Packaging definition for 25 years

Ramu Ramanathan (RR): TCPL Packaging has reported a sales standalone turnover of Rs 108.62-crore and a net profit of Rs 4.24-crore for the quarter ended March 2014. The company has seen 20% growth until last year. What is sustaining the 20% growth in seven years?
Saket Kanoria (SK): Last year, we grew by 6–7%. Until last year we had seen a sustained average growth of 20% year-on-year. There are several reasons for this. One is that the industry is growing at 10–12% and we have observed a volume growth of 10–12% in the industry. In addition, we have constantly picked up market share. All these factors combined have enabled us to achieve 17–18% growth. Moreover, our geographical diversification has helped us in sustaining it.

RR: Mr Kanoria, you have managed your numbers above industry levels. How do you look at the operating margin?
SK: The CAPEX cost of a new plant has become very significant. The depreciation of rupee has played a major role since we are looking at imported equipment. Also, the cost of land and building has gone up disproportionately. Therefore, the capital cost is very high and the capital-to-turnover ratio has fallen. So you need to be in a high value-added space, which is not so easy to find, in order to fill up the entire capacity. If you are in a regular space then your margin of operating has to be high in order to justify the CAPEX. So, what is high? It varies!

RR: What is your yardstick when it comes to measurement of profitability?
SK: As a company, we are operating in the 15–16% EBIDTA margin, which could be lower than a couple of our competitors but it could be higher than the general average of the industry. However, I don’t think that’s a good yardstick to measure profitability. What is a really good measure, to my mind, is the Return On Capital Employed (ROCE).

RR: How so?
SK: At TCPL, we sweat our assets a lot. So the amount of tonnage that we churn per machine is highest percentile of the industry. We calculate the absolute number on that tonnage and divide that with the CAPEX invested. This number is a relevant factor. At the end of the day, business is about how much money you put in and how much you get back. I could put Rs 100 in a business and could do a Rs 1000 turnover and make a Rs 10 profit. I can also do a Rs 150 turnover but with a Rs 15 profit. So, which one will I prefer  – 1000/10 – or will I go for the 150/15 model? At the end of the day what matters is your bottomline, divided by the amount of money employed with the business. ROCE is critical and one has to be very mindful of that. 

RR: There are a raft of new players coming into the packaging space. How easy or difficult is it for them to sustain?
SK: What has happened is that a typical MNC customer has got more alternatives and an expanded supply base. There are some suppliers operating in the turnover range that we are in. Also, there are some new players trying to get in. I find them to have a much more challenging task ahead. The reason being, they have to pay a higher entry price, lower their prices to compete. Plus, they don’t have all facilities under one roof. They don’t have multi-locational facilities. It’s not that easy for new comers. People do aspire to reach our levels and some commercial printers are aspiring to venture into packaging. There is space for everyone and everyone will find their own level at the end of the day.

RR: In terms of scale, you are converting 4000 to 5000 tonnes of paperboard per month. Does this give you a definitive edge?
SK: This gives us extra value in terms of cost leadership. Now the manpower cost has upped significantly, so you need a scale to spread it over. Certainly, it is helping us. I don’t really know how well the smaller guys are performing. If we can keep growing at the rate at which we are, then the gap will widen; it won’t narrow. Our challenge is really to be able to maintain our growth, which we aspire to do at 20%. If we can do that we are fairly comfortable.

RR: What is TCPL’s strategy for customer development?
SK: Our top 20 customers have a very dominant share of our business. We have found that those customers have actually grown to the extent that we have grown. Or you can say, we have seen a higher growth in those customers than we have grown overall. So that list has a very strong weightage. Having said that, we also focus on acquiring newer customers.

RR: Is there any segment that you haven’t stepped in as far as folding carton business is concerned?
SK: In folding cartons, the segment that we don’t have a major stake in is pharma, and we are trying, but not significant as yet. We have capacity constraints; unless we dedicate certain capacity for pharma, it will be very difficult.

RR: As far as capitalisation for a packaging plant is concerned, the required investment at more than $50 million sounds big? Does that throw open the doors for consolidation, as well as associate mergers in the next few months or quarters?
SK: To set up a packaging greenfield, we are talking upwards of Rs 50 crores for one line, which really isn’t viable. So, we need to talk of two, so we are in the range of Rs 75–80 crores. That is quite a significant investment. But this does not necessarily mean that it will require consolidation and foreigners will set up operations in India. The existing players have excess capacity today in the overall industry.

RR: Last two years were grim. Are things looking better now?
SK: We had two pretty much rough years for the economy. With the new government in place the sentiment is quite positive and the expectation is there that economy will be on track. But we now have two external factors: of Iraq and oil price, and the delayed monsoon. This will certainly have an impact on the consumer; especially the rural market will get affected. Going forward, if we return back to 14–15% overall growth, this would require considerable investment and if the local players don’t, then the doors will be opened for foreign investment.

RR: We have seen such consolidation in labels and flexible packaging segment. Is folding carton segment immune to this trend?
SK: I think the typical Indian promoter doesn’t want to get out of his business as long as he can avoid it; even if he does, he wants a very good value, which the incoming guys are very reluctant to pay.
 

RR: TCPL signed a technical collaboration agreement with AR packaging group, AB, Sweden. In an official comment you said, “The objective of the agreement is a strategic partnership mainly in cooperation in the manufacturing, sourcing and sales and marketing in India for the solid folding carton market.” What is the update on this?
SK: Basically, we knew each other well. At that stage, neither of us was looking at having any financial stake in each other. So we signed a technical agreement wherein we could interchange ideas and people and visit each other’s plant and learn together. It’s more about us learning from them than them learning from us. It is under two years now and it has given us some access to technology and to bounce off ideas and know what is going on in the Western world. They had sent one of their technical experts who helped us on some cost-cutting measures. And they have expertise in tobacco printing, which has helped us in our tobacco business.

RR: Has value-addition grown in recent years?
SK: I think that the ‘sales per tonne’ is the right measurement for this. People are adding lot of value, lot of UV finishes, textured finishes, foil stamping etc. It’s a good thing for the industry. That is what is sustaining us. Otherwise the prices only kept declining, and it’s because of value- addition that we have survived.

RR: What do your customers expect from you?
SK: Customers are looking for innovation. They do come out with a lot of promotional packs every year, or twice a year, or festive packs. They are looking for suggestions and their expectation is that we have a supplier who can deliver innovation. To this end we have set up a design centre which offers graphics design services to TCPL and its customers. It has been six months and the service has been well received. We are also setting up an innovation centre in which we can incubate the packaging development process and do prototyping and such things.
 

RR: In terms of organisational structure how does it work at TCPL?
SK: We are a single entity with plants in Silvassa, Haridwar, Goa, and now in Guwahati. We have two sections of business, namely, tobacco and non tobacco. Tobacco is based out of Silvassa. And for non tobacco we will have four plants,including the one in Guwahati. They share the same technology, same suppliers, pre-press, inks and varnishes. We have tried to achieve fair amount of standardisation across all the locations. My philosophy is: suppose in one plant we are doing something right then it should be immediately implemented in all the plants. We have centralised purchase, marketing, pre-press and finance. Only the production centres are different.

RR: TCPL is one of the largest exporters of printed cartons from India. Exports constitute about 17% of TCPL’s annual revenues. Does the export focus also include cigarettes, liquor, food, FMCG?
SK: We have been exporting for quite some time now and it’s a significant part of our business. We have been exporting to Middle East and little bit to Europe and some to Africa. We feel export volumes will grow for us. Moreover, the decline in the rupee has certainly helped the export business.

RR: What about the training school in Dharampur where you impart vocational education to more than 500 adivasi students?
SK: That school is doing quite well. We have upgraded its facilities. Having said that, we have scope to do much more. The challenge is to find the time to do it. We need a bit of focus there. All the stationery used in TCPL is bought from the school in Dharampur. The new Companies Act has mandated CSR policy for a certain threshold and above, which we fall into. Now, mandatorily, we have to spend 2% of our profit for CSR. So we are registering a trust called TCPL Foundation. We will be doing genuine CSR activities in the villages around our factory.

RR: The big picture in the next five years... 
SK: The big picture is that we would like to broaden the segments in which we operate. This is our 25th year of operation. So it’s a big year. We hope to hit Rs 500 crore. We would like to grow at 20% sustainably and to expand our product range. Established in 1990, TCPL crossed Rs 100 crores mark in 2007. It took 17 years to get to Rs 100 crore. Now in seven years, we hope to get to 500 crores.
 

One of the two Manroland 700 eight-colour with a coater interdeck UV presses at the Silvassa facility

TCPL's second KBA Rapida 106 at the Silvassa unit with the auomatic pile logistics system