TCPL Packaging Limited (523301) Earnings Call Transcript

Ladies and 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.

Good afternoon, everyone, and thank you for joining us on TCPL Packaging's Q1 FY '27 Earnings Conference Call. We have with us today Mr. Saket Kanoria, Chairman and Managing Director; Mr. Akshay and Vidur Kanoria, Executive Directors; and Mr. 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. Akshay to make his opening remarks. Over to you, Akshay.

Good afternoon, everyone, and thank you for joining us today for TCPL Packaging's Q1 FY '27 earnings call. I will begin by taking you through our business and financial highlights for the quarter under review. Following which, we will be happy to open up for a question-and-answer session. FY '27 has commenced on a strong note for TCPL with healthy demand across our key businesses, continued improvement in operating performance and another quarter of broad-based and profitable growth. During the first quarter, we delivered a record quarterly performance with consolidated total income increasing by 16% year-on-year to INR 495 crores while EBITDA grew by 17% to INR 88 crores with margins improving to 18%. Cash profit increased by 56% year-on-year to INR 76 crores while PAT grew by nearly 79% year-on-year to INR 40 crores. This performance was driven by strong demand particularly in the domestic market with both of our Folding Cartons and Flexible Packaging business performing very well. We continue to grow ahead of the market and gain share across key segments supported by strong customer relationships, disciplined execution and continued investments in capacity, technology and value-added solutions. Despite various headwinds during the quarter, we were able to grow volumes and improve margins, reflecting the strength of our operating performance and focus on efficiencies. Our export business also recorded steady year-on-year growth. However, we remain cautious on the near-term outlook given the continuing uncertainty in the global operating environment. One of the highlights during the quarter was the continued strong performance of our Flexible Packaging business. Our existing facility is now operating at optimal utilization supported by strong customer demand. To support the next phase of growth, we have initiated the addition of a high speed manufacturing line. The expansion will provide additional capacity to address growing customer requirements, increase the share of value-added products and pursue new opportunities across domestic and export markets. We will continue to invest to support future growth while maintaining a prudent approach to capital allocation. Packaging remains the cornerstone of TCPL and will continue to be the principal focus of our investments. We see significant opportunities to deepen our presence across existing customers, broaden our product portfolio, expand our presence in international markets and further strengthen our leadership position across both paperboard and flexible packaging. At the same time, we continue to evaluate adjacent opportunities where our existing capabilities can provide a strong foundation for long-term growth. In this context, today marks an important milestone in TCPL's journey and we are pleased to announce our proposed entry into the Advanced Chemistry Cell battery materials value chain through lithium-ion battery separator film. This initiative represents a natural extension of capabilities TCPL has built over several decades. While the end application is different for battery, many of the underlying competencies required, including specialized films, polymer processing, precision manufacturing, process engineering, stringent quality systems and R&D are closely aligned with our existing strength. We, therefore, see this as a logical extension of our capabilities into an adjacent technology-driven opportunity. The project will be established through a subsidiary with a proposed investment of approximately INR 125 crores to be deployed over the next 18 months with commercial production targeted during Q4 FY '28. We intend to develop the business in a phased manner, initially focusing on establishing the manufacturing infrastructure, developing the technology platform, validating the product, completing customer qualification processes and building strong relationships with customers before pursuing large-scale expansion. The proposed facility will initially have a manufacturing capacity of approximately 70 million square meters per annum supporting around 6 to 8 gigawatt hours of lithium-ion cell production annually. Over the longer term, subject to customer demand and market developments, we plan to scale this platform to nearly 500 million square meters per annum capable of supporting approximately 50 gigawatt hours of battery cell manufacturing capacity. We believe the timing of this investment is attractive given the significant investments underway in India across electric vehicles, energy storage systems and domestic battery manufacturing supported by policy initiatives aimed at increasing localization across the battery value chain. As domestic cell manufacturing capacity expands over the coming years, we expect demand for locally manufactured separator films to grow meaningfully. TCPL is well positioned to participate in this emerging opportunity by leveraging the engineering and manufacturing expertise built over the last 3 decades. I would also like to reiterate that our packaging business remains our core focus. The battery materials initiative is an additional long-term growth platform that complements our existing strengths while we continue to expand and strengthen our packaging business. We will continue to invest in capacity, technology, automation and product innovation to enhance our competitive position across our existing businesses. Looking ahead, we remain optimistic about the demand environment for packaging. Consumption-led growth, increasing premiumization, rising demand for sustainable packaging solutions and continued outsourcing by branded customers provide favorable structural tailwinds for the industry. With our diversified customer portfolio, strong manufacturing capabilities and balance sheet; we believe we are well positioned to sustain profitable growth while maintaining a prudent approach to capital allocation. With that, I would like to request the moderator to open the forum for any questions or suggestions that you may have. Thank you.

[Operator Instructions] Your first question comes from the line of Abhisar Jain with Monarch AIF.

Sir, the first question is on the new CapEx on the Flexible Packaging side that you have mentioned. So what would be the capacity that we plan to add and what would be the CapEx for this?

Yes. Vidur, you want to get that?

Yes. So we'll be adding about a 30% increase on our existing capacity. About 30% you can say is the increase.

And approx CapEx for that?

So we'll be investing about INR 50 crores to INR 60 crores.

Understood. And is the flexible, because you're triggering expansion, so on the existing capacity we are at full utilization and what would be that number in terms of utilization percentage?

Yes, Utilization is varying month-to-month, but it's fairly almost, you can say, fully utilized.

Understood. And on the Folding Carton side, as of now what would be our capacity utilization and how much room we will have before we look to trigger any expansion there also?

Yes, I'll take that. So we are at about 70-plus percent. But in different units, we may be at a higher or lower utilization. So as of now, it's fine. We are mostly concentrating on expanding area in a couple of our factories to make room for CapEx in the next year. And in some of the plants, we do have some area already developed and spare. So as and when the orders pick up like in Chennai, then we can quickly add capacity in a quarter or 1.5 quarters' notice.

Right. And the next of course is on your new venture. So pretty good to kind of see that we have identified high growth area to enter into. So just a few thoughts I want to get from you. First is that how did you kind of narrow down to this product of battery separator film and how long have you guys been researching or analyzing on this opportunity before you could zero in on this? And for the technology whatever involved, you have mentioned that it is building on group's capabilities already and it's a strategic fit. But just still checking on the tech side, do you need a tech partner here or a tech transfer or it would be in-house and based on whatever analysis you would have done, you're pretty confident on kind of manufacturing this in one go?

Okay. I'm Saket Kanoria. I can answer this question. So on the group side, we have been always looking for opportunities. And there was many years ago, opportunity to invest in BOPP and polyester film and we felt that that is more commoditized and will get increasingly commoditized. So we were not interested in investing in such an opportunity. But here when we have been meeting lots of people and there are a lot of business associates who are connected with us and we come to know that the battery business in India is expected to grow leap and bound. And ultimately, we will try to be near where China is today maybe in 5, 10 years. And there is this polymer film, which is used within the cell. So it fits in very well with our philosophy, which is to make value-added materials and that led to lot of research and lot of visits to countries outside India and to meet so many such product manufacturers, material suppliers, et cetera, and that's how we have narrowed it down. As far as the technology is concerned, we understand these materials very well. And over the years, TCPL has got into many new fields and I would say that almost in every field we've got into, we are easily amongst the best in terms of the technology. We started the company in the '90s producing tobacco cartons, then we got into folding carton, then we got into paper cup, we got into cylinder engraving, we got into flexible packaging, we got into tipping paper, we got into shrink sleeve, we even got into ink business. I think each of these are specialized technologies where we have done very well with respect to the technology. In some we are the leader, but nowhere we are follower in terms of technology or in terms of product quality. So that gives us the confidence to assemble a top class team and be able to execute this venture to be able to match expectations of customers who are going to be very, very demanding because end of the day, it is in the battery where it is a very unforgiving business. So I hope that answers your question.

Yes, sir. Very, very helpful, sir. Pretty clear. And just a follow-up on this that in this project, do you have the indication that you can give us in terms of on the investment that we are making, how much would be the asset turns for the Phase 1 and what kind of margins are there in this product?

So the Phase 1, the thing is that we are building infrastructure so that in future when we expand, as we have indicated, our vision is to make 500 million square meter. So we are buying the land a big parcel, which we will do in Phase 1. So it's not fair to actually compare the asset turn, but still we expect pretty good margin top line of between INR 150 crore to INR 200 crore on this first phase investment.

And margins?

Margin will follow, let's see, but I think it will be a good double-digit number.

See, the return arithmetic on this from what our calculation meets very well our criteria as a company. So definitely, this is -- I mean if it works out well, it can be more attractive than our existing returns for sure.

Yes, because it's a very specialized field.

The next question comes from the line of Danesh Mistry with Eternity Investment Management LLP.

Congratulations on a good set of numbers. Sir, just one question. Your interest costs were lower. Was that a function of lower debt? And if so, what is your current debt outstanding, sir?

So you're comparing with June last year. So compared to June last year, we had a ForEx hit in that quarter, which was mentioned in the previous year's results. And therefore, the comparison in this quarter is not strictly correct. So this is a normalized quarter.

It is a normal cost this quarter. The last year that same quarter, there was a onetime large hit that we had to take on the mark-to-market cost.

Understood. And when do you think Phase 1 will be up for the business?

Our target is to commercialize by Q4 FY '28. So January, February 2028 is our target.

Our next question comes from the line of Rohan with InCred.

Congrats on a strong set of numbers for the quarter. Just to dive into the numbers. How was the growth profile in terms of the domestic business? Any color you can give on volume and price growth during the quarter? And how are exports trending this quarter as well?

Yes. So we did have a growth in both domestic and export for the quarter and the domestic growth was much higher than our export growth at a good double-digit clip and the export was also not bad. So overall, we are quite pleased with the mix. And in terms of the volume value split, it was a little bit more value and a little bit less volume, but even the volumes were good high single-digit number. So overall, we were quite happy and it was very broad-based sort of growth.

Just a follow-up here. The export coming back into positive, which regions would have driven this?

That detail we don't share of course. But basically last year, I think the same quarter was particularly a poor quarter and so this year was a bit of a normalization. But I would say that we were a little pessimistic going into the quarter, but it turned out to be all right.

Got it. Just a few questions on the expansions that you've announced. At the 500 million square meter mark, what kind of revenue potential do you see?

Vidur?

Yes. So it would follow a similar trend to our Phase 1 figure in terms of revenue. So the guidance we had given for that was around INR 150 crores to INR 200 crores. So for this -- I mean it's tough to give a figure, but somewhere around INR 1,100 crores, INR 1,200 crores I think would be a fair estimate for now although we don't know exactly how the prices would be trending at that time. But eventually it could be between INR 1,200 crores, INR 1,300 crores, something around that.

Sure. And in terms of from a moat perspective, what kind of structural advantages would we have in this space? Is it something that will be largely an import substitution angle for domestic APC players under the PLI scheme or is there also a strong export angle that you see here?

So we are open to both. Our primary focus is to look at fulfilling the needs of domestic cell manufacturers and that's where we see a tremendous growth about to happen probably faster than other places in the world. So our primary focus is to support the government initiatives to boost cell manufacturing domestically. And as we learn, as we go on, we also definitely will look at export opportunities. But like I said, of course to fulfill the ACP ecosystem in India, we are very much focused on that.

And then once we can prove our chops in India, then I think the world market can open up. It depends very much on the geopolitical environment at the time.

Right. And in terms of the qualification time lines, how long does it take to, let's say, get a new customer on board here?

Yes. So as far as the separator is concerned, what we understand from various cell makers is that the qualification time line is slightly faster than the other materials like the anodes and cathode. So I think we're well placed here, but we are of the mindset that it will take us at least a year to scale up for sure. So the first year, which is FY '28-'29, that year we do expect will go in qualification, testing and then starting commercial supply to different clients along that period. And we also need to see how fast they are able to set up their factories and scale up. So it's dependent on many factors, but we are patient and we'll play the long game when it comes to that. And that's something that we can totally accept as well being that it's going into critical components like EVs and energy storage systems.

Right. Just the last one from my end. Firstly, on FY '27, any guidance on growth and margins? And broadly over the next 4, 5 years considering this new business also that we'll be doing, what kind of revenue mix do you envisage across, let's say, folding carton, flexible and the separator films?

So we see the kind of historic trend kind of continuing. To give guidance is challenging in the current environment, there are so many factors out of control. But generally speaking, it's looking quite positive from where we sit today for the domestic as well as exports overall is all right and margins follow the top line typically. And over the next 4, 5 years, see the separator is going to be a long-term story. So once this scale and all really picks up, it will take a few years. So for the foreseeable future, the packaging business is definitely going to be the major driver of revenues as well as of growth. But yes, 4, 5 years down the line, let's see. The world #1 company in this separator business was a packaging company 10 years ago with a very similar profile to what we are today. And today, I think their separator business must be 20x or something their packaging business. So we don't know where this can go, let's see.

[Operator Instructions] The next question comes from the line of Pavan Kumar with RatnaTraya Capital.

Sir, can you first outline what is the non-separator CapEx for, let's say, FY '27 and FY '28? What is the CapEx we are expected to spend?

In FY '27, we have about INR 100 crores budget and this does not include the separator. The separator spend will be over the course of the next 1.5 years. So this year, it will be probably more like the land cost and then everything else will pretty much be in next year's cost. So this will go up based on the separator announcement by maybe INR 30 crores, INR 40 crores. So between INR 100 crores and INR 150 crores.

And FY '28 will also be a similar number or maybe lesser?

No. FY '28 from now, we don't know because it depends on how our carton business goes. We re keeping some space this year. That's what some of the CapEx is for enabling CapEx next year. So there will be at least similar CapEx or may be more, I'm not certain.

Okay. And Akshay, did I understand it right for this particular separator project, we don't require any outside technology transfers for the same? Is that right understanding?

So we already sort of answered that question. But basically, we are developing technology from various sources and doing our own R&D and development and this is a TCPL product, which we'll be selling.

Okay. Got it. And one last question on the margin side. Have the incremental pricing in terms of raw materials being passed on to the customers or is there still some pricing to be passed on?

So there is typically like something of a lag when it comes to price increases being passed on. It's a bit of a difficult calculation because we always have some stocks and stocks on order and everything whenever the price increase goes up gets initiated, then it takes like over a quarter it gets passed through. So that's what has happened.

Okay. But basically, the EBITDA margin could not be maintained if we didn't pass it through.

Yes.

Your next question comes from the line of Raman K V with Sequent Investments.

What was the name of the company? Sequent?

Sequent, yes, sir.

Can you hear me, sir?

Yes.

Sir, I'm sorry, I joined the call a little late. I just want to understand this lithium-ion separator film business, what we will be doing once we start to commercialize? One is that. And second, how is the margin difference from our existing business versus this new line of business?

Yes. So I would refer you to the presentation and press release. There's more details in that, which you can go through at length. But basically, this is a critical component of the lithium-ion battery, which separates, that's why it's called separator; it separates the anode and the cathode and regulates the charge and discharge cycle and we will be making that film in a phase-wise manner. The margin difference, as we said earlier, that we can't give an exact margin right now. But basically, in this first phase as well, we expect a good double-digit margin as well as double-digit return on investment in capital and eventually this can scale up substantially.

So can you hear me?

Yes, go ahead.

So can you at least say whether it will be in line with our existing margin or much better than the existing margin?

So we're doing in a phase-wise manner. So like right now, for example, we are incurring a lot of upfront cost on the land and all, which will be for the next 5, 6 years requirement in one shot. But definitely I mean we are looking at a better return on capital or investment than our existing business otherwise it wouldn't be sensible.

Understood. And sir, my last question is with respect to the growth. I think after 5 or 6 quarters, we delivered a double-digit growth. I just want to understand where are we witnessing the demand from? And going forward, is this demand sustainable?

So there's a mix of volume and value. The volume is a bit more. In terms of the domestic, we are having a good volume growth as well. So overall, I think the demand has improved in India and kind of volume growth that our customers have also improved. The export also we have sort of -- like last year was a poor year for export. So this year we hope for some recovery and so far it's been all right. So it's a mix. And our Flexible Packaging business has grown very strongly as well. Hence, the CapEx in that business this year. So it's a mix. So overall, it is a broad-based growth. I think everything has grown, but like our flexible business has grown little faster.

And sir, the second part, is the growth sustainable?

I mean yes, we feel so. We don't see any -- if there's another war somewhere, we don't know. But the Indian domestic demand is definitely sort of recovering. I think we can see that in the numbers everywhere.

The next question comes from the line of Richa Agarwal with Equitymaster.

Am I audible?