer plastic recycling plant at Poland. We have also developed a biodegradable Packaging Films, which is -- which we see as a real future.
So I think all these initiatives are are forward-looking. And we've made the investments today, especially in the PCR, setting up the PCR facility because as the consumers are becoming more on shares about sustainability aspects and all that. We are looking at that market growing in a big way, especially on the PCR side and the biodegradable side.
The biodegradable things will have to be -- we're counting on that governments will sort of put policies and the laws in place to promote the use of the biodegradable films, there is going to be a data in the price between the normal films and the biodegradables. I think with the ultimate objective of.
So if today, Europe has put some kind of a duty on the Packaging, on the plastics use, so when the consumers are paying that, it's that duty is not on the biodegradable film, is worth the same way as the combustion engines and the EV engines, as we see in India today. There are lesser duties, there are lesser registration fees on the EV versus the normal combustion engines. So I think aided by the policies, this is going to be the next big thing, in the Packaging Film business, the biodegradable packaging, which means that if you grow the package after eating, road side, it will become a fertilizer at the end of its life-cycle.
So actually, I do believe that sustainable packaging would be the future -- but sir, on that front, would you guide us like at which facilities are we currently producing that? I mean, in how much quantity and like revenue guidance for the same?
So we've set up a small pilot plant in India, but a large plant, we set up in in Mexico right now, a PCR facility, which is capable of producing 1,500 tonnes a month. And we completed that recently. I think in the next year or so, we'll see almost 100% capacity utilization levels for that facility.
And sir, also about the multilayer, biodegradable packaging, like what would be...
So for that, you don't need any much investment. We made a small facility at Dubai for that. But that is like making enzymes and adding those enzymes, while you are making the Packaging Films in the normal way. So that -- so when you're making the Packaging Films, you will add those enzymes while making this. So there is no separate production facility needs to be set up for making -- for making those film.
But I think depending on as to what is the level of traction that we see, we will continue to upgrade that facility.
Okay. Great, sir. And next question would be on the lines of like the Aseptic Liquid Packaging business. So do we have any plans to set up any global facility for the same? Like there was recently another Switzerland company, that has set up and planned in Ahmedabad, around our facility, like do we have to go global -- have plans to go global with the same?
We keep on contemplating that. And we keep on exploring the overseas markets, especially given the fact that from India also, we are exporting on an average about 40% of our output, what is exported out of India. .
And -- but anything final on that, I think, will be -- will take some time because right now, we first need to first expand from 7 billion to 12 billion pack here in India. And then we decide about the further investments that we made in that business.
Having said that, if there are opportunities to grow in that business, I think the company would be quite agile to those requirements. And given that the margin profile in this business is much better, as compared to weather the Packaging Films or the Packaging or the Flexible Packaging Business. I think if there are opportunities, why not take them on.
Got it, sir. And my last question would be like, are we -- what would be the next say, expo or convention that we would be participating in as exhibitor, if we have any plans in near term.
We keep on participating in the various Expos. We were there in the Gulf last week. We are there in Europe in the summertime. We'll be there in America, again in September, October. So, we attend all the top ones throughout the calendar. So we don't miss any. We don't miss any [indiscernible] there, we meet our customers, we take that opportunity to introduce our new product offerings and as well as getting to know our customers better and interact with them and showcase them our products, we don't compromise on that at all.
Yes. [indiscernible]
Mr. Shah, your voice is broken, can you please repeat?
I'm sorry, like i've been actively following that. So I was just -- I wanted to know if there are any one -- any expo in India, in near future that we are planning to participate?
It will be in Europe.
I'm sorry?
It won't be in India, it will be in Europe only.
Okay. Okay.
So getting the name of that show, one is the [ cash ] show and other is Roopa.
[Operator Instructions] The next question is from the line of Nirav Seksaria from Living route Analytics
Sir, could you quantify the foreign exchange losses for this quarter?
Foreign exchange losses?
Losses on the [indiscernible] .
Only INR 2 crores.
Okay. And sir, any outlook when with the Nigeria [ loss in ] middle desk.So because you asking the question again itself any previous [ partners Penta ] -- any outlook on Nigeria currency recovery or stabilizing anytime soon or so?
Nigeria continues to be affected by a huge demand/supply mismatch in the dollars. And which means that any people who were erstwhile importing the products and had the dollar availability, will now have to look at the local markets, only even if the arbitrage between the 2.
So we being a large player, we being an international player, we are able to manage that, given our global reach. But our customers who are small, they do not have that much of access to the ForEx. And even if they have the price differential between the official market and the parallel market is way too high. So that's where there is more propensity in Nigeria, and it is to procure the raw materials locally.
And today, with that result, you are getting a price arbitrage also with the imports because the importer simply does not have the dollars available to pay for its improve. So that, in a way, is helping the business also. Now there is a 30% duty also, and with the shortage of the dollars, the customers wants to buy local material only because he then has to pay in the local currency only.
So you're getting a price arbitrage to that extent. But I think with the -- if the Fed stops goes the other way in terms of the rates, we will see that impact softening in the typical markets. So with the interest sales going down, I think the dollar availability in these markets will definitely improve.
Okay. And sir, any revenue guidance for H2 and major of the markets that you have said should recover in H2 or FY '25. Any guidance I suppose here?
So on an H1 basis, we are 15.5% down on the revenue. If we can bridge that gap and be at 10% down for the year as a whole and take our EBITDA level -- for the year at about 11.5% or so, I think that is what we would strive for.
Anything about 11.5%, right?
Also a 10% revenue decline over the last year and with 11.5% EBITDA margin on an annualized basis.
[Operator Instructions] The next question is from the line of Chirag Singhal from First Water Fund.
Sir, what is the latest status on the U.S, the listing of the overseas subsidiaries?
Of the listing?
Yes. I mean you are contemplating the listing of the overseas business. So any update on that?
There's no update on that given that the market continue to be soft over there. And also, I think the overseas EBITDA also has to normalize. And I think FY '25 will be a better period, when we can sort of look at revising that again.
At a point in time when we were working on that, the overseas EBITDA visibility was at least $200 million. And with all that has happened, that visibility has -- is currently not there. But Q4 may, I think this gives us a good guidance as to where are we headed in terms of our offshore business volumes, revenues and profitability as such.
[Operator Instructions] The next question is from the line of Chiran Shah from Isha Securities Limited.
Sir, I would like to ask about the latest initiative about the QSR and Take-away Packaging solution. Actually, could you throw some light on that, please?
I don't have an insight to that. Let me hold on. We can come back to you that off-line on that.
Yes, sure, sir. Shall I connect with the Investor Relations team?
You can connect the Investor Relations team and then get back to you on that. .
Sure. Because that considering the demand outlook in India looks like a promising business.
[Operator Instructions] The next question is from the line of Nirav Seksaria from Living Route Analytics
Sir, just a follow-up on Sustainable Packaging, as asked by the previous participant. So I just wanted to know, are we trying to scale up on Sustainable Packaging in the Indian market, since the consumers are getting more and more cautious about it?
No. So Indian markets, I think Sustainable Packaging is the way to go because, as I said last time also, the new policy EPR policy, has given the brand owners the option to either commit to recycling of what they do. So I suppose if a company who is FMCG, who buyers say, a 10,000 tonnes of the plastic material, then they have the obligation to procure to recycle that much or the law now gives them the option that if they don't want to get into that. Then they use the biodegradable material.
So I think -- but this is not happening 100% from the year 1 from 20% to begin with 200% is a journey for the next 4 to 5 years. And that once it is done implemented and enforced properly, the Sustainable Packaging in the form of biodegradable packaging will have a huge potential because the law now specifically provides for that.
That recycling thing is a cheaper option for the manufacturers currently because those certificate are easy to get by and slightly have a price advantage. But I think if the law is enforced correctly, and the consumer itself demands a Sustainable Packaging, and that becomes a trend and the norm. I think the biodegradable packaging is un-stoppable.
And so from the Mexico plant, which markets are we planning to supply the Sustainable Packaging?
They are only for the North America market.
Sir, anything you're planning to set up for the EU market and the EU government is also a bit too cautionary in regards to that?
EU have set up multilayer plastic recycling plant while the plant in Mexico is you buy the old used back bottles and we convert them into the PET chips. The plant at the Poland takes care of the base, the -- actually the laminates that we made, the base and makes the plastic granules out of it, which can subsequently be used for making any items of the plastics.
So again, that is not our core line of business. They are all showcasing that what can be done with the plastics. While we hear all the noise that the plastic is bad, but we somehow have the responsibility and obligation to show that know the plastic, if you can recycle and, if you can generate Sustainable Packaging, I think it's a boon for the the Food segment, at least because the food preservation without the plastics is simply impossible.
And sir, any incentive by the Indian government to come on to the Sustainable Packaging aspects or already citing that aspect?.
No, [Foreign Language]
[Operator Instructions] Ladies and gentlemen, that was the last question. We thank the management for this call on behalf of ICICI Securities Limited, and we conclude this conference. Thank you for joining us, and you may now disconnect your lines. Thank you .
Thank you.