Every industry is unique in its own right, but generally all of them have some common drivers. For example, if fuel costs go up, manufacturing of any sort is going to take a hit. But if there is an increased electricity demand for a given month, it is taken as a proxy for overall economic growth.
Packaging is also one of those industries as it forms an essential component of virtually all other sectors, be it cement, food or e-commerce. In the end, they will have to pack their goods. So if one studies the trends in packaging, it can give meaningful insights into the general consumption or activity levels.
The industry is spread across four categories: paper, plastic, tin and glass. Combined, they were estimated to be around $5.3 billion in the local market in FY20, according to a report by Pakistan Credit Rating Agency. However, despite this size, a sizable share of local packaging needs has traditionally been met through imports. That is evidenced by the number of active listed entities operating across all segments: five in glass, an equal number in paper and plastic, and only one in tin.
However, the past few years have seen local players stepping up and adding to their capacity, led by the likes of Cherat, Packages Ltd and RPL. To understand industry’s current trends, future outlook as well as the company’s plans, MG recently had a detailed chat with Roshan Packages Ltd CEO Tayyab Aijaz.
The edited excerpts are given below.
RPL’s topline slipped a little even as the bottomline noticed an improvement. What caused this?
Our turnover was trending upward for three of the four quarters of FY20. However, in the first quarter, we compromised a little on the topline to focus on the bottom line. It meant improving the operating cycle and receivables recovery by maintaining our existing terms. There was also a much more efficient management of stocks, which in turn improved the free cash flows.
What share of your COGS is met through imports?
Most of our inputs come from local suppliers. We do import a small share of resin for our flexible product line but it represents no more than 15-20% of our total COGS. Meanwhile, the bulk of our paper needs are met domestically, through a mix of suppliers both from the organised and unorganised sectors.
Can you talk about the vision behind Roshpack and how that will help the company in the long term?
Roshpack is our venture targeted to small enterprises and startups who demand low volumes, which the larger players in the industry don’t cater to while the quality of the smaller ones is not comparable. We are already selling hundreds of thousands of units through this. However, its share in the topline is very modest, though it does contribute to our bottom line as the margins are generally higher. The idea is that it will also help better utilise our existing output and find new consumer segments, which we expect will eventually turn to us for bulk needs as well.
Which sectors have the biggest share in Roshan Packages’ customers?
Fast moving consumer goods is obviously the most important single segment, which in turn has numerous other streams stemming out. Beyond that, ceramic and home construction has a major chunk as well and they are growing rapidly as an industry. Home appliances would be another one, followed by fruits and vegetables, shoes, and pharmaceuticals.
What are RPL’s market shares in flexible and corrugated packaging lines?
We stand in the top three in both the product lines. In corrugated, capacity-wise, RPL is the largest player and in terms of actual output, we are second only to Packages Ltd. In flexible packaging our market share percentage might be a little higher since fewer players operate in that segment.
However, most of the market is actually catered to by the unorganised sector at the moment, but gradually shifting towards the organised. The corrugated industry is roughly around 1.2 million tonnes, of which the big three listed – Packages, RPL and Century – and the overall organised sector hold less than 50%. That said, smaller companies have started facing operational challenges and there are questions about their quality as well, so their share is being taken up by larger organisations.
The industry saw a squeeze in margins beginning from FY16. Can you explain the reasons and elaborate on the margins by product lines?
In 2016, the rupee was strong which made it easier for companies to import finished packaging material directly, increasing the competition for local players. At the same time, the industry, including RPL, was also investing in capacity which is beginning to show results now.
These factors thus impacted the sectoral margins as a whole.
For RPL, we saw a decline in FY18 and FY19 but margins have started recovering of late. Product-wise, both are profitable but there is no hard and fast rule as to which one has better margins and they really depend on customer to customer, season to season etc.
RPL’s capacity utilisation is hovering around 50%. Why is it so and how do you plan to increase this number?
Our utilisation levels have been progressively increasing over the past few years. The limiting factor is not demand but rather the availability of raw material. In corrugation, procuring required paper supplies to achieve higher capacity is the main problem, which is a global phenomenon with paper prices trending up in the short run.
This is where our backward integration plan comes in: with the establishment and operationalisation of Roshan Sun Tao Paper Mills, we will have a steady supply of paper that will boost the capacity utilisation levels. It will also help dilute the fixed costs, as well as electricity and HR charges, leading to improved profitability. Plus, this would be a self-sustaining unit in itself with its own profitability, which being our subsidiary will then reflect in RPL’s figures.
Roshan Sun Tao Paper mill is envisioned to be a one of its kind facility to produce brown paper in the country. The project will use advanced technology to recycle waste paper into A class brown paper and be environmentally friendly and sustainable. Thus, it will contribute to the circular economy within Pakistan i.e. it will support an economic system aimed at eliminating waste and the continual use of resources. It will also become a major contributor to the current goal of Pakistan of replacing plastic bags with brown paper bags which will serve the greater purpose of protecting our environment and national resources.
We are fast approaching the financial close for Sun Tao Paper Mills which will start with an annual capacity of 66,000 tonnes. However, that’s only the first phase: we want to expand it beyond 200,000 tonnes to not only ensure paper supply for RPL’s conversion but also to sell it locally and internationally.
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