Pakka Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Paper segment delivered record results: Pulp & Paper posted its highest ever quarterly top line of ₹78 cr and bottom line, driven by strong global demand and considerable price increases.
• Compostable revenue surged on plastic ban tailwinds: The division achieved 50% of FY22 full-year revenue in just four months, with Q1 FY23 revenue roughly 3x Q1 FY22, fueled by a strong order book and the single-use plastic ban.
• Profitability remains the compostable challenge: The molded fiber segment is operating at only ~33% efficiency against a ~60% breakeven, keeping the division loss-making and making it the key risk to the company’s ₹100 cr PBT target for FY23.
• Global expansion ambitions are accelerating: Management is trying to collapse its 2028 scaling timeline to 2025 for both sites, has finalized a country for a new overseas site, and is exploring fundraising through a US arm to avoid dilution in the parent company.
• What to watch next quarter: Whether machine efficiency improvements reach the targeted 60% level, progress on signing US global expansion contracts, and the release of pledged promoter shares.

Compostable Division: Demand Surge vs. Efficiency Gap

• Demand is no longer the bottleneck: Market demand is described as "very strong" and a "non issue," a sharp shift from earlier periods when the company had to actively influence minds. The single-use plastic ban and broader market awareness have solved the demand side.
• Revenue trajectory is steep: The division hit 50% of FY22 full-year revenue in the first four months of FY23, with Q1 FY23 revenue roughly 3x Q1 FY22. Volumes and revenue have doubled, if not tripled, over recent months.
• Efficiency is the binding constraint: The division is operating at ~33% efficiency against a breakeven of ~60%. The technology choice made at the outset has not delivered the efficiency levels needed for profitability. The company has raised efficiency from ~30% to 50% but needs 60-70% for significant manufacturing and overall profitability.
• Pricing power is emerging but limited: The company is perceived as number one in brand and customer perception, which is adding to better pricing. Pricing is going up slightly and margins are improving slightly, but management concedes it cannot be "the apple yet" because the market is just warming up.
• Partner manufacturing is scaling capacity: Three partner manufacturing sites have been activated, all in South India, with two more expected to come online in the next quarter. This model expands capacity without full capital outlay and also drives pulp sales, since any molded fiber supplier in India buys pulp in bulk from Pakka.

Satish: "now's the situation where you would see pricing going up slightly margins going up slightly. And our entire advantage of being integrated manufacturer coming to... fruition, you will see that happening over the next two quarters right that's the reason why i'm saying you know we will definitely getting closer towards breaking even if not even making a profit."

Pulp & Paper: The Profit Engine

• Record top and bottom line: The segment delivered its highest ever quarterly top line of ₹78 cr and highest ever bottom line, aided by considerable price increases in both pulp and paper.
• Global demand and certifications are tailwinds: Strong global demand and an upward industry trend supported performance. Newly acquired FSC certifications now allow the company to expand globally beyond current levels, with exports already at 46-47% of revenue.
• Bagasse cost pressure was passed through: Bagasse prices increased during the quarter, but price increases were taken to compensate, protecting margins.
• The segment is carrying the PBT target: Management states pulp and paper is "more or less on track" for the ₹100 cr FY23 PBT target, leaving the compostable division as the swing factor.

Global Expansion & US Entry

• New country and site near finalization: The Vice-Chairman spent over a month in Central and South America meeting industries, countries, investment agencies, and ministers. A country for the new site is more or less finalized, and a key person has already been appointed there.
• Timeline ambition has been pulled forward: The company had presented a 2028 timeline for scaling both sites and is now trying to "collapse it to 2025."
• US market entry is progressing on three tracks: A market study by an agency called "have us" is completed, confirming the launch of molded fiber materials. The company is now focused on finding the right supply chain and partner manufacturing sites. R&D collaborations are also ongoing.
• Two-way contract buffer being built: For global expansion, management is negotiating long-term (5-10 year) raw material contracts on one side and finished goods contracts with buyer letters of intent on the other, hoping to sign some contracts in the next month.
• Fundraising structure aims to avoid parent dilution: Significant CapEx for the new site will most likely be done through the US arm. Management has ideas on how to raise funds without dilution in the mother company and expects clarity by the end of the quarter. Experts are being brought in to advise on structure.

Mr. Ved Krishna, Vice-Chairman: "we have some ideas on how to do that without dilution, it is not no dilution in the in the mother company."

Product Pipeline & Innovation

• Flexible packaging is the next frontier: Commercial trial runs for flexible packaging are happening in the next month to month-and-a-half via contract manufacturing with two companies. Commercial production at scale is expected by about December of 2023, roughly a year and a half out.
• New subsidiary dedicated to innovation: A separate subsidiary, Pakka Impact Limited, has been created to focus completely on innovations, setting up a state-of-the-art lab at the IAC facility in Bangalore. It is designed to work not just for the company's own products but also for the market in general, and is already doing work with numerous multinationals.
• Delivery containers and new materials in the pipeline: A new delivery container product is now in production at a partner manufacturing site. An innovative material for food carry created in the last year is looking to be commercialized and launched within the next year.
• Nestle project is early-stage and not Maggi packaging: The company is working on a project with Nestle under NDA through the innovation arm, but management does not think it will be Maggi-type packaging, as that is a very low-cost substrate "not yet in our horizons."
• Seven-year vision targets 100x growth: The internal target is to grow from 5 crore to 100 crore by 2030, spread across three product lines: a substrate for flexible packaging, food carry products, and outsourced manufacturing for molded fiber.

Mr. Ved Krishna, Vice-Chairman: "I don't think it's going to be that much of Maggie sort of packaging it's a very low cost kind of substrate, it is not yet in our horizons that's and we will see how are two of our product lines on food Gary and flexible packaging evolves, it is an easier packaging to make but it's also very low cost packaging to make so basically, that is what"

Market Position & Competitive Dynamics

• Chuck holds a top-two position in India: Management cannot put an exact number on market share but guarantees they are "definitely in the top one or two." Lots of players have entered, but the company is expanding capacity through partner manufacturing partnerships to ensure they retain the number one position.
• Single-use plastic ban is real but enforcement is patchy: The ban has positively impacted Chuck, and management has been talking to multiple bureaucrats in the ministry. However, at ground level there is still quite a bit of usage despite the PR-level 100% ban. The company was invited to advise the government study group on enforcing the ban.
• Competitive philosophy is open, not defensive: Management does not focus heavily on competition or IP protection as a moat. The company believes in survival of the fittest, keeping technology open where it serves the larger vision, and competing on basics: proximity to bagasse source, proximity to market, and product effectiveness.
• Integrated manufacturing is the structural advantage: Any molded fiber supplier in India buys pulp in bulk from Pakka, so even if the company does not make money on molded fiber, it makes money on pulp. This integration is expected to drive margin improvement as efficiency scales.
• B2B marketing focus, not D2C: The reason consumers do not see a lot of buzz around the CHUK brand is that the focus is predominantly on B2B marketing (events, PR, lead generation). The company tried D2C early in the year but shifted back because D2C requires a different DNA.

Mr. Ved Krishna, Vice-Chairman: "I truly believe in survival of the fittest so I don't think and somehow, at least in my vision it doesn't come into sort of that sort of... the importance level for so called competition and the body around that doesn't arise so much, we have to be good at what we really need to"

Capital Structure & Governance

• Pledged share release is in final stage: Promoters' shares were pledged for all loans taken for company expansion. Most loans have now been paid off, and the release of shares is at the final stage, expected this month or so (August 2022). Collateral release has been approved by bankers and is with security trustees for physical release.
• ESOP launched at market price: A team stock option plan was released, providing each person working in the company with shares at market price, not at a discounted price, with a three-year vesting period before selling.
• NSE listing targeted by end of September: The board has approved listing on NSE. A module was pending after the merger, and the target is to complete it by end of September.
• Capital structure decisions coming in six months: Management will be taking decisions on the capital mix over the next six months, with a philosophy of keeping debt moderate, having learned the hard way from a challenging period in 2012-13.
• US subsidiary is in build phase: Consolidated financials include approximately ₹1 cr impact from US subsidiary expenses, with no revenue yet.

Ved Krishna: "the shares that issue that the market price, they are not at a discounted price. It is for growth from the current market right so of course you know anybody who sells will only sell once they have gained a certain amount of benefit on that."

Guidance & Commitments

Key Metrics