Rating Rationale
May 13, 2024 | Mumbai
Ester Industries Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.523.9 Crore
Long Term RatingCRISIL A-/Negative (Reaffirmed)
Short Term RatingCRISIL A2+ (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 reaffirmed its ratings on the bank facilities of Ester Industries Limited (EIL) at ‘CRISIL A-/Negative/CRISIL A2+’.

 

CRISIL Ratings had downgraded its ratings on the bank facilities of EIL to ‘CRISIL A-/Negative/CRISIL A2+’ from ‘CRISIL A/Negative/CRISIL A1’ on December 15, 2023.

 

The business risk profile continues to be impacted due to adverse demand-supply scenario in the flexible packaging industry with revenue of the company declining by ~4% on year in 9M fiscal 2024 after a ~21% decline in fiscal 2023. The company reported operating losses in 9M fiscal 2024 which was a significant dip from the already contracted level of ~8.8% in fiscal 2023. The margins have been on a declining trend over the last few quarters and the pressure is expected to continue in Q4 fiscal 2024 as well. However, EIL’s operating margins are expected to improve in fiscal 2025 to around 8-9% in fiscal 2025 supported by expected recovery in the industry scenario. Going forward, the improvement in business risk profile this fiscal with recovery in operating profitability will remain critical from a credit perspective. The ratio of gross 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.

 

The credit risk profile of the company is supported by equity infusion of ~Rs.99 crores in March 2024 which has improved the liquidity position. The financial risk profile has weakened with gearing more than 1 time and interest coverage declining to 2.8 time in fiscal 2023 followed by a negative number in 9M fiscal 2024 and is expected to remain under pressure in the medium term. In the interim, the company is relying on its liquidity to service the obligations.

 

CRISIL Ratings has taken note of recent announcement by EIL to set up a Joint Venture (JV) with a Canada based company i.e. Loop Industries Inc. The JV will be equally held by both the entities for the purpose of engaging in the business of manufacture of DMT and/or MEG through depolymerisation of PET and/or Polyester waste. The project cost of the same is estimated at $165 million (~Rs 1370 crores). The project is in a nascent stage with formation of company currently underway. The project contours are being finalised and the clarity is expected to emerge over the next 9-12 months. The management has communicated that financing of the project will not have any impact on the liquidity or financial risk profile of EIL, because the company will raise funds from external sources to fund the equity of the project. Nevertheless, CRISIL Ratings will continue to monitor the project progress including final project cost, sources of funding and implementation timelines.

 

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 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.

 

  • 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 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:

  • 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 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 -7.3% in Q3 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.

 

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 of Rs 75 crores and cash and equivalent of Rs 125 Crs in April 2024.

Outlook: Negative

CRISIL Ratings believes EIL’s operating performance may be 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:

  • Recovery in product prices leading to improvement in EBITDA margin to over 12% on a sustained basis.
  • Material improvement in the financial risk profile and sustenance of liquid surplus.
  • Stabilisation of new capacity resulting in sustained and significant increase in revenue.

 

Downward factors

  • Continued weak operating performance and leading to deterioration of debt coverage ratios, and further leveraging in the company.
  • Continued pressure on business risk profile leading to inability to improve EBITDA margins above 6%.

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 is 105,000 TPA for BOPET (new capacity of 48,000 TPA in Telangana started operations in the fourth quarter of fiscal 2023), 23,000 TPA for metallised films and 30,000 TPA for specialty polymers.

Key Financial Indicators*

As on/for the period ended March 31

Unit 

2023

2022

Operating income^

Rs.Crore

1119

1411

PAT^

Rs.Crore

137

137

PAT margin

%

12.2

9.7

Adjusted debt/adjusted networth

Times

1.10

1.03

Interest coverage

Times

2.78

10.0

^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:
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.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

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 Cash Credit* NA NA NA 179.89 NA CRISIL A-/Negative
NA Term Loan NA NA Sep-2025 9.31 NA CRISIL A-/Negative
NA Term Loan NA NA Jul-2024 2.16 NA CRISIL A-/Negative
NA Term Loan NA NA Feb-2028 48 NA CRISIL A-/Negative
NA Term Loan NA NA Jun-2026 20 NA CRISIL A-/Negative
NA Term Loan NA NA Sep-2026 34.29 NA CRISIL A-/Negative
NA Term Loan NA NA May-2029 58.7 NA CRISIL A-/Negative
NA Term Loan NA NA Mar-2028 40 NA CRISIL A-/Negative
NA Bill Discounting** NA NA NA 6.87 NA CRISIL A-/Negative
NA Foreign Exchange Forward NA NA NA 7.92 NA CRISIL A2+
NA Bank Guarantee NA NA NA 3.74 NA CRISIL A2+
NA Inland/ Import Letter of Credit NA NA NA 110.29 NA CRISIL A2+
NA Proposed Long Term Bank Loan Facility NA NA NA 2.73 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 2024 (History) 2023  2022  2021  Start of 2021
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT/ST 409.87 CRISIL A2+ / CRISIL A-/Negative   -- 15-12-23 CRISIL A2+ / CRISIL A-/Negative 09-05-22 CRISIL A/Stable 16-09-21 CRISIL A2+ / CRISIL A-/Positive CRISIL A2+ / CRISIL A-/Stable
      --   -- 24-03-23 CRISIL A/Negative / CRISIL A1 06-04-22 CRISIL A1 / CRISIL A/Stable 01-09-21 CRISIL A2+ / CRISIL A-/Positive --
      --   --   --   -- 25-02-21 CRISIL A2+ / CRISIL A-/Stable --
Non-Fund Based Facilities ST 114.03 CRISIL A2+   -- 15-12-23 CRISIL A2+ 09-05-22 CRISIL A1 16-09-21 CRISIL A2+ CRISIL A2+
      --   -- 24-03-23 CRISIL A1 06-04-22 CRISIL A1 01-09-21 CRISIL A2+ --
      --   --   --   -- 25-02-21 CRISIL A2+ --
Commercial Paper ST   --   --   --   -- 16-09-21 Withdrawn CRISIL A2+
      --   --   --   -- 01-09-21 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 1.14 Bank of India CRISIL A2+
Bank Guarantee 1.1 Bank of Baroda CRISIL A2+
Bank Guarantee 0.6 Canara Bank CRISIL A2+
Bank Guarantee 0.9 HDFC Bank Limited CRISIL A2+
Bill Discounting& 6.87 Bank of Baroda CRISIL A-/Negative
Cash Credit^ 39.38 HDFC Bank Limited CRISIL A-/Negative
Cash Credit^ 49.88 Bank of India CRISIL A-/Negative
Cash Credit^ 34.38 Bank of Baroda CRISIL A-/Negative
Cash Credit^ 26.25 Canara Bank CRISIL A-/Negative
Cash Credit^ 30 IDFC FIRST Bank Limited CRISIL A-/Negative
Foreign Exchange Forward 4.5 Bank of Baroda CRISIL A2+
Foreign Exchange Forward 2.44 Bank of India CRISIL A2+
Foreign Exchange Forward 0.98 Canara Bank CRISIL A2+
Inland/Import Letter of Credit 18.75 Canara Bank CRISIL A2+
Inland/Import Letter of Credit 26.66 Bank of Baroda CRISIL A2+
Inland/Import Letter of Credit 29.25 HDFC Bank Limited CRISIL A2+
Inland/Import Letter of Credit 35.63 Bank of India CRISIL A2+
Proposed Long Term Bank Loan Facility 2.73 Not Applicable CRISIL A-/Negative
Term Loan 34.29 Qatar National Bank (Q.P.S.C.) CRISIL A-/Negative
Term Loan 58.7 Tata Capital Financial Services Limited CRISIL A-/Negative
Term Loan 9.31 The Karnataka Bank Limited CRISIL A-/Negative
Term Loan 2.16 IDFC FIRST Bank Limited CRISIL A-/Negative
Term Loan 48 Bajaj Finance Limited CRISIL A-/Negative
Term Loan 20 Axis Finance Limited CRISIL A-/Negative
Term Loan 40 Shinhan Bank CRISIL A-/Negative
&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
CRISILs Criteria for rating short term debt

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