Ester Industries Limited (500136) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Ester Industries Limited Q1 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Gavin Desa from CDR India. Thank you, and over to you.

Thank you. Good day, everyone, and a warm welcome to Ester Industries Q1 FY '24 Analyst and Investor Conference Call. We have with us today Mr. Sourabh Agarwal, the CFO; and Mr. Girish Behal, the Business Head. 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 discussion may be forward-looking in nature and note to this effect was sent to you in the invite earlier. We trust you have had a chance to go through the documents and financial performance. I would now like to invite Sourabh Agarwal to make his opening remarks. Over to you, sir.

Thank you, Gavin, and thank you, everyone, for joining the call today. I have alongside with me Mr. Girish Behal, the Business Head of Ester Industries. I will briefly talk about the key business highlights, post which I will take you through our financial performance. The overall business environment for both sales and Specialty Polymers remains challenging. Our quarterly performance is reflective of the stress prevailing across both the businesses. We have seen signals of deep performance reported by our peers as well as -- as well for the quarter. Film business, as we have been highlighting, had a sharp addition on the supply side following commissioning of new capacities, which in turn had an adverse impact on the realization on the profitability. As far as Specialty Polymers is concerned, the business, as we have been articulating, is largely IT protected. And as such, it is not subject to any competitive risk. The primary reason for slowdown in Specialty Polymer business has been a recessionary worries in the gas economy, which in turn is populated into slow demand. Let me first start with the headline numbers. On a stand-alone basis, our review for the quarter stood at INR 206 crores with EBITDA of INR 13 crores and the loss for the quarter was INR 5 crores. The short performance, as mentioned earlier, in reflecting of the on-ground challenges, both are promoting a drastic [indiscernible]. As we indicated in our earlier call, Film business is higher supply following commissioning of new capacity. This, coupled with muted demand in export market had an adverse impact on our realization. Specialty Polymer business performance was impacted by recreational concerns to a U.S. economy, which is a major market for our business. Moving on to the individual businesses now, starting with Specialty Polymers. Our performance for the quarter was largely on expected lines given the recessionary worries proving across U.S. economies, the key markets for the business. We have seen a lower uptake for our key products including MB 03 as well as innovative PBT. To quantify, innovative PBT volume during the quarter stood at 79 tons as against 485 tons in the last quarter. And for MB 03 stood at 47 tons as against 403 tons in the last quarter. Here, I would just like to reiterate that the sales moderation is nothing to do with the competitive intensity within this industry because most of our products are protected. As we have mentioned in our previous call, we expect offset to continue to be slow for the next couple of quarters before revising. Despite the external challenges, we remain committed towards leveraging our R&D capabilities and into even an exciting product. We remain optimistic about the business prospects over the medium to long term, and we are confident of tiding over the new-term challenges. Moving on to our Film business. As we repeated in our earlier interactions, we have seen excess supply engines on market following consuming of new unit bunches. While the demand is progressing at a steady pace, the suppliers are growing the demand which in turn has a cost cutting effect on the realization from the margin. This coupled with muted demand in export market has further aggravated the profitability. Our overall volume for the quarter stood at 18,221 tons, comprising of 12,461 tons from channel basis and 5,760 tons at our subsidiary level. The volumes would have been higher, but for the plant shutdown undertaking during the quarter. While we expect the business to operate in a challenge environment in the near term, we do focus on our attempts towards lowering costs, enhancing efficiencies and improving the product mix by increasing share of our value-added products. We have invested in [indiscernible] quota to increase the share of value-added products, which is expected to commission soon. Buildup of value from the new quota will be achieved gradually and continuously. We are also working with new products that will enable us to improve profitability despite adverse market scenario. We believe such efforts will help us to deliver stable and profitable performance in the long term. Let me now quickly walk you through the financial performance, post which we will comment the Q&A session. Starting with revenues on a stand-alone basis, the same stood at INR 206 crores as against INR 402 crores in the corresponding quarter last year, which is lower by 49%. The reason for the -- the growth is mainly because of non-availability of Engineering Plastics business, which you are aware that we sold off in the last year. Brexit supply in the Film business and the recession worries in the U.S. market. EBITDA for the quarter stood INR 13 crores as against INR 23 crores generated in quarter 1 of FY '23, which has grown by 82%. Lower margins in the Film business coupled with adverse product mix for this quarter in Specialty Polymer business led to a lower profitability margin. Loss for the quarter stood at INR 5 crores as that is a profit of INR 42 crores gathered in quarter 1 of FY '23. Lower offtake couple with weaker realization resulted in loss for the quarter. Moving on to the performance of Ester Limited, which is our wholly owned subsidiary, revenue to the quarter stood at INR 64 crores, and the EBITDA loss will be INR 3 crores for the quarter. As most of you are aware, Ester Limited started commercial production during the last quarter, when we tested growth of -- where we tested a revenue of INR 49 crores with EBITDA loss of INR 10 crores. In terms of volume, the total volume was 5,760 tons as against 4,757 tons during the previous quarter. Volumes in quarter 1 would have been higher except for the plant shutdown, which we have taken during the quarter. EBITDA losses are largely owning to lower utilization level and the stress in the Film business, we believe currently, that has impacted margins. With time, we are confident that Ester Limited will contribute positively into the overall growth of business as capacity utilization improves. As we have mentioned earlier, the plant is expected to generate revenues worth INR 500 crores at an optimal utilization level. It is important to maintain that despite losses in a sufficient liquidity in the form of investment, which is around INR 140 crores, and the net interest bearing debt in the balance sheet of [indiscernible] as on 30 June 2023 is INR 209 crores. To conclude, I would just like to reiterate that while the near-term outlook for both businesses remain challenging, we've been optimistic and confident of tiding over the hurdle and scaling them to the 2 potential in the medium and the long term. That concludes my opening remarks. Now we can commence the Q&A session. Thank you.

[Operator Instructions] We have our first question from the line of Nitesh Dhoot from Dolat Capital.

So my first question is on the plant shutdown. What was the reason for the shutdown or was it the maintenance shutdown? And if you can quantify the volume impact that you had because of the shutdown?

Girish, would you like to take this question?

Yes. I think your question is regarding plant shutdown. This particular plant of our new investment in Telangana, which was commissioned in January and these kind of plants in the initial period have got certain stabilization period. So whatever the shutdown that we have had relating to the plant stabilization requirement. I think Sourabh has already mentioned the kind of volume that we have done in the last quarter. So that is a reflective of some of the volume loss of what we have got, because this plant has a full scale capacity when it has full potential about 48,000 tons. And we have, I think, done about 5,800 tons of proximity volume in this quarter.

Sure. My next question is on the Specialty Polymers. So where you've seen that it's been highly volatile in the recent years. So what would explain the inconsistency there?

See our primary marker for Specialty Polymers is U.S. So right now, if you look, we are going to a recessionary phase in U.S., because of which our optic for Specialty Polymers has taken a dip. As soon as the recessionary pressure in U.S. improves and the day of recovery in the market, then we expect that our sales is also going to go up.

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

Sir, I don't now if you could give us the utilization level for our plant in Uttarakhand?

So I think we've already shared the numbers in terms of production. So [indiscernible] utilization was around 50% and construction industry utilization was around 90%.

90% you mentioned.

Yes.

Okay. And sir, currently, how -- what is the -- what should be the rising level for this current quarter?

Sorry, come again?

Sir, what should be the utilization level for this quarter, sir, for the September quarter, we are already 2/3 into it?

See for Ester Industries, we expect utilization to be above 90% and for our Ester Limited, we are expecting utilization anywhere between 60% to 70%. But obviously, that is also the manufactures, which is external and internal.

Okay, sir. And sir, how have the raw material prices shifted up for the last quarter? And how -- what is the trend currently if you could give the breakup of the mix also?

See raw material prices have been remained in a range [indiscernible]. We are not seeing much movement in the raw material prices. Just a second.

Yes. And also, how have the -- how was our realization shaped up and the margin for the Film for this quarter, sir?

See, as we have explained the -- to the segmental performance, our margins for Film business was around less than 2% for the quarter, which is just ended. And in Specialty business, our margins was around 30%.

The raw material mix, and you will provide sir, then you mentioned about the debt number also, sir, on a consolidated -- what is our long-term debt and the working capital requirement and the cost of funds?

Yes. So on a long-term basis -- sorry, give you a total debt number.

Yes.

As in -- our total debt is INR 650 crores approximately as registered for our investment and our weighted average cost of borrowing [indiscernible] 7% and investment industry at 9%. But as you will appreciate that this interest rates are -- will keep changing as far as the -- we came in any [indiscernible] policy.

Sir. What are the current year maturities?

In current year, the total debt repayment is around INR 100 crores, also which we have already repaid around INR 52 crores.

Okay. And for the new facility at Telangana, do we have any moratorium, or you'll be repaying the debt from this year itself?

So the numbers we gave you was combined, the INR 100 crores repayment schedule include Telangana also and the repayment of -- actual repayment of around INR 52 crores, which I mentioned, increased Telangana also. Yes, there was a moratorium in the loans that we have taken for Telangana, but the business has already commenced operations, so the moratorium always tower and now the repayments are going to start. We have already made a first repayment as on 30th June 2023.

Correct, sir. At the next level, it is INR 650 crores for the consolidated [indiscernible].

Yes. INR 650 crores comparative including your working capital.

And can you provide another mix at the raw material price trend?

See the raw material price has almost remained in the range around [indiscernible]. So price trend, as I mentioned, is an arranged down manner, Atul describe for me to quote a number here, but all I can say is that there's not much movement in the price between January to July.

Okay. Sir, it was the raw material mix that used to also define the trend for your realization. If there is some other increase in the raw material, it was a pass on to your customers and your realizations are maintained. But now do you think because of this overcapacity or the new facilities coming online in the -- and it's taking time to get adjusted with the demand? Do you think the realizations will remain under pressure even though the raw material prices have now normalized are in a narrow band?

Yes, we see that it will remain under pressure and the major reason for this is that there is excess supply in the market compared to the demand, which is leading to this price pressure.

And for the value-added part, sir, you were mentioning something, I missed your opening remarks in the valuated segment. What is the percentage of sales we have done for this quarter, last financial year and what should we end this year?

So in terms of value added, in the June quarters, we have been around 28%. And if you mention about FY '23, the value-added percentage is of 22%. And overall, we are targeting to remain in this range of 20% to 30% on an on overall basis for the full year.

I missed your last point, you voice cut. What is the year-end target you have mentioned?

28% to 30%.

Okay, sir. And sir, last point is the Telangana facility has differentiated product than the one we have at Ester and not a unit or what is the -- product lines are different for them. We are getting to some different segments for the Telangana facility. Or are they aligned to similar products?

We are aligned to similar product but the only difference between Telangana and our Khatima plant is that in Khatima, we have a higher mix of value-added products. While in case of Telangana, the facility is most focused on commodity products. And the only value addition that we have is when we have a [indiscernible]. But going forward in marketing the demand increase, we may look at options for enhancing the product mix in Telangana also.

Right, sir. And one more point on the Specialty Polymer segment, sir. Last quarter, when we were addressing your investors, I think sir, correct me there. We were not looking at this type of M&A. These volumes for this quarter you were optimistic. So what -- where is the trouble coming? And for the coming quarter, what kind of volumes are deliverable that you do?

See as a business, we are always optimistic, and we always believe that the market is going to recover. However, optimism may not 100% converted into reality. So when we close our March quarter, we are very optimistic about our Specialty firms in June quarter 1 of FY '24. But this did not turn out extra expectation. However, we are hopeful that we are going to achieve maybe an approximate turnover from INR 200 crores in a Specialty Polymer in FY '22, '24. That is subject to recovery in the U.S., which we mentioned because U.S. will either continue or the primary customers for good product.

But sir, is your understanding that the second quarter will be in line with what the first quarter has been in the same, the volume of [indiscernible] side will be similar, or do we see any improvement, a meaningful one?

See, again, it depends on a lot of factors, and it also depends on a lot of markets because the fundamental premise here is the supply-demand gap, which is completely market-driven. So while we are optimistic about second quarter, it will be very difficult for me to give you any direction on the pace. How well we believe that it will be marginally better than the quarter 1.

And a small commission office, when we are submitting our results on the exchanges, we must take note of the PDF file and the quality of print also. And for investors seeking you can have a look at you at the submission here?

The problem we face and the major reason for this is that there is reply from the auditor as well as the Chairman, and there's a very minimum amount of time during which we need to do the filing. So because of double people carrying the print -- the quality of the print is not good. But we have taken note of the point, and we will try to ensure that we have a better quality of print, which is available and the numbers are clearly visible. Having said that, if you need specific requirement, you can always reach our growth.

Yes, I can do. And sir, we request also Mr. Rustagi and Mr. Singhania, any one of them to definitely be present on the call.

Yes. So Mr. Rustagi was supposed to take this call, but unfortunately, he is not well today and actually he is going under some treatment, because of which he could not attend the call today. And definitely, for next quarter, he will take this call.

Okay. And we hope that things do take a positive turn. And sir, for -- okay, for plant visit and all, we will make the request to the IR team, sir.

Yes, you can reach out to [indiscernible] or you can reach out IR team, and we will be [indiscernible].

[Operator Instructions] We have a question from the line of Madhan from Ester Industries.

My question is what would be the company revenue target in the next 2 years, right? And this year [indiscernible].

I could not get your question. Can you repeat the question? You say something over the next 2 years?

Yes, just what would be the revenue target of the company in the next 2 years.

The revenue target of the coming for next 2 years.

Yes.

So it is very difficult from -- see it is very difficult for me to give you any number at this point of time in terms of revenue targets for the next 2 years. However, it will all depend on the final realization which you're going to get in our end quarter as well as the cost of raw material. So right now, you can assume -- safely assume that it is in line with the past performance, but however giving a number at this point of time will be very difficult.

Okay. my next question, when we look at Telangana plant, we can use your full publicity at Telangana plant. Are you looking in this quarter?

So Telangana plant utilization, we are -- it is under ramp up sales, as Girish has also mentioned in the previous question that was asked. And as we are aware that whenever we are starting a new subsidy, there are some feeding issues, which comes in the business. However, we are hopeful that by the end of this year, we will be able to achieve -- we will be able to ramp up for full capacity.

As there are no further questions, I would now like to hand the conference over to management for closing comments. Over to you, sir.

So I would like to thank all the participants for joining today. And I hope we were able to answer all your questions, and we look forward to meet you again in the earnings call for the second quarter. Thank you so much. Thanks, everyone.

Thank you. On behalf of Ester Industries Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.