Avro India Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Subdued demand surprised management: Q2 and Q3 were below expectations despite the economy reopening, with festive and wedding season demand failing to materialize as anticipated.
• Recycling unit is the margin story: A new 300 MT/month recycling plant commenced 22 December 2022, and in-house recycled plastic granules are expected to progressively lower production costs and improve profitability.
• Aggressive pricing strategy in play: Avro sells at roughly 40% cheaper than large competitors, and lower costs from recycling will enable even more aggressive pricing to drive volumes.
• Distribution footprint expanding rapidly: The company has entered multiple new states and online channels, with 12 marketing personnel deployed and small part-load logistics now live for the first time in 20 years.
• What to watch next quarter: Whether the new distribution footprint begins converting into volume pickup, the pace of recycling unit ramp-up toward full utilization, and any sign of demand normalization after two quarters of lull.

Demand Environment

• The surprise: Management had expanded molds, machines and product portfolio in anticipation of a strong post-COVID demand surge from weddings and festivals. That surge did not arrive, and Q2 and Q3 were "reasonably subdued" across the sector.
• Current buyer behavior: No urgency or stock-out behavior from buyers; the company is now soliciting orders whereas previously it had to switch phones off due to overwhelming demand.
• FY24 thesis: Management expects a "very different year" because programs and plans people had kept on hold will result in volume pickup, surplus money is available to spend, and organic demand plus predatory pricing should combine to drive growth.

Aggarwal: "In fact, Q2, Q3 have been very subdued we were expecting, because COVID gone and economy has opened up, people were moving about, and they were splurging on a lot of products. But Q2, Q3 has been reasonably subdued, and it has shocked us. It is surprised us because we, in the anticipation of that, we expanded our product portfolio, we added a lot of molds and machines."

Recycling Unit & Margin Levers

• Plant live: The new recycling plant at Ghaziabad with 300 MT/month capacity commenced operations on 22 December 2022, and the company has started using recycled plastic granules as a major raw material.
• Current self-consumption: Avro is self-consuming almost 7,000–8,000 tons of recycled plastic, though production capacity from the new unit has been very low as it just started some time back.
• Cost advantage: Recycling will reduce cost of production, enabling more aggressive pricing, which management expects will increase volumes.
• Ramp-up timeline: Full utilization benefits in savings and profit improvement are expected progressively; by FY24 ending, production would "certainly increase by many numbers of times."
• Surplus sales potential: Once self-consumption demand is satiated, the company will offload material to others; selling an additional 2,000–4,000 tons is described as easy given strong market demand at a slight discount to market price.
• Operating margin: Reported at 10%-plus, enabled by the recycling unit initiative which helped control costs.

Aggarwal: "selling additional 2,000 tons, 3,000 tons or 4,000 tons is like an easy cake work, it's like selling gold."

Competitive Positioning & Pricing

• Price gap vs large players: Avro sells product at almost 40% cheaper than large competitors like Nilkamal, Supreme and Cello, and at 40% cheaper on distribution, which drives acceptability across all states.
• SKU breadth as moat: The company has more than 140 SKUs; regional players typically have only 2–10 designs, giving Avro a bouquet of range that only large companies can match.
• The encashment strategy: Large competitors have established and popularized the product category; Avro enters with a materially cheaper alternative and captures demand the incumbents created.
• Predatory pricing ahead: Lower production costs from in-house recycling will enable even more aggressive pricing, which management expects to drive volume growth.

Aggarwal: "These companies have actually established the product category. So I hats off to them, and I want to thank them openly now. ... we are able to sell our product almost at 40% cheaper than these companies. ... these competitors have actually given us a lot of edge. They have also given us the advantage of giving their product in the market because they popularize it, but we encash it."

Distribution & Channel Expansion

• Geographic reach: The company has set up base in Bangalore, Karnataka, Tamil Nadu, Kerala, Maharashtra, Gujarat, Madhya Pradesh, Chhattisgarh, Odisha and West Bengal — markets previously not served.
• Marketing feet on the ground: 12 marketing people deployed across states including West Bengal, Madhya Pradesh, Gujarat, Rajasthan, Northern India, Karnataka and Tamil Nadu; distributor salesmen are trained and given incentives.
• Small-load logistics unlocked: The company has started small part-load consignment sales (INR 10,000–50,000) through DP World or own logistics, something it had not done for 20 years, opening access to dealers who buy small quantities.
• Online channel presence: Selling through Flipkart, Amazon, Meesho, Jio and big-box stores like Metro; approximately 15% of revenue now comes from online.
• Warehouse model: GST numbers are in place at various locations with warehouses in Metro AG stores used exclusively for Avro, though no owned warehouses yet; over time, as product portfolio and footprint grow, owned warehouses may come in Bangalore, Ahmedabad or Punjab.
• Supply chain speed: Delivery within less than 24 hours for full truckload.

Regulatory Tailwinds

• EPR enforcement tightening: About three months prior, more than 1,700 plastic waste manufacturing units in Uttarakhand were shut down by the High Court for non-compliance, signaling stricter enforcement.
• Import regulation: Effective the day before the call, any import coming into the country wrapped in plastic must take Government of India approval on EPR regulation and pay a penalty.
• EPR credit opportunity: Avro expects to start taking credit of EPR benefits on the basis of sales done on behalf of brand owners and producers; management calls this a "golden lining" but says it is too early and will take another year or so to get into the mainstream.
• Circular economy mandate: By FY24, 100% regulation compliance is required or penalties apply, which is expected to promote recycled plastic use and bottle-to-bottle or product-to-product circular economy.

Aggarwal: "I believe that Avro India Limited over a period of time will be a company which will start taking the credit of EPA benefits on the basis of the sales that we'll be doing on behalf of these brand owners and producers. That's a golden lining that we have at this point in time, but it's too early because I think it will take another one year or so for us to get into the mainstream."

Product Portfolio & Innovation

• Continuous refresh: The company refreshes products every day; added almost six products in the last six months and ordered almost 10 fresh brand-new molds for the next six months to stay in sync with consumer expectations and avoid obsolescence.
• Integrated value chain ambition: Management aims to be the only company in the entire country with a value chain from post-consumer plastic scrap to final product sold via JioMart, Meesho or distribution.

Aggarwal: "we will be the only company, and I'm saying, again, to be the only company in the entire country to have this value chain from post-consumer plastic scrap to the final product at let's say, even in the JioMart, Misho, or even distribution of little market for that brand."

Guidance & Commitments

Key Metrics