Ester Industries Limited (500136) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Ester Industries Limited Q1 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Gavin Desa from CDR India. Thank you, and over to you, sir.

Thank you. Good day, everyone, and a warm welcome to Ester Industries Q1 FY '22 Analyst and Investor Conference Call. We have with us today Mr. Arvind Singhania, the 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 sent to you in the invite area. We trust you have had a chance to go through the documents on financial performance. I would now like to invite Mr. Singhania to make his opening remarks. Over to you, Arvind.

Thanks, Gavin, and thank you, everyone, for joining us today. I hope all of you and your loved ones are safe and healthy. As mentioned by Gavin, I have alongside me, Mr. Pradeep Rustagi, our CFO. I will start the call with a brief overview of all our businesses, post which Pradeep will walk you through our financial performance for the quarter. We are delighted with the start we had made to FY '22. For the quarter under review, revenue and profitability grew 69% and 28%, respectively, over the previous year on the back of improved performance from Specialty Polymer and Engineering Plastics SBUs. As indicated in previous calls, we expect Specialty Polymers to perform well during the year, and Q1 has offered a glimpse of what's in store for the business. The strong performance of Specialty Polymers well supported the performance of our other 2 businesses, namely Polyester Films and Engineering Plastics. Film business continued to maintain its recent growth momentum with volumes remaining elevated. Engineering Plastics after undergoing a challenging few years has made a sharp rebound. Performance of Engineering Plastics business has been unprecedented since the last 3 quarters. Let me now move on to the individual businesses, starting with Specialty Polymers. The business has performed exceptionally well during the quarter on the back of increasing demand for our products. As I have been indicating, last year's performance was not a true reflection of the business' potential as pandemic-led disruptions impacted both operations as well as supplies. Lockdown enforcement across our key markets and logistical challenges disrupted the growth momentum registered during FY '20. Product offtake of our key product, MB-03, which finds application in the commercial carpet segment, was severely impacted given the lockdown. However, we knew it was a temporary phenomenon, and we were always confident that as the situation normalize, volumes too will. We started witnessing pickup in the volumes towards the end of last year itself, especially in the last quarter following the resumption of trading and commercial activities globally, which gave us the belief and confidence of delivering a strong performance during FY '22. Innovative PBT volumes do continue to be strong. Most of you are aware, we supply innovative PBT to global chemical leader. We have been consistently selling higher than agreed volumes over the past 2 years. We believe a similar trend will continue during the current and following years as well. We exported 344 metric tonnes during the quarter under review as against 311 during the corresponding quarter last year. Furthermore, the other positive development for us has been the commencement of commercial sales of MB-07. MB-07 is added to make polyester dyeable with deeper and darker colors. We finally received the customer approval after working at it diligently over the past 3 years. Volumes have been good, and we expect to scale them up consistently in coming years. Apart from MB-07, we have also achieved techno-commercial qualification for another product, namely LMC 03. We are very close to achieving techno-commercial qualification for other innovative product MB-16. While we expect the volumes for LMC 03 to pick up significantly over the next 2 to 3 years, we expect commercial sales of MB-16 to start during FY '21, '22. Encouraged by the growing demand for certain high-margin grade of Specialty Polymers, the Board of Directors in their meeting held on 9th August 2021 have approved capacity expansion of Specialty Polymers at a cost of [indiscernible] [INR 80 crores.] We have been continuously working towards building a comprehensive product portfolio to lower our dependence on particular product and are happy with the way things are shaping up in this regard. We are confident of achieving our stated objective in coming years. Moving on to the Film business. Q1 maintained the recent growth momentum in volumetric terms. Besides benign realization, higher proportion of chip sale that has very low margin contributed to lower margin percentage of the segment. Domestic demand, as I've been saying, remains strong, growing at about 11% to 13% annually, with FMCG being the key user industry. Long-term prospects of the business remain strong, though in the near term, realization/margins may remain under pressure owing to the incremental supply that has and is expected to hit the market. Moving on to the quarterly performance of Film SBU. We registered a revenue growth of 40% over the previous year, largely owing to higher volumes and chip sales. Margins were softened a bit during the quarter despite reporting a healthy top line growth. The main reason for margin compression is commissioning of 2 new production lines overseas. Another reason having impact in the short term is input cost pressure on smaller packs for snack foods. Our efforts in recent years have been directed towards improving the share of high-margin, value-added products in line with the objective of decommoditizing the business. The share of value-added products during the quarter stood at 20% as against 17% during FY '21. We have been guiding our efforts towards increasing the share of the high-margin products to 25% to 30% and believe we are very much on track towards achieving our objectives. A quick word on our new plant at Telangana before I move on to Engineering Plastics business. As you know, we are setting up a new greenfield unit of 48,000 tonne per annum state-of-the-art plant in Telangana to our wholly owned subsidiary at a cost of INR 586 crores. We expect the plant to be commissioned on time by October 2022. The new unit post completion is expected to deliver incremental revenues of INR 500 crores to INR 600 crores and generate additional EBITDA of INR 110 crores to INR 120 crores. The funding for the project is secured. It will have a debt component of INR 410 crores with the remaining INR 176 crores being internally funded through equity investment. Of the INR 410 crores, INR 240 crores will be euro-denominated loan at less than 2% all-in cost, along with INR 170 crores being secured at 8% to 8.5%. Total cost of the debt for the project would be in the range of 5.5% to 6%. We believe the new unit will help us better serve our customers besides adding to the overall growth of the company. Moving on to our Engineering Plastics business. Performance during the quarter was impacted by the second wave of the pandemic, resulting in lower volumes and revenue for the quarter, though EBIT in absolute terms during the quarter remained quite steady. However, we have seen sales volumes pick up pace again following lockdown relaxation and recommencement of commercial activities. FY '21, if you recall, had been a stellar year for this business on the back of strong demand from the end user industry and rising trend of base polymer prices. Furthermore, we are also working towards our product mix in the business and operational efficiencies, which is starting to deliver the results. With relocation, we expect further improvement in the business as relocating the unit will help us better serve the customers and cut down on logistical expenses, both of which would help it further improving profitability of the business. We are making an investment towards relocation and setting up of a new extruder to meet our customers' requirements in light of improving demand. To conclude, I would just like to state that our recent performances demonstrate the structural shift in our business from being a commodity-independent business in the past to a specialty-dominant business. We have significantly altered the margin and profitability profile of the business. All the 3 businesses have innate strengths and growth levers, which will help us sustain this recent momentum. Specialty Polymers being largely an IP-protected business eliminates any competitive threat. Furthermore, being an innovation-driven business, it has high switching costs for the customers and therefore, ensures customer retention and commands high margins. In Film, our endeavor is towards improving the product mix with a focus on increasing the share of high-margin products, which will ensure a better quality of growth. Our Engineering Plastics business has a strong business -- has a strong tailwind. And here, too, we are working towards improving the product mix. Expansion of capacity by installing a new extruder and relocation of the unit will further improve the business economics. 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'll quickly walk you through our financial performance for the quarter ended June 30, post which we can begin the Q&A session. Starting with the top line. Revenues from operations stood at INR 319 crores as against INR 189 crores reported during Q1 FY '21, higher by 69%. The performance could have been even better but for the second wave of pandemic, which disrupted activities during early part of the quarter. Having said that, all our businesses performed well with a strong rebound in sales and profitability witnessed by especially polymer business. EBITDA for the quarter stood at INR 64 crores as against INR 52 crores generated during Q1 FY '21, higher by 23%. Margins though contracted in Film business during the quarter, owing to commissioning of new capacities in overseas markets and input cost pressure on smaller packs impacting demand in the short term. However, strong performance by Specialty Polymer SBU and in Engineering Plastics SBU ensured that financial performance of company turns out to be better than corresponding quarter last year. Finance cost for the quarter stood at INR 4.94 crores. That is 1.55% of the revenue from operations. As of June 30, '21, our outstanding interest-bearing term debt, net of free cash, stood at INR 167 crores, while interest-bearing working capital liabilities stood at INR 31 crores. Interest-bearing debt, net of free cash as a multiple of annualized EBITDA, remained at a healthy level of 0.65 as of 30 June '21. We are committed towards maintaining better than prudent debt equity levels, and we'll continue to take steps to ensure that no undue pressure is exerted on our balance sheet. Depreciation for the quarter stood at INR 9.21 crores as against INR 8.83 crores reported during Q1 FY '21. Profit for the quarter stood at INR 38 crores as against INR 29 crores generated during Q1 FY '21, that is higher by 28%. To conclude, I would just like to reiterate that we are confident of all our businesses delivering consistent growth going forward -- going forward. The last couple of years have demonstrated the true potential of all businesses and its vindication of our strategy towards moving away from commoditized business and shifting towards the specialty side. All our businesses are well positioned to deliver strong consistent growth over the coming years and create value for our shareholders. Thank you.

[Operator Instructions] The first question is from the line of Saket Kapoor from Kapoor and Company.

Sir, congratulations on a steady set of quarterly numbers performance, now on a consistent basis, thereby cementing our confidence in the business model. Sir, firstly, if you could give some more color on our putting CapEx for the Specialty Polymers part of the story, what are the inroads that we have -- what transpired us to go for this expansion at this stage? Give some more color on the same.

I'll tell you. The Specialty Polymers business has rebounded very well after being hit by pandemic last year. We had only INR 55 crores of revenue compared to INR 76 crores in the year before. But there has been a very strong rebound in all our products. MB-03 has come -- almost come back to normal. Our specialty PBT, innovative PBT, volumes are growing year-on-year. The biggest thing that we achieved was commercialization of MB-07. Now MB-07 has actually -- has come as a very pleasant surprise for us. We were only expecting to do about 700, 800 tonnes in the current financial year and another 700, 800 tonnes we were expecting it to be added next year. But I think with God's grace and luck, we have managed to start doing 150 tonnes a month, which is 1,800 tonnes a year currently, our current run rate. So suddenly, there is a lot of pressure on our production capacity. And let me explain to you, and I know there is a confusion with the investors and analysts that why we are putting up capacity when you already have spare capacity. We do have some spare capacity, but that is in the big line, which is about 2,000 tonnes per month. That big line cannot cater to the smaller volumes of Specialty Polymer. That -- only small lines can cater to that. We have only 2 small lines. Now these are almost running absolutely at 100% flat-out capacity. We need another small line to start being able to service the smaller volumes. The large will come into [indiscernible] when, let us say, a product like LMC 03 starts touching 5,000 to 10,000 tonnes per year, that is when we will start using the bigger line for that. But in the meanwhile, we need new capacity to cater to the demand for our other products. It is absolutely imperative [Foreign Language] but that is in the big line, which cannot be utilized until the volumes grow very large for one single product.

Here, we don't have competition also, sir. [indiscernible] no competition from any side.

No competition. [Foreign Language]

Okay. So you are explaining that it is the design of the plant and the line that is -- that has required this kind of CapEx in a smaller way.

Correct. [Foreign Language]

Correct. [Foreign Language]

[Foreign Language]

The way -- you were explaining earlier that we were targeting x percentage and now that has risen by an x percent. So 150 tonnes per month, can be a visibility we have it for a year time? We can execute -- when we have that much order visibility and the requirement from the customer?

[Foreign Language] And I'm telling you, I'm making a very clear cut statement, [Foreign Language]

Okay. Right. Right. And sir, this has major to do about the flooring part also, sir, this flooring part of the story? I'm talking about this flooring business about the -- that is carpet flooring and all -- these are the main buyer of the product?

Yes. Carpet industry is the main buyer for this product.

Correct, sir. Now if I come to your main business, if I may call, so the Film part here, what are the key challenges, sir, currently? Sir, I was listening to one of the players. I'm not known whether they are your peer competitor or not. I'm talking about Expro industry. Therein the management was somewhat sounding very cautious that [Foreign Language] because of the supply side [Foreign Language] and this may plateau out going forward?

Expro is not by competitor. We're not in the same phases of business. I don't know what they do, but they do not make polyester film or even polypropylene film, if I'm not mistaken.

Okay. Buyer's side, they are. Yes.

So I cannot comment on what Expro is saying, but demand for polyester film will remain strong. The only challenge is the new capacities, which are coming up, they will put pressure on the margins. So any case, last year, margins that we got were unprecedented. And I've always maintained that those kind of margins are unsustainable. [Foreign Language] last year, that is unrealistic margins. So these margins have already tapered down, have been muted. And going forward, they will remain at reasonable levels. They will not go back to those levels that we saw last year.

Okay. What is the brand we're eyeing for...

Please understand one thing, demand is growing in India, demand is growing globally. So volume growth is going to happen.

What is the brand we are expecting...

Sorry to interrupt me, I please request you to rejoin the question queue for your follow-up as we have people waiting for their turn. The next question is from the line of Sachin Kasera from Svan Investment.

Congrats for a good set of numbers. Sir, just taking this previous query that was being asked regarding this new line in polyester film. So is it not that, as you mentioned, there's some capacity also coming up and there's a lot of capacity in the market, and we are doing a very large expansion. So we could be in a scenario where margins could come under pressure and, once again, the debt would go up. And that would again create some financial stress for the company's balance sheet, if you could comment on that?

[Foreign Language] There is no doubt. [Foreign Language] debt profile is very solid. There is no debt burden that we cannot manage. Our total debt, [Foreign Language] And the debt that we have taken in the subsidiary is a very, very low-cost debt. Total cost of debt will be 5%. So [Foreign Language] the total debt is absolutely manageable even in the worst of circumstances.

What is your sense? What would be the peak debt on a consol basis, you will end up having post this CapEx?

[Foreign Language] say, about INR 500 crores to INR 550 crores.

INR 500 crores to INR 550 crores. Okay. Secondly, we keep nowadays listening that most of the polyester film guys, including you are trying to increase the share of value-added products in the overall polyester film basket. So where are we in that journey? And secondly, how do we see that mix 2 to 3 years from now when the new line comes up?

So I have been saying that we are -- and we are doing this very successfully. Last year, [Foreign Language] And our target is to reach about 30%. And we have been -- we have a clear-cut path and a plan in place to make that happen. And that will decommoditize and decyclicize the polyester film business to a certain extent.

But that is on the existing capacity or you think you can sustain this 30% because you have a large chunk of capacity with the new plant coming up? So once the new plant comes up, will this 30% again go down? Or you think with the new plant the way you have designed some of the new products, even you will be able to sustain this 30% in the medium term?

So 30% is based on Ester industry's capacity right now. When the new capacity comes up, this percentage will drop but will again start picking up once the value-added starts there as well.

In the new line, sir, what is your sense? How long will it take you to reach 25%, 30% share of value added?

I think in about 2 years.

2 years. Okay. Secondly, sir, on this engineering plastics, we have seen some significant improvement in profitability after a long period of time. So one, what is driving this? And secondly, is this sustainable? And if yes, then are we also looking in terms of an expansion on the Engineering Plastics business?

Yes. So we are relocating the business from Khatima in the north to a new location in Gujarat. And this is being done because this will save a lot of cost on logistics. Efficiencies will go up. In any case, we are falling short of space. So in the new unit, we are expanding with one extruder with an additional capacity of 10,000 to 12,000 tonnes because [Foreign Language] We are running absolutely flat out. [Foreign Language]

We are going for [indiscernible] working.

Sorry?

We are rather using job workers to do the volume for us, sir.

A little bit. You're absolutely right. We are getting some job work done outside because we don't have our own capacity. So the demand is very strong from the downstream industry, and we expect the business to do well in the coming quarters.

Sir, what has caused a significant improvement in profitability of this business? And is it sustainable, this type of profitability in the medium term? We can understand that there may be strong demand next 1, 2 quarters. But do you think structural shift that has happened, if you could drill a little bit more on an understanding net basis?

[Foreign Language] commodity prices have gone up tremendously high everywhere, whether it's steel, cement, polymers, chemicals, everything, the prices have shot up. So this has also led to an increase in prices. And margins have improved tremendously. I'm not saying that these kind of margins will be sustained forever. But we expect much better margins compared to the previous year.

What do you think, sir, is a more sustainable margin for this business from a 2- to 3-year perspective?

It's about -- earlier, if you talked about 2 years ago, we used to be doing 5%, 6% EBITDA margins. I think sustainable margins will be in the 13% to 15% range. [Foreign Language] margins are much higher.

Yes. Currently, they are in 25%, 30% if I get it right.

Right. But eventually, they'll come to about 15%, 16% [indiscernible], sustainable margin.

And will you have to invest any major sum in terms of this relocation expansion of CapEx in Engineering Plastics?

See, about INR 45 crores is being invested, which has already been approved by the Board. I mean that happened 6 months ago. And that process is on. And we will complete the relocation in the first or second quarter of next calendar.

The next question is from the line of Shanti Patel from Shanti Patel Investment Adviser.

You told just now that the margins in respect of various verticals are a little higher than what it should be. So what are the margins today? And what you are expecting?

So as far as the Film business is concerned, I have already said that the margins have come down compared to last year.

Yes, I agree. But what was in last year and what is today?

That number, Pradeep will share with you in a moment. Let me complete.

As per the segmental year, the EBIT margin for Film business, Q1 FY '21 was 34%. And in the Q1 FY '20 is 18%.

Correct. You're absolutely right. Going forward, we expect this to be maintained at 18%, let's say 16% to 18%. As far as the Specialty Polymer business is concerned, the margins are fixed. So whatever happens, the margins -- it's not a commodity business, it's a technology business. [Foreign Language] So we expect about 35% to 40% EBIT margins for time to come.

Okay. And sir, we -- our utilization capacity is 100%?

Where? In Film, it is 100%. In Engineering Plastics, it's 100%. In Specialty Polymers, you cannot take the nameplate capacity as a fixed number because for different products, the capacity is different. [Foreign Language] they are running full capacity. It's only the big line, which is running under capacity. [Foreign Language] we'll shift it to the big line, and that capacity utilization will also start increasing. So don't go by capacity utilization in Specialty Polymer.

And what is our market, sir, in respect of the various verticals in which we are?

In Film business, we are at about 9% to 10% of the domestic market. In engineering plastics, would be a similar number. Specialty Polymers, [Foreign Language] because we are not in competition with anybody.

The next question is from the line of Ravi Nanda, individual investor.

Sir, next year, [Foreign Language] INR 350 crores to INR 400 crores Specialty Polymers revenue [Foreign Language]

[Foreign Language] about INR 130 crores to INR 150 crores compared to INR 55 crores last year. Next year, there will be a substantial increase, but INR 350 crores to INR 400 crores will take about 2 to 3 years.

[Foreign Language]

LMC 03 has been completely qualified, techno-commercial, that means technically, commercially, it is approved product. Now our customer is introducing the product based on LMC 03 into the market, and the ramp-up will start now, and they're introducing it into the market in January [Foreign Language] and very good volume indications have been given by the customers.

We take the next question from the line of Pratap Makwana from Forbes Marshall.

Many congratulations to Singhania sir and the whole Ester team for the fantastic results. I have 4 questions. While you are expanding well to match with the demand, can you throw some light on the improvisation to improve the utility and energy conservation as per the Regulation 134/3, which is happening into the ongoing plant and the successful expansion? That is the first question. Second, sir, very good that you highlighted year-on-year performances for the feedback you've provided. Can you throw light on that the new product, which is -- you're supposed to visit for the line testing? And third, what is the EPS forecast for the upcoming quarter? And for the last question on that the dividend yield, which is 190%, INR 1.9, which is due for September is -- do we feel that it's slightly flat compared to the last year for a couple of months?

No. Our dividend policy is very clear, that up to 20% of profits will be distributed as dividend, and we are maintaining that. So there is no deviation from the policy. As far as the energy conservation is concerned, I don't have specific numbers to give you right now because we were not expecting this question. But energy conservation is an ongoing process, which goes on in our company on a regular basis. It doesn't stop ever. So energy conservation is an ongoing exercise. So it goes on continuously because we try to save costs and in terms of energy and power, and we look at various aspects of this on a regular basis. [Foreign Language]

About that 1 line testing was due from visit -- upcoming visit from the last June month or May month from the Austria engineer for the new line...

They are here. And the line has been commissioned. It will be commissioned this week. The man has come finally.

So I think we hopefully the production can be -- production can be realized or invoiced in this month itself?

Yes, towards the middle or end of this month, we will start doing -- start moving some volumes.

And sir, any -- so we wanted to know about EPS -- rise in the EPS, how much percentage for the next upcoming quarter?

We'll wait and see how things go, but it -- I think we'll see some good numbers. So I cannot give an exact number.

The next question is from the line of NM Modi, individual investor.

Just my query was regarding the relocation of the plant, which we are doing for the engineering division. Sir, how much time it will take?

I think we will complete the relocation by -- between March and June next year.