Uflex Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Cycle turns after a 3-year run: Packaging films margins compressed in Q2 as raw material softening forced stock adjustments, snapping a multi-quarter growth streak. Management calls it a correction, not a structural break, and expects spreads to return next quarter.
• Diversification cushion works: Liquid packaging revenue jumped ~145% and flexible packaging ~24% YoY, largely offsetting the films weakness and driving the highest-ever export quarter.
• Full-year margin guide reset to ~16%: Down from 17–19%, the new target hinges on liquid packaging volumes ramping from January and a films margin recovery, with H2 combined operating margin seen at 17%.
• Capex cycle nearing peak, not pivoting: Dharwad BOPET and Dubai CPP commission this quarter or next; Panipat backward integration targets FY25. After that, management will evaluate whether to invest more or consolidate.
• What to watch next quarter: Whether BOPET spreads actually recover as guided, the pace of Dharwad ramp-up toward its 80–90% utilization target, and any further raw material price adjustment that could delay the promised stability.

Packaging Films: The Correction

• What broke the streak: After roughly three years of continuous quarter-on-quarter growth, the industry saw demand slow just as some capacity additions came onstream. Raw material prices softened late in the quarter, forcing inventory write-downs to current price levels, which compressed both volumes and margins across peer companies.
• Europe a double hit: Demand is subdued as consumers absorb higher energy costs, while UFlex's own energy bills in Hungary rose 120% and in Poland 35% in H1 versus the prior year. No supply disruption yet, but the cost pressure is real.
• The recovery bet: Management expects the raw material price adjustment to finish by the end of this quarter, bringing relative stability to substrate prices. BOPET spreads, seasonally lean now, are expected to rise next quarter as new Indian capacity gets absorbed.

Rajesh Bhatia: "I think after a gap of, I would say, close to about three years where there has been only one way up on a quarter-to-quarter basis in terms of the growth charting for the whole packaging films' industry. So this quarter, we've seen a bit of a correction, which is on account of demand slowing down and also some capacity also came on"

Liquid & Flexible Packaging: The Offset

• Liquid packaging (Asepto) delivered breakout growth: Revenue up ~145% in the quarter, with capacity utilization already above 90% even in a lean period. The plan is to scale output from 700 crore packs to 900 crore packs from the existing plant; once that is booked, expansion ideation begins.
• Asepto margin normalization underway: Current margins of 10–11% reflect commissioning wastage at the new plant that could not be adjusted against high demand. Management sees normalized medium-term margins at 15–18%, with variation driven by paper and foil input prices.
• Flexible packaging benefited from falling input costs: After being squeezed by rising packaging film prices, the flexible business got relief as raw material costs declined, helping it post ~24% net revenue growth.
• Exports hit an all-time high: Led by the aseptic packaging division and the chemicals business, the quarter recorded the highest-ever export figure in UFlex's history.

Rajesh Bhatia: "So Asepto margins, I would take it as anywhere between 15% to 17% on a normalized basis. ... normally, our guidance on a medium to long term basis, our guidance on that business is 15% to 17% or 18% kind of a margin depending, so that variation will be more because of the paper or the foil prices."

Capex, Capacity & the Balance Sheet

• Three projects at the finish line: The Dharwad CPP facility commissioned in late September 2022; trial runs are underway for Dubai CPP and Dharwad BOPET, with both expected to commission this quarter or early next. Panipat backward integration into PET chips is progressing toward a FY25 completion target.
• Dharwad ramp-up math: At peak utilization of ~4,000 tons per month, the facility can generate roughly ₹700 crores in topline. Management expects to reach 80–90% utilization within 12–18 months under current demand conditions.
• Debt is funding growth, not shrinking: Overall debt rose only ~₹200 crores quarter-on-quarter, with the increase directed entirely at project funding. Long-term debt amortization runs at ₹500–600 crores per year, with FY24 repayments of about ₹600 crores. Management does not expect short-term debt to decline much near-term.
• Working capital should ease: The increase this quarter came from higher volumes, including aseptic packaging imports with longer lead times, plus planned incremental volumes from liquid packaging and Dharwad. Some respite is expected as both raw material and finished goods prices come down.
• No new capacity capex on the horizon: Beyond disclosed projects, only balancing equipment in large facilities is planned. After Dharwad is complete and January aseptic packaging numbers are visible, management will decide whether to invest more or consolidate.

Rajesh Bhatia: "after we complete the Dharwad, after we see our numbers on the aseptic packaging beginning from coming January. I think that's the time when you would look at, evaluate and then see whether you need to invest more or consolidate for some more time"

Recycling: The First-Mover Bet

• Regulatory tailwind arriving: New EPR guidelines promoting recycling and biodegradable packaging took effect from July 2022, though deferred by a year. Brand-owner obligations are set to scale toward 100% over the next couple of years, creating a structural demand pull for recycled content.
• Global footprint being built now: A PCR facility in Mexico, a multi-layer packaging recycling facility in Poland, and a PCR facility in Egypt converting PET bottles into chips for film production are all targeted for commissioning within FY23. India already has recycling operations at Noida, plus a small aseptic recycling investment of ₹4–5 crores underway.
• Strategy is explicitly offensive: Management frames the push as a deliberate first-mover play rather than a compliance response, aiming to capture advantage before competitors follow.

Rajesh Bhatia: "it's better to be a pioneer and take a first mover advantage in that field rather than just waiting for it watching the situation and then following others. So we have taken quite an aggressive positioning"

Pricing, Contracts & Raw Material Dynamics

• Pass-through mechanics differ by customer type: Spot customers see raw material price declines passed on immediately; index-linked contracts carry a lag, which means the margin benefit of falling input costs flows through with a delay.
• Falling film prices are a net positive for the flexible business: The same price decline that hurts the packaging films division relieves margin pressure in flexible packaging, which had been squeezed by rising substrate costs.
• Stability expected soon: Management expects the current raw material price adjustment cycle to conclude by the end of this quarter, after which relative stability in both raw material and substrate prices should allow more confident forward pricing.

Rajesh Bhatia: "I think this adjustment, which is now happening, will be probably end by the end of this quarter. And then we have a relative stability on the raw material prices as well as substrate prices and all that, and that will be right time to predict the prices for the next one year or so."

Guidance & Commitments

Key Metrics