UFLEX Limited — Q2 FY25 earnings call

Call held 25 Nov 2024

Management summary

Uflex reported a strong Q2 FY25, continuing the momentum from Q1, driven by robust performance in its packaging films and aseptic packaging segments. Consolidated revenue increased by 13.7% year-on-year, with significant volume growth across key businesses. Despite currency devaluation losses in overseas markets impacting reported profits, the company achieved a normalized EBITDA of INR 438 crores. Uflex is actively expanding its aseptic packaging capacity and establishing a PET chips facility in Egypt to enhance self-sufficiency and global market reach.

Highlights

  • Consolidated Revenue up 13.7% YoY to INR 3,853 crores.

  • Packaging Films revenue grew 23.4% YoY.

  • Q2 Sales Volume increased 10.9% YoY, driven by Packaging Films (14.6% YoY).

  • Aseptic Packaging capacity utilization reached 93% in Q2 FY25 (vs 83% last year), with 17.6% sales volume growth YoY.

  • Normalized EBITDA for Q2 FY25 was INR 438 crores, up 7.35% from INR 408 crores in Q2 FY24.

  • H1 FY25 Consolidated EBITDA grew 23.9% YoY to INR 903 crores.

  • Gross debt as of September 30, 2024, stood at INR 5,800 crores.

  • New PET Chips plant in Egypt expected to complete in H2 FY25 (Jan-March), projected to boost EBITDA by ~5% at full capacity.

Concerns

  • Currency Devaluation in Overseas Markets

  • High Debt and Finance Costs

Key financials

  1. Consolidated Revenue ₹3,853 Cr +13.7%YoY
  2. Normalized EBITDA ₹438 Cr +7.3%YoY
  3. Standalone EBITDA ₹215 Cr +28%YoY
  4. Gross Debt ₹5,800 Cr
  5. Net Debt ₹5,800 Cr

What they filed

Q1 FY27: revenue up 37.6%, net profit up 629.3% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue3,833 3,735 3,814 3,901 3,832 −0%3,612 −3%4,056 +6%5,366 +38%
EBITDA392 454 410 454 386 −2%436 −4%584 +42%889 +96%
Net profit-65 137 169 58 27 +142%36 −74%196 +16%423 +629%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

  • Packaging Films
    23.4% Revenue Growth14.6% Sales Volume Growth39% Standalone Revenue Growth10.8% Standalone Sales Volume Growth200% BOPET Gross Margin Increase (Q2 vs Q1)36% BOPP Gross Margin Increase (Q2 vs Q1)
  • Aseptic Packaging
    93% Capacity Utilization Q2 FY2583% Capacity Utilization Q2 FY2417.6% Sales Volume Growth Q2 FY2524% Sales Volume Growth October

Guidance & targets

Capacity

  • Aseptic Packaging Capacity Expansion Capacity · by end of December FY25 · High confidence 12 billion packs
    post the capacity expansion to 12 billion packs, which we are expecting by the end of December, Q4 will be the first period during this fiscal FY '25, in which we have that capacity available.

    — Rajesh Bhatia, Group President and Chief Financial Officer

Capacity Utilization

  • Aseptic Packaging Capacity Utilization Capacity Utilization · Q4 FY25 · High confidence 83%
    overall utilization for Q4 will be about 83%, even post the enhanced capacity to 12 billion

    — Rajesh Bhatia, Group President and Chief Financial Officer

Volume

  • Aseptic Packaging Sales Volume Increase Volume · Q4 FY25 YoY · High confidence 20%
    on a Y-o-Y basis, we have a 20% volume increase in the sales volume. That's about the Aseptic business.

    — Rajesh Bhatia, Group President and Chief Financial Officer

Project Completion

  • PET Chips Plant in Egypt Project Completion · H2 FY25 (Jan-March) · High confidence completion
    completion happening in PET chips plant, which we are expecting will come in H2, expected timeline is between January to March.

    — Rajesh Bhatia, Group President and Chief Financial Officer

Profitability

  • EBITDA Boost from Egypt PET Chips Facility Profitability · at full capacity utilization · Medium confidence 5%
    the PET Chips facility in Egypt, when it is fully operating at full capacity utilization will also boost our EBITDA by about, if we are expecting normalized EBITDA of INR2,000 crores, it should boost our EBITDA by another 5% or so.

    — Rajesh Bhatia, Group President and Chief Financial Officer

  • EBITDA Boost from Aseptic Packaging in Egypt Profitability · at full capacity utilization · Medium confidence 20% higher
    the Aseptic Packaging in Egypt on a full capacity utilization will also give us a 20% higher EBITDA over our current level of operations.

    — Rajesh Bhatia, Group President and Chief Financial Officer

  • Full Year EBITDA Profitability · full year · High confidence INR 2,000 crores plus
    do you believe that we will be able to do that INR2000 crores plus EBITDA that you have added for the full year or there will be some change in this? No, I think so we will get that because that number we were predicting that number

    — Rajesh Bhatia, Group President and Chief Financial Officer

Margin

  • BOPET Margins Margin · H2 FY25 · Medium confidence reasonable levels, potentially better
    I am quite confident that H2 margins in the BOPET industry will remain at reasonable levels. Frankly, I feel that the BOPET margins currently what are prevailing, there may be a little scope for them to be better.

    — Rajesh Bhatia, Group President and Chief Financial Officer

  • BOPP Margins Margin · H2 FY25 · Low confidence Q2 level
    hopefully in H2 those margins will be at a Q2 level which will be great for the industry.

    — Rajesh Bhatia, Group President and Chief Financial Officer

  • EBITDA Margins Margin · H2 FY25 · Medium confidence 13%-13.5%
    EBITDA margins for Q2, I think we are targeting about between 13%, 13.5%.

    — Rajesh Bhatia, Group President and Chief Financial Officer

Capex

  • Total Capex Capex · current year · High confidence INR 1,000 crores
    our existing commitment amortization is about INR1,000 crores a year which we are doing

    — Rajesh Bhatia, Group President and Chief Financial Officer

  • Total Capex Capex · next financial year · High confidence USD 80 million
    the next year when we get into, I think there will be no more than USD80 million of the capex what you need to carry to the next financial year.

    — Rajesh Bhatia, Group President and Chief Financial Officer

  • Maintenance Capex Capex · annually · High confidence INR 200-250 crores
    Maintenance capex could be about INR200 odd crores. ... INR200 crores to INR250 we can take that.

    — Rajesh Bhatia, Group President and Chief Financial Officer

Market Opportunity

  • US Market PET/BOPP Deficit Market Opportunity · in 2 years' time · Medium confidence 3,000-3,500 tons

    Previously 2,000-2,500 tons → 3,000-3,500 tons

    this 2,000-2,500-ton deficit, in the US markets... in 2 years' time, we expect that gap may be 3,000, 3,500 odd tons.

    — Rajesh Bhatia, Group President and Chief Financial Officer

Debt

  • Normal Amortization Debt · annually · High confidence INR 1,000 crores
    our normal amortization is around INR1000 crores annually. This year, it will be the same. It may be INR950 crores in some years, or INR1000-1025 crores in some year.

    — Rajesh Bhatia, Group President and Chief Financial Officer

  • Average Cost of Borrowing Debt · current · High confidence 10%
    Average cost of borrowing should be around 10%.

    — Rajesh Bhatia, Group President and Chief Financial Officer

  • Current Year Repayment Debt · this year · High confidence INR 1,000 crores
    We have to repay INR1000 crores this year.

    — Rajesh Bhatia, Group President and Chief Financial Officer

Risks & concerns

  • Currency Devaluation in Overseas Markets

    high

    Ongoing devaluations in Nigeria, Mexico, Egypt leading to significant translation losses (INR 92-93 crores in Q2), which management states are 'notional losses' without real cash flow impact.

    Both downplayed

  • High Debt and Finance Costs

    high

    Net debt at INR 5,800 crores, with finance cost expected to be INR 700 crores this year, impacting profitability. QIP plans are stalled due to unfavorable market conditions.

    Both acknowledged

  • Lag Effect on Flexible Packaging Margins

    medium

    When packaging film prices increase steeply, there is a lag effect on flexible packaging margins, impacting profitability in that segment.

    Management acknowledged

  • Competition from Cheaper Imports in Overseas Markets

    medium

    Exports from India are keeping overseas BOPET/BOPP prices under check, affecting margins in those markets. Management expects this to ease as India's domestic demand grows.

    Management acknowledged

  • Regulatory Delays for Recycling Business

    medium

    Postponement of EPR guidelines in India and Europe is slowing the momentum and adoption of the recycling business, despite Uflex's preparedness.

    Management acknowledged

  • Project Execution Delays

    low

    The PET chips plant in Egypt, initially expected in November, is now delayed to January-March.

    Management acknowledged

Areas of evasion (3)

  • Specific details on high-value BOPP films in Hungary (deferred offline)
  • Detailed breakdown of 'other expenses' (deferred offline)
  • The 'real' impact of currency translation losses on the company's financial health beyond accounting standards

Q&A highlights

2 direct, 1 evasive
Recycling Business Outlook and EPR Guidelines Direct
No, no. We are very much optimistic about the recycling business. But some of the EPR guidelines in Europe and in India are coming... if the whole industry sometime is not prepared, if we are prepared, our preparedness is much ahead of them, still that does not count, and the government may take a view that we need to postpone it by another quarter or six months and all that. But, having said that, this will all come from regulation only. We are ready.

Reveals that while Uflex is prepared for recycling, regulatory delays and industry readiness are slowing down the momentum, impacting the business's immediate growth potential.

Asked by Aman Kumar Sonthalia

Currency Devaluation Losses and High Finance Costs Evasive
Sir, you are very right there. We had told you earlier that we had tried earlier. But in that, because in all these forex markets, interest rates have increased. The whole market has gone bad for IPOs. So, we were ready to file our prospectus with NYSE. But at the last minute, our advisors told us that there is no point in doing it now. We will take it up appropriately. That is in on our horizon to be done. ... Why are you working in a country where the economy, where there is a devaluation of the local currency, etc. But these are all translation losses. These are not real losses.

Highlights significant concerns about ongoing currency losses (INR 1,100 crores over 1.5 years) and high finance costs (INR 700 crores this year) eroding profits. Management's response on funding was that market conditions are not favorable for IPOs/QIPs, and currency losses are deemed 'notional,' which was a point of contention for the investor.

Asked by Marcel

PBT Decline Despite EBITDA Growth Direct
Sir, this decline the only reason for this decline is the capital investment that has been made. Like in April we started a PET chips plant in India, CPP facility plant started in Russia and other projects we have commissioned during March, for such projects Q1 was the first month of that childbirth and Q2 is the second month of that childbirth. So how these will be stabilized at a higher capacity utilization. Sir the interest cost does not look at whether your current capacity utilization is 35%-50%, it comes and hits your P&L on the basis of 100% capacity utilization. So, as and when those projects, those investments which have been made are operating at higher capacity utilization levels, your EBITDA will become higher, which will offset the higher interest cost.

Explains that despite healthy EBITDA growth, PBT is impacted by higher interest costs from recently commissioned projects that are not yet at full capacity utilization, leading to a mismatch in revenue generation versus fixed costs.

Asked by Saket Kapoor

3 min read 6 chapters

Detailed narrative

Strong Q2 FY25 Performance Driven by Packaging Films and Aseptic Business

Uflex reported a consolidated top line of INR 3,853 crores in Q2 FY25, marking a 13.7% year-on-year increase, continuing the positive momentum from Q1. This growth was primarily fueled by the Packaging Films business, which saw a 23.4% rise in revenue and a 14.6% increase in sales volume. The Aseptic Packaging business also demonstrated robust performance, achieving a 93% capacity utilization in Q2 FY25, up from 83% in the previous year, and recording a 17.6% year-on-year sales volume growth. Normalized EBITDA for the quarter stood at INR 438 crores, an increase from INR 408 crores in Q2 FY24.

Improved Margins in Packaging Films, Mixed Outlook for H2

The BOPET industry experienced a significant gross margin increase of approximately 200% in Q2 FY25 over Q1, with a further 20% increase in the current quarter. Management expressed confidence that BOPET margins would remain at reasonable levels in H2 FY25, with potential for further improvement. In contrast, the BOPP industry saw a 36% gross margin increase in Q2 over Q1 but has since corrected to Q1 levels in the current quarter. The company hopes for a return to Q2 levels for BOPP margins in the second half of the fiscal year.

Aseptic Packaging Capacity Expansion and Global Strategy

Uflex is actively expanding its Aseptic Packaging capacity to 12 billion packs by the end of December 2024, anticipating an 83% utilization rate in Q4 FY25 and a 20% year-on-year sales volume increase. A new greenfield Aseptic Packaging facility in Egypt is planned, projected to deliver 20% higher EBITDA at full utilization. This strategic move aims to capitalize on Egypt's local market demand of 5 billion packs annually and its advantageous position for exports to Europe and Africa, replicating India's success.

Impact of Currency Devaluation and High Finance Costs

The company continues to face significant currency translation losses from Nigeria, Mexico, and Egypt, totaling INR 92-93 crores in Q2 FY25, an improvement from INR 180 crores in Q1. While management categorizes these as 'notional losses,' they impact reported profits. Gross and net debt stood at INR 5,800 crores as of September 30, 2024, with annual finance costs projected around INR 700 crores. Attempts to raise funds via QIP were put on hold due to unfavorable market conditions, contributing to investor concerns about profit erosion.

Strategic Capex and Debt Management

Uflex incurred INR 629 crores in total capex in H1 FY25, with key projects including a PET chips plant in Egypt and a CPP facility in Mexico. The Egypt PET chips plant, expected to complete in H2 FY25 (Jan-March), is projected to boost overall EBITDA by approximately 5% at full capacity. The company forecasts an annual capex of INR 1,000 crores for the current year and around USD 80 million for the next fiscal year, with maintenance capex estimated at INR 200-250 crores annually. Normal debt amortization is expected to be around INR 1,000 crores annually, with INR 1,000 crores to be repaid this year at an average cost of borrowing around 10%.

Recycling Business Outlook and Regulatory Environment

Uflex maintains optimism for its recycling business, having established plants in India and overseas. However, the immediate momentum is constrained by delays in the implementation of EPR (Extended Producer Responsibility) guidelines in Europe and India. Management noted that while Uflex is prepared for these regulations, industry-wide readiness and government postponements are slowing the adoption and impact of this business segment, which is dependent on regulatory enforcement.

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