Ester Industries Limited (500136) Earnings Call Transcript & Summary

Thank you. Good day, everyone, and a warm welcome to Ester Industries Q3 and 9-month FY '20 Analyst and Earnings Conference Call -- Investor conference Call. We have with us today Mr. Arvind Singhania, Chairman; and Mr. Pradeep Kumar Rustagi, the Chief Financial Officer. We will begin this call with opening remarks from the management. Following which, we will have the floor open for an interactive Q&A session. Before we begin, I would like to point out that some statements made in today's discussions may be forward-looking in nature, and a note to this effect was stated in the con call invite sent to you earlier. We have trust you have had a chance to with go through the documents and financial performance. I would now like to invite Mr. Singhania to make his opening remarks. Over to you.

Thanks, Gavin, and thank you, everyone, for joining us on our earnings call. I have Pradeep Rustagi with me, our CFO, as well. I will begin the discussion by highlighting the key operational developments, both of which Pradeep will run you through the financial highlights. To begin with, I would just like to say that we have maintained our first half momentum into the current quarter, which witnessed profitability growth of 130% over previous year. The growth was largely driven by the positive performance on the Film and Specialty Polymer business. Engineering Plastic business though continues to remain soft in line with the overall economic slowdown and sluggishness in the auto sector, the biggest end-user segment for the business. Besides the improved performance of Film and Specialty Polymer business, other reasons which drove the profitability was reduced interest cost subsequent to reduction in interest-bearing debt. Moving on to business wide performance. Starting with Specialty Polymer business. Performance during the year till date has been extremely strong. In addition to the accelerating revenues, profitability as well has seen a sharp bump up in recent quarters. FY '20 could very well be turnaround year for the business. After initial -- after few initial soft years, where in the business had few ups and downs, we believe that we have now reached the stage and maturity wherein it can deliver on a constant basis -- consistent basis. Order visibility in general remains high. We have a strong volume in this business. While the demand for MB-03 has remained high during the year, we have other products as well in our portfolio which are seeing good demand and inquiries. Let me talk about a few of them. The innovative Polybutylene Terephthalate, PBT, Deep Dyeable Master Batch MB-07 and Cationic Dyeable Master Batch MB-06. Polybutylene terephthalate as I have mentioned in my previous call, finds applications across industries and products, automotive to consumer products and from electronics to fibers. We have entered into agreement with global chemical leader in April of last year for a period of 2 years to certain quantum annually. While those volumes may be relatively low, there is a possibility for significant upside. The agreement is renewable by mutual consent after 2 years. For MB-03, though we maintain our guidance of supplying about 1,200 metric tons during the year compared with the average of 300 to 400 metric tons in the previous years. Also, as many of you will be aware, the more recently approved investment of INR 110 crores for the business to help meet the growing needs of the existing and new customers for existing as well as new products. The investment of INR 110 crores spanning over approximately 2 years will help generate incremental Specialty Polymer revenues of around INR 180 crores to INR 190 crores. As I mentioned in the past, Specialty Polymer business is a very high-margin business. It enjoys these high margins because its product portfolio represents innovation. The product portfolio that we have is a result of an immense amount of hard work and trials that have spanned over the last 7 years. We are delighted with the results. This business is now showing and believe that we will see more traction in this as the year going forward. The Specialty Polymer business is the key catalyst which will help us transform into an innovation-driven company. Moving on to Film business. Volumes continue to remain high during Q3 in line with the recent period. Realizations have remained more or less steady. We haven't seen any meaningful impact to the incremental capacity, which came on-stream during the year. The underlying demand continually remain steady, in turn helping market absorb the additional supply. Further, we have also been working internally towards improving our product mix by increasing the share of value-added products. As mentioned in our previous calls, we are targeting to increase the share of high-margin products to 30% over next 1 to 2 years from present levels of approximately 20%. We are about to commission a new offline coater by March 2020, which will help us achieve this target. We're also evaluating the existing and emerging demand/supply scenario. Any decision we take in terms of increasing the capacities will be taken after a thorough evaluation and analysis. Lastly, as far as Engineering Plastics business is concerned, the performance of this segment continue to be weak, impacted by the extreme slowdown in the auto segment. The continuous downside in the auto sector however seems to have been arrested. Signs of revival have been seen in the Electrical and Electronics segments, the other large end use segment, with promise of the next quarter performance seeing some improvement. We continue to focus on cost rationalization measures, which, in conjunction with the improving business performance, has been helping in expanding the profitability. To conclude, I would like to reiterate our positive stance on the business. We expect Film business to deliver steady performance in coming quarters. Whereas the improvement in Specialty Polymer business should continue in FY '21, in turn pulling up the overall profitability of the business. Engineering Plastic business should revive and swing with the pickup in overall economy. Further, cost rationalization measures as well should improve efficiency and margins of that business. With that, I hand over the floor to Pradeep, who will run you through the financial performance. Thank you.

Good afternoon, everyone, and thank you for taking the time out for our call. I trust that all of you have received the investor documents circulated by us earlier. Let me quite summarize the key financial highlights for the quarter and half year, following which, we can begin the Q&A session. Starting with the top line. Revenues from operations for the quarter stood at INR 246 crore. While on a 9-month basis, the same stood at INR 785 crore. Bulk of the revenue was driven by the Film and Specialty Polymer business. Engineering Plastics business continues to remain soft largely owing overall economic slowdown and sluggishness in auto demand. EBITDA for the quarter stood at INR 45 crore for the quarter as against to INR 29 crore reported during Q3 FY '19, higher by 56%. While on a 9-month basis, the same should at INR 145 crore as against INR 83 crores reported during 9 months FY '19, higher by 75%. Higher profitability was owing to improved margins in Film SBU as well as increasing sales of Specialty Polymer SBU, especially high-margin products like MB-03 and innovative PBT. Finance cost for the quarter stood at INR 5.3 crores as against interest out of INR 8.9 crore during Q3 FY '19. While on a 9-month basis, the same stood at INR 19.6 crores compared with INR 26.4 crores reported during 9 months FY '19. As on December [indiscernible] standing interest-bearing term debt stood at INR 72 crores. While interest-bearing working capital liabilities stood at INR 99 crores. Interest-bearing debt as multiple of annualized EBITDA stood at a healthy level of 0.89x as of 31st December '19 in comparison to 2.49x as at 31st December '18 and 0.8x as at 30th September '19. Depreciation for the quarter stood at INR 9 crores as against INR 8.4 crore for Q3 FY '19. While on a 9-month basis, the same stood at INR 26.4 crores as against INR 24.2 crores reported during 9-month FY '19. Profit after tax for the quarter grew by 132% to INR 19 crores as against profit of INR 8 crores generated during Q3 FY '19. While on a 9-month basis, profitability grew by 172% to INR 62.6 crores. Higher profitability was -- while was largely on [indiscernible] Film and Specialty Polymer business. To conclude, we believe we are well on track to create significant value for our shareholder in the coming years. Bulk of the business is in good shape. Volumes continues to remain steady in Film business. Realizations as well have remained steady despite additional supply entering the market. Specialty Polymers business as well is expected to deliver steady performance, in turn helping drive the profitability. Lastly, while engineering business, Engineering Plastic business goes through a challenging time at present. In fact it is temporary in nature and expect the business to revive going forward. That concludes my opening remarks. We would be happy to answer your questions now.

[Operator Instructions] We take the first question from the line of Agastya Dave from CAO Capital.

Congratulations for fairly steady and decent performance at least quarter-on-quarter. Sir, there are a few gaps in my understanding. After this new round of CapEx has been announced, so could you give the breakup of all the CapEx that you'll be doing over the next 3 years? And also the gross block breakup between the 3 divisions -- the 4 divisions of Specialty Polymer, value-added films, normal films and the Engineering Plastic part? And also for these 4 divisions, can you also give the capacity utilizations as of today? And what would be the capacity post expansion? And my second question is on the PTA. The way prices have come off and the way the duty structure has been changed, what would be the net gain to us, if any?

I'll answer the last question first. On the PTA, I have maintained before in my earnings calls, previous earnings calls as well that in our business models and PTA is relevant in the case of film, it's a pass-through model. So the price reduction or increase is passed through. So that takes care of that. You asked a lot of questions. Can you...

The capacity realization, we can give you the breakup. And the film, the capacity realization is the -- of the installed capacity is almost 100%. In metallized film, we are operating at about 85%. And Engineering Plastics, we are at about 60%. Specialty Polymers specialization as of now is very low. We have built a capacity for much more larger volumes.

The capacity has actually already existed from before. We converted our batch lines, which will be used to make commodity film-grade polymer. We have used the same capacity -- depreciated plant to produce the Specialty Polymer.

And as far as the plant and machinery for each business is concerned, that is something we will give you on the next earning call because we don't have that much breakup ready.

Perfect. Okay, sir. Perfect. Sir, can you give the breakup of the capital also for the next few years of what all...

Okay. So there is only one major CapEx which has been taken, which has been approved by the Board, which is the INR 110 crore of Specialty Polymer. No other major CapEx has been approved.

So sir, in Specialty Polymer, you said that you already have a fairly low capacity utilization. So are you adding just more capacity? Or are you adding more capabilities? How exactly are you going ahead with this?

Well, it's a very good question. I'm not adding more capacity because we have enough capacities. We are adding a new capability.

Right. Right. Okay. Okay. Can you like elaborate a bit more about that? What...

I can't elaborate too much right now, but I can tell you that it is on the lines of sustainability.

We take the next question from the line of Saket Kapoor from Kapoor & Company.

Am I audible, clearly?

Yes. Yes.

Yes, sir. Sir, firstly, in your opening remarks, you did mention about the -- include the value creation idea. So if you could delve more on the same, sir. In what ways are you going to reward your shareholders, sir?

[Foreign Language] Shareholder value creation, first of all, starts from the basic fundamental principle of profitability. The more the profit, the higher the reward to the shareholders. So our first objective is to continue to increase the margins -- in the overall margins of the business and continue to improve profitability and grow the business. So that is a fundamental thing. Second, as far as the second part of rewarding the shareholders is concerned comes through a dividend payout, which we have full intention of rewarding the shareholders handsomely. And we intend to propose to the Board a very decent and handsome dividend payout in the -- when we do the final closing of the annual year, which will be towards the end of April or early May. And we will also come out with a dividend distribution policy in that same meeting.

You're absolutely, right, sir. these are the things which we investors look forward. And kudos to your team and that you are on that track in helping the -- building the confidence. Sir, in the -- now coming to your CapEx part, sir. As being outlined that INR 110 crores CapEx is in the annual, and it will take around 2 years for the capacity to be on stream. So sir, what gives you this confidence at this juncture because the Specialty Polymer has just started evolving, sir, after a gestation period of more than 2 to 3 years. It is only 2 quarters now that you are seeing things moving up and the utilization levels also moving up. So just give the insight that what are the levers on which you are harping this CapEx on?

[Foreign Language] This is like I answered the gentleman in the first question. We are building a completely new capability. It's not on the same product lines. And this CapEx is expected to start yielding returns straight away. So it's not that we are going to invest INR 110 crores and wait for 5 years or 6 years. This is -- the ramp-up of this will start almost immediately.

Correct. Correct, sir. Sir, in the presentation part, sir, in Page #11, the headline gives -- is -- expect business momentum to continue in FY '21. And the first line which we have used is partner with a global chemical leader in manufacturing, innovative polybutylene terephthalate activity. And is this a raw material that goes into our Engineering Plastics? Because in Engineering Plastics, we find the product polybutylene terephthalate, PBT, being mentioned under the product category. So just wanted the correlation, sir.

No. There is no correlation between the PBT being used in the Engineering Plastics division and this innovative PBT that we are supplying to this MNC, global MNC. There is no correlation.

Sir, what is this all about, sir? What should investors look into these lines and partnering with the global chemicals?

You see, this is a very innovative PBT. It is a sustainability effort. And it is made from recycled PET. So it has a very high RPET content. And as you know, the world is going towards higher sustainability and environmental consciousness. So people are demanding more and more products made from recycled material. And therefore, so this product is going towards meeting that demand and that need.

And this would be clubbed in which category, sir?

This is part of Specialty Polymer business.

Specialty Polymer part, right? In the value-added Film segment, sir, what was the contribution for the quarter and 9 months in turnover terms, sir?

So in terms of volume, we are about -- at about 20%. In terms of the value -- of the sales from the VAS product, we are then close to INR 110 crores in the 3 months -- in 9 months.

In the 9 month period.

Yes. INR 110 crores is from value-added products in Film segment.

Sir, we did total revenue of INR 153 crore, which is clubbed under polyester chips and films. And out of that value added has contributed to INR 110 crores?

No, no, I'm saying INR 110 crores for 9 months.

Sir, so 9 months, we have done INR 153 crores?

No, no. 9 months, we have done...

No. I'm sorry. I'm absolutely sorry. I'm looking at the PBT numbers. Wrong, wrong. I'm wrong. It's INR 600 crores.

Yes.

Yes. Yes. I'm sorry. And sir, coming to this business environment for the BOPET segment, sir, as your competitors lines have already -- they've commercialized the sale. And you have told that the impact has been on the lower side. So what has added to it, sir, because on the -- on the FMCG part, there has been a decline in the consumption pattern. So what has attributed to this absorption of fresh capacity?

Okay. To our understanding, what we understand that, yes, FMCG is seeing a decline in the growth -- in the growth rate. But because of this slowdown in the economy and the GDP, there is a conversion from higher price back to lower price back. So when -- for example, people are now buying less bottles of shampoos and buying more sachets of shampoos.

Correct. Right, sir. If I come to your -- my last one...

Sorry to interrupt, but -- next question is from the line of Priyasha Mohanty from Dolat Capital.

My question was on the CapEx of the Film business and SP business over the next 2 years, what is the outlook of that? I think more or less I have got the answers. So the third question that I wanted to ask was about the Engineering Plastics business. So what has been done to turn it around? And how do you see it growing further? I mean the performance has it been soft as you have mentioned. So what's the plan for it?

The performance of the Engineering Plastics business has been soft because of the slowdown in the economy in the auto and electrical segment. It was directly linked to that. And in the last 2 months, we have started seeing some improvement in the sector. And our performance has improved in the month of December and in January. And we expect that this momentum will continue. So we hope to see -- start seeing a revival in the prospects of the Engineering Plastics business going forward as well.

Next question is from the line of Dharmendra Dave from Prabhudas Lilladher.

Congratulation for a great set of numbers, sir. Sir, although you just mentioned on the previous participant that you have been looking -- the Engineering Plastic SBU is looking to come out of the pressure. But having said that, if we should look at the segmentally, if the Engineering Plastic business has been continuous dragging down the total Ester's performance. So are you planning to any strategic plan like divestment or merger on the SBU particularly?

Well, all I can say on this point is that, if there is a good opportunity for divestment, we will certainly have a good look at it. And if a good offer is made, we will view it favorably. And I just want to add that if such a thing were to happen that the EPU business were to be divested, and this would actually make Ester virtually debt-free as well.

Right. Okay. And coming to Specialty Polymer business, sir, it has been growing exponentially very well on the -- both on the volume and value side also as well as on the margin side. So what could be the potential for this -- particularly this segment in terms of sales over the -- what time line and also on the margin sir?

Yes. So we did a total sales value of about INR 32 crores for FY '19. And we will do about INR 70 crores to INR 75 crores for FY '20. So more than -- we will double it in this current year over the previous year. This investment that we are making of INR 110 crores in the Specialty Polymer business will yield a turnover of about INR 200 crores additional, which will -- part of it will start coming because the first line -- the first part of that expansion will start up in May this year, which is a smaller part. And this will start yielding results, let us say, towards the end of the calendar. So this investment itself will give additional revenue of about INR 200 crores over the next 2 to 2.5 years at a run rate of INR 200 crores per year. And on top of that, all the other products that we are working with, which I mentioned, which were the cationic dyeable MB-06, MB-07 easy dyeable, and there are 2 or 3 other products which I'm constrained to talk about in detail. We expect that over 4 to 5 years to reach a turnover of about INR 400 crore to INR 500 crore, it seems absolutely possible. And -- with the margin levels commensurate to what we are doing right now.

Okay. The current kind of margins are sustainable?

Yes.

Okay. So sir, so if we see the Specialty Polymer is roughly around 10% of the packaging segment. So over the 4, 5 years, how could we see at the top line and EBITDA level? Will it be....

Right now, the Film business is doing at about INR 650 crores a year, am I right? It's about INR 650 crores, annually...

INR 600 crores extra.

And chips INR 100 crores extra. But if I were to take only Film, it's about INR 650 crores. And this year, we're doing INR 75 crores. So a little more than 10% is the Specialty Polymer contribution in terms of top line. And if there is no further increase in capacity in film. And this remains same at INR 650 crores in the next 5 years, we go to INR 500 crores and then Specialty Polymers will become a very significant proportion to overall business of 30% to 40%.

Yes. So 30% to 40% on a topline front. Even EBITDA level, it would be even higher with the higher, sir?

Yes. Yes. So right now, let's say, if you're doing about INR 1,000 crores to INR 1,100 crores, you add about INR 400 crores to top line. So we go to about INR 1,500 crores to which INR 500 crores would come from Specialty Polymers and INR 650 crore would come from films. INR 200 crores would come from...

INR 100 crore from chips sale.

And INR 100 crores from chips sale.

Okay. Okay. Yes, yes . And sir, lastly, on the specialty, so on the packaging film side, how is the outlook for the first half?

Sorry. Can you repeat that question? I didn't understand.

On the Packaging Film side, what is the outlook, particularly for the fourth quarter and the first half of FY '21?

Well, fourth quarter is looking pretty steady. There has been no major upheavals in terms of pricing, even those 2 lines have started up and now fully operational. So the fourth quarter is looking steady. We hope we have -- that this trend will continue for the next financial year as well.

The next question is from the line of Rajesh Agarwal from Maneyore Investment.

My question is...

Sir, I would request you to please use the handset mode while speaking.

Okay. Sir, my question is on the special -- Specialty Polymer. What has been the turnover in MB-03?

MB-03, we are going at about 100 tonnes per month.

We have done 890 tonnes in the 9 months period with the sales value of about INR 36 crores to INR 40 crores.

Okay. INR 36 crores to INR 40 crores for the 9 months?

For 9 months over a volume of 890 tonnes.

Okay. And this quarter, sir?

In this quarter, we have done 260 tonnes, December quarter.

And sir, the second question, now the Film business is being peaking, so why we need to do the CapEx or can we wait for the Specialty...

No final decision has yet been taken on the capacity expansion for specialty.

Okay. And sir, which are the other companies which make barrier films and silk material?

Which makes what?

Silk material and the barrier films?

This details I wouldn't have at right now.

Next question is from the line of [ Gonanda ] Vaidya from Nirmal Bang.

Just one question. Could you help me with the margins in the BOPET film?

Yes. We can give you the value additions that we have been achieving over the last few quarters.

So in the value addition defined as selling price minus the raw material cost for June quarter, we are talking of 12 micron plain corona film, INR 51 in June '19 quarter. September '19, it was INR 40. That it improved to INR 46 in December. And currently, it is in that range only INR 45 to INR 46.

Okay, sir. And with these 2 lines in set up and fully functional, sir, do you see any pressure on these margins?

Well, they've already started up. Right now, we seem to be holding on. And we don't see any reason for any major upheaval. There may be some short term, but I don't see any major upheaval because demand growth has been strong.

Okay. So INR 46 is like the average margin that you'll earn on a BOPET film, approximately?

Very difficult to put a finger on the exact number, but ballpark. Yes.

We take the next question from the line of Ravi Nagda, individual investor.

Sir, I want to know about the first 9 month free cash flow of the company, sir.

Yes. So we made a PAT of about INR 52 crores. And if we add depreciation and the MAT adjustment, et cetera, there was a free cash flow of about INR 55 crores generated in the 9 months.

Okay, sir. And sir, what about the product MB-06, when we expect the substantial increase in MB-06, where it is positioned now, sir.