TCPL targets Rs 1,000-cr but focus is on doing it the right way - The Noel D'Cunha Sunday Column

PrintWeek India (PWI): We start off with the numbers. TCPL Packaging has posted net sales of Rs 182.94 crores and the net profit of Rs 4.98 crores for Q1 FY 2018-19. The numbers are definitely better than last year. What are the attributing factors considering that it’s been a rough 18 months?
Saket Kanoria (SK): Last year, the first quarter was badly affected by the GST. So, there’s the low base effect. Therefore the growth in percentage is quite high.

Secondly, if you see the quarter versus quarter result, that is, March versus June, then the growth isn’t that much. But it is unfair to compare that because March quarter is generally a good quarter and the June quarter is not the greatest of the quarters because April is always a poor month. So I think we are quite satisfied with the top-line growth and we feel that from May there is certainly an increase in offtakes.

PW: What about your customer growth?
SK: Most customers are very positive about their numbers and all are witnessing growth. There is no customer that is complaining that the business is not growing.  So that’s a good sign. We have also installed sufficient new capacity earlier for which we are getting the dividend now, and therefore, we are able to cater to the demand.

PW: What’s the conversation among print buyers?
SK: The customer sentiment is quite good. Unfortunately, the government embarked on the GST reforms on the wrong foot. The tax rates were kept high, and the procedures were very cumbersome. Eventually, in November last year, they did a shake-up where they reduced a lot of items from 28% to 18%, 18% to 12% and even the filing procedures became a little simpler.

PW: The GST Council did tweak the system, recently …
SK: Finally, they have realised that a lot of things needed to be changed, most of which they have now done. So, the overall sentiments with respect to GST have at least turned positive. But there’s still room for improvement.

PWI: So much of tinkering, is that good?
SK: I just can’t understand how this government got the GST so wrong. In the sense, multiple GST rates at high levels, then their expectations that once collections are high they will reduce the rate. But usually, collections will go up only if you reduce the tax rates.

PWI: What is your take?
SK: My take is: when you start with a new system, start it simple and then tweak it if needed. They did the exact reverse, hurting the economy in the process.

PWI: That said, if you see the net change in the profit, from 3.09 to 4.9, that’s 61.17%?
SK: I don’t know if it’s the right way to look but you need to look at the EBITDA margin, which has gone down in percentage terms, besides the interest on the depreciation has gone up because of the expansion. So, overall on a higher base, obviously the profit is higher but the margin has gone down which is a matter of great concern for us, as well as I guess for all in the industry. This is a problem I am sure all our competitors face and is a matter of really big concern.

PWI: Why is that?
SK: My view is that until the demonetisation, the economy was doing quite alright and margins were better. However, after the demonetisation, there were a few quarters of negative or poor growth which led to falling margins as a consequence of lower demand. As you know TCPL is a listed company and we have to declare results on a quarterly basis. If you see our history, we never had a sales de-growth for any quarter in the last 20 years but last year March quarter, we de-grew. That happened after demonetisation. The following June quarter too there was a de-growth due to GST. It was the only two quarters of de-growth in our history, so you can imagine how severe the matter was.

PWI: So the ill-effect of demonetisation has faded, so to say?
SK: Post-demonetisation, companies reduced their production dramatically because no one had any cash flow, and it was not a good time for our customers' overall sales and distribution. It led to shrinking demand growth at least for a quarter, and probably that led to margin pressure.

PWI: Are you saying today the industry has become a far more competitive space than it was two years ago?
SK: Yes, and on top of that, the oil prices have gone up, which has led to most input costs such as inks, solvents, PET films etc going up. Further, internationally pulp prices have gone up leading to an increase in board prices. So there has been a series of constant input pricing change. Just when we are talking to customers for one increase, there’s a second increase announced and now recently a third increase. This causes a huge lag effect in getting our costs passed on which is really putting a lot of pressure on us to maintain margins

PWI: Despite that, we see print companies investing in machinery?
Akshay Kanoria (AK): I think in some cases it’s irrational. If you see our Capex, we did not expand last year. But this year, we are expanding. Given the size at which we operate, our expansion is quite reasonable. So we are putting one line in Goa on our base of 15 lines. So that is quite responsible.

While investing, people are not thinking it through. All they want to achieve is to hit a certain number. I agree that there should be growth, but not at the expense of margins.

PWI: Margins are being severely squeezed.
SK: Once you agree to margin reduction, then it’s very tough to get back to the earlier levels.

PWI: So how do you tackle this downturn?
AK: We have diversified our customer base as far as we can and that’s why we are strengthening our marketing team. So we are constantly reaching out to new clients. We have put a lot of focus on innovation with a dedicated cell which only does new product developments for customers.

PWI: Like?
AK: Offering new effects or gift boxes and the like, which actually help you get better margins and helps you to impress those customers who value our effort. The industry is what it is, we have to live with it.

PWI: So it’s customer base diversification in the B-size and C-size?
AK: Yes. Because those are the people who would be able to give you more money in terms of margin and they will also value new developments. For example, a large retailer, who came to us to develop a packaging for some gift boxes, which we were very successful in executing.

PWI: Akshay, we saw you tweeting about the truck strike. Was that significant because we saw very little coverage in the mainstream media?
AK: I honestly feel the strike was justified. I think the transport industry is facing a lot of hardship, perhaps, manifold worse than our industry.

SK: I think that’s true. The government has promised to do certain things in six months to resolve the matter. Basically, it’s about how they collect the toll, my sense is that it could have been resolved by the government in the first place. Why should they wait for the transporters to strike? The basic point is that even for such simple things, the people have to protest, which is sad.

PWI: In 2016, TCPL ventured into flexible packaging with a Bobst rotogravure printing machine and Nordmeccanica laminator. How has that project taken off? Update on this front…
SK: We started in October 2016 and then came the demonetisation, so in a sense, it was a tough time to start. Honestly, we did not expect this business to be as tough as we find it to be. It has been a huge learning. I think we have come out quite well though and now are operating at a decent capacity utilisation and beginning to make money.

PWI: Tougher than carton making?
SK: If you think carton making is a tough business, this business is at another level.

PWI: How so?
SK: One, it is far more competitive; and number two, since the business involves primary packaging where the product is in direct contact, the customers are far more discerning. They are far more demanding about the criticality of the functional properties involved in the production – adhesives, inks, and the seal strength among others. It is unending. If you go wrong then you really lose your shirt. But of course, it’s a much larger business, so ultimately if you get it right it will be worth it

But we are still new to the game and have to broaden our offering. We have done some new things which I think no one else in India has done in flexible packaging.

PWI: Could you leverage your carton knowledge?
SK: We brought our carton knowledge into this business from day one – things like haptic effect, etc. For example, the new Emami Fair and Handsome packaging, which was re-launched with different effects in various pack sizes.

AK: Emami re-designed and replaced the tube with a pouch. So we created a haptic effect and also the tactile effect. I don’t think anyone else has done such a thing as of now. We are also into the tobacco business for pan masala. If you see the new Tulsi pack, you will see a new tactile effect.

SK: We are getting traction. We have worked with 4-5 brands and offered value addition. We are also settling down to a normal manufacturing cycle, into export, and it promises to increase considerably.

PWI: There are a number of tweaks transpiring, new notifications which will impact the flexible space?
SK: I think there was a lot of confusion until very recently. So nothing much has changed. There is a drive to get out of multi-layer, mono-layer, etc. Let’s see we are watching but it is a long way to go I think.

PWI: There’s talk of making ink production toluene-free?
SK: It’s very nice if it happens because we hardly use it. But that’s just a recommendation. It has a while to go.

PWI: Will that also have implications on other things like non-contaminant inks, non-contaminant solvents across the spectrum?
SK: But my only worry is that the government may legislate, but how will they implement. For example, if toluene is banned in food then what about shampoo, where it may not be banned? There’s a chance of misuse. So if you are banning toluene, then the ban should be across the board.

PWI: There’s conversation about water-based ink?
SK: Water-based inks in gravure printing are quite difficult given that we live in a hot country. At the end of the day, India cannot become over-priced. We have to make sure we are aligned with the world standard. If we start doing new things then it would be very difficult.

PWI: Manufacturers of multi-layer flexible packaging have been given an ultimatum of three months to switch to eco-friendly alternatives. How do you approach this? What are the challenges?
SK: It has been postponed now. What you are talking about is single use kind of things like cutlery and straws. We are not in that spectrum. In industrial packaging, multi-layer is not being banned. I think there is a two-year extension. They say as long as you can burn it and recover energy it is fine.

I think what goes in plastic’s favour is the low cost. We need to bring in a whole new eco-system – collection and disposal.

There is not enough awareness about plastic. If you ask a layman about plastic, he will say it’s horrible, but can you live without it?

PWI: There are varying voices within the industry. The question is: has the paperboard packaging benefitted?
SK: The paperboard packaging has certainly benefited. But even within the paperboard is the film laminated board, which is in the realm of the plastic ban.

In the western world, the rule in Europe is that if a packaging has paperboard content of more than 50% of the weight, then it’s still classified as recyclable even though there is a film typically 12 microns, or 15-20 gsm. Here we consider paperboard to be 300gsm. The paper mills in Europe put that base into the recycler, pulping it. Because of the difference in density, the film separates from the paper and the film gets collected separately and then it can go for recycling. So there is no problem.

PWI: What happens to MetPET? Does it come under the ambit of the ban?
SK: Right now there is no problem. It has been deferred for two-three years. I don’t know what they’ll do, but this is not happening, elsewhere.

PWI: Who do you think are the advisors who are drafting these rules and regulations?
SK: I don’t know who the advisors are. I know that in India when new legislation takes place, it gets to the extreme. Even in tobacco packs when you see the health warning, our health warning covers about 85% of the pack. Very few countries are worse than us. Even the developed ones don’t have it, so why did we need to do that?

PWI: TCPL has production plants located in four locations − Haridwar, Silvassa, Goa and Guwahati. It’s a fairly good geographical spread. Any more?
SK: For the time being there’s no fifth location plan. The Goa location is a new one and an expansion in Goa in October. It is a beautiful site which has a lot of potentials to expand, but if the growth continues as we are witnessing now, then we will be at a high level of capacity utilisation across our plants and hence we may need to add a location as our current locations will not be able to handle this growth after a few years.

I would say generally we are very bullish about packaging. We have the leadership position in this industry and will maintain it.

PWI: You mentioned exports a while ago...
SK: Exports have a big potential in flexible and we are working very actively towards it. We have some immediate success. In cartons also we are exporting but there is very limited potential as the freight is very high.

PWI: What are the markets for exports?
SK: We are moving a lot of tobacco packaging export. There’s a lot of food packaging export to Western Europe and to Africa.

PWI: Why are exports targeted towards Africa and Europe? What about the neighbouring countries?
SK: There are too many barriers - duty, transit, etc. There are some government-level talks, but nothing is happening.

AK: Right now a ship going to Bangladesh has to go via Colombo. Then if you have to export from Assam to Bangladesh, you have to go via Bengal. The reason is that there is no full-fledged check-post on the Assam-Bangladesh border or the Meghalaya-Bangladesh border or in Mizoram, even today after 70 years of independence. So even if the export takes through Bengal, you have to offload and on-load material on trucks on either side of the border. The same truck can’t reach the customers.

PWI: Coming back to your customers, the changing need of customers. What are their demands?
AK: Their quality requirements are growing more stringent by the day. Even if they have one spot on the carton, your whole lot gets rejected. Now we have to move to 100% perfect quality. So we are putting these lots of digital equipment because human-eye will fail once in a while.

SK: Quality is one thing and the market dynamics are also changing so their planning cycle is also being shorter. That’s a very big challenge.

PWI: Who are the leadership voices in sustainability and green initiatives?
SK: The point is: is the customer willing to pay a higher cost when he demands replacing MetPET with foil or silver? That’s the bottom-line. Some customers are willing to pay but that’s just the case with certain brands.

PWI: Some 8-10 years ago when you set up the plants, GMPs were in place and those GMPS became the benchmark in this part of the world. Is there a need to re-invent the wheel or it sustains itself in terms of factory or handling the materials and efficiencies on the shopfloor?
SK: Yes there is a need. Now we are planning how to differentiate from others. For example, a folder-gluer, over the years the technology has improved, so we can think of replacing two gluers and replacing it with a new one. I mean a faster one, more productive one. There’s no change in the basic GMP, but we now have more efficient lighting system, more efficient air-conditioning, composting of all our waste, disposing of the canteen waste. We don’t throw or burn anything; we are composting it in all our centres. Then all plate chemical go through effluent treatment. There was not so much awareness previously. We have ISO 14, 18, 22, so we are even with the environment standard. Safety too – there are fire safety measures which were not there in the previous years. Now all our factories are fitted with fire sprinklers.

AK: Even the ingress and exit points to the factory down to pest control. Now if you come to our Goa plant once its ready you will see a 100% controlled environment. It’s almost like a pharma factory. There is no direct entry either for material or people into the factory.

PWI: This is an awkward question. How is the next generation handling the business? Akshay was a project captain for Guwahati.
SK: It’s not just Akshay, Vidur my other son is also involved with the business.

PWI: As a mentor, how do you rate his performance?
SK: Akshay has been in the business for three to four years now. He is fully entrenched in the business and is working very hard. They both bring in a lot of energy so it’s very good for the business. It feels good to have the younger generation together. They also get along with their colleagues besides customers and constantly give me feedback which is really valuable.

PWI: What about Vidur?
SK: Vidur, my youngest son, focuses on the flexible side of the business. He is also doing quite well. It’s important that they enjoy working. And if they enjoy working, they’ll do a good job. If you work because you have to work, then your heart is not in the business and then you are not successful.

PWI: What’s the update on the collaboration with AR packaging in Sweden? Any other collaborations?
SK: We are not very active with the AR collaboration. The organisation has gone through some acquisitions in Europe and in Asia, so they have been really busy themselves and they haven’t been very active on the India front. But as a company, they are doing very well and at the top level we are very close to them, but its sparingly used. AR has a very similar customer profile as we do so it’s a good thing.

PWI: TCPL crossed Rs 100-cr in 2007, Rs500-cr in 15-16. What is the target now?
SK: I think the first immediate target is to get to Rs 1,000-cr. Now we count net sale after GST so I think we will cross the target very soon.

PWI: That’s great news for TCPL.
SK: To be honest I don’t really fancy targets. What difference would it make if I tell you a number right now? At the end of the day what we should do is do our job well and it should be sustainable financially over a period of time and you know you should feel good about what you do and everything will fall into place. We are growing and we will continue to grow but not at the cost of creating problems for everyone.

PWI: One final question. You are an avid cricketing fan, whose leadership style do you prefer?
SK: Sourav Ganguly, because he is a Bengali and I connect very well with the Bengalis, since I was brought up in Kolkata. He is emotional, passionate and took his own decisions. You cannot consult ten people before making a decision, and that’s not how I function too. I think Ganguly is like that.

PWI: Explain.
SK: The other quality is his belief that if you put your might behind achieving a goal, it can be attained.  Ganguly’s biggest achievement has been instilling that confidence in his players that as a team they can win abroad. He did it. I don’t think as a team we believed we could win an overseas series, so we never won.