Pakka Ltd Q3 FY2025 Concall Summary

Key Takeaways

• A tough quarter, candidly owned: The packaging business faced a "very, very tough quarter," with management openly admitting a technology selection mistake in molded fiber and an execution gap in launching delivery containers.
• Molded fiber is the core problem: ~50 new entrants and arbitrary pricing forced production shutdowns, while a self-inflicted machine choice keeps capacity utilization at just 55-60%, destroying the cost advantage of being the world's lowest-cost pulp producer.
• The big flexible packaging bet is advancing: Project Jagruti is 44% complete and the Guatemala project (Project Kawok) has begun land acquisition, with a fundraise roadshow planned by April to secure the needed \$140-170 million in outside equity.
• Sustainability demand is softening, not vanishing: US market rhetoric has shifted ("we don't need paper straws") and corporate targets have slid, but Gen Z awareness, regulation and brand-value considerations still underpin long-term demand.
• What to watch next quarter: The molded fiber strategy decision due this month (write-off and reinvest, or pivot), the Guatemala fundraise valuation outcome, and whether the M3 metallized substrate trials convert into orders.

The Molded Fiber Problem

• A business under siege: The food service disposables segment is where "the challenge lies," with approximately 50 new competitors entering and pricing that has become "completely arbitrary," forcing the company to take production shutdowns due to stock build-up.
• Self-inflicted technology wound: Management admitted a technology selection mistake, for which the CEO took personal responsibility. The result is a fleet where machines run anywhere from 50% to over 80% capacity, averaging 55-60% because the larger machines operate at the lower end.
• The cost paradox: Pakka is the lowest-cost pulp producer globally with one of the lowest power costs, yet it cannot compete because low machine efficiency makes fixed costs high. Competitors save on chemicals by lowering quality, while Pakka carries a heavier management setup, team, branding and marketing costs.
• A forced strategic rethink: A meeting at the end of this month will explore options including a shift toward B2C (a Ziptos/Blinkit model) versus large QSRs. Management has set a clear bar: a business generating only ₹60 crores revenue and ₹2 crores profit is not worth pursuing, and the target is at least 20% of the total disposable market.
• Write-off decision imminent: If the team's strategy is convincing, management may take a write-off on current machines and invest in new ones, funded via supplier credit from a European machine supplier. A decision is expected later this month, and investors may be informed before the next quarterly call.

Ved Krishna: "that's a technology selection mistake, which mostly I'm responsible for, but we are trying to now see how we can bite the bullet and alter the technology."

Flexible Packaging: The Big Bet

• Project Jagruti progressing: Now 44% complete, the main flexible packaging line comes from French company Alimo. The ETP is almost commissioned, and construction has begun on the recovery boiler, pulp mill and paper machine building. Base paper production is expected by the end of this calendar year, with coating operations converting to flexible packaging early next year.
• Guatemala (Project Kawok) moving to execution: Land purchase initial payment was made this month, government permissions have started, and the team heads to Europe next week to finalize technology providers. Full load engineering is planned for conclusion by March, and an EPCM contractor has been shortlisted for finalization within this quarter.
• Scope narrowed to pure flexible: The Guatemala project will not build a molded fiber facility; food services will be supplied through an outsourced model there, which management describes as less risky and less capital intensive. The project scope shifted to 100% flexible packaging from an earlier 80/20 split.
• Fundraise roadshow by April: Outside equity needed is \$140-170 million, with a pre-money valuation of approximately ₹50 crore and expected dilution of 30-40%. Management believes it has strong arguments to maintain that dilution, though acknowledges first investors may negotiate it down.
• Offtake groundwork underway: Promissory letters are being converted to contracts, drafting has begun, and a conglomerate of companies has given a written promise committing to take 120,000 tons of material if specs are met, post-election.

Product Pipeline & Commercialization

• M3 metallized substrate: Trials are underway in the US, with the first release scheduled for the day after the call. A conversion partner has been finalized for the US market. Management aims to complete development by Q1 (April-June), commercialize M3 in Q2, and commercialize the non-metallized version in Q3. [3-5]
• Delivery containers delayed again: Originally expected to launch two quarters ago, the new family of delivery containers has been designed and "cracked to about 95%" for Indian food service applications. Management refuses to launch until the product does not leak at all, and no timeline has been given. The CEO called the delay a shortcoming with no excuse, citing gaps in the team and project execution.
• Clamshells and US distribution: Clamshells are being developed for both the India and US markets. A distributor and broker network in the US is planned, with at least five appointments targeted this month.
• Product Innovation Lab: The location has been finalized as Portland, where new Head of Innovations Dr. Sam Sohn (formerly of LG Chem, SC Johnson, Samsung, Amcor, DuPont) will operate.
• Europe as a new market: Pakka is now looking at Europe, a market it previously did not target at all. Management will hold meetings there in May. Separately, a partnership opportunity in Colombia has emerged to make products there and supply other markets.

Ved Krishna: "Not moving till it doesn't leak at all."

Demand & the Sustainability Thesis

• Sustainability taking a backseat, especially in the US: Statements like "we don't need paper straws" are emerging, and many companies have slid their sustainability targets (e.g., Coca-Cola moved from 2028 to 2030). Management sees a spectrum: some companies say sustainability is not a high priority right now, but no one has said they are not interested.
• The pioneer's cost disadvantage: An analyst noted that as a pioneer, Pakka incurs market-development and trial costs that later entrants avoid, and new competitors can leverage Pakka's learning and technology selection mistakes to be more cost-competitive. Management responded that they cannot blame markets or others and must keep innovating, improving costs and building customer service and consistency.
• The long-term case remains intact: Gen Z awareness, government regulation and brand-value considerations still drive demand. The big challenge for companies remains availability of material at scale. Management believes the goal should be creating better materials, not just replacing plastics.
• Flexible packaging transport economics work: Flexible packaging fits 26 tons in a 40-foot container, similar to paper, making shipping viable. For food services (volumetric products), the US is not the only market; Latin America is also decent.

Ved Krishna: "I think this whole idea that's the starting point needs to be that of it's sustainable. You will have to pay more and expect less. We feel that that's in itself I would say a wrong place to start."

Organization & People

• Key hires and role changes: Dr. Sam Sohn joined as Head of Innovations on the day of the call, operating out of Portland. Jagdeep is leading the India business, Satish is moving to take care of the US business, and a head of innovation products has been brought in. Annual planning this month will further strengthen organizational structure and incentivization.
• Patents moving to US jurisdiction: The shift from India is being made for investor purposes. Management holds design patents but has not taken anyone to court.
• Unanswered accountability questions: When an analyst asked who is responsible for the India B2B/B2C business and for taking 20% market share in molded fiber over 12-24 months, and whether the organizational structure is sufficient for business development, management did not answer directly, instead pivoting to a 500-year vision for Guatemala.

Financial Position & Margins

• ROA/ROC declined: The decrease was attributed to the dilution effect from preferential equity issuance.
• Margin guidance explicitly declined: When asked for revenue and margin guidance for FY26 and FY27, management refused to provide forward-looking statements, stating the board is already unhappy with such statements. The only commitment offered was to "continue to work the way we have been working" and "do our utmost to maintain what we've been doing so far."
• Food services economics under scrutiny: Management has communicated internally that a business generating only ₹60 crores revenue and ₹2 crores profit (or no profit) is not worth it. The team will provide their strategic direction later this month.

Ved Krishna: "My board is already very unhappy with me and these forward-looking statements I'm going to avoid that."

Guidance & Commitments

Key Metrics