| Ester Industries Limited | ||||||
| 'CRISIL A-/Stable/CRISIL A2+' assigned to bank debt and CP | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has assigned its 'CRISIL A-/Stable/CRISIL A2+' ratings to the bank facilities and commercial paper programme of Ester Industries Limited (EIL). |
| Analytical Approach |
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For arriving at the ratings, CRISIL has combined the business and financial risk profiles of EIL and its subsidiary, Ester Filmtech Ltd (EFL). That's because the two companies, together referred to as Ester, have business and financial linkages and a common management. EFL is a newly formed wholly owned subsidiary which is implementing a new greenfield BOPET line of 48,000 tpa in Telangana. Thus, both EIL and EFL are in the same line of business and the latter was formed to take benefits of lower taxation. EIL will support the new project in EFL by providing equity support and guaranteeing bank debt. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Established market position along with long track record in packaging films business The company has been manufacturing packaging films since three decades at a single plant in Uttarakhand. While subsequently company has diversified into engineering plastics and specialty polymers, 75-80% of revenues continues to come from films business. The installed capacity presently of biaxially-oriented polyethylene terephthalate (BOPET) is 57000 tonnes per annum (tpa), metallised films of 13000 tpa, engineering plastics of 16500 tpa and specialty polymers of 30000 tpa. Capacity utilisations in the BOPET lines is expected to remain healthy over the next 12-18 months given the demand situation while the share of 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. Given the established customer relationships, the volumes in the packaging films business is likely to be sustained over the medium term. * Moderate operating efficiency supported by strong capacity utilisation Operating profitability is susceptible to raw material prices and prevailing demand-supply situation. Given the favourable demand of packaging films since second half of fiscal 2019, the operating margins have been strong at 19% in fiscal 2020 (11% in 2018 and 8.7% in 2019). Meanwhile, the company has been able to maintain steady operating performance during the Covid-19 driven national lockdown as well because of healthy demand for packaging products. While volumes in engineering plastics will remain constrained in the near term, they are expected to improve in next fiscal 2022. The company has 7 patents for its specialty polymer division and with maturing product profile in specialty polymers segment, margins are expected to remain over 35%. Therefore, while overall revenue may be marginally lower in fiscal 2021, the operating margin should remain healthy. Operating margins are expected to remain healthy at 18-20% in fiscal 2021. * Diversified Product Profile The company has a diversified product portfolio in the polyester films, engineering plastics and speciality polymers divisions. Though the revenues are dominated by films segment (75-80%), the other segments have been increasing their share in last two years. Diversified revenue profile helps the company in protecting profitability from unfavourable conditions in any particular segment and adds stability to cash flows. While the demand for engineering plastics and specialty polymer business was adversely affected due to the pandemic led slowdown, higher profits from packaging film business has helped the company to maintain profitability. Weaknesses: * Susceptibility to volatile raw material costs and realisations driven by demand-supply dynamics The company presently has a single-location manufacturing capacity in Uttarakhand. In the past operating efficiency of EIL has been constrained in the absence of economies of scale and vulnerability to fluctuation in raw material costs. The packaging films business (BOPET) is cyclical; product realisations have fluctuated in the past depending on demand-supply gap. Further, the industry is highly competitive with a few large players aggressively expanding capacities over the past few years, resulting in realisation pressures. Players have tended to add large capacities whenever there is improvement in prices, leading to a fall in product realisations subsequently. Further, the key raw materials, PET resin/chips, pure terephthalic acid (PTA), and mono ethylene glycol are all derivatives of crude and hence, profitability is susceptible to volatility in crude prices. Players have the flexibility to pass on raw material price fluctuations to customers to an extent. However, presence in other segments like specialty polymers and engineering plastics is expected to support the margins of EIL. Susceptibility of the margins to impact of demand-supply and volatility in raw material prices will remain 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. The project will be funded through internal accruals (30%) and debt (70%) and is expected to be operational by October 2022. With strong accruals driven by existing lines in packaging films business the company has been able to improve its financial profile through prepayment of long term debt and lower working capital utilisation. 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 times and 8 times as on March 31, 2020 respectively (1.1 times and 2 times as on March 31, 2018). With continued healthy operating performance in current fiscal 2021, the accruals are expected to remain healthy to fund the new capex. The capex once comes onstream is expected to almost double the revenues 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. at the new facility being an industrial park. Given the substantial size of the capex (1.4 times of the networth as on March 31, 2020), the company is exposed to risks relating to timely implementation and stabilisation of the project. |
| Liquidity Adequate |
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Expected cash accrual of Rs 90-110 crore, should be adequate to service maturing debt of Rs 35-40 crore each in fiscal 2021 and 2022. The bank limit of Rs 156 crore remained 37% utilised on an average during the 12 months through July 2020. With the equity contribution for capex in EFL being funded through internal cash accrual, the cash balances of the group would remain low until fiscal 2023. However, internal cash accrual, cash and cash equivalents, and the unutilised bank limit should be sufficient to meet debt obligation over the medium term. |
| Outlook: Stable |
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CRISIL believes EIL will sustain its business risk profile over the medium term, supported by a diversified product profile. The debt protection metric, however, expected to remain average over this period on account of a large debt funded greenfield capex. |
| Rating Sensitivity factors |
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Upward factors: * Significant and sustained improvement in operating performance leading to cash accruals 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 a significant decline in margins * Weakening of the financial risk profile due to delay in ramp-up of new capacities, new sizeable debt-funded capex/acquisitions, leading to debt to EBITDA of over 4 times on a sustained basis |
| About the Company |
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Promoted by Mr Arvind Singhania and incorporated in 1985, EIL is engaged in the manufacturing of packaging films, specialty polymers and engineering plastics. The manufacturing facility is in Khatima (Uttarakhand). The total operational BOPET capacity at present is 57000 tonnes tpa, metallised films of 13000 tpa, engineering plastics of 16500 tpa and specialty polymers of 30000 tpa. |
| Key Financial Indicators - (CRISIL adjusted) | ||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL 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. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
**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 various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
**Interchangeable with Foreign Inland | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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