It’s one thing to talk about how plastic is environmentally degrading and the other thing to remain in the business of sustainable plastic making significant returns. For UFlex Group, plastic is not a bad word, but a word that has epitomized its over three decades of existence.
The desi firm with offices across India and the world employs over 9,000 employees in a nearly Rs 10,000 crore business. “Plastic is not a bad word… .agricultural waste would be so high, that the world would see extremely high food wastage,” says Rajesh Bhatia, the Group CFO at UFlex Ltd when asked about the sustainability of the plastic business.
UFlex leads the category of large listed packaging stocks with an impressive client list that reads Nestle, Mondelez, PepsiCo, etc. After an impressive quarter, Bhatia explains Sify.com on the business prospects of UFlex’ flexible packaging business, the potential business, the environmental concerns as well as global trends.
Sify.com: What kind of complications did you face during the Covid days?
Rajesh Bhatia: There were two sets of pandemic challenges. The challenging part was keeping factories operational and getting staff to work in safe environments since the demand was huge. The other set of challenges that kept us on our toes was ensuring availability of raw materials, cashflow, converting outstanding and overdues into payments. Since packaging is integral to the supply chain for our clients, and falls in the essential items category, we had to ensure that transportation for finished and raw materials was always operational. The pandemic was a real test for the management.
UFlex Q2 Fy20-21 Snapshot:
What do you think about the top-lines?
RB: This is the best quarter on all fronts - volume, production sales, toplines (in terms of revenues), operating cost, and even EBITDA and PAT. In fact, our top line of INR 2,200 crores is the best in the history of UFlex.
Food & Personal Hygiene have been top contributors to the financial performance. Do you see the scope widening in the coming days?
RB: Categories such as Food, and Personal Hygiene will continue to remain high-demand categories. Once the pandemic is gone, the demand for personal hygiene may plateau a bit. However, we have seen pouching business deliver high business growth and are increasing our throughputs. The pouching business should certainly substitute for the plateau.
In terms of exports, we do about 80 crores worth of exports every year and we realize that exports can offer us better potential compared to Indian markets where there is an over-capacity currently. The idea is to improve exports, for a 50 percent jump in the next 12 months.
Rajesh Bhatia, Group Chief Financial Officer, UFlex Ltd.
When you discuss with your clients - Mondelez, Nestle, and others, what is their priority -- Is it design aesthetics or storage with a purpose or climate change or something innovative?
RB: The Indian and global markets have a different thought-process. In India, clients are fine to work with a price advantage with small convertors. In the overseas markets, brands generally are more purpose or design-oriented. We still see lots of players doing business with smaller setups owing to the price advantage. A probable consolidation may prompt Indian brands to work on best standards. It may also provide some respite on the over-capacity.
In our case, we have been able to clearly explain reliability to our clients. We had a volume increase of 23 percent these past few months. We have also been able to make our customers understand clear trends on supply-chain and cost disruptions.
An image of UFlex Ltd's film plant
Do you think organizations, governments or the industry have reforms in mind around recyclable plastic manufacturing? Also, since you work with BOPP & BOPET which is technically recyclable plastic, wouldn’t there be an advantage with plastic compliances getting stricter?
RB: Many clients and reports indicate that by 2025, most packaging will be bio-degradable. I am of the opinion that the ultimate cost for recyclable plastic will be borne by the customer. Biodegradable may be an increment in cost, but it could be so marginal that a customer pays only 25 paisa extra for a pack of Lays.
The European Council has rules on plastic treatment. India has a policy too, and we are working with respective ministries on solutions. I think we may have lost focus owing to the pandemic. A strong policy will separate the men from boys since since small players may not have access to technology for biodegradable.
For organizations like UFlex, the policy will be an advantage. Although, recycling is a matured approach not many organizations invested because there was no obligation to do so. So far, we are demonstrating our tech preparedness to governments across India, Europe and elsewhere. From an industry perspective, I am of the opinion that recycling of any plastic would not be in good interest of petrochemical industry since it may affect the prospects of virgin plastic so biodegradability solutions are a win-win for everyone.
Is it wise to theorize that Crude is inversely proportional to UFlex PAT?
RB: Indeed, it is linked to crude prices since most of our raw materials are polymers. During the pandemic, demand for PTA came down since the textiles, and PET bottling industries were large consumers. PTA usage in flexible packaging is low. We may have been de-linked for a brief time, but in normal times PTA prices are highly linked to crude prices.
Where do you see Crude in the coming days?
RB: I think we should remain range-bound between 38 and 45 which is good enough for our kind of business.
Does it inspire you that many fertilizers and petrochemical players are expanding into newer turf? Do you look at a category expansion or an inorganic strategy?
RB: Be it fertilizers or petrochemicals, the commodity business is a steady stream albeit with limited growth . Obviously, the market valuations for a commodities business pales when compared to something like an internet or technology related business. But, besides the valuations what most investors fail to look at is the steep entry barrier. For example for someone to compete with Reliance, the entry barrier in Retail or E-commerce is steep. The losses, funding levels and entry barriers are so challenging that no newcomer would dare enter it. Any business with such high entry barriers commands high valuation. Commodities is a matured business with stable cashflow and reasonable growth but the entry barrier is low.
For UFlex, our strategy is only within this line, flexible packaging to be specific. Also, we are growing only organically. Many companies fared poorly after an inorganic acquisition. The acquiring company ends up accepting debt and couple of years down the line may face a down cycle. Hence, we are happy to grow organically and within our limited access to capital. In terms of our growth strategy we are not conservative, but reasonable.
You seem to be an apt example for Aatmanirbhar Bharat. UFlex has significant exports numbers, presence across the world, and even a manufacturing base in Jammu. Do you have any specific inputs for the corporate world?
RB: Based on our years of experience in India and global markets, the only mantra is -- Deliver nothing but the best of quality. Quality is the only way to succeed. Also, the global markets, especially the developed ones, give you several perspectives on success.
What is the strategy ahead? Are there any plans to revisit dividend payouts?
RB: We would like to complete our projects in Nigeria and Hungary and start utilizing those capacities. It takes time and the markets are reasonably good. In about 2 years’ time, we should achieve optimal capacity utilization.
We may revisit the dividend strategy after reaching a reasonable level on our expanded capacity. We would also want to realize absorption levels before announcing the liberal policy. Ideally, a business that generates good profits certainly builds value for investors.