Ester Industries Limited (500136) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Ester Industries Limited Q2 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, Mr. Desa.

Thank you. Good day, everyone, and a warm welcome to Ester Industries Q2 and H1 FY '24 Analyst and Investor Conference Call. We have with us today Mr. Arvind Singhania, the Chairman and CEO; Mr. Pradeep Kumar Rustagi, the Executive Director of Corporate Affairs; and Mr. Girish Behal, 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 a note to this effect was shared with you in the invite earlier. We trust you have had a chance to go through the financial performance. I would now like to hand over to Mr. Arvind Singhania to make his opening remarks. Over to you, Arvind.

Thank you, Gavin, and thanks to everyone for joining us today. I have alongside with me Mr. Pradeep Rustagi, Executive Director; and Mr. Girish Behal, Business Head, Film SBU. I will briefly talk about the key business highlights, post which Pradeep will walk you through our financial performance. The current business landscape continues to pose challenges for both the BOPET Films and specialty polymer sectors. On stand-alone basis, though quarterly performance reflects improvement on a sequential basis at a broad level, it does mirror the pressures being faced by both these industries. We have seen our industry peers in the BOPET Film business report a subdued performance in the same period as well. Starting with the BOPET Film sector. We've been emphasizing the significant increase in supply due to the introduction of new capacities. This surge in supply has negatively impacted pricing, margins and overall profitability. On the other hand, the Specialty Polymers division safeguarded by intellectual property rights is not exposed to direct competitive risk, but it is nonetheless exposed to the challenges of a slowdown and the uncertainties grappling the U.S. economy, which is our primary market. Let me now move on to our quarterly performance. To start with the headline numbers. On a stand-alone basis, our revenue for the quarter stood at INR 244 crores, with EBITDA of INR 3 crore and a loss for the quarter at INR 13 crores. The underwhelming performance, as previously highlighted, mirrors the on-the-ground hurdles our businesses are currently facing. The film business, as we have previously mentioned, is experiencing acute demand-supply imbalance due to commissioning of new capacities. This combined with the subdued demand in overseas market has negatively affected the profit margins. The performance of the Specialty Polymers business has also being affected by continuing recessionary pressure in the U.S., which is key and major market for this business. Moving on to individual businesses now, starting with Specialty Polymer. While we did witness some improvement in both revenues and volumes during the quarter compared to Q1, the ongoing situation though remains challenging owing to the uncertainties and the inflationary worries grappling the U.S. economy. In terms of product offtake, we have seen 14% growth in volumes on a sequential basis, although on year-on-year basis, it has degrown. The present volume trajectory is below the historical averages and the true potential of the business. During Q2 as well, despite reporting higher volume, we have seen our profitability and margins trend lower owing to lower contribution from the marquee higher-margin products. MB-03 volume for the quarter stood at 179 metric tons as against 422 metric tons in Q2 FY '23, and 247 metric tons in Q1 FY '24. As far as innovative PBT is concerned, Q2 business volumes of 185 metric tons as against 605 metric tons in Q2 FY '23, and 79 metric tons in Q1 FY '24. We have been reiterating that the products and the businesses on its own is not subject to competitive threats given that most of our products are IP protected. The growth momentum though is subject to the overall business sentiment and health of the U.S. economy. We are hopeful that the demand and, subsequently, the volumes and profitability of the business will revive maybe after a couple of quarters as the U.S. economy starts to recover. It is important to mention here that basis revenues of INR 130 crores of Specialty Polymers SBU generated during half 1 of FY '23, we had achieved an annual run rate of about INR 260 crores, with the EBITDA margin of approximately INR 85 crores as soon as global and U.S. economies revive, we're confident of bettering these numbers. We are committed to harnessing our R&D expertise to introduce innovative and captivating products. We maintain a positive outlook on this business potential in the medium to long term, and have the confidence to navigate through the current short-term challenges. Turning the attention to our Film business, and we are emphasized -- as we've emphasized in our prior discussions, there have been an influx of excess capacity in the market due to commissioning of new production units. Most of the production lines that got commissioned in the recent past were put under implementation after we started implementation of Telangana project in October 2020. While the growth in demand continues to be robust with domestic demand growing at 11% to 12% per annum and global demand growing at 5.5% to 6% per annum, the supply has surpassed this demand by significant percentage, leading to a chain reaction of reduced pricing and margins. This along with subdued demand in export markets are aggregated by geopolitical disturbances across the world has further exacerbated the pricing challenges. Our overall volume for the quarter stood at 18,867 metric tons, comprising of 12,892 metric tons on a stand-alone basis and 5,975 metric tons at a subsidiary level. Despite higher volume growth, we have seen moderation in profitability and margins during the quarter, owing to the sharp price and margin erosion. We believe the pricing pressure will continue for a couple of quarters before the stabilization process starts. Our efforts till then would be directed towards enhancing efficiencies and improving product mix by increasing the share of value-added products. On a stand-alone level, we have seen our share of value-added products comprising 25% during the quarter. We are also working on new products that will enable us to improve profitability and mitigating effect of an adverse market scenario. We are also focusing a lot on reducing cost, reducing wastages and improving efficiencies. We believe such efforts will help us deliver stable and profitable performance in the long term. That concludes my opening remarks. I will now hand over the floor to Pradeep to walk you through our financial performance. Thank you.

Thank you, and good day, everyone. Thank you for joining us on our Q2 FY '24 earnings call. Let me quickly walk you through our financial performance post which we can commence the Q&A session. Starting with the revenues on a stand-alone basis, the same stood at INR 244 crores, as against INR 308 crores in corresponding quarter last year, lower by 21%. The reason for the degrowth, as mentioned by Arvind ji, pertains to excess supply in Film business and recessionary worries in U.S., the key market for our Specialty Polymers business. EBITDA for the quarter stood at INR 3 crores as against INR 30 crores generated in Q2 FY '23, lower by 91%. Lower realizations in margins in film business, coupled with adverse product mix for the quarter in Specialty Polymers business led to lower profitability and margins for the quarter. Loss for the quarter stood at INR 13 crore as against profit of INR 8 crores garnered in Q2 FY '23. Lower offtake coupled with weaker realization of margins, resulted in lost for the quarter. Moving on to the performance of Ester Filmtech Limited, our wholly-owned subsidiary, revenues for the same stood at INR 64 crores, with EBITDA loss of INR 3 crores for the quarter. In terms of volume, Q2 FY '24 generated 5,975 metric tons as against 5,760 metric tons volumes generated in previous quarter. EBITDA losses are largely owing to lower utilization level and the stress in the film business prevailing currently. With time, we are confident that Ester Filmtech will contribute positively to the overall growth of the business due to its low operating costs. As mentioned previously, the plant is expected to generate revenues worth INR 500 crores to INR 550 crores upon achieving optimal utilization. In summary, we would like to reaffirm that although the immediate future presents challenges for both our businesses, we maintain an optimistic and confident stance. We are determined to overcome these obstacles and propel our business to their full potential in the medium to long term. That concludes my opening remarks. We can now commence the Q&A session.

[Operator Instructions] Our first question is from the line of Saket Kapoor from Kapoor & Co.

Sir, if we firstly -- thank you for the opening remark. That was very vivid and covered a lot of the aspects about the business part. But sir, if we take into account the cycle in which we are -- we must have -- we have faced this kind of excess capacities earlier also. So if you could guide us where are we in midst of the glut? And then again, the demand rising and, again, we returning to our normal margin situation? So are we midway or is the worse still there in terms of the pricing part and the lower utilization levels, which would definitely happen as they -- all players are bleeding and also new capacities, I think, one new line is also expected going ahead. So if you could give some color on what are the other capacity addition we are seeing in the near future. Your outlook, where are we in terms of the midst of the pricing?

In terms of the pricing, we are at the bottom. We can't go any further, I mean, at least substantially further. We have -- we are, I would say, more than midway through the cycle. We have only one more line left to be commissioned, which will be commissioned by the end of this month or early next month. And I think we should start seeing some improvement in the next couple of quarters definitely. Please also note one very important thing that as per the new plastic waste management rules, which have been declared, as they demand a 10% recycled content in all packaging materials. Now this is possible, and this is becoming effective from 1st of April 2025. Now this is possible only in polyester film. It is not possible in BOPET. So actually, we are going to see a much higher growth in demand starting towards end of next calendar to fulfill this requirement of the plastic waste management rules. Polyester film demand is expected to grow substantially more than any other competitive product. So actually, we are now -- I think, in the next couple of quarters, we should start seeing some improvement in terms of margin. And I think, by 2025, we will be in a reasonably good shape. I hope this answers your question, Saket ji.

Yes, sir. And sir, for the Specialty Polymer, I think -- so things are looking in even line if you take quarter-on-quarter numbers. So therein also sir, how -- when can we go back to our previous margin state and the outlook which we had earlier in terms of the offtake?

This is just bad luck, Saket ji. Please understand that if you take our Q1 numbers of FY '23, we reached an annual run rate of INR 260 crores of turnover with an EBITDA margin of INR 85 crores, INR 90 crores. This would have actually grown from there had this global recession has not occurred. Interest rates have gone up in America from 0% to 5%. And this is hurting the business and economy tremendously. And as soon as this recovery starts, we are expecting this recovery to start by second quarter calendar 2024. And I'm very hopeful that towards the end of next year, we should be coming back to the numbers of last year. This is our expectation.

And sir -- Rustagi ji, if you could give me some color on the -- how the raw material prices have played out? And what's the current trend there? And also on the net debt numbers, and I think, sir, now with these utilization -- also on the utilization levels, if you could give separately the utilization levels for our new facility and the existing one, the previous one?

Pradeep, I think you can answer all these questions.

Raw material is more or less stable. The PTA prices are about INR 77 a kg, and the MEG is in the range of INR 46 a kg, which gives us the chip rate raw material cost for chip at about INR 81 to INR 82 a kg. More or less, the raw materials have been stable since last 2 to 3 months, and we don't foresee any major variations in the raw material cost going forward. Coming to the debt portion. So we have a term debt of about INR 400 crores outstanding in Ester Filmtech, and a working capital outstanding of about INR 50 crores. So that INR 450 crores in Ester Filmtech, and we have close to INR 300 crores debt, INR 200 crore is the term debt and INR 110 crores is the working capital. That's the debt -- interest-bearing debt in Ester Industries. So all put together both the companies, the consolidated debt is INR 750 crores. But we also have INR 140 crore lying in the liquid financial instruments securities. So net debt is about INR 610 crores. Coming to the capacity utilization, the capacity utilization in Ester Filmtech is about 55% to 60%, whereas in Ester Industries, it is 75% plus, as far as Film is concerned. Specialty Polymers because of the recession in the U.S., the utilization levels are very low, less than 10% currently. So I hope this answers all the 3 questions that you had raised.

Yes, sir. And the cost of funds, sir, currently?

Cost the fund in Ester Industries, it is about 10% now because there has been continuous increase in the repo rates, which is also forcing banks to increase their rate of interest. In Ester Filmtech, it is about 8% -- 7.5% to 8%.

Okay. Sir, taking into account the deterioration in the finance -- operational and the financial performance, can we -- how are we going to ride through this INR 600 crores debt on a consolidated basis also? It's a large number and taking into account the current business environment, what steps are you taking to tide over this? And sir, can we also -- how are the rating agencies are taking into consideration the current environment?

So we had a meeting with the rating agency in the recent part. And looking at the comfortable liquidity position, we are not taking any negative view only -- on the company per se. But in 3 months to 6 months' time, they would be looking at the industry in totality, and then they may come out with some sort of correction if required. But this is our discussion with the rating agencies. As of now, there is no risk to the downgrade of the rating that we have obtained. We are A minus as of now from CRISIL.

And we have enough liquidity to ride through this downturn. And so we are not really worried. And we are always there to stand by with the company. We have performed extremely well in the last 3, 4 years, handed out very, very handsome dividends to the shareholders. The share price also went up. Unfortunately, because of the excess capacity and the global recessionary conditions, this has happened, but this is a very short-term phenomena. And we are very, very sure that we'll come out of it very soon and stronger.

Our next question is from the line of Ajinkya Jadhav from Dolat Capital.

Am I audible?

Yes, sir. Please go ahead.

Yes. So my first question is, what are the sectors one must look actively like there are signs of potential growth for the revival of the Films business?

Sorry, we couldn't hear -- we can't hear you. You are not very clear. Can you please speak louder? Or use handset rather than speakerphone.

Sir, if you could use your handset, please.

Please don't use speakerphone.

Yes. I was saying what are the sectors one must look to see the signs of potential growth revival for Films business?

What sectors should we look at? I mean Polyester Films actually addresses the flexible packaging business, while the Specialty Polymer addresses many sectors across the board, including consumer electronics, carpets, textile, industrial, rigid packaging, flexible packaging. So we are actually addressing a host of our applications in Specialty Polymers, while Polyester Films addresses largely flexible packaging.

And the flexible packaging would be mainly consumer FMCG sector.

Okay. Okay. Clear. My second question is, these 2 products, innovative PBT and MB-03 Master batch, how will they contribute to the, you can say, Specialty Polymers business, innovative PBT and MB-03 products?

Sorry, again, you are not very audible. Your voice is very unclear. Can you please repeat your question?

Sir, may we request you to use your handset, please?

Yes.

Yes, sir, please go ahead and use your handset. Sir, your audio is not very clear, sir. It's muffled.

Yes, yes. So my question is, MB-03 and innovative PBT, these 2 products, how much they contribute to the Specialty Polymer business?

They contribute very largely to the Specialty Polymers business, about 70% to 80%. And right now, because of the -- like I explained, because of the recession in the U.S. and global recession actually, the volumes have fallen quite substantially. And we are hoping that this will start reviving by middle of next year -- by the middle of next calendar.

Okay. Okay. That's helpful. Just last question from my end, like how is the pipeline in the Specialty Polymers business for the new products? Are there any plans to launch?

The pipeline is quite strong. And actually, we are working on a couple of very interesting products right now, and we are very hopeful that they will also start giving dividends. It may take some time because we have just started introducing it to the market. So hopefully by sometime during next year, we should hear some positive -- start getting positive effect of it also.

Our next question is from the line of [ Jatin Damania ] from Svan Investment Managers.

Sir, I just wanted to understand more from an industry perspective. Now I mean you mentioned in the opening remarks that there was an oversupply. And probably we are at the mid-level of cycles, and there's only one more line coming up in the coming months. But if you look overall in the industry, there are a number of players who are increasing their capacity. So if you look in -- I mean almost 58% capacity we have seen increase over December '21 in BOPET and similarly 23% in BOPP. And almost 2/3 of the capacity is another lined up in March '26. So over a longer period of time, how can one look at the BOPET and BOPP industries and the spreads going ahead?

See, it's all a question of demand and supply. Right now, the supply is more than demand. That is the reason why the margins are under compression. So that's the good -- the good news is that the demand growth is extremely positive and it is growing at about 10% to 12% domestically and about 6% globally. So this will lead to closing the gap between demand and supply very soon. So let's say, right now, if we're at about 65%, 67% capacity utilization, the moment we start touching anything between 75% to 80%, we start seeing improvement in margins. So it's not -- we wouldn't be too far away before we start seeing improvement. Like I said, a couple of quarters more we'll start seeing improvement, and this is what we strongly feel.

Sir, which segment is driving the growth? And probably you are being so confident that in a couple of quarters will reach to a 75%. So can you help us with segment which is driving -- which will drive the overall growth?

All segments, across the board, FMCG. We -- this goes for flexible packaging of dozens of FMCG products. including rice, sugar, salt, tea, coffee, namkeens. Biggest sector is namkeen. Your bhujias and your -- all your big brand names, snack foods, potato chips. Everything is packaged in polyester and BOPP. So we -- and these sectors are growing phenomenally. I mean these numbers are available for you to see in our public platforms. So when these sectors will grow so phenomenally, the growth for the packaging is always bound to grow in a similar manner.

Right. So I mean, in your opening remarks or probably in the previous comments, you also indicated about the new plastic policy that will probably will come into effect from 1st April of '25. Sir, on a ballpark number, do we have any idea what would be the incremental demand that we probably can generate from this policy?

Well, the policy says that all flexible packaging must contain 10% recycled content, and this is effective from 1st of April 2025. Now polyester film is the only product, which can give this -- which can meet this requirement. Even BOPP cannot meet this requirement of 10% recycled content. So I believe or we believe that there will be a big switchover from BOPP towards polyester once this become effective. It's very difficult to give number, but I would imagine there will be a substantial boost to the consumption of polyester film.

Okay. And sir, coming to your quarterly numbers because, if I am not wrong, last quarter, we had some impact of the shutdown at our facility in Telangana. So if you can help us the status -- what was the status of the entire facility in Q2 because that was a new capacity which came on stream and at what level we utilized this?

Can you repeat your question? Your voice is very muffled. We can't understand what you're saying.

No, sir. See, I just wanted to understand the volume side. Because last quarter, we indicated that there was some impact of the shutdown in the Telangana. So just wanted to understand the status in the Q2, and at what level of utilization will be operated at Telangana facility?

About 65%. The Telangana is at about 65% capacity utilization.

Okay, 65%. And sir, and the last question, which is on the Specialty Polymer. So because we are seeing the near-term headwind because we are seeing a decline in the demand. So by any chance are we seeing any green shoot or probably 2 or 3 quarters down the line or probably are we hearing anything from the U.S. end customers that probably we are seeing a revival in demand. Because that's the key product and which will drive the overall value-added proposition in our entire basket and drive the margins. So if one want to understand the growth in the Specialty Polymers and the margins probably for FY '25, '26, so how should one look at it?

I think by FY -- if you talk about FY '26, or let's say, the year of '25, '26, I think this will be fully back to normal by then.

So is it safe to assume that we will be around 25%, 30% for the Specialty Polymers at that point of time?

So like I said, I expect the revival of Specialty Polymers to start sometime middle of next calendar, so around June, July or May, June. And by the end of next calendar, that means by end -- by December '24 or let's say, early '25, we expect most of the demand to come back in Specialty Polymers. So '25, '26 should be a very good year for Specialty Polymer.

[Operator Instructions] Our next question is from the line of Saket Kapoor from Kapoor & Co.

Sir, I was coming to the point of the new capacity coming up in the near future. If you could just provide outline...

Sorry, can you repeat your question? Can you repeat the question again?

Sir, we request you to use your handset, please.

Now you can hear me, sir?

Yes.

Yes, please go ahead.

Sir, I was looking for an answer for the new capacity that will be commercialized in the near future, domestically also and internationally also, the size?

I think as far as the domestic is concerned, there's only one line coming up this year and one is coming towards end of next year. That's all. And then there are nothing -- there is nothing else slated till '26 or '27.

Okay. And internationally, sir?

Internationally, there is no capacity that we know of other than China, where some substantial expansions are taking place. But to get absolutely accurate information on the China is very, very difficult. And they don't export anything, so it's not really a threat to us.

And sir, taking into consideration the current domestic demand, are films being imported in the country? Or...

No, there are no imports. There is no import threat as of now.

There is no import threat as of now. So what factors will change our fortunes, meaning going ahead? How will these capacities get absorbed? And how is the path going to be? What's your experience, sir?

Very simple. Saket ji, I have explained before. Demand growth is about 11%, 12% in India and 6% globally. And once the plastic waste management rules becomes effective 1st of April '25, the demand for polyester film will shoot even more. There will be -- likely to be convergent from BOPP to polyester film because BOPP cannot offer products with 10% recycled content, only polyester can. So we expect demand shoot substantially in the polyester film sector starting April '25.

And sir, how has been our performance in the value-added segment? I think so for Ester Limited, we had a good proportionate, and we also guided for...

They're doing quite well. And in fact, we are working on one very interesting product, which could actually become a game changer for the whole sector of packaging industry. You will come to know of it very soon.

Okay. That is, again, in the value-added metallurgical segment only?

It is a value-added product. Yes.

Okay. And what are the spreads are currently, I forgot to ask? Currently per kg spread for us?

The domestic market will be around INR 18, INR 19 -- INR 17 to INR 19.

Okay. And in optimum conditions, sir, what are the reasonable margins that we have been incurring over a period of time consistently for giving away the variations?

The margins -- we are seeing crazy margins of up to INR 75 -- that, of course, is not going to come back for a while. But I would imagine reasonable margins to be in the region of about INR 40, INR 45. I think that we should expect to see [ enough ] to the future.

Ladies and gentlemen, that was the last question of our question-and-answer session. As there are no further questions, I would now like to hand the conference over to the management for closing comments.

Thank you all for attending the earnings call today, and I look forward to seeing you all for the next earnings call for the quarter 3. Thank you very much, and have a good day.

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