Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A-/Stable/CRISIL A2+’ rating on the bank facilities and commercial paper programme of Ester Industries Ltd (EIL),

 

The ratings continue to reflect the company’s strong market position and track record in the packaging films business, moderate operating efficiency and diversified product profile. These strengths are partially offset by susceptibility to volatility in raw material prices and realisations and large, debt-funded greenfield capital expenditure (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), together referred to as Ester, given their business and financial linkages and a common management. EFL has been formed as a wholly owned subsidiary of EIL, to implement the new greenfield BOPET (biaxially-oriented polyethylene terephthalate) line of 48,000 tpa in Telangana, and benefit from lower taxation. EIL will support the new project in EFL, by providing equity support and guarantee on bank debt.

 

Please refer Annexure for the list of entities considered and the analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths

• Established market position and long track record in the packaging films business

The company has been manufacturing packaging films since three decades at a single plant in Uttarakhand. Though it has diversified into engineering plastics and specialty polymers over the years, it still derives 75-80% of revenue from the packaging films business. Presently, the installed capacity comprises BOPET (57000 tpa), metallised films (13000 tpa), engineering plastics (16500 tpa) and specialty polymers (30000 tpa). Capacity utilisation in the BOPET line should remain healthy over the near term given the demand situation, while share of the specialty polymers segment is also inching towards double digits. The company is augmenting its BOPET capacity by 48000 tpa, to be implemented over next two years. Established customer relationships should also help the Ester group sustain volume in the packaging films business over the medium term.

 

• Moderate operating efficiency supported by strong capacity utilisation

Profitability is susceptible to volatility raw material prices and demand-supply factors. Supported by favourable demand of packaging films since the second half of fiscal 2019, the operating margin was strong at 19% in fiscal 2020 (11% in 2018 and 8.7% in 2019). The company was able to maintain robust operating performance during the Covid-19 pandemic because of healthy demand supported by heightened hygiene consciousness, growing in-home consumption and benign input cost. While volumes in the engineering plastics segment will be constrained in the near term, they are expected to improve in fiscal 2022. The company has seven patents for its specialty polymers division and with maturing product profile in specialty polymers segment, margins in it are expected to remain over 35%. Consequently, operating profit of the company for the first nine months of fiscal 2021 improved to Rs 174 crore, against Rs 139 crore for the corresponding period of the previous fiscal. Therefore, while overall revenue may be marginally lower in fiscal 2021, the operating margin should remain healthy. Operating margin is expected to remain healthy at around 20% in fiscal 2021.

 

• Diversified product profile

The company has a diversified product portfolio in the polyester films, engineering plastics and speciality polymers divisions. Though revenue is dominated by the films segment (75-80%), market share of the other segments has increased in the past two years. Diversified revenue profile protects profitability from adverse conditions in any particular segment and adds stability to cash flow. While the demand for engineering plastics and specialty polymers businesses was adversely affected due to the pandemic led slowdown, higher profit from the packaging film business helped maintain profitability.

 

Weaknesses

• Susceptibility to volatility in raw material cost and realisations, driven by demand-supply dynamics

The packaging films business remains prone to cyclicality, as evident from fluctuations in product realisations, owing to the demand-supply gap. 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 then leads to a fall in product realisations. Further, key raw materials, PET resin/chips, pure terephthalic acid (PTA), and mono ethylene glycol are all derivatives of crude and hence, profitability remains susceptible to volatility in crude prices. Players have the flexibility to pass on raw material price fluctuations to customers to an extent. Amid the current upcycle in the packaging films business, players may undertake capex to add new capacities over the next couple of years. Margin thus remains susceptible to demand-supply dynamics and volatility in raw material prices, and hence, a key monitorable.

 

• Large, debt-funded greenfield capex

The company is setting up a new BOPET line (48000 tpa) in an industrial park in Telangana at a cost of Rs 586 crore through its wholly owned subsidiary EFL. The project will be funded through internal accrual (30%) and debt (70%), and is expected to be operational by October 2022. With strong accrual driven by existing lines in the packaging films business, Ester has been able to prepay part of its long-term debt and lower dependence on working capital debt. Total debt halved to about Rs 154 crore in fiscal 2020, from Rs 307 crore in 2018. Consequently, gearing and interest cover improved to 0.38 time and 8 times as on March 31, 2020, respectively (1.1 times and 2 times, respectively, as on March 31, 2018). Sustenance of the healthy operating performance in fiscal 2021, should ensure sufficient cash accrual for the parent company, so as to fund the new capex. Once the new facilities go on-stream, the group’s revenue is likely to double over the medium term. Profitability from the project is also expected to be healthy with benefits from state government in the form of lower power cost and tax rebates etc., as the new facility is located within an industrial park. Given the substantial size of the capex (1.4 times of the networth as on March 31, 2020), the company remains vulnerable to risks relating to timely implementation and stabilisation of the project.

Liquidity: Adequate

Expected cash accrual of Rs 90-110 crore will adequately cover debt obligation of Rs 35-40 crore in fiscal 2022. The company has prepaid debt obligation for fiscal 2021. Bank limit of Rs 156 crore was utilised 24% on average during the 12 months through January 2021. As capex in EFL will be funded through internal cash accrual, cash balance will remain low until fiscal 2023. However, internal cash accrual, cash and equivalent and unutilised bank limit should be sufficient to meet debt obligation over the medium term.

Outlook: Stable

CRISIL Ratings believes EIL will sustain its business risk profile over the medium term, supported by diversified product profile. The debt protection metrics, however, will remain average over this period on account of a large debt funded greenfield capex.

Rating Sensitivity factors

Upward factors:

• Significant and sustained improvement in operating performance, leading to cash accrual of over Rs 120 crore
• Sustained and significant improvement in liquidity along with timely implementation of new project without any overruns

 

Downward factors:

• Lower-than-expected operating performance leading to significant decline in profitability
• Weakening of the financial risk profile due to delay in ramp-up of new capacity or large debt-funded capex or acquisitions, leading to debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio of over 4 times on a sustained basis

About the Company

Promoted by Mr Arvind Singhania and incorporated in 1985, EIL manufactures packaging films, specialty polymers and engineering plastics. The manufacturing facility is located in Khatima, Uttarakhand. Total operational capacity for BOPET was 57,000 TPA, metallised films was 13,000 TPA, engineering plastics was 16,500 TPA and specialty polymers was 30,000 TPA.

 

For the nine months ended December 31, 2020, operating income was Rs 695 crore and profit after tax (PAT) Rs 105 crore, against Rs 785 crore and Rs 63 crore, respectively, in the corresponding period of the previous year.

Key Financial Indicators

As on / for the period ended March 31		2020	2019
Revenue	Rs crore	1044	1031
Profit after tax (PAT)	Rs crore	99	31
PAT margin	%	9.5	3.0
Adjusted debt / adjusted networth	Times	0.38	0.79
Interest coverage	Times	8	3

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity levels	Rating assigned with outlook
NA	Proposed long-term bank loan facility	NA	NA	NA	0.83	NA	CRISIL A-/Stable
NA	Cash credit *	NA	NA	NA	126	NA	CRISIL A-/Stable
NA	Bill discounting **	NA	NA	NA	30	NA	CRISIL A-/Stable
NA	Inland / import letter of credit	NA	NA	NA	122	NA	CRISIL A2+
NA	Bank guarantee	NA	NA	NA	4	NA	CRISIL A2+
NA	Foreign exchange forward	NA	NA	NA	9.30	NA	CRISIL A2+
NA	Term loan	NA	NA	Jul-24	81.89	NA	CRISIL A-/Stable
NA	Corporate loan	NA	NA	Sep-25	36.98	NA	CRISIL A-/Stable
NA	Commercial paper	NA	NA	NA	40.00	Simple	CRISIL A2+

*Interchangeable with packing credit
**Interchangeable with foreign inland

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Ester Filmtech Ltd	Full	Strong operational and financial linkages