Ester Industries Limited (500136) Earnings Call Transcript & Summary

Thank you, Kevin. Good afternoon, everyone, and thank you for joining us on our earnings call today. I have alongside me, Pradeep Rustagi, our CFO. Before I begin, I hope all of you and your loved ones are safe and healthy. I will start the call by highlighting the key operational highlights, post which Pradeep will walk you through our financial performance for the quarter. To begin with, our revenues during the quarter were largely impacted by the lockdown-led manufacturing and supply disruption, which we had indicated to you about in our previous call. I'd also said that the business has picked up pace again, and we should be performing well for the rest of the year. Film business has seen good traction again on the back of strong demand. Performance of Specialty Polymer business, consequent to the pandemic and the increasing restrictions in customer markets, was muted; though, we are confident about long-term prospects of the business as fundamentals remain strong. Performance of the Engineering Plastics business was suboptimal owing to suspension of operations due to softness in the application industry segments. However, return to normalcy has been faster than expected as we have been able to achieve normal levels of operations in the month of July 2020, whether this will be sustained going forward remains to be seen. Though overall situation in the near term continues to remain challenging for the EP business, we are nonetheless undertaking steps towards reviving this business by improving the product mix and rationalizing expenses. Let me now talk about the individual businesses, starting with Specialty Polymer. FY '20 was an exceptional year for the business with strong revenue and profitability growth. Though our Q1 performance, as indicated in our previous call, was to a large degree impacted by the closure and lockdown challenges in India and U.S., we expect return to normalcy towards the end of the current financial year, maybe a little bit sooner. Had this pandemic not happened, we would have definitely seen a very strong growth in FY '21 itself. Demand for the innovative PBT continues to remain steady and growing. Further, new product for the carpet industry, which we have developed, has found to be -- has been found to be very successful. We have already started receiving orders for commercial volumes in the last couple of weeks. This product has immense potential going forward. MB 16, which is our newer version of the cationic -- or the cationic dyeable masterbatch has also been qualified by some of our customers, and we expect to start receiving the first commercial orders within the next 2, 3 weeks. Apart from this, we have a healthy product pipeline in various stages of development/customer approval, which makes us extremely confident about the prospects of Specialty Polymer business going forward. Moving on to the Film business. Revenues for the quarter were lower largely owing to lockdown-related challenges. As a result, we lost about 1,600 metric tons amounting to about INR 20 crores of sales in the month of April '20. However, since May '20, we are running our plant at full capacity. While domestic demand has been growing at a healthy pace of 11% to 13% per annum, we are also witnessing a further upsurge in demand due to COVID-19. It appears that there is a shift towards packaged products for health, hygiene and safety reasons. Margins during the quarter improved over corresponding quarter and previous quarter resulting into sustained profitability despite lower volume of sales. We expect the business momentum to continue on the back of strong domestic and international demand. Further, we are also working towards increasing the share of value-added products in the overall mix. We have commissioned an offline coater, which is a significant step in this regard. We are planning to increase the share of value-added products to 30% over the next couple of years, which would help increase the profitability levels in this business. As regards to expansion of film capacity to a wholly owned subsidiary, I am very happy to inform you that we have already started implementation of the project. We are confident that basis projected performance, the expansion will not hinder any pressure on our balance sheet. Our debt levels are at a very comfortable level at present. Pradeep will talk about this in a bit. All I will say is that we are conscious of the need to maintain growth momentum, and we will achieve this with better than prudent levels of debt to ensure a healthy balance sheet always. Moving on to Engineering Plastics business. Performance of the Engineering Plastics business was suboptimal owing to suspension of operations due to softness in the application industry segments. However, return to normalcy has been faster than expected, as we have been able to achieve normal levels of operation in the month of July 2020. Like I said before, whether this will be sustained going forward remains to be seen. Overall situation in the near term continues to remain challenging for the business. We are nonetheless taking steps towards reviving the business by improving the product mix and cutting down on expenses. A quick word before I hand over the floor to Pradeep. We have been diligently working to improve efficiencies and enhance productivity. Conscious of the need to maintain a healthy balance sheet, we have adopted a judicious and prudent approach as regard to utilization of funds for prepayment of interest-bearing term liabilities and conserving resources for expansion project. To conclude, I would just like to say that after delivering a strong performance in FY '20, we believe FY '21 will be even better in terms of profitability. Film business is expected to drive bulk of this growth. Performance of Specialty Polymer business is expected to remain muted for some time due to impact of COVID on customer markers. However, we expect a return to normalcy by the end of the current financial year. New developed products are -- as well are seeing good traction and product pipeline continues to remain strong. Lastly, while Engineering Plastics business has had a few challenging years, we are hopeful of things improving over the coming quarters. With that, I hand over the floor to Pradeep to walk you through our financial performance. Thank you.

Thank you. Good day, everyone, and thank you for joining us on our earnings call. I hope all of you and your loved ones are safe and healthy. Let me quickly highlight the key financial developments, post which we can commence the Q&A session. Starting with the top line, revenues for the quarter stood at INR 189 crores as against INR 284 crores reported during Q1, FY '20, lower by 34%, largely owing to the lockdown implemented during the beginning of the quarter. EBITDA for the quarter stood at INR 52 crores as against INR 54 crores generated during Q1, FY '20, largely flat despite lower volume metric sales and revenue generation. A combination of the improved margins in Film, improved efficiencies and cost management resulted in maintaining operational profitability. PAT for the quarter stood at INR 29 crores as against INR 24 crores reported during Q1, FY '20, higher by 23%. Moving on to the segment-wise performance, starting with the film business. Revenues for the quarter stood at INR 161 crores as against INR 226 crores reported during Q1, FY '20, lower by 29%. Despite lower revenue generation, we were able to report better margins and profitability owing to improved margins on account of favorable demand-supply scenario. EBIT for the quarter stood at INR 55 crores as against INR 50 crores, higher by 10%. EBIT margins in terms of percentage as per segmental reporting improved from 22% to 34%. Moving on to Specialty Polymer business. Sales for the quarter stood at INR 10 crores as against INR 16 crores reported during Q1, FY '20. Performance for the quarter was largely impacted by the lockdown and closure issues in India and U.S.A. But as mentioned by Mr. Singhania, given that the business fundamentals remain steady, we expect the same to revise it steadily by end of the current financial year. Lastly, moving on to Engineering Plastics business. Temporary suspension of operations registered in lower profitability for the quarter. While the overall business environment continues to remain challenging, our efforts towards improving the product mix and lowering the costs should help in maintaining the margins in the business. A quick word on the balance sheet before we commence the Q&A session. In comparison to interest-bearing debt of INR 142 crores as on 31st March '20, interest-bearing debt stood at INR 99 crores as on 30 June, '20 [indiscernible] INR 73 crores and working capital liabilities of INR 26 crores. Interest-bearing debt as a multiple of EBITDA stood at 0.47x as at 30th June '20. We expect further reduction in the coming quarters. We are confident of maintaining total outside liabilities and even network ratio at prudent levels going forward. We are diligently working towards continuously deleveraging our balance sheet and improving our leverage ratios. To conclude, I would like to say that we are confident of delivering a good performance during FY '20 (sic) ['21], aided by strong momentum in Film business. Thank you.

Should we open up for questions?

Yes.

[Operator Instructions] The first question is from the line of Sonaal Kohli from Bowhead.

Congratulations on a good set of numbers. So I have a couple of questions. My first question is that when you look at sales minus raw material per tonne, what was that number for you in this quarter? And if you can give some indication what kind of number would that be in the month of July?

Okay. The gross value add in polyester film for the June quarter was -- excuse me, 12-micron plain commodity was INR 55, the gross value add. In July, it is much higher. It is more like -- July was about INR 77.

I'm sorry, what did you say the number for July?

So June was INR 55.

Yes.

And July, which has gone past is about -- has been about INR 77. Rupees per kg. Rupees per kg for polyester film. For polyester film, 12-micron commodity.

Sir, what is driving such a large change? Would this change lead to increase in EBITDA or there some other costs? So if I see the difference of INR 77 minus INR 55, what pushed off -- it will flow through EBITDA? Or there are a lot of costs below the [indiscernible]

No, there's no increase in cost. There is no increase in cost.

Okay. And sir, what is driving this change? So I mean did you start seeing these kind of numbers even in the month of May or June or it's likely a July phenomenon. What I'm trying to understand is that was it that April was bad, because of lockdown or May, and the situation improved even in the last quarter, or this is a recent phenomenon. What is leading to this kind of change?

We were at -- we have touched these kind of numbers even in March.

March was INR 52, 12-micron per [indiscernible].

But...

Sir, I'm talking about the INR 77 kind of number, I'm talking about the INR 77 kind of number, which is [indiscernible]

We had touched a number of INR 70, INR 72 also in the month of March, in early March, before the lockdown happened. So we are seeing -- like I mentioned before, we are seeing a very steady growth in demand in the domestic market as well as the international market.

And is this demand here to stay? Or what could go wrong? What is driving the demand change?

So, like I've been saying that the demand growth in India has been in the range of about 12%, 13% for the last many years, and we expect this demand growth to continue for the next few years. People are changing -- the habits -- the consumption habits of people are changing. They're going more and more towards packaged food rather than open kirana shop material. It's a change of habit that is happening. We are a country with 1.4 billion people with close to 400 million or 500 million people in the middle income bracket, and that bracket is also growing substantially every year. So -- and on top of that, we are also seeing -- there is some movement towards -- more movement towards packaged goods, because of health and hygiene post COVID. So that itself has had an impact and which is here to stay. We don't believe that this is a short-term spurt as far as demand is concerned -- demand growth is concerned. It's going to be a sustained growth story.

And sir, what was the tonnage you did in the June quarter? And what is the maximum you can do in the quarter? And what was the EBITDA per tonne in the June quarter?

Buddy, say again please. Your voice is not very clear, Sonaal.

My apologies. Is it better for you now?

Yes, yes, now it's better.

So sir, in the June quarter, what was the EBITDA per tonne in the total tonnage you sold? And what is the maximum we can sell in a quarter with current capacity?

So the maximum we can do is approximately 5,000 tonnes per month right now. And we are running at full capacity.

So June quarter was full capacity or...

No, June quarter we lost 1,500 tonnes because of the lockdown in early April. So these numbers would -- if the June quarter number would have been much better had the lockdown loss not happened.

Sir, what was that volume number for June quarter?

The what number?

What was the total volume sold in June quarter?

June polyester film was 12,631 tonnes.

And you're saying you can do 15,000, in a normal...

Yes. No, I mean 15,000 plus minus couple of hundred tonnes.

And sir, what was your EBITDA per tonne in the June quarter?

So the variable expenses and the EBITDA... [Foreign Language] And this we are taking into account common expenses also. So we have per kg expense over raw material in the range of INR 25 to INR 27 in EBITDA. So INR 55 was my value addition for 12 micron, we -- you reduce another INR 25, that will give you the EBITDA [indiscernible] so about, let's say, INR 28.

Sir, lastly, if you can tell us about your Polyester business. I mean this year will be a washout as you said, but what kind of, let's say, a more longer-term plan, let's say, 2023. What kind of -- I know it's difficult to forecast, because it's a little way off. But what kind of ambition you have or what kind of turnover you could achieve perhaps in 3 years from now, let's say, 2023 or '24? And what makes you confident or under confident about this growth in Specialty Polymer -- polyester, sorry?

Are you talking -- you are asking both for Film and Specialty Polymers, right?

No. Polymer, polymers only.

So Specialty Polymers, Okay. So Specialty Polymers, the fundamentals remain very, very strong. We -- like I said before, we delivered a very good performance in FY '20, and that would have improved substantially in FY '21 had COVID not happen. But the -- like as the fundamentals for this business remain very strong. Basically, we have lost ground on our MB 03, the stain-resistant masterbatch product, which we did 1,100 tonnes last year. We were expecting to do anything close to 1,600, 1,700 tonnes in FY '21. But this volume will be lower, because the main market in America has gone -- very badly impacted, and therefore, we are going to lose volume on this account only. Our specialty PBT business is steady and growing despite COVID. So we did 450 tonnes last year, and this year, we'll do about 800 tonnes plus. So that business remains strong. Other than that, right, in the previous portfolio, we had a variety of small, small products, which we have to wait and see how they will be impacted. So largely, we may be close to last year's performance in terms of volume and turnover in Specialty Polymer business. But next year onwards, we expect a very, very significant growth owing to not only a resumption of volumes in MB 03, further growth in volumes of the Specialty PBT and 2 new products, which we have started. In fact, the new product we developed for the carpet market, we just started receiving orders in the last 2 weeks. So that product has been qualified and now slowly that volume is starting to -- last 2 weeks, this is a new development. And also on the MB 16, which is our cationic dyeable masterbatch, which was earlier known as MB 06. MB 16 has been finally qualified, and we expect to receive the first commercial order in the next week or two. So there is a lot of potential in terms of these 2 new products, plus the existing product. And on top of that, we have a pipeline of another 2 or 3 products with phenomenal potential, which are at various stages of development with the customer for customer qualification. So that is why we are extremely bullish about this business going forward.

And sir, is there any ambition level, like what is the realistic level of growth as in which we should expect a broad range or so over the longer term?

I mean if you ask me over the next 3 years, where would we be? We could very easily be in the region of INR 300 crores to INR 400 crores with EBIT margin of 35%, 40%.

And what would be that number for 2020 or '21?

2021 will be maybe the same as FY '20, because of COVID or maybe even a little bit lower.

INR 70 crore, INR 75 crore. would that number be...

I will keep it at INR 73 crores.

The next question is from the line of Deepak Poddar from Sapphire Capital.

Sir, just wanted to understand the pricing trend of BOPP and the sustainability that you see on BOPP pricing, yes?

We are not BOPP. We are BOPET. We are not polypropylene, we are polyester. Are you asking for polyester or polypropylene?

Polyester.

Okay. So like I said, that demand growth is at about 12%, 13% per annum, and we expect this to be sustained going forward for the next year.

And you mentioned about like INR 28 kind of a per kg kind of EBITDA, right?

Yes. INR 28 is -- may not be a number, which can be -- which could be sustained on a regular basis for the next many years. I don't think [Foreign Language]

So what sort of sustained level that you look for maybe in the medium term in terms of per kg?

So this year is going to be very strong because no new capacities are coming -- are expected till middle of next year. So since no new capacity [indiscernible] demand is still going to continue to grow, so we expect margins to remain strong. Now whether that margin will be INR 80 in terms of value add or INR 70 or INR 55, I don't know. But it's going to be a fairly strong year.

The next question is from the line of Giriraj Daga from K M Visaria Family Trust.

Sir, my question is really related to the EBITDA number you gave, INR 25, INR 27 or INR 28 kind of a number.

Your voice is not clear. Can you please speak into the phone?

Hello. Is it audible now?

Yes, better.

So you gave the number of INR 28. But when I look at your EBIT per tonne, it even comes to INR 42, INR 43 per tonne. And if I adjust the cost...

That is EBIT, earnings before interest and tax as per the segmental results, and segmental results as per the accounting standard, the unallocable expenses are not charged to the business. So it doesn't take into account the [indiscernible] expenses, which are for the common functions. So the EBIT margin would be more than the EBITDA, because the EBITDA number that we told you, it included the common expenses also.

Okay. Okay. My next part is that how is the let's say in the beginning you gave the number of June July, but how is like...

Your voice is not clear at all. We can't hear you. We can't understand.

Is it audible now?

Better.

Okay. My question is on the July, you gave the number of INR 77. Is there a major movement in the month of August so far in terms of BOPET prices or raw material?

No, there is no change in raw material prices. BOPET prices have softened a little bit, but nothing significant.

Okay, okay.

[indiscernible] wise there is always a variation of INR 5 to INR 6, INR 10, it will happen.

The next question is from the line of Chirag Singhal from First Water Fund.

Sir, I'm just trying to match the numbers you gave for the BOPET. So last -- on last con call, you mentioned that the spreads, the gross value add was INR 52 kind of. And you also mentioned that Q1 will be much more better than Q4, which we are seeing on the EBIT front. Like the margins have jumped from 26% to 34%. So I'm just not able to match the numbers when I'm doing it per kg or per tonne. That this INR 55 seems to be very lower. So you mentioned that the March on -- like in the March end, the margins were like INR 72. So was there a drastic improvement -- downside in the quarter 1 on the spreads and then again, it shot up? Is that the scenario?

First of all, but in the last earnings call I mentioned that the Q1 numbers will be very good, you will be surprised and that is taking into account the lockdown. Despite the lockdown, we have given this number. Q4, the PAT of INR 36 crores also includes the MAT recalculation of INR 9 crores. So if you remove that, the real profit was about INR 27 crores. Against that, we have given INR 29 crores in this, and if you compare it to the corresponding quarter, it was INR 24 crores. As far as the [indiscernible] it touched the peak of about INR 74, INR 73 in the month of March, but it was not sustained during the March quarter at that level.

And when we give you the value addition, we give for only 12-micron commodity films. Then you have metalized film, you have value-added films...

We have 30 kinds of films that we sell. But the bulk of the volume is in 12-micron Corona, and that is what we -- and that is a benchmark product and we give you the benchmark margins on that. Basically margins improved in the month of June. In the quarter 2 -- in the June quarter.

Right. So as we are seeing that 2 lines, which we know. The competitors are going to come up with in the current year, current year 2020. So are you seeing that there will be -- due to those...

There is -- no new line is coming up in 2020.

No, 2 new lines of BOPET, sir?

Yes. the -- India, there is no new startup till middle of next year.

Yes, not India. Globally, I'm saying, but the prices are driven by the global prices, right?

Also, there is an impact, yes, not fully.

Right. So on the same front, I was asking that given the new capacity is coming up in the next 12 months, are you -- like do you foresee any improvement in the margins from the current levels, because of the incremental capacities?

Listen, with incremental capacities, one would expect a lowering of margins, not increase of margin. But in any case, demand is also growing.

Yes. No, for improvement -- Yes. I meant the same thing from the improvement. Like are you seeing that will there be any reduction in the margins because of the incremental capacities?

Like I said, there may be -- this -- we expect FY '21 to remain strong. It will be stronger than FY '20.

The next question is from the line of Gaurav Lohiya from Bowhead Investments.

Just wanted to clarify on 1 calculation. So the number you gave to Sonaal, where you said that operations are normal, and we are running fully and delta and gross margin contribution is about INR 22 [indiscernible] to a number. So EBITDA, the delta EBITDA is coming out with INR 30 crores. So let's say, if we have done an EBITDA of INR 55 crores -- EBIT of INR 55 crores, would that mean that we will be close to somewhere around INR 80 crores, INR 85 crores in Q2, assuming that things or contribution remains here on this for the full quarter?

Yes. More or less, if you do a math -- simple math calculation, those numbers are more or less, right, where it's INR 80 crore or INR 75 crore, I don't know. But if the number -- if these margins were to remain, then yes, the ballpark number that you've given would be correct.

Okay. And second on the, sir, Director's commission. So what would have been this number in Q1?

Sorry, what?

Director's commission that we say, right? What this number would have been in Q1? Do we account for like the same -- do we spell it out over 4 quarters or is it like lower in Q1 and probably higher in Q4 when we know the full year profit?

Let me make a very clear-cut statement that our Director's commission will be at 10% subject to a cap. We will -- the Director's commission will not be irrespective of profit. So let's say the profits were to go to INR 200 crores, INR 300 crores. We -- the Directors will not take the full commission. We will cap it at -- within market expectations and performance. Here, also in FY '21, we will cap it.

Understood. I was just asking what that number would have been in Q1?

About INR 3 crores.

The next question is from the line of Aditya Singhania from Enam Holdings.

Sir, I just wanted to clarify how pricing moves in India versus globally. I understand this is a product where we don't import, I think, or maybe marginally, but there is some level of exports. So is pricing some sort of export parity or global pricing or how does it happen?

Yes, there is a link between -- with export pricing and import parity. So -- but right now, we are running higher than both, because of the strong demand. And we are always able to attract a little bit of premium over import parity also.

So just to clarify the INR 70 -- sorry, INR 77 you said in July. You're saying the global prices or global spreads may be slightly lower than this. And this has always been the case that India pricing is implying a slightly higher spread than globally?

Correct. Absolutely, correct. Your understanding is absolutely right.

Okay. And what would be the reason for this extra normal -- sort of extraordinary growth in India?

I think our population is the single biggest answer.

Sir, but population was true 6 months ago as well. Why has the growth accelerated?

The growth has accelerated. See, please understand another thing, that we are talking about -- whenever we talk about growth, we talk about growth in terms of percentages, when we say 12%, 13%. So as the volume grows, the 12% on our, let's say, on a 500,000 tonnes will be 60,000 tonnes. On a 600,000 tonnes will be 72,000 tonnes now. So there's a compounding effect.

Right. But has supply not kept pace with such addition?

Well, 2 new lines started up last year, which were fully absorbed without any major disruption. The next line in India is expected only towards the middle of next year. So capacity will need to be added to meet the demand. We will need continuous capacity addition.

Okay. And what prevents imports from happening if spreads in India are higher?

See, it's not easy to import. It's not like a bag of cement or sugar that 1 bag can be consumed by any customer or any person. It is very fungible. In polyester film, you have to be very specific in terms of the product you want. You have -- there's so many variables. You have micron, you have lens, you have width, you have coating, you have treatment. So it's more of a custom-made product. It's not easy to import and consume and there's a very big lead time. People are not able to also forecast exactly what kind of product they will need. So it's very difficult to import this product.

Okay. And final question, if I may be permitted to us. We were hearing that there is some increased export demand as well from primarily European countries. Would you also see that in your business? And why is that happening?

The underlying reason for increase in demand of higher consumption of packed food.

Even in places like Europe?

That is happening worldwide. This is a COVID impact.

The next question is from the line of Saket Kapoor from Kapoor Company.

Sir, firstly, if the breakup between the Specialty Film percentage for the quarter 1, the polyester films. In the Film segment, how much was Specialty?

About 14%, 15%.

14%, 15% of the total sales?

Yes, volume wise.

12,600, so 14%, 15%.

We just commissioned our coater in the month of May. It's not fully commissioned, because we're not able to get the engineeres to do the full commissioning, so it's been slowed down because of COVID. But this will help us to increase our value-added product portfolio substantially in the coming months.

Right, sir. So this will be the...

... 30%, and we'll do that very soon.

So this will be the enabler for it. I mean it is on full commissioning of this off coater line -- offline coater, that we will be able to scale up from the current 14%, 15% levels to 30% by end of this year?

This coater will help us to reach about 25%, 26%.

By when, sir?

Over the next few months.

Over the next few months. And what is the differential between these specialized films and the normal one? The price -- the realization difference?

Yes. So the additional contribution from these products will be in the range of INR 50 to INR 70 a kilo.

INR 50 to INR 70. And the cost side also, sir, it will add or...

... contribution. So that takes care of cost.

After the cost, it is INR 50 to INR 70.

Contribution. I'm talking contribution.

That is the sales. I'm talking about the profitability part, sir. If we compare both...

Profitability only. It is sales minus...

Yes, that's what.

I'm talking profitability only. The additional contribution over normal sale will be anything between INR 50 to INR 70 a kilo.

INR 50 to INR 70 a kilo.

[Foreign Language] additional profit will be INR 50 to INR 70 a kilo on the volume of coated films.

Secondly, sir, how have the raw material basket behaved, sir, over the last...

[indiscernible] for the last 6 months, it's remained -- 4 months, it has remained absolutely flat.

Okay. So both the PPA as well as the MEG prices have been -- the flattening of the curve is there for them. There is no exaggeration.

There is 0 movement in raw material over the last 4 months.

Okay. And availability is not an issue, sir, in any case?

No, no, no. It has never been.

It has never been the case. Sir, now if we come to the Engineering Plastics part, sir. It has been the pain point for even in the -- even in last quarter also and even if you take the December quarter also, we were contemplating, sir, to put the same on block and now with COVID in full blown, any M&A would be a tough task. So what has been the capital employed for this segment, sir?

The capital employed in this business in terms of investment to receivables inventory, et cetera, all put together is about INR 65 crores to INR 70 crores, including fixed assets.

INR 65 crores to INR 70 crores. And sir, can you give the cash earnings for this quarter? What has been the cash earning? How was the...

See this quarter has been a bad quarter for Engineering Plastics, because the application industries were all under shut down, lockdown. And therefore, the volume of sales was very less. We normally do about 2,400 to 2,500 tonnes per quarter, but this quarter, we could do only 1,200 tonnes. So this quarter is not indicative of the normal scenario.

Full company, I'm asking, sir. What has been the cash accrual for this quarter? Sir, we made a profit PBT of INR 40 crores -- INR 39 crores.

It's also -- a very good indication is also that our total debt has reduced from INR 142 crores to INR 99 crores. So from first of -- between 31st of March 2020 and 30 June, we have reduced our total term -- total liabilities by INR 43 crores.

So profit before tax plus depreciation minus the tax go, the amount is about -- cash accrual is about INR 45 crores.

And that is exactly according to the reduction index.

Okay. I'm just talking about the receivable cycle also. Is there any mismatch due to this COVID or the cash is the same as it was pre-COVID?

It is the same.

So that is getting collected...

The debtors are getting collected on time. There is no major...

There's no issue.

There's no issue.

No issues with them. And sir, now coming to the other part about the customized -- the polymer part, the specialized films and MB 01 and all. So you mentioned that due to the lockdown in the international market, especially in the U.S., the growth will be backed by how many quarters sir, I missed the point?

Very difficult to say, but we expect that we -- see, majorly only 1 product has got affected, which is the MB 03, which is a key product in our Specialty Polymer portfolio, because this was going for the commercial carpet application. And as you know, commercial spaces are completely -- everybody is working from home in the U.S. So the commercial segment has taken a very big hit right now. So till activity starts again, this volume will revise.

Two more questions, sir, what would be the CapEx for this year, sir? Yes, last point, ma'am. What will be the CapEx figure for this year and want to come to the queue.

So the CapEx, we have outlook of INR 45 crores.

This is the expansion plus the maintenance CapEx? So how much...

No, no, no. This is other than expansion.

[Foreign Language] for this year and [indiscernible] the figure?

[Foreign Language] because it's going to -- the investment from extra will go as equity into the subsidiary. And this year, we expect to be about INR 100 crores expenditure in -- less than INR 100 crores expenditure.

As equity investment into wholly owned subsidiary, less than INR 100 crores.

Any partner also we are contemplating? Yes, I'll come in the queue, ma'am. Please send me to the queue.

No partner.

The next question is from the line of Sonaal Kohli from Bowhead.

Sir, just a clarification. You mentioned that in July, your gross value add for the normal...

So, Mr. Sonaal Kohli. Sir, we're not able to hear you clearly.

Am I audible now?

Yes, much better. Thank you.

Yes.

So sir, you mentioned that the gross value add was about INR 77 per tonne and your normal commoditized 12-micron unit. And obviously, the higher quality ones, specialty ones have a higher margin. Then you also mentioned that this number may be INR 50, INR 55 going forward. Why are you expecting this number to fall? And when would you see this fall in a quarter or 2?

I didn't say it's going to drop to INR 50, INR 55. It was -- earlier it was...

So would you expect this number to be range bound like in July? I mean, plus minus INR 5, INR 10 either side?

July is already gone. I mean this is...

I mean, sorry, going forward, in the next few months or quarters?

It will be range bound between INR 65 and INR 80.

I see. And how would the capacity additions globally impact you, if we can't import? And why should it impact? And also are there any import duties which prevents imports from happening?

Yes, there is an import duty of about 11%. So there is an import protection.

Okay. And how would global capacities impact you? Is there a way these could come into Indian market? Has it ever happened in a significant way?

Imports really don't matter in India, because [Foreign Language].

So let's say, sir, if there's more capacity coming for next -- hypothetical question, the next 12 months, before it becomes operational. And assuming there's some capacity coming up globally. Would the pricing in the domestic market in any way get impacted because of the global capacity or demand in India is reversed and there's a demand-supply mismatch in India?

Like I said, please understand, fundamentally, there is a very strong demand growth in polyester film globally and in domestic market. So it's going to continue to go up. You might have short-term glitches where you might see a -- and this happens in -- this could happen month to month as well. It's not necessary that if today our margin is at INR 80, it is going to remain at INR 80 going forward for the next few months. There are various factors which come into play, which cause the margin to reduce by INR 5 or INR 10 for a short period of time, again, go back to higher margins. So largely, I have mentioned that this -- the direction is going to be strong for FY '21, because no new capacities are coming up and demand is going up. It's very difficult to estimate exactly what the margin is going to be between now and March 2021.

And there's a new specialty capacity which you're talking about is going to come over. What kind of incremental delta would it cost per tonne at the overall level? Because it would be a small portion of...

I didn't understand [indiscernible] offline coater.

Yes.

So, I have already mentioned that the offline coater will -- the volumes coming from there will give us additional contribution or, let's say, profit of anything between INR 50, INR 70 a kilo.

Yes. But the weightage would be relatively small. So I'm just trying to understand what is that absolute number?

At full capacity, [indiscernible] close to 3,500 to 4,000 tonnes a year.

So the right match would be INR 60, INR 70 multiplied by 3 divided by -- which -- 3,000 is per year?

Say, additional INR 20 crores to INR 25 crores profit from the coater.

Incremental?

Incremental.

This is a yearly number you're talking about, right?

Yes.

INR 20 crores, INR 25 crores incremental number compared to whatever it is.

Correct. Correct.

The next question is from the line of Ankur Agarwal from RC Wealth Solutions.

[Foreign Language]

Sorry to interrupt, Mr. Agarwal. Sir, your voice is sounding very soft. Can you speak a bit louder?

Hello, hello?

Yes, go ahead, please.

[Foreign Language]

Are you talking about Engineering Plastics or Specialty Polymers?

Engineering Plastics.

Engineering Plastics, what has started to do quite well in the first quarter of this calendar year, but then the COVID came, and we had a sharp reduction because the downstream application industries were affected very badly, which is largely auto and electrical. But we have seen a very surprising turnaround in the month of July. We are yet to see -- we have to wait and see whether this will be sustained. Of course, it will be way better than Q1 going forward. Q2 will be very, very much better than Q1. And we hope that the revival will be strong in this business in this current financial year.

[Foreign Language]

The market is very well segmented. There is a very, very small overlap.

[Foreign Language]

[Foreign Language]

In June quarter, we had exports of about 30%.

30%. [Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language ]

14% quarter [Foreign Language] Going forward, it could be less.

We'll move on to the next question that is from the line of Keshav Garg from Countercyclical Investments.

Sir, congratulations for great results, but you will recall that, sir, 2011 also something similar happened. Sir, like a typical commodity, so the spread and realizations went up. We did 33% operating margin. And sir, but from the next year, there was such a glut in the market that operating margins from 33%, they reduced to 5%. And they remained at low single digit for many years. So then, sir, like a typical commodity, still this time also same thing will happen. Right now, the spreads are very remunerative. So I mean additional capacity will come like you yourself are expanding capacity. So will everyone else. So subsequently, definitely, margins have to fall.

Okay. So you remember only 1 part of 2010, you forgotten the other part apparently. And let me remind you. In this -- you're absolutely right that 2010, the margins were crazy, and then they had -- there was a crash, but there was a reason behind the crash. 30% of the domestic sales went away overnight because of the ban on gutka. If that hadn't happened, that crash also wouldn't have happened. And also, you must not forget that in 2010, the total domestic demand was in the region of about 14,000, 15,000 tonnes per month. So when 30%, 40% of your demand goes away, you have -- you are burdened with a massive oversupply, which was completely unexpected. Nothing of this sort is going to happen [Foreign Language]. So we don't expect any such scratch to happen -- that happened. That was specifically because of the ban on gutka. And gutka was consuming 30%, 40% of the domestic demand. And the domestic demand totally was about 14,000, 15,000 -- sorry, it was about 17,000, 18,000 tonnes per month. Today, it is at -- today, the demand is at 42,000 tonnes per months -- 44,000 tonnes per month. and growing at 12%, 13%.

Okay, sir, much appreciated. Sir, but also, I was comparing our company with our competitor, Garwre Polyester and both companies have similar basically capacities. But they are -- their value-added proportion is almost 70% of their sales, and their exports are -- also 2/3 of their sales is exports. So -- and we are still at -- the value-added portion is like 15% in our turnover. So then why such a big discrepancy and what will it take for us to, I mean, increase that value-added proportion that our competitors have been able to do?

Not competitors, only one. Garware is a very -- Garware has not grown in terms of volume at all, and I don't know what their plans are or business future are. But they're also to thick film where they have a very high proportion of value-added products. We don't have any thick films. And plus, they have had historically product called Sun Control and some other products, wherein -- which is why they have a very high proportion of value-added products. Nevertheless, we are also on the same path of increasing our proportion of value-added products. 30% is our short-term target. It is not going to stop there.

Sure, sir. And also, sir, if you could just tell us broadly that, in FY '17, our operating margins were 6%, and they have increased to now over 25% in recent quarters. Sir, so how much has the realization change of the polyester film that we are selling? Broadly, sir, in FY '17, what was the price and today, what's the price?

I don't have that data available readily. We weren't expecting to...

You can make the call to us offline. We will get this data from our books and share with you. We don't have it readily available.

I don't have the data available for 2017 readily.

The next question is from the line of Chirag Singhal from First Water Fund.

Sir, on the EBIT front, which -- I just wanted to extend my earlier question. So you have generated operating EBIT of INR 55 crores, segmental EBIT in the film division against INR 50 crores last quarter on a lower volume base. So if I convert that into per kg basis, then we are seeing a INR 10 per kg increase in EBIT on a sequential basis. So...

Correct.

Yes, so INR 3, INR 4 is what we are understanding that this is because of the increase in spreads. So the other INR 6 is -- if you can explain, if you can throw some light on that?

So we talked only of domestic market, commodity films. Then you have metalized films, export, value-added films, and there were certain savings on the expense part also. So EBIT takes into account the raw material costs, conversion costs, selling costs, so we could -- there were savings in the other expenses also. So as a result, the EBIT margin has improved.

Okay. Okay. And pardon me for my ignorance...

Everything is not on account of value addition. We could save on the administrative expenses, we could save on material handling expenses. These were also lower.

Yes, that's very well taken, sir. But it's like INR 6 per kg is not a small figure, right? So not all of it would come from savings in costs and lower operating leverage would have also increased the cost -- lower capacity utilization would have also increased the cost, yes.

If you compare our results with the previous quarter, you will see significant savings in the administrative and other expenses, and other -- that is the category we are sving INR 6 crores to INR 7 crores in this quarter over the last quarter.

The next question is from the line of Sonaal Kohli from Bowhead.

So sir, you mentioned about some capacities coming on mid-year in India. What kind of size of capacity would that be? And considering the market growth, would that be able to absorb these capacities if not in 1 month over a couple of quarters? If you could throw some light on the total industry size and the capacity which is coming up in next 12 months midyear? And how would the picture look like, let's say, 12 months from now?

You see, I have already mentioned this before. The demand growth in domestic market is about 12%, 13%. If I take only 12%, today our domestic consumption is more than 500,000 tonnes per year. So if I take 12% on that, it's 60,000 tonnes. That's almost 1.5 to 2 lines per year additional requirement. So we don't expect [Foreign Language] they were absorbed without any major disruptions. Next year, 2 lines will start up. In fact, this year, 1 line was supposed to have started up this year. The industry and the market needs this additional volume. We want this additional volume to come. We are not happy in starving the market.

So sir this INR 6,00,000 numbers which we talk about, is this like 2020 number or -- which is this INR 6,00,000 number or is it quarterly number is it general? How do you arrive at the INR 6,00,000 number?

Okay. So the domestic demand [indiscernible] at 1,000 tonnes per month. That comes to about 5,40,000 tonnes per year. Each new additional line is between 35,000 and 40,000 tonnes. Now on a base of 540,000 tonnes, if you take 12% growth, you're talking about 60,000 to 70,000 tonnes of additional demand with these 2 new lines next year will provide.

And sir, when would your capacity come up?

That will come up in the second half of 2022.

And sir, typically, can you start this capacity at full utilization on day 1 or it takes a couple of quarters or a couple of months to reach the full utilization?

It's very, very quickly. So we can -- we are now experienced in this business, and we can ramp up very quickly within a period of maybe 1 to 3 months.

The next question is from the line of Saket Kapoor from Kapoor Company.

Sir, the point was that we came with a 25 dividend distribution policy, and thank you to the directors and the team for doing so for the investor community. So looking at the cash generation, which we are envisioning and god willing as and when we succeed. And looking at what the taxation part has been on the dividend -- on the part of recipient being taxed now. So could the Board look at buyback also as a more better mode of rewarding shareholders. Since it is a tax-efficient way also of returning cash back to the shareholders. I know this is COVID period, and it would be very difficult for us now to conserve cash burn. Since we are coming up with CapEx also and the cash generation has not been affected. So what is the thought process? And when is the AGM schedule, sir?

AGM is on 28 August. And all options are there. The Board will consider everything at the appropriate time and take a decision, which will be most beneficial for all stakeholders, including the shareholders of the company.

Yes, sir. Only on the taxation front, I was just thinking. It would be tax efficient for everyone.

Please understand. I'm making a very clear-cut statement that the interest and benefit of the shareholders is always very high in our priority.

Correct, sir. And sir, thank you for the teams are putting up a good show and we hope for better numbers going forward as we will be -- as told by you that we will be running at full utilization level for this coming quarter. And definitely, we would be -- we are expecting a better show from the company going forward. Any effect on monsoon, sir? Or any...

No.

No. It will be a normal quarter for us going forward also in terms of your production and dispatch numbers?

Right.

The next question is from the line of Arnab Kapoor, an investor.

You had mentioned a guidance of around INR 70 crores this year and about INR 300 crores in 3 years for your SP business. What should be the EBIT on that? Would it be same as the level that you're operating?

EBIT, as mentioned, is going to be between 30% to 40% in this business. And going forward, also, we will maintain these numbers.

Okay. And how much of this is exported or this...

FY '21, like I said, because of the drop in volume expected, drop in volume in MB 03. This year could be a bit of a hiccup. But otherwise, going forward, we are very confident of maintaining these numbers.

Okay, sir. And how much of this business is exported, like how much of the SP capacity is exported versus India?

All export. Right now almost all.

All exports. So all U.S.

Mostly U.S., Europe. Some going to China now -- China is starting up.

Okay, sir. And on the last earnings call, you had mentioned that you're looking for a diversification in the special -- in the SP business and about INR 110 crores was approved. Are you looking to do that? Are you looking to progress on that? Or it would be some hold given COVID for now?

Because of COVID reasons, we have now -- we are having a relook. We will take a call on this in the next few months. We've put it on hold.

Okay. sir. And the INR 300 crore guidance we should take that for the 3 year, which you had mentioned?

Sorry?

You had mentioned INR 300 crores by FY '23 or 3 years for the Specialty Polymer business. So we should continue with that guidance?

So in the next 3 to 4 years, INR 300 crores to INR 400 crores is entirely possible from this business.

Okay. And the sales from MB 06 or MB 16, which you are mentioning just kicking in this quarter, can you give a number or any range for that?

Well, right now, we are going to start off very slow, as no business picks up and goes to full levels. But we are expecting the first order in the next week or two. And the potential that the market has given us, it could be anything between 2,000 to 3,000 tonnes per year.

The next question is from the line of Shivlal Khandelwal, an investor.

Can you hear me?

Yes.

Sir, just I wanted to know why the expansion is done through subsidiary, why not in the same company only? And what will be the debt equity portion of that?

So the expansion, we are going in a subsidiary to take advantage of the lower tax relief, that the finance minister -- honorable finance minister announced. So new companies are -- can take advantage of tax rate at 15%. That is the reason why we're going in to the subsidiary group route.

And what would be the debt equity ratio in that, sir?

30% would be through equity, 70% would be through debt.

But that debt will be able to service quite comfortably then?

Very easily, because majority of that debt is going to be in form of...

ECB.

ECB, external commercial borrowing, which is going to be at a very, very low cost, extremely low cost.

And 1 another question, sir, next 2 to 3 years, how much export turnover -- total turnover on export contribution we are expecting?

From which product?

Total all together.

Well, SP is going to be all export. Film will maintain anything between 20% to 30% in export volumes.

The next question is from the line of from Rahul Nadkarni, an investor.

First of all, I'd like to start by congratulating the management for an amazing set of results for this quarter in spite of the challenging times of COVID. So in terms of -- a few questions from my side. First, in terms of the expansion that we are having by way of [indiscernible] subsidiary. So one, have we closed on the debt tie-up for that particular project? Or you are yet to tie up the funds in terms of lending?

It's work in progress. It's happening and it will happen -- it'll be disclosed in the next few months. It's not a problem.

Okay. But it would be an offshore debt?

Part of it, not all of it.

Okay.

So out of the approximate INR 350 crore debt, INR 200 crore to INR 220 crore will be in foreign currency and INR 130 crore to INR 150 crore will be rupee debt.

Okay. Understood. And what would be -- okay, so you're still under [indiscernible] stage for that. Okay. That is 1 question. Next question is in terms of the Specialty Polymer business. There was a statement in the investor presentation that innovative PBT, the capacity that you had was significantly higher as compared to, if I take a quarterly average of the annual capacity, which is contracted with this global chemical player. So If, let's say, the annual capacity goes over and above that for which the order is there, does the price remain same or is there a...

Yes, price remains same. Price is contracted. In fact, the price is contracted on a fixed margin basis. So the price moves up and down based on raw materials, the margin has been negotiated and fixed.

Okay. Understood. Then the next question is in terms of your Engineering Plastics division. So there, because -- I understand because of lockdown, there was serious impact on the application industries. Just if you could -- if you have a broad breakup of costs in terms of what is the variable and fixed costs for the Engineering Plastics business?

Direct variable cost would be, if you talk...

It changes from product to product, but in terms of broad -- I'm more concerned with the fixed costs, variable is still -- it will vary based on your revenue. But what's the fixed cost?

[Foreign Language] if you have another question to ask, I'll take 5 minutes to get back to you.

Sure, sure, sure. So another -- 1 more question in terms of now the cash levels. So the company has been generating healthy cash accruals, which is evident from the debt servicing that you guys are doing -- debt payments, prepayment that you are doing. So I wanted to understand, I heard in the con call that somewhere around INR 40 crores, INR 45 crores is the cash generation on a quarterly basis. Right?

Yes.

Yes. So with the -- now if I look at the debt, which is there, it is around INR 98 crores out of which working capital is only INR 26 crores. So on the next -- in this quarter, with INR 45 crores additional coming in, do we expect to do some prepayment on the term loan piece as well? Or you are looking at, using those especially for equity infusion?

So we will have, whatever is the [indiscernible] judiciously used for prepayment of debt and for equity infusion into the subsidiary.

Okay. And are you planning in terms of the debt that you would be taking at the subsidiary level, would -- are you expecting to give a guarantee from the company, a corporate guarantee?

[indiscernible] -- yes. Corporate guarantee will be given for the debt offer.

Will be given. Okay. Okay.

So regarding the variable cost -- variable cost and fixed cost and the variable cost over and above raw material is in the range of INR 9.50 to INR 10.50 per kg, depending on [indiscernible] and fixed costs, including all elements of cost, direct and indirect, is about INR 10.50 to INR 11.

So how much would that translate to in terms of your actual content in terms of fixed cost, absolute?

I couldn't get...

Okay. The volume [indiscernible].

That is volumes? Okay. The fixed cost...

Yes. Absolute number in terms of what is the fixed cost that is incurred cost?

For a year on a normal volume basis, it would be INR 5.5 crores to INR 5.6 crores.

The next question is from the line of N M Modi, an investor.

Sir, that coating machine is now in full swing, that has fully commissioned?

No. It has not been fully commissioned. The machine we started up in May, but there are still travel restrictions. So we are unable to get the engineers to come in to finally fully commission it. So it's only partially commissioned.

So he has to come from abroad?

No, he has to come from Bombay.

Oh, Bombay only. Okay. Okay.

Yes.

Okay. Another thing I wanted to know, in segment, there are 2 types of revenue. One is polyester chips and film. So these polyester chips and film consist of polyester film and this thing -- your polymer -- Specialty Polymer?

Yes. Correct, correct.

So sir, can I know the breakup of the last year turnover. This INR 877.92 crores, we have done the turnover. So what was the breakup, sir, for this polyester film and Speciality Polymer?

Out of this, INR 73 crores were Specialty Polymer.

Okay. So the major portion is, sir, polyester film only?

Absolutely.

So sir, I think 90% of our turnover consists of polyester film of this company as a whole?

75% comes from polyester film, another 6% to 7% from polyester chips and 7% to 8% from Speciality Polymers and close to 14% to 15% from Engineering Plastics. Last year break up.

Okay. Okay. So more or less, these are actual to the same. And whatever there will be a shortfall because of U.S.A in Specialty Polymer, that will be compensated, I presume, by new product you are launching?

See, again, whatever is a loss this year on the Specialty Polymer, basically MB 03 is going to be a permanent loss. I mean that is the time gone, volume gone is gone. This volume will come back once things stabilize in the U.S. All the new volumes, which will come from the new products, will be over on top of that.

Okay. But at the same time, we are launching some new products. So whatever the shortage you will -- arise because of that, that will be compensated by the new product as you were telling about carpet?

This year, we will not be able to compensate that loss.

We'll move on to the next question that is from the line of Gaurav Lohiya from Bowhead Investment.

Just wanted to clarify on Specialty Polymer. You mentioned that you expect somewhere around INR 300 crore revenues in next year's time and EBIT margin of 35%. So would that mean that even U.S. products would have the similar margin profile as you are patented products such as MB 03 and that would mean somewhere around INR 100 crores of EBIT. So are these numbers like way off in our expectation? Or would we have to do some CapEx and that's why one should not be looking at this EBIT margin and there would be additional interest outflow?

See, the blended margin in the Specialty Polymer business will be in the 35% region.

That is the current scenario, right? And going forward also, it would...

Going forward, the new products also will demand this margin number.

Okay. And would we need to do major CapEx to be able to get to that INR 300 crores and therefore, the EBIT margin while maybe higher wise...

No.

So that would lead to still addition of somewhere around INR 100 crores of EBIT in your current numbers, right?

Right? So no major CapExes are required to reach at least INR 300 crores.

Thank you. Ladies and gentlemen, that is the last question. I now hand the conference over to the management for their closing comments.

Thank you very much for joining us for the Q1 earnings call of Ester Industries, and we look forward to talking to you again after close of Q2. Thank you very much.