Uflex Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Nigeria devaluation drives a net loss: A 62% Naira devaluation triggered a ₹382 Crores exceptional forex loss on dollar borrowings, pushing the company to a consolidated net loss of ₹416 Crores.
• India volumes hold, but global demand is soft: India packaging films hit record volumes, yet overall sales volume fell 7.5% YoY as European plants suffered from lower consumption and high energy costs.
• Margins are under severe pressure: Consolidated EBITDA margin was 9.3%, dragged down by overseas operations and a normal forex loss of ~₹18 Crores; the near-term target is a recovery to a 12-13% run-rate.
• Backward integration is the margin self-help story: Two PET chip plants (Panipat and Egypt) are on track to reduce raw material dependency, a direct response to paying 3.5x normal prices for PET chips during COVID.
• What to watch next quarter: Whether the promised sequential improvement materializes in Q2, the pace of margin recovery toward the 12-13% target, and any further currency shocks from Egypt or Nigeria.

The Nigeria Shock & Currency Exposure

• The exceptional loss: A Central Bank of Nigeria policy change linked the Naira to market supply and demand, causing a 62% devaluation from ₦460 to ₦750 per USD. This triggered a ₹382 Crores exceptional loss on dollar-denominated borrowings, the primary driver of the ₹416 Crores consolidated net loss.
• Egypt is a persistent drag: The Egyptian currency continues to weaken every quarter, and while this impact is reported as a normal expense rather than an exceptional item, management identified it as the second biggest negative after Nigeria.
• A partial offset from Mexico: The Mexican Peso appreciated during the quarter, providing some relief against the broader currency headwinds.
• Opacity on hedges: Management declined to quantify its net hedge position in Egypt and Nigeria, citing the difficulty of providing a point-in-time impact due to different valuation methods for balance sheet items versus operating expenses.

Bhatia: "It is about Rs.382 Crores in this quarter where the currency has moved from about ₦460 (Nigerian Naira) to a dollar to about ₦750 (Nigerian Naira) to a dollar and that explains us this exceptional item because our borrowings there are in dollar and that has impacted the profitability at the bottom line."

Margin Walk & Recovery Path

• Standalone vs. consolidated: Standalone EBITDA margin was 12.3%, or ~13.5% excluding a ~₹18 Crores normal forex fluctuation loss. Consolidated EBITDA margin was 9.3%, which management noted was still better than peers in the 4.5% to 9% range.
• The gap to normal: Combined India and overseas EBITDA margins used to run at 17-19%, so the current 9.3% represents a deep compression driven by weak global volumes, raw material price corrections, and currency impacts.
• The recovery target: Management’s first goal is to reach a 12-13% EBITDA margin on a combined basis, ideally on a run-rate basis by Q4 of this fiscal year, which would set the tone for FY2025.
• Sequential optimism: Based on July management accounts, the current quarter (Q2 FY24) is expected to be better than Q1, both in India and globally.

Bhatia: "I think if we first target 12% to 13% and then look at consolidating from there that will be the right approach so in about a year's time I think or in the Q4 of this year on a run rate basis if we can achieve that I think that will be good."

Volume & Demand Dynamics

• India packaging films resilient: India operations achieved their highest ever packaging films volumes, with a positive QoQ sales volume increase of ~0.5% despite sluggishness following the Russia-Ukraine conflict.
• Holographic films a bright spot: Volumes increased 28% YoY, driven by the commissioning of the Dharwad project.
• Europe is the weak link: Capacity utilization in European plants was impacted by lower consumption, driven by higher energy prices and increased mortgage payments from rising interest rates.
• Americas at full throttle: The America plant ran at 100% capacity utilization, and Mexico at 87%, though both were impacted at the margin level.
• Aseptic demand hit by weather: The aseptic business missed momentum due to an early monsoon that shortened the summer and affected beverage consumption, though capacity utilization was still ~120%.
• India overcapacity correcting: Management estimates India can absorb about 1.5 to 2 new plants each year, and the current sluggishness of 6-7 months should correct in about six months, though not back to "dizzy heights." New plant commissioning is seeing delays of about six months, and new plants are not being run fully.

Bhatia: "India can take care of about two new plants each year without disturbing the market so I think India should correct itself in about six months time, but it will not go back to those dizzy heights what we have seen in."

Strategic Projects: Backward Integration & Capacity Expansion

• The PET chip rationale: During COVID, the European business paid almost 3.5x normal prices for PET chips when availability was tight. The two backward integration projects aim to insulate the company from such supply and price shocks by manufacturing its own raw material.
• Panipat PET chip facility: Expected to be operational by the end of this fiscal year. It will have the flexibility to produce either bottle-grade chips or PET chips for packaging film, and will be margin-accretive through in-house consumption rather than revenue-accretive.
• Egypt PET chip facility: A ~$71 million plant with ~$60 million in capex spread over this fiscal and part of the next. It is expected to be operational six to eight months after the Panipat plant.
• Aseptic debottlenecking: Capacity is being expanded from 700 crore packs to 1,200 crore packs with a capex of ~₹100 Crores, targeting April 2024 (possibly January). Management expressed high confidence in achieving 100% utilization of the expanded capacity in FY25, citing the successful ramp of the prior expansion.
• No further capex planned: Management stated explicitly that there is no further capex beyond the projects discussed.

Bhatia: "During the COVID period, during tough times while availability was an issue, in European business we have almost paid three and a half times of our normal prices that were add on prices for the PET chips during this COVID period as compared to what we were paying earlier."

US IPO & Valuation Ambitions

• The plan is on hold, not dead: The company had been preparing to list its overseas business (held under a Dubai holding company) in the US, with investment bankers nearly ready to file a prospectus before markets stumbled. The plan is now being revisited and depends entirely on US IPO market conditions.
• A higher valuation expectation: Management indicated that the valuation the US market was pricing in was "much, much, much higher" than UFlex's current Indian valuations, though specific numbers were not shared. The right time to re-engage will be when pricing power and earnings return alongside higher international capacity utilization.

Bhatia: "I think it was nowhere close to the current valuations of the UFlex that you see in India. It was much, much, much higher. I cannot share the numbers, but definitely those markets were pricing in a much different way."

Guidance & Commitments

Key Metrics