| Ester Industries Limited | ||||||
| Ratings downgraded to 'CRISIL A-/Negative/CRISIL A2+' | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has downgraded its ratings on the bank facilities of Ester Industries Limited (EIL) to ‘CRISIL A-/Negative/CRISIL A2+’ from ‘CRISIL A/Negative/CRISIL A1’.
The downgrade in rating factors in weak operating performance of EIL over the last several quarters as well as expectation of continuation of the same this fiscal due to adverse demand-supply scenario in the flexible packaging industry. The BOPET industry added around 45% of its existing capacity in fiscal 2023, leading to oversupply and sharp correction in product prices. The industry’s performance is expected to remain subdued this fiscal, with recovery expected in fiscal 2025. Additionally, EIL’s specialty polymer segment’s sales were impacted due to slowdown in the US market.
The revenue of the company declined by 21% y-o-y in fiscal 2023 and by 17% y-o-y in H1 fiscal 2024. The operating margins fell to 8.8% in fiscal 2023 and to -1.9% in H1 fiscal 2024, from 17.6% in fiscal 2022. The margins have been on a declining trend over the last few quarters and the pressure is expected to continue this fiscal as well. EIL’s operating margins are expected to decline to 1-2% in fiscal 2024 followed by expected improvement in margins to 8-9% in fiscal 2025. Consequently, the net cash accruals of the company for fiscal 2024 and 2025 are estimated to be much lower than the earlier expectations. The key ratio of debt to earnings before interest, tax, depreciation, and amortisation (Ebitda) stood at 8.3 times as on March 31, 2023, and is estimated to remain higher than expected going forward as well and hence remains monitorable. Going forward, improvement in industry dynamics and consequent expansion in operating profitability will remain critical from a credit perspective.
The financial risk profile of the company has weakened with gearing more than 1 time and interest coverage declining to 2.8 time in fiscal 2023 followed by 0.3 time in H1 fiscal 2024 and is expected to remain below 2.0 time in the medium term. Nevertheless, the financial flexibility of the company remains currently supported by cash and equivalent of ~Rs 140 crore.
The ratings continue to reflect the company’s established market position and long track record in the packaging films business diversified product profile. These strengths are partially offset by susceptibility to volatile raw material costs and realisations driven by demand-supply dynamics and pending stabilisation of operations of the recently commissioned capex. |
Analytical Approach To arrive at the ratings, CRISIL Ratings has combined the business and financial risk profiles of EIL and Ester Filmtech Ltd (EFL; a wholly owned subsidiary), together referred to as Ester, given their business and financial linkages and a common management.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
The company has been manufacturing packaging films for three decades at plant in Uttarakhand. Though it has diversified into various other segments (such as specialty polymers) over the years, it still derives a major portion of its revenue from the packaging films business. The installed capacity comprises BOPET (105,000 tpa), metallised films (23,000 tpa), and specialty polymers (30,000 tpa). Capacity utilisation in the BOPET line should remain supported by moderately strong demand in the industry over the near to medium term. Established customer relationships should also help EIL sustain volumes in the packaging films business over the medium term.
The company has a diversified product portfolio in the polyester films and specialty polymers divisions. Though revenue is dominated by the films segment, share of the other segment has increased in the past two years. While the demand for specialty polymers is adversely affected in the current fiscal year due to the global slowdown, going forward the volumes are expected to pick up and drive the business.
Weaknesses:
The packaging films business remains prone to cyclicality, as evident from fluctuations in product realisations and profitability, owing to the demand-supply mismatch. The industry is also highly competitive, with aggressive capacity expansions by few large players exerting pressure on realisations. Players tend to add large capacities whenever prices pick up, which leads to a fall in product realisations. Further, key raw materials, such as polyethylene terephthalate (PET) resin or chips, pure terephthalic acid and mono ethylene glycol, are derivatives of crude, and hence, profitability remains susceptible to volatility in crude prices. Currently the industry is going through an oversupply situation due to the addition of over 45% of capacity in fiscal 2023, impacting the Ebitda margins of the company. The margins declined from 18.3% in Q1 fiscal 2023 to 3.3% in Q4 fiscal 2023 and further to -4% in Q2 fiscal 2024. The operating margins are expected to remain under pressure with recovery expected from fiscal 2025.
The margin remains susceptible to demand-supply dynamics and volatility in raw material prices, and hence, will continue to be a key monitorable.
Due to the growing demand in the films business, the players add capacities every 4-5 years to keep up with the industry dynamics and maintain its market share. These capacities are bulky in nature and hence result in intermittent imbalance of demand and supply. The company (in its subsidiary EFL) has commissioned 48,000 MTPA capacity in Telangana in January 2023, the commercial operations of which started in Q4 fiscal 2023. EIL (in its subsidiary EFL) has taken debt in the ratio of 60:40 for the newly commissioned capacity. Stabilization and profitably ramping up the capacity utilisation will remain a key monitorable. |
Liquidity: Adequate The impact on business has weakened the cash accruals. However, liquidity in the company is expected to be supported by , unutilized bank lines and cash and equivalent of Rs 140 Crs in November 2023. The bank limit (Fund based and Non fund based) of over Rs 160 crore was utilised at an average of 65% during the 6 months through September 2023. |
Outlook: Negative CRISIL Ratings believes EIL’s operating performance may get impacted over the near to medium term as adverse demand-supply situation impacted operating profitability and coverage ratios. The outlook may be revised to 'Stable' in case of significant improvement in profitability and healthy revenue growth. |
Rating Sensitivity factors Upward factors:
Downward factors:
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About the Company Promoted by Mr Arvind Singhania and incorporated in 1985, EIL manufactures packaging films and specialty polymers. Its manufacturing facility is in Khatima, Uttarakhand. Total operational capacity for BOPET is 57,000 tpa, metallised films is 13,000 tpa and specialty polymers is 30,000 tpa. The commissioned new capacity of 48,000 MTPA in Telangana in December 2022. |
Key Financial Indicators*
^Includes revenue and profit from Engineering Plastics division which was sold off in September 2022 *as per analytical adjustments made by CRISIL Ratings |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Interchangeable with packing credit **Interchangeable with foreign inland |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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**Interchangeable with foreign inland
Criteria Details
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