Ester Industries Ltd
NSE:ESTER
Ester Industries Ltd
NSE:ESTER
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Karnataka Bank Ltd
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Ladies and gentlemen, good day, and welcome to Ester Industries Limited Q1 FY '23 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [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. Good day, everyone, and a warm welcome to Ester Industries Q1 FY '23 Analyst and Investor Conference Call. We have with us today Mr. Pradeep Kumar Rustagi, 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 opened for 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 that this effect was sent to you in the invite earlier. We trust you had a chance to go through the documents on financial performance.
I would now like to invite Mr. Pradeep Rustagi to make his opening remarks. Over to you, Pradeep.
Thanks, Gavin. Thank you, everyone, for joining us today. Mr. Singhania will not be able to attend the call today as he has some family emergency. So I and Girish Behal would be here to make the presentation and answer the questions that you may have. So I'll begin the call with a brief overview of all our businesses, post which we will walk you through the financial performance for the quarter.
We have started the FY '23 on a strong note, as can be seen by our financials with both our core businesses, Films and Specialty Polymers registering good growth in revenue and profitability despite a challenging inflationary environment. Post the decision to divest our Engineering Plastics business, our attention is now fully focused on improving and scaling up the performance of our core businesses, mainly Films and Specialty Polymers.
EP transaction is likely to certify in next 25 to 30 days, and will enable us to further deleverage the balance sheet and make it healthier and stronger. It will also provide us with the requisite growth capital to fund the planned capital expenditure and next phase of growth for the company.
Moving on to the quarterly performance and starting with the headline numbers, we have seen a good double-digit growth in our top line and profitability for the quarter. Margins as well have improved on a quarterly basis. Both Films and Specialty Polymer businesses, as I have mentioned, contributed to the revenue and profitability growth, better product mix and improved realization, coupled with higher sales volume resulted in delivering better operating profitability despite elevated feedstock prices and fuel prices.
A strong performance of core businesses, coupled with lower finance expenses resulted into profitability growth both on year-on-year basis and quarter-on-quarter basis. Performance of the Engineering Plastics business were expectedly benign.
Moving on to the original businesses, starting with the Specialty Polymer. After ending FY '22 on a strong footing, the business has started the new fiscal with the same gest, largely driven by strong volumes. We continue to see good uptake for our marquee established products. MB 03, for instance, has seen volumes of 411 metric ton for the quarter as against 379 metric ton during Q1 FY '22, a growth of 8%. While Innovative PBT has seen volume growth of 41% for the quarter with volumes of 485 metric ton as against 344 metric ton during Q1 FY '22. Margin for the business stood at 31% for the quarter as against 36% during Q1 FY '22 and 29% during Q4 FY '22.
At Specialty Polymer, as we have been reiterating, is largely a patent protected and innovation-driven business, with realizations tied to raw material prices. The variation in average sales realization is a function of raw material costs, product mix and customer mix. Product pipeline for the business remains encouraging, offering better visibility and potential for significantly improved performance over the coming years.
We are extremely confident of the value proportion our products bring to the table, as well as the barriers to entry and hence believe Specialty Polymer will always be a highly profitable business for us. We expect the growth trajectory for MB 03 and Innovative PBT to continue throughout the course of the year.
Some of our newly developed products have the potential to do well in years to come. However, ramp-up of commercial sales of newly developed products got affected due to global supply chain disruptions and inflationary pressures that caused feedstock prices to rise significantly.
Consequently, finished goods prices increased substantially resulting into high input cost for the customer. Rationalization of feedstock prices has started, and therefore, we expect sales to resume in near term. We are confident that existing products, coupled with new products would help us sustaining the growth momentum going forward.
Moving on to the Film business. We witnessed growth in revenue and profitability during the quarter. Volumes as well picked up based on a sequential basis, having grown [Technical Difficulty] quarter-on-quarter basis. Demand momentum continues to remain stable across domestic and international [Technical Difficulty]. Realizations during the quarter were better owing to passing through the increase in input prices. Besides price movement, the margin improvement was owing to better product mix.
As we have been reiterating, our objective has been to increase the share of value-added and specialty products in the overall mix. As of Q1 FY '23, value-added products constituted about 22% of the overall sales volume. Our aim, as we have stated before, is to increase the share of high-margin products to 30% of the overall mix and we are well on track towards attaining that. Objective of improving our product mix is to largely decommoditize our product portfolio and make it more exclusive towards specialty, wherein margins do not fluctuate as much as and as widely as in commodity films.
As we have indicated in our earlier calls, as well while inflationary pressure and demand supply imbalance caused by commissioning of new production lines may cause margin compression in the near term. The long-term prospects of the business remain strong, and we expect business to generate healthy margins.
A quick word on our new plant before we move on to Engineering Plastics business. The setting up of our 48,000 tons plant at Telangana is progressing as per schedule, and we expect commencement of commercial production during the last calendar quarter, most likely by October 2022.
Moving on to our Engineering Plastics business, as mentioned during our previous calls, we have entered into a business transfer agreement to sell the business to Radici Plastics India Private Limited in an all-cash slump sales transaction amounting to INR 289 crores. In Q1 FY '23, the performance of business was benign given the contraction in margins, both on year-on-year basis and sequential basis. Lower volumes of Engineering Plastics compounds, OFC grade material and gradual moderation in realizations contributed to margin compression during the quarter.
Transaction with Radici Plastics India Private Limited is expected to be concluded in the next 25 to 30 days. As mentioned earlier, post the transaction, our efforts will now be directed towards building innovative and path-breaking products in Specialty Polymer business besides increasing the share of value-added products in Film business.
We would just like to state that fundamentals of our core businesses of Films and Specialty Polymer remain strong, and we are well placed to deliver consistent growth and returns over the coming years. Specialty Polymer business has been performing well, consistently over the past quarter, having recovered sharply from the pandemic levels. Volume uptick, as well as realizations have remained fairly buoyant amidst steady demand from customers. Existing and newly launched products, both are witnessing good traction, which is likely to sustain the business momentum going forward. Last year, the product pipeline for the business gives us the confidence that the business will see even better days in the coming years.
Moving on to Film business, we expect normalization of margins in the near term due to commissioning of new production lines with long-term prospects of the business remaining highly. Our efforts towards improving the product mix by increasing the share of high-margin products has been shaping up well, in turn helping us deliver these steady margins.
Lastly, the commissioning of the new plant will help us contribute towards starting a new path for the business, it scales the business up and enable Ester to draw benefits of economies of scale at consolidated level. Basis low cost of operations and proximity to market, we expect Telangana plant to return satisfactory financial performance.
We will quickly walk you through our financial performance for the quarter ended June 30, post which we can begin with Q&A questions. Starting with the top line, revenue from the operations stood at INR 402 crores as against INR 319 crores reported during Q1 FY '22. That is higher by 26%. The growth was largely driven by the good performance of both Film and Specialty Polymer business.
EBITDA for the quarter stood at INR 73 crores as against INR 65 crores generated during Q1 FY '22. That is higher by 13%. Though the EBITDA in absolute terms is higher than Q1 FY '22, EBITDA margin percentage sums were compressed during the quarter in the review largely owing to higher denominator effect due to sharp increase in input costs and consequent increase in sales realization.
Finance cost for the quarter stood at INR 6.6 crores as against INR 4.9 crores outgo reported during Q1 FY '22. As of June 30, '22, our outstanding interest-bearing term debt, net of free cash stood at INR 214 crores, while interest-bearing debt -- working capital is INR 86 crores.
Interest-bearing debt net of free cash as a multiple of EBITDA remained at a comfortable level of 1.02x as of 30th June '22. While our [Technical Difficulty] healthy and resilient, the divestment of [Technical Difficulty] will enable us to further deleverage the balance sheet and strengthen it further. Divestment will significantly improve the liquidity profile of the company and provide us with the requisite growth capital to further scale up our core businesses.
Depreciation for the quarter stood at INR 9.5 crores as against INR 8.7 crores reported during Q1 FY '22. Profit after tax for the quarter stood at INR 42 crores as against INR 38 crores generated during Q1 FY '22, higher by 12%.
To conclude, we would just like to reiterate that we are well positioned to deliver consistent growth and drive the next phase of growth for the company. Thanks.
[Operator Instructions] The first question is from the line of Alpesh Lad from Dolat Capital.
Am I audible?
Yes, you are, sir. Please go ahead.
Actually, I wanted to ask a question on the revenue front of Specialty Polymers. So basically, we have seen a margin contraction in this quarter on a Y-o-Y basis. So has there been any specific reason for that apart from the raw material costs? And if it is the raw material cost then how is the trend that we are looking at in coming few quarters for the year?
So the margins in Specialty Polymer are appearing to be compressed because of the higher denominator effect. Because the feedstock prices have increased. And therefore, there was increasingly sales realization. And as a result of which, in percentage terms, the margins are appearing to be lower. But in absolute terms, there is a significant improvement as compared to the last quarter and the corresponding quarter last year.
Right. And how can we look at the trend of the raw materials in the next 2, 3 quarters, if I may ask?
Raw material prices have started to settle down. There is a reduction that is seen by the industry. And we don't foresee any further increase, there could be downward revision in the prices going forward.
Okay. Fine. And my second question is basically regarding our product portfolio. So apart from MB 03 and Innovative PBT, which are the other products that are in pipeline and what would be their revenue potential in year down?
Actually, I think there are many products which are in pipeline. These products are in different stage of trial validation and market streaming. It's a long list, we cannot share the details on this call, but what we can only -- the only answer that we can give at this stage is that is all these products promise a good future of the company.
[Operator Instructions] The next question is from the line of Saket Kapoor from Kapoor & Co.
Sir, I missed your opening remark by quite a bit, sir, but on the raw material basket, if you could give the color how the raw material prices have fared the mix between PTA and MEG?
So we will share with you the prices in the last, let's say, June quarter and the current month and the previous month. So in June quarter, the PTA was about INR 87 per kg, which is now down to about INR 77 per kg. And the MEG was INR 58 per kg in the June quarter, which is now down to about INR 47 per kg. So there has been reduction. On a per video film basis, the prices from June quarter of INR 94 has come down to about INR 82.
And MEG has fallen from INR 58 to INR 47 per kg?
INR 46, yes. So MEG is at very low prices now. And further reduction may not be possible. PTA, yes, there could be further reduction, which is already at $525 international size.
And the key reasons for the same, is it the crude prices declined only or any new capacity for MEG that has come up of late, sir?
It's more to do with the global sentiment here. I think most of the polymers are on a declining trend as of now. And there are respective supply-demand balances and across various industries, so it's a mix and culmination of various factors.
Correct. Sir, you did mention about this mention of rice husk prices in the raw material basket. So if you could explain what has been the contribution, the increase in rice husk and what percentage of our raw materials do the rice husks plays a part, sir? In your presentation, it was mentioned.
Yes. So rice husk is not a raw material. It's a fuel for utilities for heating and steam. It's not a raw material. So the prices in the belt that we are operating in Khatima, there is a lot of rice around that belt. And -- but at the same time, the demand has also increased a lot. And with the increase in the prices of coal and fuel, oil, so funnel oil, HSD, et cetera, there has been increase in the prices of husk as well, though it continues to be more remunerating to use husk today as compared to coal or oil. But still, it has become very expensive from, let's say, average of INR 5,000 a ton to about INR 9,000 a ton is the price of rice husk today.
Okay. So that goes into which line item, sir, cost of material consumed only because we don't have a line item for power and fuel?
Power and fuel, it is used for heating and steam.
Correct, sir. But which line item does it affect in the P&L?
This is what I'm saying power and fuel and [Technical Difficulty] all the products of the company.
That is -- it will be clubbed under the cost of material consumed only.
No, no, no [Technical Difficulty]
I'm sorry to interrupt.
In the quarterly basis that we are talking about.
Yes, sir. In the quarterly line items, this...
Other expenses.
Other expenses, okay. So can you quantify the absolute number on a like-to-like basis?
I'll just share, just hold on for a minute. Just a minute.
And next few questions are on the net debt level, cost of fund and the update on the greenfield CapEx. As mentioned, how much have we spent? I think now we will be commercializing it sometimes in the month of October, end of October?
Power and fuel in this quarter, the expense is about INR 28 crores as compared to INR 22 crores in the quarter ending March '22. And in June '21, it was only INR 20 crores. So that shows the increase in the pricing of fuel oil and especially rice husks.
Correct, sir. And now, sir, the net debt -- I was looking at the net debt number, sir, on a stand-alone as well as on a consolidated basis.
So we will focus on Ester Industries because Ester Filmtech, the operations have not yet started. So it is in the construction phase. So we get whatever is the debt there for the project cost. So there's no operation related debt. Ester Industries, we have an interest-bearing debt of about INR 300 crores, which is broken into 2 parts. Some loan of INR 214 crores and working capital debt of INR 86 crores. On an annualized EBITDA basis, this works out to be a multiple of about 1.02.
Right. And what is the cost of fund currently with the increase in...
About 8% per annum. There has been an increase in the policy rate. So there is some marginal increase in the interest rates that we are paying to the bank and NBFC. So it is about at 8% per annum during the quarter ended June '22.
8% is the blended or the long term -- on the long term?
Blended. For Ester Filmtech, this would be lower because we have a foreign country debt, significant amount of about INR 227 crores. So for Ester Filmtech, it should be about in the range of 6%. For Ester Industries, we don't have much foreign country debt, only the sort of small LP which are buyer credit is availed on those. So we have weighted average cost of debt about 8%.
And sir, what would be the impact of ForEx on our numbers since there has been a significant depreciation? So our debts are measured in dollars or in euros?
Based of Ester Industries, there is no foreign current debt. We have more export receivables than trade payables. Therefore, appreciation of dollar has resulted into a foreign exchange gain for the company. We made a profit of about INR 1.4 crores during the quarter ended June '22. In Ester Filmtech, we have only foreign country debt in euro denominated -- which is euro-denominated, and euro has not appreciated. It is now almost at parity with dollar. So there has been no adverse effect of the currency movement on Ester as far as impact on the P&L is concerned.
Okay, and sir, coming to this, the greenfield project, sir, you mentioned about the demand-supply imbalances in the industry because of commissioning of capacity. So what are -- what is the margin profile that we are going to look ahead for the Film segment? And also for the Telangana unit as an entity, what should be the percentage of expected revenue post its commissioning, say, from November onwards?
I think you have a couple of questions here. One is the -- the question is regarding the margin profile regarding commissioning of new capacities. Am I right?
Correct, sir.
So I think whenever the new capacity starts up, there is a temporary demand supply imbalance, which puts some pressure on the marginal spread so which is probably expected in coming weeks. So that is one. And on, let's say, at the back of the total top line, I can only just give you roughly quantitative numbers. Currently, Ester is selling about 60,000 tons of film in a year, and this new capacity is going to add 48,000 tons more. That's the kind of top line that one can relate to in coming quarters.
So Ester Filmtech will commence production sometime in the month of October. So we would have only 6 months in the current financial year of Ester Filmtech.
Okay. And in that, what would be the -- we will be producing value-added films or the commodity films? What would be the product profile?
When the line would start, I think that largely, it is going to be a commodity film, which comes from this line in the initial days.
So we would have a metalizer also there, so which is sort of a marginal value addition on the plain film.
As on today's prices, what should be the realization, sir, from this 24,000 should be expected if the ramp-up is in at optimum level if the plant is run. I think so the ramp-up will happen in phases. So 100%, we will reach over a period of time.
Yes.
So just to take into account, sir, what are we planning for the coming 6 months? Or is it too early, post second quarter numbers would be better to have an understanding how the ramp-up is happening.
Yes, as you have answered. You have answered yourself. Actually, second quarter is just more useful or indicative of the future.
One more question on this, sir, Innovative PBT part. What are the key raw materials that constitute this Innovative PBT?
This is confidential. We are bound by confidentiality. It's a very -- it's a patented product, and therefore, it's not possible for us to give you the name of the raw materials that are used in manufacturing of Innovative PBT.
Correct, sir. And lastly, sir, going for the -- how the current business environment is shaping up. Do you find any slackening of demand, or are we running the utilization levels in the higher 90s currently for our Film business, as well as Specialty Polymer is order-driven. And advance there is there. But for the Polyester Films segment, what is the business environment currently?
The plants continue to run on full capacity basis as of today. And yes, your observation is right. Yes, there are different sentiments across the globe. So -- but as far as India is concerned, we are not seeing any demand issues currently in our country.
Correct, sir. So for this quarter also, barring this, the raw material price that the benefit will go to your customers, these margins are sustainable, the ones which we have posted for Q1.
So I think as I mentioned before, there is a bunching of capacity -- new capacity, which is expected to come. And that capacity is expected to put some pressure on the spreads on margin level, so which we are going to see in coming quarters.
The new capacity lines are coming from which part of the country and who's the players?
There are few lines which are lined up for start-up from now till December. So our line is coming in Telangana, some -- another line is coming in Karnataka. And there is a third line, which is expected in Gujarat. I think just to correct, I think in Telangana the are 2 lines. One is ours and one is one of our competitors.
Okay. The total capacity addition in tonnage terms you can give?
If you can just simply just take a higher thumb rule of 40,000 tons of capacity, 45,000 tons of capacity given the mix of lines and multiplied with number of lines. That's the kind of capacity will be added. All these lines when they start, they take some time to stabilize and start producing a reasonable level of volumes.
So last point, sir, what is the current capacity for the country, domestic capacity of films currently being produced?
The current capacity would be around, I think, 850,000 roughly. 850,000 tons of films.
Okay. I will come in the queue, sir. Singhania sir is not there on the call today?
No.
Okay. He is not doing well, sir?
He is fine.
Okay. Fine, sir. This is the first time I have not heard him over of the course. So that was impromptu. Nothing for the numbers. That's it.
Next question is from the line of Pratap Makwana from Forbes Marshall Private Limited.
First of all, thanks for this commentary and clocking of highest ever EPS. And so this gives the confidence to the shareholders. I have a couple of questions, starting first with the Plastics business sale, which is INR 289 crore, by which one this value will be on the book? And what are the further plan of exploring new market or further new product addition or can we expect utilization for this fund to distribution of more dividend?
My second question, any impact on the new GST resin rules available of the food packets, less than 20 kg having the rise of -- having the GST of 5%. Any impact of -- can we expect on the revenue side or can we say that this will impact only on the plastic business, which is as of now sold?
And my last question, INR 1.9 dividend is good, but having the expected good cash available in future further shareholder can be appreciated with the more dividend. I'm expecting an answer.
So there are too many questions. So we'll answer one by one. So the deal is likely to be certified in about next 3 to 4 weeks. We would have money in our bank account by, let's say, by 15th of September. These funds will be used for the CapEx that has already been approved by the Board of Directors of the company, in Ester Industries, and part of the money would be retained in operations.
As far as dividend is concerned, because of the liquidity, that is for the Board to consider and decide. As of now, there is no such discussion on the table.
On the GST side, my colleague, Girish will explain to that the impact on the demand, et cetera, of the GST of 5% on food products.
Yes. I think on the GST side, there is no impact on the packaging space. These are the only few products which are where the GST applicability has been widened. Otherwise, as far as packaging is concerned, there is no impact.
You also asked about questions about new markets and new products. That's continue the fare. We keep on evaluating, very supportive and we are happy to inform there are many things which are in pipeline for increasing share of specialty products. And there are some investments also lined up for supporting those growth.
So what will happen that we will not raise loan for the new CapEx as the existing liquidity, which is getting generated from sale of EP business will be used to fund that. So we would have less debt going forward as the repayment would also continue.
[Operator Instructions] The next question is from the line of [ Pravin Yadav ], individual investor.
I have 2 questions. What is the capacity utilization for the Specialty Polymers currently? And my second question is, like in future, will the emerging Specialty Polymers from the packaging business?
We couldn't get the second question. What's that?
Yes. My first question is, what is the capacity utilization of Specialty Polymers?
Yes. So in Specialty Polymers, there are various products, each process, each product has different requirements in terms of machines and the processing time. So therefore, it is difficult to state the capacity and therefore, the capacity utilization. But yes, we have adequate capacity available to ramp up volume significantly. The only investment that we are proposing to make is in -- on the utilities and power and food side. And for balancing of certain capacities in utilities, et cetera. So very difficult to define capacity utilization in Specialty Polymer. And what is the second question?
So second question is in future when the Specialty Polymer gets big, are you planning to demerge it like in future, not now but in future, are you planning to demerge both the units?
So as of now, this has not yet been evaluated because we are only at INR 172 crores last year turnover. And therefore [Technical Difficulty] considered by the Board.
And sir, in -- like as the power -- like you need power a lot. So are you considering to put renewable energy to like reduce your power like money that goes out?
Yes, we are working on that, evaluating options and it's on the drawing board. So we are looking at solar energy. On the renewable energy, we are looking at solar energy.
The next question is from the line of [ V. Surendra ], an individual investor.
My question on this Specialty Polymers, CapEx plan, our CapEx plan is entitled for PLI schemes?
No, we are not there in the Production Linked Incentive schemes.
And sir, what will be the amount of our CapEx plan for Specialty Polymer?
So in Ester, we have total CapEx of about INR 200 crores, which is going to be spent in the next 12 to 18 months. I don't remember the number for Specialty Polymer. Give us some time, we'll get back to you.
[Operator Instructions] The next question is from the line of [ Hitesh Chauhan ], an individual investor.
What can we expect prior year from now, revenue and margin profile?
Pardon? Couldn't get your question.
If you are looking for 5 years from now, then what is the revenue and margin profile, EBITDA profile?
The plant in Telangana will start, we have some other plants. So as of now, it is difficult to assign a particular number, both top line and the bottom line. But yes, we are [Technical Difficulty] and we expect the performance of the company to improve year after year.
Year-on-year, how much we can expect revenue increase?
The world is very random. There is a lot of volatility, very difficult to state numbers. But rest assured, there would be -- the top line will be on a growth trajectory.
As there are no further questions, I would now like to hand the conference over to the management for closing comments.
So thank you very much for participating in the earnings call. We look forward to see you next quarter.
Thank you. On behalf of Ester Industries, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.