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Edited Transcript of ESSELPACK.NSE earnings conference call or presentation 7-Feb-20 11:30am GMT

Q3 2020 Essel Propack Ltd Earnings Call

Thane Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Essel Propack Ltd earnings conference call or presentation Friday, February 7, 2020 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* M. R. Ramasamy

Essel Propack Limited - COO

* Parag Shah

Essel Propack Limited - CFO

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Conference Call Participants

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* Arjun Sengar

Nippon Life India Asset Management Limited - Research Associate

* Naushad Chaudhary

Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps

* Percy Panthaki

IIFL Research - VP

* Varshit Shah

Emkay Global Financial Services Ltd., Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Q3 FY '20 results call of Essel Propack Limited, hosted by Emkay Global Financial Services. We have with us today Mr. M. R. Ramasamy, Chief Operating Officer; Mr. Vinay Mokashi, Whole-Time Director; Mr. Parag Shah, Chief Financial Officer; Mr. Amit Jain, Head, Corporate Finance; Mr. Suresh Savaliya, Head, Legal, Company Secretary and Compliance Officer; Mr. Deepak Ganjoo, Regional Vice President, AMESA; Mr. Ashok Vashisht, Regional Finance Controller, AMESA. (Operator Instructions) Please note, this conference is being recorded.

I now hand the conference over to Mr. Varshit Shah of Emkay Global. Thank you, and over to you, sir.

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Varshit Shah, Emkay Global Financial Services Ltd., Research Division - Research Analyst [2]

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Thank you, Vikram. Good evening, everyone. I would like to welcome the management of Essel Propack and thank them for giving this opportunity to host their earnings call.

I would now hand over the call to the management for their opening remarks, post which we will take up the Q&A. Over to you, sir.

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M. R. Ramasamy, Essel Propack Limited - COO [3]

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Thanks, Varshit. Hi, everyone. Welcome to the third quarter earnings call for the financial year FY '20. Investor presentation has been shared with the stock exchanges, and I will refer to that presentation in my opening remarks. As a reminder, this quarter is the second quarter since Blackstone became the new controlling shareholder of the company. We, as management team, are very excited about this partnership.

On Page 4 of the presentations, I want to recap whatever new mission in our new avatar, EPL 2.0, and our progress in Q3. There are 4 key messages on this page that I want to remind everyone. Message 1; in this avatar, our mission is to deliver capital-efficient, consistent earnings growth. I would like you all to note 3 keywords in this mission: capital-efficient, consistent and growth. Message #2, we have the building blocks in place to deliver on this mission. The entire Board has been revamped with fit-for-purpose experts who continue to be deeply involved in the key strategic initiatives being undertaken by the company. I would also like to formally welcome Parag Shah, who joined as our new CFO in November 2019. Parag comes with 25-plus years of consumer and pharma industry experience, with Unilever, Nike and most recently at ACG group.

In addition, we, as management team continued to work closely with Blackstone's global adviser and portfolio company network to support us deliver on this mission. Mr. Harish Manwani, ex-Chairman of Hindustan Unilever and COO of Unilever Globally (sic) [Global], is helping with the key account management and various growth initiatives of the company. Mr. Dhaval Buch, ex-Supply Chain Head for Unilever Globally (sic) Global , is leading what we are internally calling Project Phoenix, a productivity improvement program. Finally, Mr. Don Anderson, who is a global energy expert with Blackstone, is helping the company optimize its energy utilization globally. The effects of this lean and productivity initiatives have started to reflect in the improved margins you all are seeing in Q3.

Coming to Message 3. The key levers to deliver on this mission are: 1, accelerated growth in Personal Care; 2, continued leadership in Oral Care; 3, innovation and sustainability solutions; and 4, prudent capital allocation across regions. And finally, we as a team are proud to report that the early results of these efforts are reflected in our Q3 financials.

Coming to the next page. Q3 reported revenue is up by 2.4% year-on-year. EBITDA is up 20.1% with margin expansion of 328 basis points. PAT is up 32.3% year-on-year. As promised last time, we, as management team, will measure ourselves on the progress we have made on our mission. The relevant metrics on a recurring basis, adjusted for any onetime items, are on Page 6. Q3 revenue grew by 3.7% year-on-year on constant currency basis. This growth was achieved despite a tough macroeconomic environment in India and China and 1.5% revenue growth impact due to pass-through of lower raw material prices to contracted customers.

The adjusted EBITDA grew by 17.3% year-on-year on a recurring basis, and adjusted EPS grew by 40.8% (sic) [40.9%] year-on-year. This growth has been driven by improvement in revenue mix, productivity and cost optimization across regions. The focus on capital efficiency is also visible in the numbers. Against INR 304 crore of CapEx spent in FY '19, the CapEx spent in 9 months of this year has only been INR 96 crore. As a result, the return on capital for the business has increased from 16.7% to 17.8%. And the net debt has reduced to INR 361 crore, which is at a healthy level of 0.7x of EBITDA.

The key message on Page 7 is that this quarter has been the strongest quarter in terms of absolute EBITDA in the history of this company. The strong operating performance has been achieved with prudent capital allocation and lower CapEx spend. The improvement in ROCE to 17.8% from 16.4% last quarter is a testament to it. With the recent volatility in macro environment and raw material prices, we got a few queries from some of you asking what it means for the company's margins.

Given EPL's presence across end-to-end value chain and being a value-add partner to many of our customers, variations in key raw material, that is polymer prices, does not translate to margin variations. Despite significant movement in the polymer index over the last 8 quarters, our gross margins have remained in a narrow band. In many of our long-term contracts, the raw material prices are vet to the relevant index and any movement in these indexes is a contractual pass-through to the customers.

Now I will hand over to Parag Shah to walk you through the key business highlights of Q3 FY '20. Parag.

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Parag Shah, Essel Propack Limited - CFO [4]

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Thanks, Ram. It's been 2 months. Delighted to be here and be part of the journey to deliver our mission of capital-efficient, consistent earnings growth.

Let me start with the first business highlight, accelerated growth in Personal Care segment. Personal Care has been a major growth driver for the company for the last 8 years, growing at a CAGR of 17% and now contributes to 45% of the company's revenue as compared to 34% of revenue 5 years back. We've been industry leaders in driving conversion to laminated tubes in newer subcategories like hair care, and we continue to expand the market in categories like eye care and hand care.

Personal Care grew by 14% year-on-year in the first 9 months of FY '20 despite a weak demand environment in India. Coming to the regions. Personal Care segment grew by 23% year-on-year in Americas; 20% year-on-year in Europe; 12% year-on-year in EAP, East Asia-Pacific; and 6% year-on-year in AMESA in the first 9 months of FY '20. We continue to provide innovative laminated tube solutions to our customers in Beauty & Cosmetics as well as Pharma categories across the globe.

Second, Oral Care continues to provide a solid, stable base to the company, and EPL continues to strengthen its market leadership in the Oral segment globally. We continue to be preferred suppliers to major global and local oral players worldwide. This has been enabled by our constant product innovation and agile supply chain models suited to our customer needs.

Third, Europe continued its strong revenue growth and profitability improvement in Q3. Q3 revenue grew by 12.4% year-on-year and a 16.7% in constant currency, with 10.8% year-on-year growth in Personal category. The strong revenue growth is driven by new customer wins as well as wallet share increase in existing customers on the back of several initiatives, which includes strengthening the front-end sales team and investments in manufacturing capabilities. The EBITDA margin for the region improved to 13.5% in Q3 of FY '20 compared to 8.7% in Q3 of FY '19. The margin improvement was driven by fixed cost leverage as well as productivity initiatives taken under Project Phoenix.

Fourth, we continue to be industry leaders in innovation and providing eco-friendly solutions to our customers. As mentioned last quarter, we now have Platina laminate, which is 100% recyclable and has been certified as recyclable in core 2-stream by the Association of Plastic Recyclers, USA. We are happy to report that our new laminate has seen strong traction with customers globally.

One of the largest global oral players recently launched its first recyclable tube in partnership with EPL. Similarly, another popular oral brand in the United States has commercialized its sustainable tubes on the back of EPL's Platina laminate. We continue to be the torchbearers for the industry in the sustainability journey. As you all can see, we continue to make solid progress across all dimensions to deliver on our mission of delivering capital-efficient, consistent earnings growth.

Now I will hand over back to Ram to conclude the presentation.

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M. R. Ramasamy, Essel Propack Limited - COO [5]

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Thanks, Parag. To conclude, we all are excited about the momentum we are seeing towards achieving our mission. We continue to have a strong business development pipeline across regions. The results of the various growth and productivity initiatives underway are starting to show. We are excited about the many opportunities in front of us and remain committed to deliver capital-efficient, consistent earnings growth.

Now we will pause here and take any questions you all may have. Percy?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a first question from the line of Sameer Gupta from India Infoline.

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Percy Panthaki, IIFL Research - VP [2]

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This is Percy Panthaki here. Sir, congrats on a good set of numbers. Especially on the margin front, you have delivered sort of good margin expansion. However, just a little bit of concern on the top line growth because out of 4 of your geographies, 3 of them are in a plus or minus 1% kind of a band. Almost all 3 geographies except Europe is flat. So just wanted to understand what is the reason for the sales growth not picking up in these 3 geographies.

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M. R. Ramasamy, Essel Propack Limited - COO [3]

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Percy, you know the macroeconomic conditions in India. It's continued to be tough. We are working on many fronts. Oral Care has its own challenges. But we are able to grow in Personal Care, as Parag was saying. AMESA is being India-driven. And going back to Americas, this is -- last quarter is always -- the December quarter is always -- we don't work for 10, 15 days because it's a soft quarter always, because of year-end holidays and things like that. In November, we have a Thanksgiving holiday. It's always use to be slightly softer. And China is growing. Most of those customers that, as we explained in many of the con calls, we -- our growth comes from newer customers, and that we see a traction going forward. We should see more and more.

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Parag Shah, Essel Propack Limited - CFO [4]

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Percy, just to add. In case of Americas, in constant currency terms, the United States grew by 0.5%.

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Percy Panthaki, IIFL Research - VP [5]

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Okay. So just some follow-up questions here. So in India, basically, you're saying the main sort of thing pulling down is Oral Care. So if you can just give me some color in India. What is the growth separately for the Oral Care business and for the Beauty & Personal Care and Pharma?

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M. R. Ramasamy, Essel Propack Limited - COO [6]

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Personal Care. 1 minute, Percy.

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Percy Panthaki, IIFL Research - VP [7]

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Sure.

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M. R. Ramasamy, Essel Propack Limited - COO [8]

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Percy, it will be 1.5% or so lower in Personal Care -- sorry, in Oral Care and about 6% growth in Personal Care. Personal Care being Beauty & Cosmetics and Pharma put together.

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Percy Panthaki, IIFL Research - VP [9]

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And Personal Care would be what percentage of the portfolio?

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M. R. Ramasamy, Essel Propack Limited - COO [10]

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I think India will be somewhere close to 48%, yes.

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Percy Panthaki, IIFL Research - VP [11]

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But sir, then the math doesn't add up, no? Because the overall is minus 1%. So if Oral Care is minus 1.5% and Personal Care is plus 6%, then the overall growth should be in positive territory. What am I missing here?

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M. R. Ramasamy, Essel Propack Limited - COO [12]

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See there are difference in ASP and things like that, right? So yes, 48.3% right, yes. Percy, let me check and come back to you, but this is...

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Percy Panthaki, IIFL Research - VP [13]

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Yes, yes. Maybe I'll take it offline.

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M. R. Ramasamy, Essel Propack Limited - COO [14]

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Yes. You take it offline. Thank you.

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Percy Panthaki, IIFL Research - VP [15]

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Okay, okay. So then I can understand India, it's a macro environment, which is poor, and that's why your growth is poor. But in EAP and Americas, basically, what is the plan to accelerate the growth? Especially in America, the reason which you gave is that this is a soft quarter with closures due to festivals. But that would have been true even in the last year because we are comparing a Y-o-Y number, right?

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M. R. Ramasamy, Essel Propack Limited - COO [16]

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Yes. Correct, yes. See, what happens is, see there is -- we -- balance as of all our customers are intact. There are uptakes, variations comes from their earlier stocking and things like that, right? And we see a very strong traction in Q4, and we already have done well in January. So we don't see -- we will see a strong growth in Americas.

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Percy Panthaki, IIFL Research - VP [17]

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Right, sir. Second question was on margins. This quarter, you have done about a 22% EBITDA margin for the company overall consolidated. So is there a seasonality in the margins? Or should I take this 22% as a sustainable number for annualized basis?

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Parag Shah, Essel Propack Limited - CFO [18]

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Percy, this improvement in margin would be sustainable within a very narrow band.

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Percy Panthaki, IIFL Research - VP [19]

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Okay. So there's no seasonality in the sense that December quarter would be higher than the annual number, there's no such thing?

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Parag Shah, Essel Propack Limited - CFO [20]

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Yes, as I said, a narrow band.

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Percy Panthaki, IIFL Research - VP [21]

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Okay, okay. And same for Europe, I think this quarter, the EBITDA margin has gone up to about 13%. Again, any one-offs? Or should we take this sort of within a narrow band, 13% as sort of a manageable number going ahead?

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Parag Shah, Essel Propack Limited - CFO [22]

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So Percy, actually this nicely answers your earlier question. If you see my quarter 2 margins also, the margins in Europe were 13%-plus. So that answers a bit of your sustainability question. And as explained even earlier, this is nothing but operating leverage. You're aware, we had invested in the previous years. And this year, our business has grown in terms of volumes and therefore, clearly a case of operating leverage.

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Percy Panthaki, IIFL Research - VP [23]

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Understood. Sir, clearly, over the last 2, 3 quarters, you have been able to expand margins very visibly, and now the margins are at 22% for the overall company and 13% for Europe. So do you think most of your margin expansion journey is done? Or would you believe that even on this base, there is a margin expansion potential over the next 1 to 2 years?

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Parag Shah, Essel Propack Limited - CFO [24]

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So this is a journey, which is an ongoing journey, and I already confirmed that it would move within a narrow band. There are many levers to it. There is revenue mix. There is productivity and cost optimization. And it's a journey.

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Operator [25]

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We have next question from the line of Naushad Chaudhary from Systematix Shares & Stocks.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [26]

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Congress for a decent set of number and margin improvement, sir. 2, 3 questions I have. First off, if you can share what was the Personal Care revenue share in the current quarter?

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M. R. Ramasamy, Essel Propack Limited - COO [27]

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Okay. What is the other question?

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [28]

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Sir, other questions are related to this segment only. And on growth part, I believe last quarter, we had share quite a bit about our EAP and Americas segment. We had some decent pipeline, and we had acquired some new customers in America region. So what has happened to those things? And when should we expect growth from our new initiatives in these 2 regions?

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Parag Shah, Essel Propack Limited - CFO [29]

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So to your earlier question, the share was 43.6% of Personal Care in Q3. Can you please repeat your second question?

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [30]

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Sir, on this first question, a follow-up on is, can you share the reason behind shrinking of this revenue share versus last year? If I have the correct number, it was around 44.5%, and our overall revenue growth is quite flat. So there would have been a degrowth in Personal Care segment in this quarter. So any specific reason for this, sir?

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Parag Shah, Essel Propack Limited - CFO [31]

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There is no degrowth. I'm not too sure from where you got your information. And I would sort of redirect to say that, look at our growth 9 months over 9 months, 14% year-on-year growth on Personal Care. This is a journey. To deliver our mission is the journey, and we are confident of keep tracking to our mission. So I would encourage that, look at the longer term. There isn't a decline versus last quarter same period.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [32]

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Sir, for this quarter, should we consider it flat or how should we look at it this quarter, in our Personal Care segment, sir?

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M. R. Ramasamy, Essel Propack Limited - COO [33]

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I would recommend to see the 9-month picture. That gives you a better picture of what is sustainable and what will drive it going ahead.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [34]

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Okay, sir. And in our EAP and America region, last quarter, we had guided some good things about a strong business pipeline, and we had some new customers in our America region. So if you can throw some light more there. And when they'll convert into revenue?

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M. R. Ramasamy, Essel Propack Limited - COO [35]

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Yes. America region continued to do well. And the pipeline is a mature pipeline. We will see the impact in Q4 going forward. And see, structurally, what happens in this business, as we explained in many calls, here and there -- 1% here and there growth is depending upon the supply chain efficiencies. Otherwise, the traction on Personal Care growth will be visible in all -- across regions.

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Parag Shah, Essel Propack Limited - CFO [36]

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So in case of EAP, if you look at constant currency growth, even in this quarter was 3.6%. And the growth in Personal Care for 9 months was 13%. So clearly, this is evidence of the fact that the pipeline is playing out in terms of gaining share in Personal Care.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [37]

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Right. Any specific number you are working with to have this Personal Care revenue share in next 3 to 5 years? Anything you have in mind?

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Parag Shah, Essel Propack Limited - CFO [38]

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No. I mean this is something that we will continue to work aggressively and expand all the time. But like I said earlier, it's a journey, and there is effort to be put in.

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Naushad Chaudhary, Systematix Shares & Stocks (India) Ltd., Research Division - Analyst of Midcaps [39]

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Okay. Last question on CapEx side. Sir, any guidance for FY '21 CapEx number, sir?

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Parag Shah, Essel Propack Limited - CFO [40]

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No, there isn't any guidance for the FX '21 CapEx number. I humbly just take you back to my mission, which says capital-efficient, consistent earnings growth. So when it comes to growth, we will find ways and means to do prudent capital allocation and still grow.

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Operator [41]

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We have next question from the line of Arjun Sengar from Nippon Mutual Funds.

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Arjun Sengar, Nippon Life India Asset Management Limited - Research Associate [42]

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Congrats on a good result. First question is on the competitive landscape, if you can throw some light on that and our positioning within that landscape and the edge that we may have over the peers.

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M. R. Ramasamy, Essel Propack Limited - COO [43]

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See, as we explained in earlier calls, what is needed to meet competitive positioning, most of the investments have been done in the last year. That's why last year CapEx seems to be higher. In terms of [zero defect], in terms of flexibility in printing, necessary CapEx has been done. So I think we -- being an industry leader in many regions, we will continue to grow, and you will see the traction going forward, too.

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Arjun Sengar, Nippon Life India Asset Management Limited - Research Associate [44]

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Sure. And on this recyclability, is that a race that peers are participating in, in terms of products and all that stuff? And how are we positioned in that race? Or are we ahead of competition?

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M. R. Ramasamy, Essel Propack Limited - COO [45]

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We are. As we reported that there are 2 -- most multinational brands are -- Platina is under testing with most multinational brands. We already had first launch with our products in 2 brands in the region. I think we -- as we said earlier, people will catch up, but we are the lead -- currently, we are the lead customer -- lead supplier and most MNCs are testing our products already. 2 launches have already happened.

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Arjun Sengar, Nippon Life India Asset Management Limited - Research Associate [46]

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Okay, sure. My last question is on this coronavirus situation. Is that causing any disruption to us in terms of demand from China and our manufacturing over there, if there is any?

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M. R. Ramasamy, Essel Propack Limited - COO [47]

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See, first of all, let's take like this slightly differently. Employees are our first concern. I'm happy to say, most of our employees are safe, and nobody is impacted by this so far, and their families are safe. That's a very good news. And we are continuing to monitor the situation there. There are 2 aspects to it. One, the domestic market, we are in continuous dialogue with our customers as well as business partners, and we will continue to watch. We can't predict anything, but we will continue to watch. And there are supply used to go from China to our other units, which has been completely protected by alternative arrangements we have done from India. So other regions are secured. Is there any -- is it okay?

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Arjun Sengar, Nippon Life India Asset Management Limited - Research Associate [48]

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So from what I understand you're saying the supplies to other regions are secure.

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M. R. Ramasamy, Essel Propack Limited - COO [49]

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Yes.

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Arjun Sengar, Nippon Life India Asset Management Limited - Research Associate [50]

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But the demand from local customers will be monitored. Is that what you're meaning?

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M. R. Ramasamy, Essel Propack Limited - COO [51]

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Correct, correct. You're right. Absolutely.

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Arjun Sengar, Nippon Life India Asset Management Limited - Research Associate [52]

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But so far, as of now, there is no major dislocation as far as you see?

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M. R. Ramasamy, Essel Propack Limited - COO [53]

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No. See, January business has been as usual. Current situation is same for me as well as my customers. We need to closely watch and see. We are in continuous dialogue. Each one is working with each other to see how we will overcome the situation.

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Operator [54]

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We have the last question from the line of Mr. Varshit Shah from Emkay Global.

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Varshit Shah, Emkay Global Financial Services Ltd., Research Division - Research Analyst [55]

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Sir, just wanted to ask you in terms of your sales pipeline going ahead, where are you seeing more traction in -- across geographies? I mean, if you do -- is there an outlier in terms of growth, especially the Europe? Or -- and how is the Americas doing in terms of sales pipeline?

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M. R. Ramasamy, Essel Propack Limited - COO [56]

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All the four quarters we -- is doing well in terms of a pipeline maturity. As you know, this business has its own lead time to get customer acquisitions. So we work at least 6 to 1-year in advance. So we see a very, very strong traction in development.

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Varshit Shah, Emkay Global Financial Services Ltd., Research Division - Research Analyst [57]

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So just a follow-up. So structurally, do you see that when you're building the sales pipeline probably for FY '21, are you offering with the higher value-added products and trying to get more high-value orders in terms of value addition? So is that traction coming in now since you have now a host of offerings, especially on the recyclable offerings?

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M. R. Ramasamy, Essel Propack Limited - COO [58]

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Yes, Personal Care and recyclable offer are based on those factors.

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Operator [59]

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Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments. Sir, over to you.

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M. R. Ramasamy, Essel Propack Limited - COO [60]

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Thank you very much, Percy. Thank you very much for everybody to participate and ask questions. In case you have any follow-up questions, you could connect with Amit Jain and Parag Shah, and they will be happy to answer. Thank you very much.

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Parag Shah, Essel Propack Limited - CFO [61]

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Thank you.

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Operator [62]

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Thank you very much, sir. Ladies and gentlemen, on behalf of Emkay Global Financial Services, that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.