Ester Industries Limited (500136) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Ester Industries Limited Q4 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, sir.

Thank you, Kevin. Good day, everyone and a warm welcome to Ester Industries Q4 and FY '24 Analyst and Investor Conference Call. We have with us today Mr. Arvind Singhania, Chairman and CEO; Mr. Pradeep Kumar Rustagi, Executive Director of Corporate Affairs; Mr. Girish Behal, Business Head of SBU; and Mr. Sourabh Agarwal, the CFO. 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 have been 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 Mr. Arvind Singhania to make his opening remarks. Over to you, Mr. Arvind.

Thank you. Thank you, Kevin and thank you, Gavin and thank you, everyone, for joining us today. I will briefly talk about the key business developments post which Pradeep will walk you through our financial performance. I would like to begin the call by talking a bit about our JV with Loop Industries Inc. You all may be aware that we recently executed a 50-50 joint venture agreement with Loop Industries. The purpose of the JV is to build, own and operate a manufacturing facility in India. This manufacturing facility will produce a unique product offering of lower-carbon-footprint, recycled dimethyl terephthalate, or rDMT, recycled monoethylene glycol, or rMEG and convert part of these products into various specialty polymer grades for various applications. Loop's patented technology offers significant advantages over traditional mechanical PET recycling. Let us talk about the significance of this JV and why we believe it's a game-changing development for our company. In simple terms, I will try to explain what this JV aims to achieve and what is the potential of this initiative. This technology is gaining a lot of traction because sustainability nowadays is at the forefront of every company's agenda, especially consumer-branded product companies. Using products made from recycled inputs is largely the way to achieve sustainability. Mechanical recycling is the technology that currently is being used to recycle PCR PET bottles. PCR PET bottles is the only material that is being used to produce recycled feed through mechanical recycling process for manufacture of PET bottles, polyester fiber and film. Now if you think about it, mechanical recycling is not offering full circularity in true sense. It provides circularity as far as bottle-to-bottle conversion goes but it is not able to offer the circularity in other products like fabric and garment because the input feed is PCR bottles -- scrap -- PCR bottle scrap while the output is PET from bottles, fabric or garments. Loop patented chemical recycling process will be able to use any kind of used polyester waste whether adulterated or un-adulterated. Products manufactured through Loop technology will enable the consumer-branded product companies to achieve full circularity. Under this technology, we will be able to use PCR PET bottle scrap, yarn or fiber to produce rDMT and rMEG production of PET polymer for PET bottles polyester yarn fiber or film. So resin chemical recycling is the only technology which will give you full circularity. Mechanical recycling technology, which has been existing for the last many years, has its limitations. DMT and MEG -- the specialty care -- sorry -- DMT and MEG specialty chemicals global market size is huge and is estimated to grow at a CAGR of about 4% through [ 2023 ]. Low carbon DMT and MEG are in high demand but available options are limited and costly. This opportunity offers immense potential to grow and scale up the operations. Loop technology is the only technology that has reached ready for commercialization stage. The other key trigger is that the governments across the world are pushing towards recycling sustainability and zero-waste policies. As stated in the investor presentation, we expect the JV company to commence commercial operations in early 2027. The project is estimated to be set up at a cost of USD 165 million. The funding for which will be in the form of debt and equity in the ratio of 60-40 with Ester's equity commitment in the JV being USD 33 million, or INR 275 crores. We will be approaching the capital markets to raise funds through the equity route for this investment. We expect the project to generate an IRR of about 25% and equity IRR of 35%, translating into a payback period of about 5 years. To start with, JV company will annually produce 70,000 tonnes of rDMT and 23,000 tonnes of rMEG, which will be scaled up over time. JV combines Loop's cutting-edge technology and access to global brands with Ester's nearly 40 years of experience in polymerization, operational prowess and local expertise. Having said that, let me now talk about the performance during the fiscal year gone by. As mentioned in our earlier calls, the external environment remains challenging for film business as anticipated due to temporary demand-supply imbalance. Financial performance of films SBU for the Q4 FY '24 and FY '24 are reflective of the business grappling with the challenges. While near-term challenges and pressures on margin persist, our optimism about medium and long-term prospects of the business are reinforced by growth in demand at a healthy rate and plastic waste management rules that are slated to be effective from 1st April 2025. The plastic waste management rules mandate 10% recycled content in flexible packaging laminates. This regulation will further boost the demand for polyester film conversion taking place from other substrates to polyester because other substrates cannot offer recycling content. Regarding specialty polymer business, we have started to witness gradual pickup in volumes of some of our marquee products trending higher. Demand has seen some revival and is showing early signs of stabilization. Moving on to individual businesses, starting with Specialty Polymers. As mentioned earlier, we did witness some improvement during the quarter over Q3 FY '24. Offtake for some of our marquee products, namely MB-03 and innovative PBT put together grew 20% on a sequential basis, actual volumes of both orders for the fiscal being 1,719 tonnes. In addition to these products, we are also witnessing good traction in some of our recently introduced products. Our product pipeline as well remains encouraging. As you may recall, this business is largely IP protected and as such, the threat of competition doesn't arise. The softness in the business is largely owing to the demand uncertainties that prevailed in major markets for these products because of the recessionary trend. We are positive about the prospects of the business and expect FY '25 to be a much better year in terms of sales, in volume metrics, as well as value terms and profitability. Moving to our Film business, the market experienced a surge in capacity due to commissioning of new production lines in the last 2 years. As a result, supply has significantly exceeded demand despite demand growth remaining strong and domestic demand increasing at an annual rate of more than 13% per annum. This imbalance has caused a decline in both prices and margins. For the quarter, consolidated sales volume reached 20,000 metric tons with 13,048 metric tons on a stand-alone basis and 6,954 metric tons from our subsidiary. While we estimate demand-supply gap to bridge gradually due to continuous growth in demand, we estimate the pressure on pricing and margin will persist in the short term. Accordingly, we are taking steps to improve product mix besides continuing our thrust on improving operational efficiencies and cost rationalization to cut losses of the business. On a stand-alone level, we have seen our share of value-added products at 28% during the quarter. In conclusion, we believe we are well positioned to create value for our shareholders as fundamentals of both the businesses remain firmly intact. The JV with Loop is a game-changing development, which will charter a part of profitable growth for the company for years to come. 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 Q4 FY '24 earnings call. Let me quickly walk you through our financial performance, post which we can commence the Q&A session. Revenues on a stand-alone basis, stood at INR 216 crores as against INR 252 crores in the corresponding quarter last year, lower by 14%. The primary reason for the degrowth is the pressure on pricing and margin that is being witnessed in the Film business. You may have noticed that performance of all the players in the BOPET film space has largely been lower due to higher competitive intensity, which has resulted in severe pricing pressure. Specialty Polymer business on the other hand did witness good pick up on a sequential basis. EBITDA for the quarter stood at INR 9 crores as against INR 19 crores generated in Q4 FY '23, lower by 53%. Margin for the quarter stood at 4% as against 7.4% during the corresponding quarter last year. The business incurred a loss of INR 9 crores during the quarter as against profit of INR 3 crores generated during Q4 FY '23. Lower profitability and margins during the quarter are largely owing to the subdued performance of our film business. Moving on to the performance of Ester Filmtech, our wholly owned subsidiary, revenue for the films stood at INR 76 crores for the quarter. In terms of volume, FY '24 generated sales of 6,954 metric tons. With time, we are confident that Ester Filmtech will contribute positively to the overall growth of the business due to its low operating cost. As mentioned previously, the plant is expected to generate revenue worth INR 500 crores to INR 550 crores upon achieving optimal utilization and sales at reasonable price [indiscernible] margins. In summary, as mentioned by Arvind ji, we are all excited about the JV with Loop Industries. We believe it will transform the entire profitability profile of the business. It is really exciting opportunity for us and we are making concerted and focused efforts towards ensuring that it progresses as per plan. With regard to our existing Film and Specialty Polymer business, while Film business may see some pressure in the short term, we expect Specialty Polymer business and Film business to perform much better in FY '25. That concludes our opening remarks. We can now commence the question-and-answer session.

[Operator Instructions] The first question is from the line of Krushna Parekh from Dolat Capital.

I have a couple of questions. First is on how is the environment for the BOPET film business? And when do you see stabilization in demand and supply situation over there?

The situation is far better than earlier because the demand -- the growth in demand for polyester film has been very, very good. In fact, it is actually more than 15%, although we mentioned 13% in our speech. But it is, in fact, more than 15%. So it is getting better day by day. And very soon, we will see that the -- this overhang will be over maybe in the next couple of quarters. And because of the plastic waste management rules implementation by 2025 -- April 2025, the demand for polyester will increase further because other substrates will not be able to offer a recycled content in their film.

Okay. Sir, my second question is what is the specialty polymer business -- size of the specialty polymer business over the next 3 years?

So this year -- last year, we did...

INR 100 crores.

About INR 100 crores turnover. And this year, the target is to almost double that number. We have doubled that number for this year. And I think over the next 3 to 4 years, we can look at a turnover of about INR 350 crores to INR 400 crores.

The next question comes from the line of [ Jainam Gillani from Svan Investments ].

Sir , could you please help us understand the current demand-supply dynamics in BOPET? And how do we see the movements in the spread going forward?

Okay. So the demand-supply gap has reduced substantially. And I would now imagine that the overhang is about 15% to 20%. That's about it. And I think we will start seeing improvement in spread over the next couple of quarters.

Okay. Sir, we were planning to have our FY '25 mix for value-added products to around 30%. So what could be your incremental margins as compared to the normal film business?

We -- you want to know the -- because of the value-added products, what would be the value addition per kg of film?

Yes.

Yes, incremental. So I'll just give you the numbers. So suppose we are getting INR 15 in the domestic market as on the commodity film. We blend it, in the export market for the same would be about INR 65 to INR 70 because of the value-added films. The metallized -- the print film in the domestic market because the component of value-added product that is getting sold in India is not much, the incremental value addition is about INR 6, so against INR 15, we will be getting INR 21 -- INR 20, INR 21, on a overall basis.

Okay. And so for our JV, as you have mentioned, since you already have debt, what -- how are we going to fund the investment?

I already mentioned in my speech that we'll be approaching the market for raising capital.

We have the next question from the line of Deepak Malhotra from CapGrow Capital Advisors.

Arvind ji, few questions on the industry outlook actually. We can see over the last 30, 40 years since 1980s, when everybody set up the plants and when you did a convertible 10 million bond issue in 1997, I don't know if you can even recall that. Okay. So I've been following your company for very long, over the 30 years this sector. Now what I see that in between, we have, obviously, it's a cyclical industry, so you have crests and troughs. The last one, what we had -- major one was in around 2012. And even in 2016, '17 also, we had issues. But now this time, the down cycle has, I think, has a very -- kind of been prolonging, I would say, scenario, which we haven't seen in the past. I mean the spreads have come down for everybody in the industry. The EBITDA margins are kind of bottom. And things don't seem to be improving off late. While I'm sure there is a commentary from your side, which is basically kind of boasting a positive scenario going forward. But are you actually seeing any green shoots on the ground, sir?

Yes, we are starting to see some green shoots on the ground. And that is why I'm confident that over the next 2 to 3 quarters, you'll start seeing the improvement. The demand-supply gap has come down.

Because what we hear is that when we compare PET film versus BOPP, then the situation in BOPP is much better than what the industry experts are talking about but...

You are absolutely right. Right now, the demand-supply gap in BOPP is far more favorable. But I think a lot of new capacities are expected in BOPP over the next 12 to 18 months. So that's -- so both the industries would have to run parallel to exactly what's happening. So we went through a phase of very high capacity growth over the last 2, 3 years. And now this will be experienced by BOPP in the coming year or so.

So when you talk of the value-added products, I think you referred, I mean what micron film are we talking, 10-inch, 12-inch?

It's on various microns. It's not one microns. The value-added products are on various microns.

So I mean you mentioned [Audio Gap] per kg for the specialty one or the metalized one, you refer to.

No, no. I mentioned the plain commodity film 12-micron gives about INR 15 over raw material cost. The blended -- for the plain film in the domestic market, the value-added and the commodity put together would be about INR 21, INR 20. Over and above -- INR 15 becomes INR 20. We get INR 6 extra but in export, since the majority of the volume of vast film -- value-added specialty film is getting sold in the overseas market, there the incremental is about INR 40 to INR 50. So we get about -- so in export, we are getting, let's say, close to INR 20, INR 21. In the value-added film, we'll be getting INR 65 to INR 70, specialty [indiscernible].

Okay. So yes, so now I mean, while this is definitely a good attempt to increase the value add as you mentioned earlier also but are you seeing any further capacity expansion by other players? I mean, if we say any domestic players or internationally because 60% is any ways production is by China and India. So that kind of creates a lot of impact.

Yes. So domestic, there is no more capacity coming up for the next 2 to 3 years.

Okay. And internationally does it have an effect?

By the time the next line comes up, there will be a shortage. So that new capacity will be required.

Okay. And in terms of the margins, if we see -- I mean, we are at the rock bottom, EBITDA margins or the EBIT margin, the way you're reporting. So in the past, I think we have obviously seen double-digit margins, right? So I mean, what kind of trajectory you see we're going to follow now going forward? I mean, is it going to be next 6 months, 18 months, 24 months? I know it's difficult to take a call but what's your view, sir?

I think as far as the EBITDA margins are concerned, you will see a substantial improvement in FY '25. And I think we should be reaching a state of near balance in FY '26, halfway to FY '26.

And do you also see the capacity utilization improving for yourself? Because in the Telangana plant, I think it's still -- last time you mentioned between 50% to 60%. And now also, I'm sure the situation continues the same. So how is it going to look forward?

I think going forward, we'll start seeing improvement and reach about 75% capacity utilization in Telangana and in Khatima.

On a consolidated basis, the capacity inflation was close to 70%, if we club Telangana and Khatima.

Which will now improve to 75% to 80% over the next couple of quarters.

And your outlook in terms of the industry situation improving by FY '26 or by the end of FY '25, is it based on this 10% plastic rule, which you referred to earlier also? And how seriously will it be implemented, sir?

How seriously it will be implemented is a question for the government. This is not a question for me. But I think the government is very serious about implementing and that's our understanding. And yes, the growth in demand is in both, one, the organic growth in demand, which is coming naturally, which is, in my opinion, more than 15% per annum and plus, of course, it will be supplemented by this PWM, plastic waste management rules, which will -- well, I think other substrates will -- cannot offer any recycled content will be favorable for PET.

I have not understood even in the earlier calls, you have mentioned that it's not possible for BOPP to offer this 10% recycled element. Why is that so?

Why is that so? I have no question because it's not available, in my opinion. In our opinion it's not available. The technology for that -- for a viable, you see there may be some small volume available but what -- our understanding is that so ridiculously priced, that it cannot be viably -- it will not be commercially viable and even the volumes that are available are not enough. So it is our understanding that other substrates cannot offer recycled content, while polyesters definitely can.

Okay. Because you spoke of a switchover from BOPP to polyester film over the last few calls when we talked about the issue. So I was a bit surprised that why will people shift because otherwise, I mean these are 2 quite competitive products, which are well established for quite long. And they have their own...

If the government mandates 10% recycled content in the -- how will the consumer or the brand owners fulfill that mandate? Please tell me. If there's a need for a 10% recycled content and BOPP cannot operate, then how will the brand owner fulfill their commitment? They have no choice but to come to polyester.

Okay. Now my other question is on the INR 100 crore issue, which you did the preference on. So is that already been completed and has all the funds come in?

Yes, the money came in before end of March.

We received the final approval from the stock exchange. The shares have already been allotted and listed.

And the money is in the bank. It came end of March, the money.

28th March. That's right.

Okay. One more question. What is really the final, I mean, plan you have? Because now you have 2, 3 very strong investors investing in the company and so what is really the future outlook in terms of -- I mean, how do you foresee basically the business going forward? I mean, why are they really invested in the company? Or what is the outlook -- business outlook?

Well, first of all, like I said, that the polyester film business is likely to turn around in the next cycle -- it will definitely improve substantially in this year, expect turnaround next year. Specialty Polymer business is poised for very good growth. And the game changer, of course, is going to be our joint venture with Loop for the chemical recycling business. That's going to be a complete game changer for the group.

But this Loop technology, has it been employed by anywhere else in the world, I mean, in that sense?

Not at commercial scale but at a small commercial scale, Loop has a plant in Quebec, Canada, which they've been operating for the past many years. And we have been working with Loop for the past -- that's a 5,000 tonne capacity plant and they've been operating this plant for the last 4 years and continuously producing recycled DMT and MEG. A lot of that DMT, MEG has come to our plant in Ester, where we have converted into various grades of polyester polymer for bottles, for fabric, fiber, garments. And these products have been tested at brand owner places. And from many places, we have already got approval for quality.

Okay. Great. One final question. In terms of your debt -- I think in the past, you have indicated that the number is about INR 750 crores gross and the net is still about INR 600 crores. Is there any change in those numbers?

So on 31st March exact number is INR 780 crores, the gross debt. And if you consider the cash and FD, et cetera, the net debt, net of liquid investment is about INR 610 crores, including working capital.

We have the next question from the line of [ Saket Kapoor from Kapoor Company ].

[Foreign Language] Singhania ji. [Foreign Language] Rustagi ji. Sir, Rustagi ji, if you could give me the details of the current work in progress -- capital work in progress, which we have the closing balance.

The capital work in progress as on 31st March '24?

Yes, it is pertaining to which segment? And when it will get capital -- INR 83 crores is the closing balance?

These are maintenance CapEx in Khatima. So I'll give you the amount, just looking at the numbers. In the meantime, we can discuss other questions.

Okay, sir. And sir, the color on the raw material mix also, how about the raw material prices currently...

Both API and MEG has been very, very stable since last many months. It is -- the per kg of [indiscernible] and MEG cost has been in the range of INR 80 to INR 82. So quite stable.

Okay. And the breakup, sir [Foreign Language] price trend [Foreign Language] and MEG [Foreign Language] price trend for the last quarter.

[Foreign Language] about, let's say, between INR 75 and [ INR 74]. MEG is about INR 51 and [ INR 49 ] range [Foreign Language] [indiscernible].

Correct, sir. And sir, you mentioned the net debt number at INR 610 crores.

INR 610 crores, including working capital, both funded and nonfunded.

Okay. What is our cost of funds, sir, currently?

About 9.5% to 10%. And this is for Ester Industries. The cost of debt is lower in Ester Filmtech because we have foreign currency debt there sitting in the balance sheet.

Okay. And then sir, there is any foreign earned money conversion cost also, MTM that we have booked last year?

So yes, during the year, there was MTM but it was a gain.

Okay. Can you quantify it, sir, absolute number?

Yes, I'll just share the number, both of them.

And also, sir, what is the current maturity, sir, total?

INR 30 lakhs. So December quarter, there was a negative. In March quarter, there was a big positive. Overall for the year, it is only marginal about INR 30 lakhs, positive.

Okay. And what are our current year maturities, sir [Foreign Language]

So in Ester, it is about INR 60 crores -- INR 64 crores. And out of that, we have already paid till 22nd May about INR 27 crores. In Ester Filmtech, it is including the foreign currency debt and the rupee term loan, only the term portion is about INR 366 crores. And repayment is about INR 53 crores, [indiscernible] in the wholly-owned subsidiary.

And for Filmtech, how are we going to fund the maturity?

So we have the support from the parent company because it's a wholly-owned subsidiary, so Ester will be providing adequate and timely support so that there is no delay or default in servicing the debt.

Okay. And the fundraising, which we have done, sir, what was the total fund, I think INR 100 crores, was it raised?

INR 100 crores.

INR 100 crores.

And how are we going to utilize these -- we have paid from those funds only for -- till May of the first quarter?

There is -- so when the issue was done, there was a amount given in the -- so INR 50 crores is for repayment of term loan, INR 30 crores for investment in subsidiary and INR 20 crores to be used by Ester Industries for its operations.

Okay and this -- all the funds have been deployed to the use as such.

Yes, we have received and we are using those funds now for repayment and for operations in Ester Industries and for investment in subsidiaries.

Right sir. Singhania ji, when you spoke about specialty polymers revenue, correct me here, doubling to INR 200 crore levels for FY '25, what gives you the --the pillars of doubling of top line? Where is the positives?

Because we have already started seeing improvement from the last quarter of FY '24. And going by the current run rate, we feel that we feel that it's not going to be INR 200 crore but at least INR 180 crores to INR 200 crores we will definitely do this year, against INR 99 crores or INR 98 crores last year.

Okay. And these are specific to those MB-4 products only, wherein we'll see more traction?

Yes. Of course, the 2 products are the main products, but after that, there are many -- there's some volume in many other products as well.

Sir, you outlined earlier that it was the U.S. recessionary trends, the interest rate scenario. As of now, the data points do not show any change in the commentary what was articulated earlier. So what has resulted in this optimism for...

We could not understand you.