Ester Industries Limited (500136) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Ester Industries Limited Q3 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 Q3 and 9 Months FY '24 Analyst and Investor Conference Call. We have with us today Mr. Arvind Singhania, the Chairman and CEO; Mr. Girish Behal, Business Head, Films & SBU ; and Mr. Sourabh Agarwal, Chief Financial Officer. We will begin this call with opening remarks from the management following which you 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 has been included in the invite earlier. I trust you have had a chance to go through the financial documents -- documents of financial performance. I would now like to invite Mr. Arvind Singhania to make his opening remarks. Over to you, Arvind.

Thank you. Thank you, Gavin, and thank you, everyone, for joining us today. I have alongside with me Mr. Girish Behal, Business Head, Films & SBU; and Sourabh, our Chief Financial Officer. I will briefly talk about the key business highlights, post which Sourabh will walk you through our financial performance. Our performance for the quarter is largely reflective of the sale across both our businesses. While temporary disruption in temporary -- and domestic demand supply dynamics has impacted film business performance, the ongoing inflation worries in U.S. has halted the growth momentum of specialty polymer business. Film business has seen a few pressure in realization and margin post the commissioning of new facilities, which has strengthened the performance of our peers and industry at large. As far as our financial performance is concerned, our revenues for the quarter on a stand-alone basis stood at INR 204 crores with an EBITDA loss of INR 1 crore. Moving on to individual businesses now, starting with Specialty Polymers. While we have seen volumes for the business somewhat sustained and continued to trend below its historical levels. The reason for the deacceleration in business momentum is largely owing to the challenges grasping the U.S. economy, the main market for the business. Volume for the quarter stood at 558 metric tons as against 405 metric tons in corresponding quarter last year and 599 metric tons in Q2 FY '24. While the realizations are stable across products, volumes remain under pressure compared to expectations. Sales of our marquee products MB-03 and innovative PBT has shown resilience. We have started seeing improvements in volumes from Q4 FY '24 and expected positive momentum to continue to improve. In terms of marquee products MB-03 volume for the quarter stood at 153 metric tons as against 143 metric tons in Q3 FY '23 and 179 metric tons in Q2 FY '24. Q3 FY '24 volumes for innovative PBT amounted to 314 metric tons as against 74 metric tons in Q3 FY '23 and 185 metric tons in Q2 FY '24. Profitability for the current quarter though was impacted by a onetime inventory write-off and adverse product mix, the combination of which significantly dented our margin as well as for the business. As many of you may recall, this business is largely IT protective and as such the set of heightened competition doesn't arise. The softness in the business is largely owing to the demand uncertainties prevailing in the major markets. We are hopeful that the demand and subsequently the volume and profitability of the business will revive maybe after a couple of quarters as the U.S. economy starts to recover. Our focus remains towards harnessing our R&D expertise to infuse innovative and captivating products. As I mentioned before, we have already started seeing a major uptick in volumes for Specialty Polymers in Q4 of FY '24. And we expect to come back to normalcy within the next 2 to 3 quarters. We remain positive and confident of the medium- and long-term profitability and growth prospects of the business. Shifting focus to our Film business. As highlighted in our previous conversations, there has been a surge in excess capacity in the market resulting from the commissioning of new production units. Although demand growth remains robust with domestic demand increasing at a rate of 11% to 13% annually and global demand at 5.5% to 6% annually, supply has exceeded demand by a significant margin. This imbalance has triggered a chain reaction of declining prices and margins. Our overall volume for the quarter stood at 19,781 metric tons, comprising of 12,816 metric tons on a stand-alone basis and 5,975 metric tons at a subsidiary level. We believe that the pricing pressure will continue at least in the near term. Our efforts till then will 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 24% during the quarter. We are also working on new products that will enable us to improve profitability and mitigate the effect of adverse market scenario. We are also focusing on continuing cost and strengthening our cash flows. To maintain healthy liquidity, the company is raising INR 99.9 crores to preferential issue of equity shares. This strategic move will enhance company's ability to meet its short-term and long-term obligations. In conclusion, despite potential challenges in the short term, we are confident that both our businesses are statically positioned to meet the underlying demand in their respective markets and generate value for the shareholders. Thank you.

Thank you, sir, and good day, everyone. Thank you for joining us on our quarter 3 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 203 crores as against INR 237 crores in the corresponding quarter last year, lower by 14%. The reason for this degrowth, as mentioned by Arvind ji, pertains to excess supply in the Film business and recessionary worries in the U.S., the key market for our Specialty Polymer business. EBITDA for the quarter stood at a loss of INR 1 crore as against INR 30 crores generated in quarter 2 FY '23. Lower realizations in margins in the Film business, coupled with the advanced product mix for the quarter in Specialty Polymer business led to a lower profitability and margins for the quarter. Loss for the quarter stood at INR 16 crores as against the profit INR 8 cores garnered in quarter 3 FY '23. Lower offtake coupled with weaker realization resulted in loss for the quarter. Moving on to the performance of Ester Filmtech Limited, our wholly-owned subsidiary, revenues for the same stood at INR 74 crores, with EBITDA loss of INR 14 crores for the quarter. In terms of volume, quarter 3 FY '24 generated INR 6,965 metric tons as against 5,975 metric tons generated in the previous quarter. EBITDA losses are largely owing to lower utilization level and the stress in the Film business prevailing currently. And adverse foreign exchange fluctuation of INR 8 crores on reinstatement of EURO denominated term loan. This is a noncash accounting NT having no impact on the cash flow. At this time we are confident that Ester Filmtech will continue 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 obtaining optimal utilization. In summary, we would like to reaffirm that although the immediate future presents challenges for both the businesses, we maintain an optimistic and confident stance, we are committed to welcome these obstacles and propel our business to the full potential in the medium to long term. That concludes my opening remarks. We can now commence the Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Nitesh Dhoot from Dolat Capital.

So my first question is on the pref issue. So how do you propose to utilize the funds with the proceeds of this issue?

Sorry, I can't hear you very clearly.

Sir, may we request you to kind of use your handset please, if you're using your Bluetooth.

Yes, I'm on the handset. Is this any better?

Yes, sir, please.

Yes, better.

Yes. So sir, how do you propose to utilize the proceeds of the preferential issue?

So this is basically to show up the cash flow and ensure that we are able to meet all our obligations towards repayment of interest in principle largely and also to be able to -- through equity -- participation of equity in subsidiary and also to be able to meet -- to fund the losses.

All right. All right. And sir, secondly, on the value-added portfolio in the packaging films business. So your presentation says that it's 24% in Q3. So what exactly are these value-added products here? Any special films or I mean whether it's higher margin. And how is the contribution likely to increase going forward?

I mean, there is a very long list of products, very difficult to explain to you the list in detail, but we are continuously increasing. These are -- some of them are online produced products, some are offline coated products, some are metalized and coated products. So there are various list of products that we are doing. And a lot of them are very, very high margin assets. It's very difficult to give you exact list, and we would actually refrain from doing that on a public platform.

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

Thank you, Singhania ji and team for a very detailed presentation and also opening remarks. Sir, coming to the preferential allotment, therein, it is being mentioned that a commitment of INR 25 crores -- INR 24.90 crores from yourself, Arvind ji? And then there is mentions about Modi Rubber promoter group. So I would like to understand -- in the shareholding pattern, we are not able to recognize Modi Rubber, is Modi Rubber the same listed company, which you are talking, sir, here?

Yes, yes. That's right. It's a listed company, they were never shareholders before. They are a new shareholders. They will become a new shareholder after allotment.

And they will be clubbed as promoters -- any relation with the existing promotor?

Yes, yes. They will be clubbed as promoter.

And in the non-promoter category, sir, we have 2 entities, first is by the name of Mr. Kamlesh Jain Shah, and then Mr. RJ Corp. So RJ Corp is again that -- the listed company, I think, so they have a ...

No, no, no. So RJ Corp is a holding company for Varun Beverages and Devyani International. Both by Mr. Ravi Jaipuria.

Ravi Jaipuria. Okay. So I just wanted to understand the -- their commitment -- from the Jaipuria Group and Modi Rubber to take interest or what is the road map ahead? Is it only just -- it may not be only to fund your cash flows or the losses. What's the trajectory going ahead? If you could just elaborate in detail?

Yes, it is not just to fund losses. Basically, they see a lot of value in the business going ahead. And they recognized that this is a short-term problem, which has been in the Film business being created by overcapacity. So this -- all the investors who have come in are seeing long-term value in the business. Mr Ravi Jaipuria through RJ Corp has done full due diligence, Modi Rubber has done a full due diligence, Mr. Shah has done a full due diligence. And they have all come to the conclusion that there is a long-term value in the business, including myself, I mean, I'm putting in money myself. And we have -- there is a long-term value in the business and therefore to demonstrate our commitment to the business as well as ensure of the cash flow this investment is being made.

Okay. Just a small point for here, once again, for Mr. Kamlesh Jain. Sir, can you give the background, which industry does it belong to?

He runs the auto component business.

Okay. In the listed space [indiscernible] or in the unlisted space?

Unlisted. [indiscernible].

Okay. And then coming to the point that generally in case of allotment, 25% is what to be paid at upfront. And the balance, 75%, we have a window of 18 months, but taking into account ...

No, no, no. This is a full 100% payment through preferential allotment and the entire allotment will be done within 45 days approximately. These are not warrants. These are full 100% preferential share allotment.

Correct Sir. Thank you for correcting me here. So the entire money will be coming up before 31st March '24. That we are sure of the results and the value.

Hopefully. I mean it could be 1 or 2 days here or there, but otherwise, the target is before 31 of March.

Mr. Kapoor, this is subject to regulatory approvals from the stock exchanges as well as the shareholders approval. So we have -- we have followed the process and as per our estimate, we should complete this by 31st March, but obviously it is subject to regulatory approvals.

Now, sir, coming to the operational performance. Firstly, to our -- for our subsidiary, therein, sir, it has been mentioned that foreign exchange loss to the tune of, I think so -- INR 8 crores is because of, I think, so restatement of loan. And other than that, sir, there is a cash loss mentioned [Foreign Language]. So if you could -- this is what we are burning our depreciation element is also here?

Including depreciation.

Okay. Okay. This is a cash loss we are incurring, INR 22 crores.

No, no, Mr. Kapoor. So total profit before tax is INR 28 crores, this includes the foreign exchange interest around INR 8 crores and then adjust for the interest in EBITDA portion, but according to the rise of the cash loss.

Okay, Sir. And what are our utilization levels for the Filmtech unit?

Sorry?

What are the utilization levels for Ester Filmtech?

Utilization levels of around 50% to 60%.

60%?

Yes. 50% to 60%.

Okay. And for our unit at Khatima, the mother plant, how was the utilization?

75% to 80%.

Okay, sir. And sir, if you could give us some color on how the raw material basket is currently shaped up for the quarter and the current price trend?

So, see in our line of business, raw material cost is mainly path free. And as I mentioned in my -- in the previous calls also, the raw material values are pretty stable and there is no concern as far the prices are concerned. So the last one year there is not much movement in the raw material prices.

Okay. Can you give the breakup, sir? What are the current price trend for PTA, MEG. Do you have the numbers with you?

No, no, no. We can't reveal the exact pricing for confidentiality purposes on the public platform.

Okay. Right. Right, sir. And sir, one of your competitors also spoke earlier about curtailing down of capacity to rationalize the price trends and also to reduce losses. So are we also contemplating...

I can't understand what you're saying.

Sir, we have heard on another call that one of your competitors is also planning to curtail its capacity -- lower down its capacity so as to reduce losses. So going ahead, taking into account the current business environment, are we also emphasizing on the same path?

I don't understand what my competitor is doing. I have not heard anything. I cannot comment on anything what my competitor does.

Okay. So we are looking to maintain this capacity utilization levels at 75%.

Capacity utilization levels will keep improving with the improvement in demand.

[Operator Instructions] Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Thank you very much, everybody, for joining us for the earnings call today, and we look forward to welcoming you for our next earnings call, which will be for the year ending FY '24, which will be sometime in May. Thank you very much.

Thank you, members of the management. Ladies and gentlemen, on behalf of Ester Industries Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.