Rating Rationale
March 24, 2023 | Mumbai
Ester Industries Limited
Rating outlook revised to ‘Negative’; Ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.523.9 Crore
Long Term RatingCRISIL A/Negative (Outlook revised from ‘Stable’; Rating Reaffirmed)
Short Term RatingCRISIL A1 (Reaffirmed)
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 revised its outlook on the long-term bank facilities of Ester Industries Limited (EIL) to ‘Negative’ from ‘Stable’ and reaffirmed the rating at 'CRISIL A'. The short-term rating has been reaffirmed at ‘CRISIL A1’.

 

The outlook revision reflects the pressure on the company’s revenue and profitability during 9M fiscal 2023 due to adverse demand-supply scenario on account of oversupply in biaxially-oriented polyethylene terephthalate (BOPET) films industry. The revenue reported a decline of ~20% on-year due to sharp correction in BOPET prices seen during Q2 and Q3 of fiscal 2023 as well as slowdown in demand from global market for specialty polymers segment.

 

The operating margins of the company has seen a significant contraction to 9.9% in 9M fiscal 2023 from 17.5% during the same period last fiscal. The margins have been on a declining trend over the last few quarters and the pressure is expected to continue in the next fiscal as well. Consequently, the net cash accruals of the company for fiscal 2023 and 2024 are estimated to be much weaker than the earlier expectations. The key ratio of debt to earnings before interest, tax, depreciation, and amortisation (Ebitda) is estimated to remain higher than expected going forward and hence remains a monitorable.

 

Nevertheless, the financial flexibility of the company remains comfortable supported by cash and equivalent of ~Rs 260 crore, which was boosted due to selling of engineering plastics business.

 

Going forward, improvement in industry dynamics and consequent expansion in operating profitability will remain critical from credit perspective.

 

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

Established market position along with long track record in packaging films business

The company has been manufacturing packaging films for three decades at a single plant in Uttarakhand. Though it has diversified into various other segments (such as specialty polymers) over the years, it still derives major portion of its revenue from the packaging films business. The installed capacity comprises BOPET (57,000 tpa), metallised films (13,000 tpa), and specialty polymers (30,000 tpa). Capacity utilisation in the BOPET line should remain supported by gradual improvement in the demand-supply scenario over the near to medium term. EIL sold off its engineering plastics division for Rs 260 crore in August 2022. EIL (in its subsidiary EFL) completed its new project at Telangana of 48,000 MTPA in December 2022 which started its commercial production in January 2023 and is expected to run in full swing in Q1 fiscal 2024. Established customer relationships should also help EIL sustain volumes in the packaging films business over the medium term.

 

Diversified product profile

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 was adversely affected in current fiscal due to the global slowdown, going forward the volumes is expected to pick up and drive the business.

 

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 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 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 addition of over 40% of capacity, during 9M fiscal 2023, impacting the Ebitda margins of the company. The margins declined from 18.3% in Q1 fiscal 2023 to 7.7% in Q2 and further to -1% in Q3 against 16-19% during each quarter in fiscal 2022.

 

The margin remains susceptible to demand-supply dynamics and volatility in raw material prices, and hence, will continue to be a key monitorable.

 

Large debt-funded projects and stabilization of recently commissioned project

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. The company (in its subsidiary EFL) has currently commissioned 48,000 MTPA capacity in Telangana in December 2022, to be expected to run in full swing in Q1 FY2024. These players tend to fund these additional capacities using debt; hence most players would see an ongoing term debt in their book of accounts. EIL (in its subsidiary EFL) has taken debt in the ratio of 60:40 for the newly commissioned capacity. Stabilization and ramping up of this capacity will remain a key monitorable for sustenance of profit and to service the debt obligations.

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:

  • Significant and sustained improvement in operating performance leading to cash accruals of Rs 170-180 crore
  • Stabilisation of new capacity resulting in sustained and significant increase in revenue

 

Downward factors

  • Continued weak operating performance and inability to improve operating margin as well as cash accruals
  • Debt to Ebitda ratio remaining more than 3.5 times on a sustained basis

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*

As on / for the period ended March 31   2022 2021
Operating income  Rs crore 1411 996
PAT Rs crore 137 137
PAT margin % 9.7 13.8
Adjusted debt / adjusted networth Times 1.03 0.4
Interest coverage Times 10 12.7

*as per analytical adjustments made by CRISIL Ratings

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

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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 Bank Guarantee NA NA NA 3.14 NA CRISIL A1
NA Bill Discounting** NA NA NA 17.75 NA CRISIL A/Negative
NA Cash Credit* NA NA NA 169.01 NA CRISIL A/Negative
NA Foreign Exchange Forward NA NA NA 7.92 NA CRISIL A1
NA Inland/ Import Letter of Credit NA NA NA 119.4 NA CRISIL A1
NA Term Loan NA NA Jul-24 3.05 NA CRISIL A/Negative
NA Term Loan NA NA Sep-25 13.71 NA CRISIL A/Negative
NA Term Loan NA NA Jul-24 14.93 NA CRISIL A/Negative
NA Term Loan NA NA Feb-28 54.5 NA CRISIL A/Negative
NA Term Loan NA NA Jun-26 29.5 NA CRISIL A/Negative
NA Term Loan NA NA Sep-26 40 NA CRISIL A/Negative
NA Term Loan NA NA May-29 50.99 NA CRISIL A/Negative

*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
Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities ST/LT 401.36 CRISIL A/Negative / CRISIL A1   -- 09-05-22 CRISIL A/Stable 16-09-21 CRISIL A2+ / CRISIL A-/Positive 28-10-20 CRISIL A2+ / CRISIL A-/Stable --
      --   -- 06-04-22 CRISIL A1 / CRISIL A/Stable 01-09-21 CRISIL A2+ / CRISIL A-/Positive 08-10-20 CRISIL A2+ / CRISIL A-/Stable --
      --   --   -- 25-02-21 CRISIL A2+ / CRISIL A-/Stable   -- --
Non-Fund Based Facilities ST 122.54 CRISIL A1   -- 09-05-22 CRISIL A1 16-09-21 CRISIL A2+ 28-10-20 CRISIL A2+ --
      --   -- 06-04-22 CRISIL A1 01-09-21 CRISIL A2+ 08-10-20 CRISIL A2+ --
      --   --   -- 25-02-21 CRISIL A2+   -- --
Commercial Paper ST   --   --   -- 16-09-21 Withdrawn 28-10-20 CRISIL A2+ --
      --   --   -- 01-09-21 CRISIL A2+ 08-10-20 CRISIL A2+ --
      --   --   -- 25-02-21 CRISIL A2+   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Bank Guarantee 1.44 Bank of India CRISIL A1
Bank Guarantee 1.1 Bank of Baroda CRISIL A1
Bank Guarantee 0.6 Canara Bank CRISIL A1
Bill Discounting** 6.87 Bank of Baroda CRISIL A/Negative
Bill Discounting** 3.75 Canara Bank CRISIL A/Negative
Bill Discounting** 7.13 Bank of India CRISIL A/Negative
Cash Credit* 22.5 Canara Bank CRISIL A/Negative
Cash Credit* 42.75 Bank of India CRISIL A/Negative
Cash Credit* 34.38 Bank of Baroda CRISIL A/Negative
Cash Credit* 30 IDFC FIRST Bank Limited CRISIL A/Negative
Cash Credit* 39.38 HDFC Bank Limited CRISIL A/Negative
Foreign Exchange Forward 0.98 Canara Bank CRISIL A1
Foreign Exchange Forward 4.5 Bank of Baroda CRISIL A1
Foreign Exchange Forward 2.44 Bank of India CRISIL A1
Inland/Import Letter of Credit 33 Bank of Baroda CRISIL A1
Inland/Import Letter of Credit 30.15 HDFC Bank Limited CRISIL A1
Inland/Import Letter of Credit 19.5 Canara Bank CRISIL A1
Inland/Import Letter of Credit 36.75 Bank of India CRISIL A1
Term Loan 3.05 Canara Bank CRISIL A/Negative
Term Loan 13.71 The Karnataka Bank Limited CRISIL A/Negative
Term Loan 14.93 IDFC FIRST Bank Limited CRISIL A/Negative
Term Loan 54.5 Bajaj Finance Limited CRISIL A/Negative
Term Loan 29.5 Axis Finance Limited CRISIL A/Negative
Term Loan 40 Qatar National Bank (Q.P.S.C.) CRISIL A/Negative
Term Loan 50.99 Tata Capital Financial Services Limited CRISIL A/Negative
This Annexure has been updated on 24-Mar-2023 in line with the lender-wise facility details as on 17-Aug-2021 received from the rated entity.
**Interchangeable with foreign inland
*Interchangeable with packing credit
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Criteria for Consolidation

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