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Edited Transcript of ESSELPACK.NSE earnings conference call or presentation 8-Nov-19 12:30pm GMT

Q2 2020 Essel Propack Ltd Earnings Call

Thane Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Essel Propack Ltd earnings conference call or presentation Friday, November 8, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Amit Jain

Essel Propack Limited - Head of Treasury

* M. R. Ramasamy

Essel Propack Limited - COO

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Conference Call Participants

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* Jatin Damania

Kotak Securities Limited - Research Analyst

* 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 Essel Propack Limited Q2 FY '20 Earnings Conference Call hosted by IIFL Securities Limited. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Percy Panthaki from IIFL Securities Limited. Thank you, and over to you, Mr. Panthaki.

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Percy Panthaki, IIFL Research - VP [2]

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Hi, good evening, everyone. Thank you for joining us on this Q2 FY '20 Essel Propack Call. I have with me from the management: Mr. Ramasamy, COO; Mr. Vinay Mokashi, CFO; Mr. Amit Jain, Head of Treasury; Mr. Deepak Ganjoo, Regional Vice President, AMESA; Mr. Ashok Vashisht, Regional Finance Controller, AMESA; and Mr. Suresh Savaliya, Head, Legal and Company Secretary.

So without further ado, I hand over the call to Mr. Ramasamy. Over to you, sir.

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

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Thanks, Percy. Hi, everyone. Good evening. Welcome to the second quarter earnings call for the financial year FY '20. Investor presentation has been set with the stock exchanges. I will refer to that presentation in my opening remarks.

This quarter marks the first quarter since Blackstone became the new controlling shareholder of the company. We, as a management team, are very excited about this partnership. We will walk you through our new mission in this avatar called EPL 2.0 and our progress in Q2.

Now I refer to the presentations. Here on Page 4, I want to leave you with 4 messages. Message number one, in this avatar, our mission is to deliver capital efficient, consistent earnings growth. I would like to -- like all of you to note these three key words in this mission: capital-efficient, consistent and growth. Message number two, we are fully geared to deliver on this mission. As part of this transition, the entire Board has been revamped with what we call fit-for-purpose experts. The work on further strengthening the management team has been initiated. And last but not the least, the company is tapping into Blackstone's global adviser and portfolio company network to support us to deliver on this mission. Coming to message number three, the levers to deliver on these missions are: one, accelerated growth in personal care; two, continued leadership in oral care; three, innovation and sustainability solutions; four, prudent capital allocation across regions. And finally, we, as a team, are happy to report early success on this mission.

Coming to next page, Q2 reported revenue is up by 6.9% year-on-year and EBITDA is up 22% -- 22.3% with a margin expansion of 270 basis points. PAT is up by 49.1% year-on-year. And really, we are proud of these results. We, as management team, will measure ourselves on this progress we have made on our mission. To do so, we have selected the relevant matrices, which are highlighted here on a recurring basis, adjusting for any one-off items.

These numbers are on Page 6. EBITDA grew by 18.4% year-on-year on recurring basis. EPS grew by 24.3% on year-on-year basis. The growth has been led by personal category, which I am going to walk more -- talk more about later. We are going to refer to nonoral category as personal care going forward, which comprises of beauty and cosmetics, pharmaceuticals, food and home categories. The focus on capital efficiency is also showing in the numbers. There is INR 304 crore CapEx spend in FY '19. The CapEx spend in the first half of this year is only INR 54 crore. The return on capital for the business has increased from 15.5% to 16.4%. On the back of this performance, the Board of Directors have approved an interim dividend of INR 1.25 per share.

As I mentioned, the entire Board has been revamped with industry experts from around the globe. Dr. Davinder Singh Brar, he's the Chairman of the Board. As some of you may know, he is the Chairman of Mphasis, a USD 2.5 billion Indian-listed IT company. He was also the ex-CEO of Ranbaxy Limited. The other Independent Director is Mr. Uwe Roehrhoff, who was -- who has an extensive experience in packaging industry across the globe. He was the CEO of Gerresheimer, a German-based packaging company for pharmaceutical industry, and led its successful IPO in 2007. Gerresheimer was the most successful packaging investment by Blackstone, where it delivered 7x return to its investors. The audit committee is chaired by Mr. Sharmila Karve, who recently retired as the auditor for PwC India. She was the lead audit partner for several large consumer companies. We also have senior professionals from Blackstone on the Board, including Amit Dixit, Head of Blackstone Private Equity in India; Amit Jain, Managing Director of Blackstone; and Alex Yang, who is a Senior Managing Partner of Blackstone in China, who led their investment in ShyaHsin, a [leading] packaging company for beauty and cosmetics customers globally.

I am excited to announce that Parag Shah has been appointed as our new CFO, who will be joining us later this month. Parag comes with 25 years of consumer and pharma industry experience, starting with Unilever, Nike and most recently at ACG packaging group. Vinay Mokashi would be retiring from his role as CFO after spending 23 years with EPL. We thank him for his invaluable contribution to the company. He will continue to be the Wholetime Director on the Board. The management team is also closely working with Blackstone's global adviser network. Most of you will know, Mr. Harish Manwani, who is the ex-Chairman of Hindustan Unilever, COO of Unilever globally, is helping us with key account management and various growth initiatives. Mr. Dhaval Buch, ex-Supply Chain Head for Unilever globally. He's leading what we are internally calling Project Phoenix, a productivity improvement program, and has already identified key areas for efficiency enhancement. Finally, Mr. Don Anderson is the global energy expert with Blackstone, and he is helping us, the company, to optimize the energy utilization globally.

Some of these effects of these lean initiatives have started to reflect in the improved margins you all are seeing in quarter 2.

The key message on Page 9 has been the strongest -- this has been the strongest quarter on revenue and EBITDA in the history of Essel Propack, primarily led by growth in personal care.

Moving onto Page 10. As we discussed, operating performance has been strong with lower CapEx spend. Hence the Board, for the first time in the last decade, has declared an interim dividend. It's to say this is a very exciting time.

Now I will hand over to Amit Jain to walk you through the key business highlights of Q2. Amit?

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Amit Jain, Essel Propack Limited - Head of Treasury [4]

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Thanks, Ram. In my interactions earlier, many of you have asked for increased information disclosures and visibility on the performance of different segments and regions. I trust this present presentation provides more insights toward that.

Let me start with the first business highlight, accelerated growth in personal care segment. To set the context, personal care has been a major growth driver for the company over the last 10 years, growing at a CAGR of 17%, and it now contributes 46% of the company's revenue as compared to 34% 5 years back. We have continuously expanded our offerings to newer subcategories, for example, hair care and prescription medications.

Personal care grew by 21.4% in quarter 2 and saw traction across the regions. Personal care segment grew by 39% in Americas and 22% in Europe. An industry-defining testament to this growth has been the 100% conversion of a market leader in antifungal pharma segment from aluminum tube to laminated tubes. This has opened up a lot of new opportunities for similar convergence in other pharma products.

Second, oral care continues to provide us a solid, stable base to the company, and EPL continues to strengthen its market leadership in oral segment globally. We continue to be preferred supplier to major global and local oral players worldwide, and we have been able to maintain this leadership through continuous product and process innovations.

Third, Europe has demonstrated strong growth traction and improved profitability in quarter 2. Quarter 2 revenue grew by 17.7% year-on-year, with 22% year-on-year growth in personal care segment. The strong revenue growth is a result of several initiatives taken, including the strengthening of front-end sales team and formalization of the sales pipeline tracking process.

The EBITDA margin for the region improved to 13.7% in this quarter compared to 9.5% same quarter last year. Given the low utilization in Europe, the strong revenue growth contributed to fixed cost leverage, and we expect the margins to expand further as the revenue momentum continues.

Fourth, we continue to be the industry leader in innovation and providing eco-friendly solutions to our customers. We now have Platina laminate, which is 100% recyclable and has been certified as recyclable in Code 2 stream by the Association of Plastic Recyclers, U.S.A. This will definitely enable us to be the partners of global brands in their sustainability programs. We continue to be the torchbearers for the industry in the sustainability journey.

As you all can see, we had a strong start to deliver on our mission of delivering capital-efficient, consistent earnings growth.

Now I'll hand over to Ram for concluding the presentation.

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

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To conclude, as you've seen in the numbers, we are excited about EPL 2.0. There are multiple growth and productivity initiatives underway at the company, results of which are starting to show in our performance. We are excited on the opportunities in front of us and remain committed to deliver capital-efficient, consistent earnings growth.

Now I will pause here, 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) The first question is from the line of Jatin Damania from Kotak.

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Jatin Damania, Kotak Securities Limited - Research Analyst [2]

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Congrats on the good sets of numbers. Sir, just wanted to understand the key reason behind the improvement in the Europe performance. Because if you look in the past, I mean, despite the higher contribution of the nonoral care as compared to America, the EU business has delivered a lower margin. So what had -- sorry, what did -- what happened in this quarter, where the margin has improved and the sustainability of the same going forward?

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

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Yes. See, as there are new business wins across both oral care as well as in personal care, that has improved the revenue. As we were always explaining, the operating leverage will start happening as the volume goes higher. That's what is reflecting. And the business development pipeline (inaudible) in avatar 2 of Essel Propack that we have got a lot of subsegments in each one of the category to see are we applying the same amount of energy in each one of those areas. That's reflecting on the growth. And we believe this will be a sustainable growth in Europe.

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Jatin Damania, Kotak Securities Limited - Research Analyst [4]

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So the same applies with the Indian business also in AMESA and EAP because I mean, until last couple of quarters, we have seen the downturn in the China and India. So if you can help us in understanding the performance of both these regions.

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

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AMESA and EAP, that's one thing that we need to -- we are a strategic supplier to many large customers with substantial wallet share. Our wallet share in these regions continue to remain very strong. And in the recent past, we have actually grown our wallet share with some of the customers. However, having said that, the macroeconomic conditions are not good. It's getting better, but we can't say it's good for our customers. So that will continue to reflect in our performances because customers performs well, we will too. But what we have done in the meantime is we are putting a lot of energy into grow our businesses in personal care, converting customers who are in a different kind of a packing format into laminated tube. Those efforts are on. That's when Amit explained, he explained across regions, our personal care growth has been substantial. That reflects on that.

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Jatin Damania, Kotak Securities Limited - Research Analyst [6]

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Right. So that means the strong -- this performance, definitely leaving AMESA and EAP, definitely China and India are the -- the growth is not that strong, but Europe and America will continue to deliver the strong performance, right?

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M. R. Ramasamy, Essel Propack Limited - COO [7]

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Yes.

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Operator [8]

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The next question is from the line of Varshit Shah from Emkay Global.

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Varshit Shah, Emkay Global Financial Services Ltd., Research Division - Research Analyst [9]

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Congratulations for a great set of numbers. And also, thank you to the management for more detailed disclosures in this presentation. So really, thanks for that. It does help us. First question on -- is on the AMESA region. So I think the growth, last quarter, we had some miss in one particular large account. So, a, has that been recovered in this quarter? Because, I think Mr. Ashok Goel last quarter had mentioned around that. That's my first question.

Second question is that you had strong cash flow generation in H1. And historically also, our company has delivered strong cash flows. We see that you -- if you [add in] dividend tax into account, it's almost -- the dividend payout is almost 70%. So can this be the new normal of payout ratio going forward? Or is it just for the quarter and then we'll see?

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

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Yes. I will answer your first question, I'll make Amit to answer your second portion of the question. The large account loss, which Ashok mentioned last time, has been recovered. In fact, we have improved our wallet share with this customer. On cash flow, Amit?

Just a few seconds, Amit is checking.

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Varshit Shah, Emkay Global Financial Services Ltd., Research Division - Research Analyst [11]

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No sir, my question is more strategic. My question is less on numericals. What I'm asking is that, it almost amounts 70% dividend payout ratio if I consider here H1 EPS and H1 dividend. I mean the dividend which you have announced. So should we expect such high dividend payouts going forward as well? That's my question.

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Amit Jain, Essel Propack Limited - Head of Treasury [12]

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So Varshit, after the change in the change which has happened, I think the philosophy has changed. And any excess cash, if there are not any other opportunities available in the market, will be distributed as dividend.

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Varshit Shah, Emkay Global Financial Services Ltd., Research Division - Research Analyst [13]

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Okay, okay. And one more thing I just wanted to ask on the margin improvement in Europe. I think you alluded to operating leverage in the European segment because of the revenue growth. So if I were to just to say is this margin level also sustainable along with the revenue growth? Or margin is still a little shaky and it'll take some time to stabilize out there, in the European...

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Amit Jain, Essel Propack Limited - Head of Treasury [14]

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Europe, I think, these margins as we always informed you that volumes were needed in Europe and as oral and personal category, both are driving this revenue growth, as Ram mentioned, the operating leverage started kicking in now. And as we are winning new business in both oral and personal care, these margins will be sustainable as we grow further.

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Varshit Shah, Emkay Global Financial Services Ltd., Research Division - Research Analyst [15]

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Sure, sure. And just one last question, if I can just squeeze in. So your -- our other expenses as a percentage of sales have come down drastically. So is it just your operating leverage? Or there's some efficiencies which you guys have kicked in and the efforts from the Blackstone experts have already -- at least there is some reflection of that in this margin? Or that is yet to come and will be over and above this?

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Amit Jain, Essel Propack Limited - Head of Treasury [16]

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Yes. So, Varshit, other expenses, there are 2 things. One is there is an impact of new accounting standard on lease where the reclassification of the operating lease, that is one. That's how we are seeing this. Number two is that, as Ram mentioned in his earlier opening remarks about Project Phoenix, which we call it internally. So the benefits of that are also seen in the operating cost.

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Varshit Shah, Emkay Global Financial Services Ltd., Research Division - Research Analyst [17]

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So what would it -- it would improve -- this benefit would improve over, I think, in coming quarters right? Because you would not have those benefits for the full quarter, if I were to say?

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Amit Jain, Essel Propack Limited - Head of Treasury [18]

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Yes. So there are certain projects identified which team is working on, and that will continue.

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Varshit Shah, Emkay Global Financial Services Ltd., Research Division - Research Analyst [19]

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And is it -- just last bookkeeping. Is it possible for you to quantify the Ind AS impact of reclassification impact in Q2.

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Amit Jain, Essel Propack Limited - Head of Treasury [20]

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Ind AS adjustment, I think, in the presentation, if you see, there is one slide where it is already quantified.

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Varshit Shah, Emkay Global Financial Services Ltd., Research Division - Research Analyst [21]

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Okay, okay. And sorry, just one more...

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Amit Jain, Essel Propack Limited - Head of Treasury [22]

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Page 26.

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Varshit Shah, Emkay Global Financial Services Ltd., Research Division - Research Analyst [23]

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Okay, okay. So you have also done -- made a provision of INR 20 crores, INR 203 million. So for -- so can you just help out with that? I mean they're in the notes to accounts.

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Amit Jain, Essel Propack Limited - Head of Treasury [24]

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Yes. So it's an old loans and advances to an [infra] company, and we have [checked] on that under the impairment. And that's how we have provided it for. We are still following up for the recovery, and we will see going forward what is that. But because of the new audit committee and the new board, this conservative estimates we have taken, and we have provided for this amount.

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Varshit Shah, Emkay Global Financial Services Ltd., Research Division - Research Analyst [25]

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So this is a -- is there one in -- is this a loan going to one of the [infra] companies? Is it correct?

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Amit Jain, Essel Propack Limited - Head of Treasury [26]

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It's an old company.

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Varshit Shah, Emkay Global Financial Services Ltd., Research Division - Research Analyst [27]

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Right, right. And hasn't -- has been provided fully? Or is it still partially provided?

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Amit Jain, Essel Propack Limited - Head of Treasury [28]

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No, it's provided fully.

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Varshit Shah, Emkay Global Financial Services Ltd., Research Division - Research Analyst [29]

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And does this explain the reversal in -- anything on the tax side? Because I think you had some tax reversals over earlier year period. So is that related to this or anything else?

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Amit Jain, Essel Propack Limited - Head of Treasury [30]

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No. So refer to the tax on the earlier period is basically a tax refund in our China subsidiary, where our China subsidiary is being approved as high-technology company. And in the high-technology company in China, the rates are different compared to a normal corporate income tax. So that benefit is refunded back to company, which was for the last year. Going forward, the reduced rate will continue on this.

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Varshit Shah, Emkay Global Financial Services Ltd., Research Division - Research Analyst [31]

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No, so -- so for, incrementally, what is the tax rate, which we should assume then for -- excluding this impact? What is the normal tax -- effective tax rate for our company on a -- at a consol level?

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Amit Jain, Essel Propack Limited - Head of Treasury [32]

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Sure. So on a going-forward basis, normal at ETR will be around 27%, globally.

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Operator [33]

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The next question is from the line of Percy Panthaki from IIFL Capital Limited.

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Percy Panthaki, IIFL Research - VP [34]

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To ask about your CapEx guidance, you have reduced it for the first half. But looking at your capacity utilization across different regions, what is the guidance for the next 2 to 3 years? And when do you sort of reach full capacity utilization in each of the different geographies, if you can give some guidance on that, please?

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Amit Jain, Essel Propack Limited - Head of Treasury [35]

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We expect for this year in the range of INR 130 crores to INR 150 crores for this year. So INR 50 crores has been spent, the balance will be spent. And our -- always our objective is to remain within the depreciation parameters other than any strategic projects comes in.

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Percy Panthaki, IIFL Research - VP [36]

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Right, sir. But if you start growing well, and you run out of capacity, then inherently, this is a contract manufacturing business. So your return ratios cannot be very, very high, right? So you will need, apart from just some small line addition or something at some point of time, you will need some heavy CapEx, right? So are we sort of 2 years away from that point, 3 years away? I mean what's your judgment?

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Amit Jain, Essel Propack Limited - Head of Treasury [37]

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See, Percy, this -- many times we have explained to you this is based on many factors that currently, the Project Phoenix that we are working on. We are working on to improve our efficiency, changeover times. There are many other matrices that because of global connections now we have, we have started benchmarking. So that should further improve. But the stated objective continues to remain we -- this should be well within the depreciation amount.

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Percy Panthaki, IIFL Research - VP [38]

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Okay, understood. And...

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Amit Jain, Essel Propack Limited - Head of Treasury [39]

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And Percy, one more thing on this is that I think -- I don't know from where you have got that term. But definitely, I can say that it's not a contract manufacturing business.

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Percy Panthaki, IIFL Research - VP [40]

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Yes, yes, sorry. That was not a correct -- or sort of a way to put it. What I meant was that it's not a brand or something where we can get 80%, 90% ROCE like an FMCG company. So that -- I meant it in that kind of a context.

Secondly, I just wanted to ask regarding this -- some of the one-off items. Can you explain what is this transition services agreement related one-off of INR 17 million on the EBITDA?

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Amit Jain, Essel Propack Limited - Head of Treasury [41]

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So transition service agreement, I think the details are already in the public domain. This is an advisory services agreement, which is entered with and Mr. Ashok Goel for the strategic inputs, which will be required going forward in the business. And actually, it is not a part of the day-to-day business operations. So that is the TSA.

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Percy Panthaki, IIFL Research - VP [42]

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Okay, sir. Okay, understood, understood.

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Amit Jain, Essel Propack Limited - Head of Treasury [43]

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And for that quarter, whatever is the amount is shown as adjustment.

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Percy Panthaki, IIFL Research - VP [44]

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Understood. Secondly, in China, last quarter, you had some 10%, 11% kind of decline or, I think, higher, and you had mentioned that part of it -- a large part of the decline is because of the laminate being supplied from India rather than China. And if you adjust for that, then the decline in China is much lower at, I think, 2% or something like that last quarter. So any such kind of bifurcation that you would like to give for this quarter as well?

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Amit Jain, Essel Propack Limited - Head of Treasury [45]

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See, Percy, that the situation is something similar to India, right? Our focus on fast-growing regional customers personal care brands is yielding sequential growth. There are some structural changes, like you are referring, has been addressed in consultation with the customers. Structurally, our business development pipeline in China is very, very strong, and we are very confident to take it to the next level while continuing to maintain our wallet share with the existing customers.

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Percy Panthaki, IIFL Research - VP [46]

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Okay. So this entire issue of laminate supply to the western countries from India rather than China, which was there last quarter, that is not an issue this quarter, right?

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Amit Jain, Essel Propack Limited - Head of Treasury [47]

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You see a 26% growth on sequentially.

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Percy Panthaki, IIFL Research - VP [48]

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Okay, okay. Understood, understood, sir. And on Europe, this margin expansion that you have seen and significant huge growth in terms of EBIT. I mean is it -- can you -- I mean it must be some cost-saving initiatives, et cetera. But can you give some more details about what those initiatives are? And is this kind of 6% to 7% kind of EBIT margin sustainable for the future?

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

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This is -- Percy, this is volume-related. This is certainly sustainable as long as that we continue to grow in volumes. It's sustainable, Percy.

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Percy Panthaki, IIFL Research - VP [50]

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Okay. So it is mainly the operating levers there, isn't any large contribution from any cost-saving plans into this number?

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Amit Jain, Essel Propack Limited - Head of Treasury [51]

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Percy, when we talk about Project Phoenix, Ram has told that internally, we called it Project Phoenix. So this Project Phoenix is not for any particular region of the country. So this is -- these are the global projects, which we are working on. So that is for Europe also, Americas also, AMESA also and EAP also. So that is also there.

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Percy Panthaki, IIFL Research - VP [52]

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Okay, okay. And lastly, sir, on AMESA. Even adjusted for some one-offs, your EBIT growth is sort of quite poor. I see in one of the slides where you have given the India performance, you have adjusted for the TSA and one more item. But Ind AS 116 is not adjusted. So if I adjust for that, I think it might be about kind of flat kind of EBIT growth for AMESA, correct me if I'm wrong. So just wanted to understand this Project Phoenix benefits, they are yet to flow in for the AMESA region?

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Amit Jain, Essel Propack Limited - Head of Treasury [53]

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See, when you talk about the adjustment of TSA and Ind AS -- the adjustment for TSA and amnesty, the EBIT growth is around 7%. As far as leases are concerned, leases will not impact EBIT too much because that effect is nullified by the depreciation amount. But if you see EBITDA numbers, the margins have improved from 19.5% to 22.2%.

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Percy Panthaki, IIFL Research - VP [54]

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Okay, okay. So I understand it's a soft economic situation. But these margins that we have posted currently, are they sort of margins which are going to continue for the next 1 or 2 years? Or do you expect further accretion to these margins with Project Phoenix or any other measures?

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Amit Jain, Essel Propack Limited - Head of Treasury [55]

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See, margins will improve going forward because Project Phoenix is there, the revenue growth is there, and everything is there. So margins are going to improve further. The mix will also improve. As you know that the personal care growth in this quarter is already there. So that momentum will continue.

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Percy Panthaki, IIFL Research - VP [56]

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Right, sir. And finally, can you give me separately the oral and the nonoral care for AMESA?

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Amit Jain, Essel Propack Limited - Head of Treasury [57]

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I think that I will give you off-line.

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Operator [58]

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Ladies and gentlemen, due to time constraint, this was the last question. I now hand the conference over to the management for their closing comments. Over to you, sir.

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M. R. Ramasamy, Essel Propack Limited - COO [59]

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Thanks. To conclude, we are all excited about the EPL 2.0. There are multiple growth and productivity initiatives underway in the company as explained in some of the questions and answers, results of which fully will reflect going forward. We are very excited about the many opportunities in front of us and remain committed to deliver capital efficient, consistent earnings growth. Thank you very much.