Ester Industries Limited (500136) Earnings Call Transcript & Summary

[Audio Gap] Only MB 03 was impacted due to lack of demand from a key customer markets due to exceptional situation caused by COVID-19. The sales of MB 03 is expected to rebound by -- from next year. We expect effects of vaccination drive to normalize situation by April '21 in United States of America, which is our primary market for MB 03. We therefore expect normal levels of exports of MB 03 to start from May or/June '21. We are pleased to inform you that last night itself, we received orders for 100 metric tonnes of MB 03 to be dispatched within the quarter of March 2021. This leads us to believe that our expectation of revival by May/June should happen. As regards prospects of innovative polybutylene terephthalate, the agreement signed with global chemical leader in April 2019 was for a nominal quantity of 400 metric tonnes per annum. We achieved sales of 465 metric tonnes in the first year of agreement and sales of 786 metric tonnes during 9 months of FY '21. Basis orders in hand, we are confident of achieving sales of about 1,000 metric tonne during FY '21 compared to the contract of 400 metric tonnes only. Based on growth in sales achieved in the last 2 years, we expect volume of sales to grow substantially post '21 as well. Innovative PBT finds application mainly in consumer electronics currently and is now being propagated for other applications for the automotive, textile, cosmetics, et cetera. The underlying strength and strong structural fundamental of this business gives us confidence that this business will regain its momentum as the environment normalizes. Commercial sales of 2 new products, namely MB 07, that's the easy dyeable, and LMC 03, low melt copolyetherester, having immense potential, has started during the quarter. Export of MB 16, the cationic dyeable masterbatch is also expected to start within the month of February. Commercialization of these products will act as a strong growth trigger for the business. All these products are developed in-house, which is a testimony to our innovation and R&D capability. Further, this business is technology driven, patent protected, which helps limit competition and offer sustained and strong growth prospects. Our efforts in recent years have been directed towards building a comprehensive portfolio so as to reduce dependency on few products. Moving on to our Film business. On year-on-year basis, favorable demand-supply scenario, coupled with higher operating leverage, resulted in better profitability and margin. On quarter-on-quarter basis, maintenance shutdown undertaken during the quarter resulted in lower volume and revenue generation. We continue with our focus and thrust on increasing proportion of value-added and specialty products and overall product mix by focusing on innovation, development and partnership with customers both in India and overseas. Resultantly, we have been achieving steady improvement in product mix. Share of value-added products stood at 20% as of Q3 FY '21. Commissioning of the off-line coater would help us to achieve the target of 30% of value-added and specialty products in the total volume very shortly. Going ahead, we believe that better product mix, coupled with capacity addition through the wholly owned subsidiary, will drive the performance metrics of this business. Polyester Film business is one of the few segments which has benefited positively from the outbreak of COVID-19 pandemic as majority of the people now prefer packaged products from health and hygiene point of view. Going forward, we expect the domestic and global demand to grow at the rate of 11% to 13% per annum and 6% to 6.5% per annum, respectively. We are accordingly getting future ready by scaling up our capacity through our wholly owned subsidiary to meet the growing demand of our customers. As regards expansion of film capacity through the wholly owned subsidiary, we have already started implementation of the project and invested about INR 87.4 crores till date. Commercial production is expected to start as per the schedule, that is by October '22. Lastly, let me discuss our Engineering Plastics business. The performance of the division has been fairly muted over the last -- over the past year largely owing to the softness in the end user industries. Starting from September '20 quarter, the business delivered a stellar performance for 2 consecutive quarters, with revenue and margins registering a sizable improvement. Volumes of sales and profitability for the quarter were exceptionally strong on the back of strong demand from end user industries OFC, auto and electrical. We expect the business to continue to deliver consistent and meaningful performance going forward as well. As mentioned in the previous call, we are evaluating the relocation of our engineering plastics plant to help serve the customers better and also to cut down the logistics costs that we incur currently. The relocation of the plant itself should help us improve EBITDA margin by approximately 2%. In addition to the relocation, we are also evaluating an investment towards setting up a new extruder to help us meet the growing demand. We expect the Engineering Plastics business to deliver consistent performance going ahead. To summarize, Film business continues to be the mainstay of the company at present. We believe the capacity expansion, coupled with improved product mix, should help us improve overall profitability of the business. Specialty Polymers business is expected to deliver growth as well as better performance in the coming years. While FY '21 was affected adversely due to certain challenges, we expect performance to pick up pace going forward. Lastly, Engineering Plastics as well, after a few challenging years, is getting back to its growth trajectory. The demand environment is steadily improving, and we expect the momentum to continue going forward. To conclude, let me just reiterate that we are quite positive on our -- on all our businesses. We believe that all our businesses are shaping up well and are well positioned to deliver sustained performance in the coming years. That concludes my opening remarks. I now hand over the floor to Pradeep to walk you through our financial performance. Thank you.

Good afternoon, everyone, and thank you for joining us today. I will quickly walk you through the financial performance for the quarter and 9 months ended December '20, post which we can start the Q&A session. Starting with the quarterly performance. Revenue from the operations stood at INR 256 crores as against INR 246 crores reported during Q3 FY '20, higher by 4%. While on a 9 months basis, the same stood at INR 695 crores as against INR 785 crores that is lower by 12%. Turnover at company level is lower mainly on account of sales of 355 metric tonne of chips having sales value of INR 1.7 crores during 9 months ended December '20 as against sales of 8,390 metric tonne having sales value of INR 58 crores during 9 months ended December '19. Though chip sales adds to the top line, it adds marginally to the bottom line. Q3 marked the first quarter wherein we have been able to deliver higher revenue run rate over the previous year, indicative of the normalcy in the business. Growth during Q3 was largely driven by strong performance of Film and in plastic businesses. Specialty Polymers performance, as mentioned by Arvind, was impacted by exceptional and uncontrollable situation caused in customer markets by COVID-19. EBITDA for the quarter stood at INR 58 crores as against INR 45 crores generated during Q3 FY '20. That is higher by 29%. While on a 9 months basis, the same stood at INR 183 crores as against INR 145 crores [indiscernible] H1 FY '20.

Nine months.

Nine months FY '20, sorry, 9 months FY '20, higher by 27%. The growth was [ due to ] better performance of Engineering Plastic business, better product mix, operational efficiency and margins in Film business. Finance costs for the quarter was marginally lower than December '19 quarter. On 9 months basis, the same declined by 34% to INR 13 crores as against INR 20 crores 9 months '20. As of December 31, 2020, our outstanding interest-bearing term debt, net of free cash, stood at INR 105 crores, while interest-bearing working capital liabilities stood at INR 52 crores. Interest-bearing debt, net of free cash, as a multiple of annualized EBITDA stood at a healthy level of 0.64 as of 31st December 2020 in comparison to 0.39 as at 30th September '20. We are committed towards maintaining better-than-prudent debt-equity levels. This is evident from the total outside liabilities and tangible net worth ratio that is [Technical Difficulty]

Ladies and gentlemen, we request you all to please stay connected. We are trying to reconnect the management. Ladies and gentlemen, the line for the management is reconnected. Thank you. And over to you, sir.

Interest-bearing debt, net of free cash, as a multiple of annualized EBITDA stood at a healthy level of 0.64 as of 31st December '20 in comparison to 0.39 as at 30th September 20. We are committed towards maintaining better-than-prudent debt-equity level. This is evident from the total outside liabilities-tangible net worth ratio that stood at 0.58 as at 31st December '20. Further, as mentioned in the previous call, while funding the expansion project in wholly owned subsidiary, we have taken advantage of benign interest rate environment globally and, as such, got sanction for foreign currency term loan of EUR 28 million in the wholly owned subsidiary. Depreciation for the quarter stood steady at INR 8.85 crores, while on a 9-month basis, the same stood at INR 26.5 crores. Profit for the quarter stood at INR 33 crores as against [indiscernible] during Q3 FY '20 that is higher by 70%. While on a 9-month basis, the same stood at INR 108 crores against INR 63 crores reported during 9 months FY '20, higher by 73%. To conclude, I would just like to reiterate what Arvind said earlier. We believe all our businesses are well positioned to deliver consistent performance over the coming years. While Film business will continue to be the mainstay of the company, the growth will be delivered by Specialty Polymers. We expect Engineering Plastics business to contribute consistently and meaningfully to the top line and bottom line of the company going forward. We believe we are well placed to create significant value for our stakeholders in the coming years and are about to embark on an exciting phase of the business. Thank you.

Can we open the floor for Q&A, sir?

Yes, please.

[Operator Instructions] The first question is from the line of [ Rahul Nadkarni ], an individual investor.

Yes. Can you hear me?

Yes, sir, we can hear you.

Yes, yes.

Yes. Yes. I would, first of all, congratulate the management for delivering a very good set of numbers in spite of the challenging times that we are in. There are a few basic questions which I had. One is there, I can see an increase in the amount of term debt which has happened on a quarter-on-quarter basis. So just wanted to understand what exactly is the reason for that.

Okay. So we are -- like I mentioned, we are putting up a polyester film capacity expansion through wholly owned subsidiary, and major amount of investment was made in this quarter as equity into this subsidiary, which caused us to -- the working capital facilities to be utilized higher than the previous quarter. It's ...

We have also raised some core term loan so that the net working capital remains healthy.

Overall, our total debt level still remains better than prudent, so I'm not worried. And nobody should be worried on that account.

But this is mainly towards the investment which has been done. So is it like a corporate debt which has been taken for investment?

No. It was equity into the wholly owned subsidiary.

No, no. But there was a [indiscernible]

I think [indiscernible]. We had unutilized [Technical Difficulty]

Ladies and gentlemen, the line for the management is disconnected. We request all the participants to please stay connected while we reconnect them.

I am back online.

Sir, you may proceed.

Yes. So understood. So you were explaining something before the line got disconnect on the debt part.

Yes. So basically, what we are explaining is that we utilize the unutilized working capital limits, and some additional term loans were taken, which were used for CapEx and investment into the WOS.

Okay. Understood. Another couple of questions. One is on the -- any update on the renewal of the contract for the innovative PBT [indiscernible]?

There is no need. The renewal of the contract is now a mere formality. The business is continuing to grow. We may not even need to sign another contract for that. As I've explained in my opening remarks, against a nominal contract value of 400 tonnes for FY '21, we are going to exceed 1,000 tonnes already.

Okay. So it's basically -- based on the understanding that it will be an ...

You will see substantial improvement in volumes going forward with or without a contract.

Okay. Understood. Got it. And another question on Engineering Plastics. In your opening remarks as well as in Pradeep's remarks, you had mentioned that you're planning to shift the plant to some other location from a logistical cost perspective. So I just wanted to understand when -- what would be the timing of this shift. And would it impact or result in a shutdown or loss of revenue because of that?

No. So that -- we are targeting to complete relocation by December '21. And this will not cause any loss of revenue, because, first, we will install a new extruder in the new location so that any impact of closure of the old extruder does not hit revenue. And one by one, we will shift all our equipment. There will [Audio Gap] loss of revenue.

Understood. Just one more question, if I'm allowed. In terms of the -- in one of the statements you made there, there was a shutdown which was done in Q3 which impacted the revenue, which is a maintenance shutdown which was done. So I wanted to understand, how many days was the shutdown done? And what was the impact of -- on the revenue and EBITDA? If this shutdown wouldn't have been done, what would have been the revenue? And EBITDA would have been higher by what quantum?

So there was a 7-day shutdown which impacted with a loss of production of...

Close to 700 tonnes.

700 tonnes. 700 tonnes multiplied by, let's say, about INR 7 crores approximately revenue loss.

Close to INR 9 crores.

INR 9 crores of revenue loss. [indiscernible] EBITDA on this...

Close to INR 4 crores, INR 4.5 crores.

INR 4 crore, INR 4.5 crore EBITDA loss.

INR 4 crore to INR 4.5 crore. And this is a normal maintenance shutdown which you do in Q3 considering it's the holiday season?

Yes. Yes.

[Operator Instructions] The next question is from the line of [ Sudhir Reddy ], an individual investor.

First of all, congratulations on the set of numbers, what you have delivered, and also a good growth -- progress of growth year-on-year. I just want to ask a question on Film business. With respect to the film business, like the September quarter was good because of whatever, the pandemic situation. And now the -- followed by post September, like the growth was not expected. So is this the growth going to be declining more or it's going to be stabilized after this?

I think it'll be more or less stabilized. There will be -- there will always be some fluctuation. No business can exist without some fluctuation. So -- but basically, more or less, you can expect it to stabilize at these levels plus/minus a little bit. September quarter was an average, and I mentioned that in my previous con call as well.

Yes. Sir, I also have one more question on -- with respect to new order has been received last night, right? So can you please give more details on that?

Yes. So basically, in our Specialty Polymers business, we largely got impacted because of our stale-resistant masterbatch MB 03, which it forms a large chunk of our business. And this was highly impacted because America has -- is in very deep trouble because of COVID-19. And we have [Technical Difficulty]

Participants are requested to please stay connected while we reconnect the management back. Ladies and gentlemen, we have the line for the management reconnected. Thank you. And over to you, sir.

Sorry, we got disconnected again. I don't know what's happening. But like I said, MB 03 was very badly impacted because of COVID in the U.S. We were expecting a recovery to start by May/June. And this big order -- the sizable volume, the order that came in last week only supports what our supposition is, that this business will revive back very shortly.

[Operator Instructions] The next question is from the line of Gaurav Lohiya from Bowhead Investment.

Yes. Am I audible now?

Yes, sir.

Yes. Sir, can you please give me the volume data for this quarter as well as Q2 FY '21 and the gross value addition for both these 2 quarters?

Which product do you want, Gaurav?

Sir, for the packaging segment, I meant.

Okay, I'll give you the volumes.

Sure.

For December '20, we did 14,300 tonnes of sales. September was 15,000. You need December '19 also?

No, December '19 I already have. It was 13,539, right?

September was 15,000 and December is 14,000.

300, right. Sir, and what was the gross value addition, sir, for these 2 quarters?

So the 12-micron -- the commodity 12-micron film, I'll just give you the number.

Sure.

Just a minute. It was INR 46. But blended for all the products put together, metalized, et cetera, it was INR 64 for our -- for the company.

INR 64. And then the costs and other indirect costs would be, let's say, somewhere around INR 20 crores, INR 30, right? INR 30. So I think you know that.

INR 20 is the variable cost, and the other cost is about INR 15.

INR 15. And what was it in previous quarters, sir, in September quarter?

Pardon? The cost number will remain largely [indiscernible].

Okay. No. I meant the gross value addition in the last quarter. Would it be somewhere around close to INR 70?

So September, the 12 micron was INR 58. Blended for the company, it was INR 73, which reduced to INR 46 for 12-micron and INR 64 at the blended level.

For -- understood. So sir, just one clarification. So if I see that the volumes have increased versus last year, right? last year is somewhere around 13,600 micro -- metric tonnes volumes was there, right, in the packaging. And this year, it's about 14,300. But if I see revenue, the revenue have declined in that packaging segment. So was there a realization pressure versus last year, and that is leading to the compression of gross value add? Or it was mainly raw material driven?

Raw material driven.

Okay. And if I look at the revenue, so that -- since the volumes have grown while the revenues are kind of -- or it has declined, so was there a compression in sales value and in realization as well? Or was it like the export mix would have changed? Export was less in this quarter, and that may have led to this kind of ...

In the current year, the margins are better than previous year. But the decline in revenue is because of raw materials, so ...

And the chip sales, we... [Audio Gap]

Tough chip sales. It's also is a part of the [indiscernible].

Sorry, your voice is breaking, sir. Can you please repeat that?

So margins in FY '21 are much better than margins of FY '20. The reduction in revenue is because of reduction in the -- sharp reduction in raw material costs and no chip sale during FY '21. That is the reason you see a reduction in revenue.

Okay, sir. I anyways had adjusted for chip revenue. I subtracted that. But I will take it offline if I want more clarification. And sir, if I look at the specialty division, your sales have declined. Let's say, last year, you did INR 20 crores-odd sales. In this quarter and this year, it's about INR 13 crores, right? While our margins -- I think last year, we did an EBIT of -- reported EBIT of INR 10 crores. And this year, it's about INR 2 crores. So -- sorry, INR 7 crores, INR 8 crores, and this year it's about INR 2 crores. So the decline in EBIT is higher than your -- the revenue decline in specialty. So is it that the MB 03 was a much higher-margin product and that's why the decline is higher over there in the -- is it? Or was there -- hello?

So the only product which really got impacted was MB 03. And this entire decline in revenue and margin can be attributed to that.

Secondly, there are [Audio Gap] in the EBIT calculation. So the -- beyond a certain threshold, the jump in the EBIT will be more as we increase -- achieve more sales. So it's not everything that goes into the EBIT calculation. It's not variable.

Understood. And sir, you said that you already started exporting MB 07. And I remember that you said that the potential is about 1,000 tonnes from one customer, right, and the overall production could be much, much higher. So would we be able to expect this volume, 1,000 tonne, in next year? Or it would take time? That's a 2, 3 years kind of target for MB 07.

So definitely, we expect a volume between 800 to 1,000 tonnes in FY '22.

FY '22. Okay. And will the price -- or the price of the product will be, sir, close to?

It is -- it would be selling close to INR 320 a kg, MB 07.

Okay. Understood, sir. And the margins would be, let's say, close to 30%-odd, right, at EBIT level?

The distribution margin would be close to about 30%, yes.

All right, sir. Okay. And sir, similarly, last thing on LMC 03, you said that the potential there was 5,000, 6,000. So what kind of volume or revenue we can expect from LMC 03 in FY '22 and '23?

So LMC 03 was, again, impacted because of COVID. The customer could not do the major launch they were expecting to do in the last quarter of calendar '20. So that -- because of COVID, it got delayed. But the product has been accepted commercially, technically, everything. Small volumes that we have already started moving. So every second month, we are doing about 30, 35 tonnes of this product. A bigger launch is expected around June. So we can start expecting good volumes in FY '22, and this will grow substantially as the years go by.

Can we expect some 1,000, 2,000 tonnes from this product in FY '22? Or would that be high considering it's a new product for customer also and, considering the pandemic, they may not want to take -- or play with new products as of now?

So this is a brand-new product that the customer is launching. And I'm going to make a conservative estimate of about 500 to 600 tonnes of sales in FY '22.

500 to 600 tonnes. And the realization is same as MB 07, close to that?

No, no.

No, no, no.

The realization for this is INR 185 a kg.

INR 185. Okay.

But contribution margin is quite tangible.

At about INR 85 a kg.

At INR 85.

INR 85? Okay. Okay. Okay, sir. And last question, sir, what is the exit gross value addition that we have seen in December, probably January? What is the current run rate? Is it similar to the average of Q3? Or it's much higher than Q3 average because it's...

It's...

Sorry. It's related to the average, right?

Similar to Q3.

[Operator Instructions] The next question is from the line of [ Saket Kapur ] from [ Kapoor & Company ].

Sir -- firstly, sir, I missed the -- your initial part of the commentary, sir. So sir, I would just -- I was looking for the factors that resulted in the lower EBITDA, lower PBT numbers, sir, in the polyester chips and Film segment. Barring MB 03 part due to that export or the COVID issue, how has the core -- what were the factors that are currently playing for our core Polyester Films business? And how is the business environment currently shaping up in terms of the demand-supply, sir?

Okay. So like I mentioned in my previous earnings call also, September was an aberration where the margins were extremely high, and I mentioned that those kind of numbers are not sustainable. So the margins reduced in the December quarter. Plus, coupled with our maintenance shutdown, we lost about 700 tonnes of production, which resulted in the fall in the absolute EBITDA for the Film business. On the Specialty Polymers side, MB 03 was our main driver till last year. It's not going to be so going forward. And we lost a lot of MB 03 business because of COVID in America. But this is now starting to pick up again.

Hello?

Yes.

Hello?

Did you get that?

Sir, last point. You told that MB 03, there was a dip in the onset. Could you quantify, sir, what was the normal rate? What was the deliverable schedule? And what did we -- what we were able to deliver?

Okay. In FY '20, we did about 1,150 tonnes of MB 03. Before COVID happened, we were estimating this volume to go up to 1,500, 1,600 tonnes in FY '21. But because of the COVID impact, up to now, we have done about 216, 216 [indiscernible]. And we just got an order for another 100 tonnes last night. And maybe -- so we might close it at around 400 tonnes for March quarter. But this fresh order gives us great confidence that this business will rebound back as soon as the COVID story is over in the U.S.

Okay. So we have done after 9 months INR 200 crore, INR 250 crore [indiscernible]?

215 tonnes, yes. We lost a lot of business because of COVID in MB 03.