Ladies and gentlemen, good day, and welcome to JK Paper Limited Q4 FY24 conference call, hosted by IDBI Capital Markets and Securities Limited. As a reminder, all participant lines will be in the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Archana Gude from IDBI Capital Markets and Securities Limited. Thank you, and over to you.
Good evening, everyone. On behalf of IDBI Capital Markets & Securities Limited, I'd like to welcome you all to the Q4 FY 2024 post-results conference call of JK Paper Limited. From the management, we have with us today, Sri A.S. Mehta, President and Director, and Sri K.R. Veerappan, CFO, along with other key members. We begin the call with a brief discussion with management and with the opportunity for Q&A session. Thank you. Over to you, A.S Mehta.
Good afternoon, everybody, and thank you for joining this call today for the first quarter, as well as the annual consolidated results of JK Paper Limited. In fact, the Q4 has been a difficult quarter, I must say. The year 2023-2024 first half was relatively better year from a pricing point of view and also the cost point of view. But thereafter, we have seen a sharp drop in the prices of packaging board, as well as the Maplitho paper and the coated paper. Of course, there was a slight drop in the coated paper as well, but it was not that sharp. At the same time, there was some commodity price correction also, including the pulp and coal, and that has given some benefit.
But the wood cost, which is a basic raw material for integrated pulp manufacturer, remained very high. In fact, it has gone up sharply by close to 30-35%, so that has impacted the result. But somehow I would say that the major reason for the drop in profitability, which was expected, I must say, is primarily because of the lower prices despite the higher input cost. If the prices would have been at the level of 2022-2023, then we could have managed with a decent profitability despite the higher raw material cost. So but, at the 26-27% EBITDA margin also, I would say that this is better than the long-term average EBITDA of the paper industry and our own long-term average. 2022-2023 was an outlier year, and this was bound to come down.
I hope that even the 2023-2024, which is 26% EBITDA, which gives a decent return on investment, is still satisfaction for all of us. The year gone by is one, but the coming year is likely to be more tougher. I would say that the competition and also the dumping of paper from the Asian country will pose a challenge in time to come. With this, I again welcome all of you people. Thank you.
Should we begin the question and answer session, sir?
Yes, please.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question, hit the star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the questions are presented. We take our first question from the line of Rajesh Majumdar from B&K Securities. Please go ahead.
Yeah. Good evening, sir. Am I audible?
I'm not very clear. Can you use your handset mode, please?
Just one second.
Sure.
Yeah, this is better?
Yes.
Okay. So I have a few questions. First of all, thanks for organizing this call, after some time. So my first question was, do we have the EBITDA of Sirpur and the packaging company separately for the quarter and the year?
Okay, next question.
Yeah, my next question was that we've seen that the price increase took place in April in most grades of paper. So does that counter the increase in the RM cost, especially wood cost, or will we still see some kind of, you know, gap in that? That was my second question.
Any other question from your side?
Yeah. My last question is that we've seen some improvement in pulp prices and some consolidation in the global pulp paper industry with Suzano making a shift towards the International Paper. So outlook on pulp prices and whether the prices will come to that extent because of the international consolidation. Yeah, please.
All right.
... Thank you. See, as far as the Sirpur EBITDA is concerned, yeah. You're giving the?
Okay. Yeah.
See, the Sirpur EBITDA. Hey, I would say that the Sirpur EBITDA is in the range of somewhere around 30%, but when you talk about the Q3 and Q4, it sharply dropped because of the price drop. And, so year as a whole, around 30%, and but that includes the incentive state incentive, accounted for on accrual basis, which we did not receive during this year. So if I exclude that incentive part, then the EBITDA would be close to 22%-23%. Isn't it?
Okay. So-
Okay. Sorry.
22.20%-23%.
Oh, 2023, 2024, I'm saying.
Ah, 22%, 23%. Oh, okay. 23 % , 24 % . Okay, got it. Got it. Got it. Yeah.
When you are talking about the packaging company, see, in fact, the corrugation industry has a very bad time, the year 2023-2024. In the normal course, their EBITDA should be around 12%-14%, but it was a bad year and it was close to 10%.
Around 10%.
Yes. As far as the NSR, your question, number two question on the wood and cost and the NSR. I would say that the NSR in the second half, there was a severe drop in paper packaging board and the Maplitho prices. And the wood cost has gone up by 13%, as I said in my opening remarks. As far as the pulp prices and international scenario is concerned, the pulp prices were pretty stable, but in the last 2-3 months, and particularly last two months, it has again started moving upward very sharply, and right now it is in the band of $700-$750, which is much higher.
See, the international scenario, I mean, there are two pulp mills coming up, and with these new pulp mills, demand-supply equation normally would be comfortable and, in long run, the pulp prices should remain in the band of $550, ± $ 25.
Okay. So the NSR increase we saw in April, does that cover for our wood inflation?
No. See, the NSR increase in April this year, increase is just in a Packaging Board, one particular segment, is nothing as a major increase.
Okay. Okay. But then we can expect to see more price increases in the future?
Let's see the demand supply scenario in time to come.
Okay. Okay. Thanks.
Thank you. We'll take the next question from the line of Gaurav from Capital Farming. Please go ahead.
Hi. Thank you, for giving an opportunity. I hope I am audible. Yeah?
Yes, you are.
Yeah. I have a couple of questions. So first of all, first question, like, the 15% that we are- we have announced to acquire, incrementally from HPPL and SPPL, right? So, acquisition cost is coming around, on a consolidated basis, INR 104 crore or INR 105 crore. So, what was the cost of remaining 85% that we acquired, I think, a year back or almost 1.5 years back? If you can share that number, please. That is the first question. Second question related to this only, like, we have seen that on a short period of, even less than two years, we have acquired three companies, HPPL, SPPL, and then Manipal Utility Packaging Solutions also.
And if I'm not wrong, we were in process of having our own plant in Ludhiana, in the line of business only, right? So, when you look at the business to acquire it, at what parameters you look at it, whether from a price to earning point of view, price to sales point of view, or what are the parameters? And if whatever parameter you look at it, what are the numbers at which you are comfortable when you make a call, "Yes, we need to purchase that business," right? And the third question, with the same segment only, that Ludhiana plant, is that commissioned, if yes, production has started, and if yes, then what is the sales number or the profitability number for fiscal 2024 for that plant?
Because if I'm not wrong, that plant is hosted in or is held in a 100% owned subsidiary, if I'm not wrong. These are my three questions, please. Thanks.
Thank you. So your first question on the 15% and 85%. When we acquired 85%, it was close to INR 590 crore. That was the consideration. And the 15%, when we acquired balance equity, it was rightly, you said yourself, said INR 104 crore. So this is the consideration part. When we acquired these three companies, in fact, the two companies were together, Horizon and Securipax , and Manipal happened later. So the criteria is very clear, that, which geography it is favorable for the industry. So we see a customer profile and the demand pockets when we acquire a target. So this is one criteria. And also we see the competitive intensity in that geographic territory.
These are the consideration, and also the quality of assets has to be better, because what we acquire is the customer. And we are not to on the asset part or the net asset value, because the asset we can create, but the customer acquisition takes time in this industry. So we see the quality of customer catered by that company, and then we acquire. So it is basically a customer profile and quality of assets. These are the criteria. At the same time, basic the selection criteria for the demand center or a consumption center is the criteria. The question about the-
If you don't mind-
Sorry?
If you don't mind, like, for example, if we take all the three companies on a consolidated basis, so if I'm not wrong, then we have spent almost INR 800 crore in acquiring all these three companies. So over a period of, let's say, next 2-3 years, what would be our expectation in terms of return on invested capital? Though you strategically mentioned that you are acquiring the customer, you are looking for a more better wallet share or maybe the geographical location of the plant or how strategically fit that companies into it.
All right.
At the end of the day, it all boils down to return on investment that we as a company are making. So almost INR 800 crore invested in equity in acquiring these three companies. So what would be our expectations in terms of return on invested capital?
All right. All right. See, whenever we do any project, capital investment or acquisition, our basic criteria is the return on investment, something around 4%-5% over the cost of capital. That is our criteria. In long run, it should be better than that. So at this point of time, our cost of capital is something around 9-point-odd %, post-tax, WACC, so 9%-10% WACC and 4% over that. So in long run, we would expect something around minimum 14%-15% return on investment. That is our criteria of any project or any acquisition. Right? This is one. The other question was on the strategic side, as I said, that this is the most growing sector, and in time to come, this is likely to grow healthy. So...
Of course, we entered into this business just not for acquiring these two companies or three companies or some location. We will have to grow in this industry and continuously expand and remain as India's top corrugator company. This is our strategy. Ludhiana plant, we commissioned last year, to be very precise, in some time in August 2023. See, in this industry, it takes time because the customer acquisition is a long process, because the plant is audited by them, then the plant is approved, then the sample is approved. It takes a lot of time. So it will take time. The plant, hopefully this year, our target is to utilize the capacity more, and by end of the year, we should be in the idea.
Thank you, sir. I will come in a few more questions. Thank you.
Thank you.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to answer queries from all participants, please restrict your questions to two at a time. You may join back the queue for follow-up questions. We take our next question from the line of Deepak Lalwani from Unifi Capital. Please go ahead.
Hello, sir. Thank you for the opportunity.
Hi.
So firstly, my question was on the import scenario. When you mentioned that, you know, the import intensity is high today. Just wanted to check on the difference between the landed cost and RMS for different paper segments. And also, given, you know, the rise in pulp prices, in your opinion, do you think the import intensity should reduce going forward?
Thank you. A very good question. I must say that when the pulp prices go up, suddenly the import intensity should come down logically. Because if the pulp price is, let's say the pulp price is $750, then the natural and, fundamentally, on a, the financial basis, the paper prices should not be lower than $950. Because the $200 is considered to be the conversion cost and other element of, the pulp vis-à-vis the paper. But, the different, geographic territory and different companies, they have a different competitions, and they start dumping. So I have seen a time where the pulp prices and the paper prices were the same, when the people were selling paper at the pulp prices. That is also desperation on their part.
So anything is possible, but in a normal course, in the ordinary course of business, with the fundamentals of the cost and structure, if the pulp prices remain $750 or $800, paper prices should always be $950 or $1,000. And if the pulp prices remain at that level and the paper prices behave in a rational manner, then I find no, no, no threat of import. You rightly said this. But there are countries, they don't follow rational and the logical risk cost comparison, and since they have the surplus capacities available, so they just dump it. So that creates a problem.
Sure, sure. That was quite useful, sir. Sir, if you can explain largely from which countries, you know, we're getting these imports from and their demand scenario, if you have a judgment on, you can just give us some sense on that.
Right. I would say that we are more worried on the import coming from Indonesia, because Indonesia is a part of Asian ASEAN bloc.
Yes, sir. You were mentioning that Indonesia is causing the problem in terms of dumping, so if you could continue from there.
Yeah, yeah. This is what I said, Lalwani is that, the Indonesia, because they have the surplus capacities available, and also there is a FTA between ASEAN bloc, where Indonesia is a member of that bloc. And also on top of it, they had the long-term forest concession given by the government of Indonesia, where their raw material cost is lower compared to our raw material cost today. In a normal course, our raw material cost would also come down, but I mean, currently it is much higher, and hopefully next one more year it will remain higher raw material cost because of the wood availability. So more worrisome is import from Indonesia. China, of course, there is an import duty.
In some product category, China also, I mean, because they have the surplus capacities available, and there is an anti-dumping or a countervailing duty imposed by, all the other barriers imposed by U.S. So they find the alternate windows or the markets where the India get a softer target for them. So that also some product category, can be dumped from China.
Sure, sure. Understood. Sir, my second question was on your balance sheet. So today, when we are at a comfortable position in terms of debt, you know, are thinking on further expansion, whether brownfield or greenfield, if you can give some sense there, or we should look at, you know, continuing to take further cost measures like how we did the mechanical pulp expansion, which is going to come in next year. So how are we thinking about using the cash from your increase volumes or to reduce cost initiative?
No, no. See, we are very clear on this part that a small element of borrowing or the loan should always continue to remain on the balance sheets. And, of course, we are comfortable, but at the same time, after the BCTMP mill, which will happen next year, so that should give advantage of the input cost reduction as well as the stability of the supplies of our mechanical pulp for our board production. At the same time, when there is appropriate time, as I said, that we will further expand our footprints in the packaging industry, means the corrugation. And, at the appropriate time, if there is a, I would say that good demand-supply mismatch of packaging board, we will further expand our capacity and also some debottlenecking and balancing will continue to happen.
Okay. Understood, sir. Got it. And what would be the cost savings from this mechanical pulp CapEx you are talking in from next year?
See, this, the CapEx what we are, we will be doing it, should give a return on investment, as I said, that something around 15%.
Okay. Right. Understood, sir. I'll just come back in the queue for further questions. Thank you.
Thank you. I'll take the next question from the line of Pujen Shah from Molecule Ventures. Please go ahead.
Hi, sir.
Mr. Shah, may I request you to use your handset mode, please?
Am I audible now?
Yes.
Yes. Yes. Okay. Just wanted to know on the FTA side, as we have, like, there are very recent news article saying the there should be because of the dumping by the Asian countries, the government was going to take a regulatory step. I just wanted to know, is there any update or like, is there any decision which is making in our favor?
See, I mean, there are announcements or the communication from the government side, but nothing has happened. I would say that the review was due, because this was effective in 2015 and 2019 review was due. It was not reviewed because those countries were not interested in review, because they are benefited. The government of India is trying to have the review of the FTA, but this is a very cumbersome process because it has to be mutually acceptable review by both the countries, because these are the sovereign agreements, so those can't be reviewed arbitrarily or severally by one particular country, so it may take some time. The government has intent to take care of the domestic industry, but nothing has been done yet.
In fact, on the packaging board, we have filed an anti-dumping petition against Indonesia, China, and Chile. Hopefully, because now the government is active and I would say supportive, hopefully, they must expedite the anti-dumping process.
Okay, sir, much insightful. The second question would be on the, on the overall scheme of things, it's like we let go on a broader picture. If we, if we look into it, keeping the current, demand scenario, so, what, what's your outlook on like, how like... at what point of time or like what time it will take to, satisfy this, oversupply by the other countries? Or, like, we will be stable and the import substitution, like the import intensity, would be low. So what time it would take, it would take in the next few years?
See, it's very difficult because, that entirely depends on the global prices elsewhere. Because these, like the companies in Indonesia or China, they have no love and affection for the India. They have no love and affection for the customer in India. They are only concerned for their own profitability. So if they get a windows or outlet in the other countries, like Europe or America, and if they get a better price there, they will vacate the market from India. So-
Okay. So, so is that not a concern about the, like, they are being importing, like, let's suppose U.S. or Europe is been importing any duty that has been affecting to us or like the demand scenario on the global like Europe, U.S. is being stuck, that's why it is being affected to us?
Oh, see, one is the demand scenario. I mean, that is also impacting because the lower demand in those countries means the lower export from China to those countries, so they have a surplus available for dumping to India and other markets. This is one scenario, you are right. But at the same time, if, if the Western world, they impose duty as they have recently done, so that also cause the additional dumping from these countries to India.
Sure. Got it. I will get back to you. Thank you, sir.
Thank you. We'll take our next question from the line of Amit Doshi from Care PMS. Please go ahead.
Yes, thank you. Sir-
Mr. Doshi, please use your handset mode. You're not audible.
Hello. Yeah, I'm audible?
Yes.
Okay. Thank you. Yeah. Sir, do you think this margin of last quarter can be considered as now a base case, considering the higher raw material cost as well as the lower NSR, which has been there now for couple of quarters? Or do you think there is been some more, pain to see?
See, any quarter is a unique quarter, and can't guarantee that this quarter will remain the quarter thereafter, because there are so many variables. I mean, the global pulp scenario resulting into the global different price trend, the demand and supply scenario globally, and demand and supply scenario locally. Because now we are living in a connected world where, I mean, it's so difficult to predict which variable is going to impact your market. So still, I would say that this is one quarter where we have seen this. I personally see that the raw material costs should remain now at this point. I mean, whatever is the raw material cost today, will remain more or less maybe 5% here or there. The only question mark is on the price scenario.
So what kind of a dumping, what kind of a global, pulp and paper prices behave, will define the NSR in the domestic market, and that will define the margin.
Okay. And this anti-dumping duty petition that you filed, by when do you expect any response? You know, either positive or negative, whatever it takes may be, but by when generally those reply come?
It's a million-dollar question. I mean, I must say that many a times the government and the ministers, they say that we will be very fast, we can decide in a month's time, but my practical experience that it takes much longer time.
Okay.
Let's see how fast they decide on this matter.
Sure, sure, sure. So in one of the recent TV interviews, you did mention about, you know, the paper industry likely to go in a single digit and the packaging, in double digit, now-
Yes
-growth trajectory. As far as JK Paper is concerned, what do you think our company will grow, especially considering, you know, like, you know, we probably likely to be net debt free probably by H1 of this year, considering, you know, we have around INR 1,100 crore plus cash flow almost probably, hopefully even in next year. And you did indicate your plans about deploying any additional CapEx towards the corrugated segment or the packaging segment. So in that scenario, what would be JK Paper's growth trajectory?
... See, we are very clear on this part that, see, the industry, I said that the single digit growth, but I didn't say about JK Paper growth, and the JK Paper growth has to be double digit, and double digit is also plus double digit.
Okay. So you mean like 18%-20% plus?
I mean, I, I am not saying anything, but I'm saying that double digit plus side.
Okay, okay, okay. Is there are, can you share anything on this corrugated? Because this, our recent presentation also does not cover any, you know, about corrugated, businesses, despite that has been there now, under our subsidiaries or, things. So can you share in terms of the capacity utilization, and also, you mentioned that demand was slightly bad, in the last year, looking at FMCG and pharma. So right, right now, what is the situation and our capacity utilization, both, if you can answer?
See, the corrugation industry, ideally, the best capacity utilization is considered somewhere around 70%-75%. That's the best utilization is considered by this industry because the plants are set up to better the peak requirement of any consumer. So let's say in the summer season, for a month, there may be a huge demand by the FMCG company, and so that time you will have to cater them. But throughout the year, that utilization may not remain. So on a yearly basis, utilization of 70%+ is considered to be very good or as good as 100%. This is an industry practice. Right now, our capacity utilization is close to 55%-60% month, different month, different year, but on an annual basis, our utilization is close to 55%-60%.
Okay, okay, okay. Yeah.
Thank you.
I'll join that. Thank you.
Thank you. We'll take the next question from the line of Hemant from Seven Islands PMS. Please go ahead.
Thank you for the opportunity, sir. This is as insightful as always, this call. I just have one question, sir. We have invested some INR 60 crore odd through our subsidiary Sirpur Paper in Bengal, in Assam. Just wanted to know the rationale of this. I mean, since business is anyway having 20% ROC plus, I mean, what is the rationale to invest INR 60 crore? I mean, just because the surplus funds are available, or do you expect more-
No, no, it is just a, just a treasury investment.
Okay, okay. Just a treasury.
So the surplus funds were deployed in the mutual fund and the treasury, where you get a return of something around about 7%-8%. So we felt that it may give a better return, so we invested.
Oh, okay. Okay.
It was in the open market.
Open market. Okay, okay. Thank you so much. That's it from my side. Thank you.
Thank you. We'll take the next question from the line of Vipul Kumar Shah from Sumangal Investment. Please go ahead.
Hi, sir. So what percentage of our annual pulp requirement we manufacture in-house?
We are the chemical pulp, what we require for our paper and board manufacturing, we are 100% integrated. We don't import. We only import the mechanical pulp, which is required for packaging board.
Okay. So what is the difference between Chemical Pulp and Mechanical Pulp, sir?
Oh, see, the Mechanical Pulp is a different pulp, which has a higher bulk. It is... The whole manufacturing process is different. I mean, how do I explain to you? Because it's a technical question.
Okay.
The manufacturing is mechanical, whereas the chemical pulp is cooked chemically. These are the two basic differences between the chemical pulp and the mechanical pulp.
What percentage of our mechanical pulp requirement we meet by imports?
See, right now, 100% mechanical pulp is imported, and once this the capacity is in place next year, I mean, next year, fiscal year, it should be in place. So close to 70% of our mechanical pulp will be integrated, and only 30%-35% we will import thereafter. And that would also be the softwood. In India, it is only the hardwood mechanical pulp we will be producing in this pulp mill, because in India, softwood is just not available.
So that will happen in next financial year, 25%, 26%?
Yes, yes, yes, yes.
Towards the second half or first half, sir? And what type of cost saving it... And what type of cost saving per ton we will, get? Oh, by the-
I mean, let's see the cost saving. When you calculate, you calculate based on the market price, because your cost may be at level based on the wood cost and other scenario, but at that time, what is going to be the market price of the mechanical pulp, that will define the saving. We always calculate that it should give us a saving of $100-$150 per ton of pulp, but it all depends on the price scenario at that point of time.
... Okay. So all things equal, it gives the advantage of around $100-$150 per ton, right, sir?
Of course, of course.
Right. And so lastly, you said pulp prices are around $700-$750 per ton. So can you comment on absolute price levels for each of our products, like coated paper and this packaging board? What type of NSR we are getting as on today?
See, the pulp prices, what I said was the chemical pulp.
Okay.
Mechanical pulp prices are right now also $570, less than $600. This is the global price, pulp price today. When we talk about the NSR of the different product category, different variety, different SKU, they're all different. We normally don't disclose these things because,
For competitive reasons?
Yes. Yes, yes.
Okay, sir. Thank you very much, and all the best.
Thank you.
Thank you. This is the next question from the line of Kunal Tokas from Fair Value Capital. Please go ahead.
Hello, sir. Am I audible?
Yes.
Just a question about the import situation. I know you, I know you have talked about it already, but, my view is that, might it be that, the import situation, harmful import situation that the industry is facing right now is not because of dumping from the other countries, but because, you know, India is the, one of the largest growing, paper economies as well, and all of the players in India are making very good returns on capital, even with the falling prices. So might it be that it's a lower cost of players like, say, in Indonesia, with their lower raw material costs? India is very attractive to them, and they are not losing any money, not dumping, but, they are making money in India.
It can be a long-term strategic thing instead of a short-term dumping undertaking by them.
Please understand that, when they, when we are talking about the dumping, they are not selling the board and the paper at that price in their own country. When they are not selling the product at that price in their own country, that means it is dumping. What is a dumping called for? When you dump the product cheaper than the selling prices in your own country. That's dumping.
Mm.
They are dumping. See, their raw material cost is lower because they have their own forest. I don't have a forest. Because, as per the Forest Conservation Act in India, the forest is not given to private sector unless there is a amendment in the Forest Conservation Act. So the forest is not given to the private player. So we do a Farm Forestry, and the Farm Forestry has to compete with the agricultural and cash crops. Whereas, in their case, they have, hundreds and thousands of hectares of forest available to them, and they are able to extract wood from their own forest. So that advantage will always remain.
That advantage can only be offset by import duty.
Yes.
Is that what you're saying? Otherwise, there will always be-
That is what we submit to the government all the time, that there is no level playing fields. Because you have signed a FTA with the country where they have the advantage. Should not have signed. But anyway, now that the FTA signing is a treaty country for the country. So when we are impacted only because of the government action of FTA, so now the protection should also be by a government action, which is the anti-dumping. Like the U.S., they impose anti-dumping duty against Indonesia only because there is a forest concession given to Indonesia.
Mm.
So that-
Related to that scenario.
Sorry?
Please go on.
Oh, this is what I'm saying, that-
Okay.
Any business intervention because of the government action has to be saved also by government intervention.
Mm. Understood.
Thank you.
Related to this, are you seeing any consolidation happening in the domestic industry because of the threat from imports?
See, threat from import, this is... I would say that these are all short-term and medium-terms. Short-term and medium-term, they don't decide on the consolidation immediately. Because the consolidation will be based on the criteria by acquirer, depending on the valuation perceived by the acquirer and also the valuation, I mean, perceived by a seller. I mean, there will be many consideration, not just the dumping will become a, the factor for the consolidation.
Maybe not M&A, but exits out of the industry, smaller mills closing down.
See, the smaller mill closing down may not be just because of the dumping. Their closure may be because of their own inefficiencies, their own wrong management decisions. I mean, their capacity creation without understanding the market, I mean, those may be the factor for closure, not the dumping.
Okay, sir, understood. Thank you very much.
Okay.
Thank you. We'll take our next question from the line of Siddharth Shah, an individual investor. Please go ahead.
Yeah, hi. Thanks for taking my question. You know, I just wanted to ask about the future growth. So I think you mentioned that you are focused more on the corrugation segment, but given, you know, our new packaging board plant got utilized in a year, and, you know, there are very few players that can put up a plant, you know, that costs INR 2,000 crore. Why are we not focused on this segment more?
No, we are very focused on this segment. I must give you the assurance that we are very focused on the packaging boards as well. See, the, the machine which we set up in 2022, it is just two years now, and such a mega investment, we want to utilize it fully. So right now we have achieved 100% of the installed capacity, but we are doing deep automation of the same machine, and hopefully, we should be able to increase production by close to 10%-15% on the same machine. This is one. Thereafter, we will have to see the demand-supply scenario in the country domestically, without factoring the dumping or import or other things. And hopefully, in next one or two years, when the market is again, the favorable, we will be very open for this.
Mr. Shah? Mr. Shah, does that answer your question? We are unable to hear you.
The first question, I just wanted to ask you one.
Okay, please go ahead.
On the import scenario for FBB, isn't this a product that your customer, the converter or the end consumer, has to kind of approve, you know, and check the quality of? So, you know, I was under the assumption that FBB imports would be very tough because of the, you know, requirement of the supply chain quality by the end consumer. But it seems like-
No, of course, you are absolutely right that it takes time. But the only thing is that 15%-20% of the packaging board of FBB, what you said, is also sold off-the-shelf, and that is where it goes. See, I agree with you that the bigger player or pharma or those people, I mean, they will not just accept any imported board material for their packing. Of course, they will not. But still 50%-20% demand in the open market, it is not based on the packaging board approved material. Like any apparel industry, any cost. I mean, the smaller one, all these, the cosmetics or the jewelry or the wedding card, there is no approval of a product.
I mean, these are the smaller players, they will just go to a converter and ask for a box or a carton, and they will buy it.
What proportion of our sales would be in the open market, if any, for our FBB?
I would say that industry per se should be 15%-20%, not more than that.
But are we in line with the industry then, broadly?
More or less. More or less, yeah, yeah. We will have to.
Okay. Thank you very much.
Thank you.
Thank you. We'll take our next question from the line of Naysar Parikh from Native Capital. Please go ahead.
Hi. Thanks for taking the question. On the corrugated boxes side, can you just... Because the market, I think last time also you talked about this, that the market is very fragmented, right? And obviously, you have, you know, there's very limited pricing power because the unorganized market is very high. So how should we think about pricing and, especially margins in this segment, going forward?
See, you are absolutely right that the industry is fragmented, and, as India's number one corrugator, also our market share would not be more than 3%-4%.
3%-4%.
Right. But at the same time, the pricing power, in some cases it is there, because you are fully compliant on many legislations, many pollution or the control things, many sustainability regulation, many safety regulation. So when you are compliant, so for some customer, see the companies like very organized companies like JK or Horizon, I mean, our subsidiary, are the need, and they are willing to pay a price.
What would be the pricing on a per KG basis, and how should we look at margins and the raw margins?
See, it depends on the Kraft paper prices strictly. See, what kind of a Kraft paper price is, that will define the corrugated box price.
What is your conversion generally? How much? What, what rupee approximately?
Conversion would be around high 70.
Okay.
It may be INR 8-INR 10, INR 7, depending on. Or it may be even INR 20, depending on what kind of a box or which specification box is needed, because there are some boxes they need much manual and specialized skills work thereafter. So it depends. But in a normal box, it may be INR 7- INR 10 conversion cost.
Okay, so is it fed or-
Mr. Parekh, I request you to join back the queue, please, as we have other participants waiting. Thank you. We'll take the next question from the line of Viraj Mahadevia from Moneygrow India. Please go ahead.
Hi, sir. Thank you for my question. To the earlier participant's question regarding your, raw material pricing coming down next year in, FY 2026 by $150 a ton. Why is that so? Is it because your plantations mature and then you will have more in-house supply?
$150, I did not say reduction. What I said was that $150 saving on our own pulp vis-à-vis a market pulp.
And why would-
That was the thing I said. No, no. I said that the mechanical pulp, when we produce our own pulp, and if we don't produce, then we will have to buy from the market. So on an average, the saving is considered $100-$150 per ton if we produce our own pulp. It has no factor of-
Are you producing your own pulp?
It has no factor of wood cost, major.
Are you producing your own pulp next year?
Yes, next year, we will have our own mechanical pulp from a new pulp mill we are setting up.
Okay, understood. And my second question, sir, is given that now you are near under 1x or around 1x of net debt to EBITDA, and you're generating sort of INR 1,000+ crores of free cash flow within a challenging year, is there a likelihood that you will pay out additional dividends or take corporate action, such as buyback, because your share price continues to be undervalued?
See, the net free cash flow thousand crore is not right. I don't think we generate free cash flow of INR 1,000 crore. Our free cash flow at this performance level would be close to INR 500 crore. Because when you have this kind of a profitability, INR 400 crore, or INR 350 or INR 400 crore is the repayment part. Then we have INR 135- INR 140 crore of dividends. Then we have a normal CapEx of INR 100- INR 150 crore maintenance CapEx. So when you look at-
Sir, your cash flow, consolidated cash flow for FY 2024, you've done INR 1,375 crores of operating cash flow, and you have INR 240 crores of PPE purchase, which means you've got about INR 1,100 crores of free cash flow, which is OCF minus CapEx. This is after interest costs, working capital changes, and taxes.
What about the repayments? We did 400+ repayments.
600, right.
No, that's from financing, sir. That's not the only free cash.
This is what I'm saying, that free cash flow, when we define, we define free cash flow with the net cash accrual in our treasury or a PT, that is a free cash flow.
Okay.
That is normally something around INR 500 crore.
Okay. You will prioritize that for debt repayments then?
No. The debt repayment, as I said, that, a decent debt will always remain on the balance sheet. There's no point in prepaying everything.
Correct.
Right? And so whatever the free cash flow will be there in the company, that will become a war chest for all our project or acquisition or expansion. No question of converting the company into zero debt company.
But then will you prioritize some of this war chest for buybacks and/or additional dividends?
That I can't comment at this point in time.
Okay, understood.
Thank you.
Thank you. All the very best.
Thank you.
Thank you. We'll take a last question from the line of Bhavesh Patel from Patel Investments. Please go ahead.
Thank you for the opportunity and, and, do want to, commend the team and, and management for the great performance. Just a few strategic questions is in terms of do we see any further inorganic plans, like, we did in terms of recent acquisitions?
I mean, I would say that we will always be open, and that will be always our aspiration to acquire some more, and that is how we can expand faster. But again, it has to be at a right valuation, because at any valuation, we are not interested in acquiring. Because we are very clear that the acquisition has to be value accretive, and it should be a good target acquisition, which is a good customer base company, quality of asset is good, the geographic territory has to be of our choice. So once these criteria, any target meet, we are open for acquisition.
Okay, thank you for that. And, and in terms of, again, operational efficiency, would we maintain our internal targets of having ROE more than 20% or so, just to ensure that we, we drive it, much, much better as an entire organization?
The operational efficiency, it will remain a focus area all the time. I mean, the aspect is that we are the least cost manufacturer, but we continue to be the least cost manufacturer, and that can happen only when we continuously drive our operating parameters to the next level all the time.
Sure. Thank you, and I appreciate you increasing the dividend and looking forward to the brighter future. Thank you.
Thank you so much, and thank you all, all the people, those who connected. Thank you very much.
Thank you, sir. On behalf of IDBI Capital Markets and Securities Limited , that concludes this conference. Thank you for joining us, and you may now disconnect your lines.