INVESTMENT RESEARCH DARK HORSE - ESTER INDUSTRIES LIMITED. Agreement with Shaw Industries

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1 Dated : 15th Feb ACCUMULATE Price ` 65 Upside - vision 2022 Div Yield - Tenure 2-3 Years Sensex 34, Nifty 10, Group/Index Multibagger Stock Details M.cap (` in cr) 542 Agreement with Shaw Industries Equity (` In cr) OUTLOOK- WAY FORWARD 52 wk H/L ` 77.50/30 Face Value ` 5.00 NSE code ESTER BSE code Key Valuation Ratios RONW 0% polymer products P/E - ] Film P/BV 2.0 EV/EBIDTA IN ` Key Financial Data EV (`in cr) BV (`in cr) ] Engineering Plastics NW(`in cr) Adjst.EPS(TTM) Share Holding Pattern Promoter 41% B / S&P BSE SmallCap Others 59% INVESTMENT RESEARCH DARK HORSE - ESTER INDUSTRIES LIMITED Investment Rationale Moving from commoditized business to technology based business, focusing on sustainable and profitable growth ahead Company's vision going forward is to achieve a revenue target of ` cr by 2022 & at ` crores by the end of FY19. Talking about next four-five years, is looking at taking the revenue up between 30% and 40% from the specialty polymer business. Ester Industries has entered into a long term agreement with Shaw Industries Group Inc, USA, a wholly owned subsidiary of Berkshire Hathaway, Inc to supply circa 2,500 tonnes per year of its stain resistant Master batch MB-03.The total size of this single order is estimated to be around ` 900 million per year which is more than double the Company s FY2017 Specialty Polymer revenues which amounted to ` 430 million. ] Specialty Polymer business- Revenue share currently 6-7%, plans to take it to 30-40% over 4-5 years, margins of 25%, scale up revenue by 5X» Innovative and exciting product pipeline some of which are at various stages of approvals and commercialization stage» Tie up / partnership with renowned global players for developing niche specialty Business environment improving» Demand Supply mismatch improving» Focus remains towards improving product mix and controlling costs» Working towards increasing share of value added products towards 35% from present level of 20%» No major capacity addition in the Industry» Business scenario gradually improving» Working towards widening and improving product mix From the Management Desk: Company have seen steady improvement across business segments during 9M FY18 on the back of recent strategic initiatives and gradual improvement in the overall macros. The Specialty Polymer business after going through challenging times has now started to show signs of stabilization and is expected a steady sustainable recovery in the business in near to medium term. Film business performance continued to remain steady on the back of supportive sector developments resulting in steady realisations and demand. Further improving the cost efficiencies and product mix by increasing share of value added products would help sustain the improvement in the business. On the Engineering Plastics business front, efforts towards improving the product mix will further improve the margin profile of the business. FY 20Est. EBITDA Est. NET DEBT(Debt-Cash) No. of shares 8.34 PV Estimated Price/share 113 Note: (Assumed EV/EBITDA at 13x) Year End Tax Rate % Receivable days Source: Google Div. Payout % EV Est. Markt cap VALUATION (` In Cr except per share) Corporate Governance Transparency Ratio's Page 1

2 Quarterly & 9Months Results Analysis RESULTS CORNER Key Developments 9M FY18 Specialty Polymer business performed well on the back of gradual pick up in off-take and steady realizations Filed patent under PCT -Modified polyester masterbatch for textile applications and manufacturing process thereof. Facilitates easy dyeability of Polyester Fiber and provides deep dyeing through cationic as well as disperse dyes Outlook remains positive on the back of sustained R&D initiatives / investments and stepping up the production of existing products Improving sector fundamentals supporting Film business performance Steady volume growth coupled with gradual improvement in realisations following demand supply parity helped deliver better performance Margin expansion owing to better cost control and higher share of value added products Engineering Plastics business delivers steady performance Sustained, improved performance delivered during the first half Working towards widening and enhancing product mix 9M FY18 -Highlights Product pipeline for Specialty Polymer continues to strengthen Patent filed under PCT -Modified polyester masterbatch for textile applications and manufacturing process thereof Facilitates easy dyeability of Polyester Fibre and provides deep dyeing through cationic as well as disperse dyes Ensures complete dye bath exhaustion which helps in environment protection. This will enable printing of fabric, carpets and PET sheets RESULTS HIGHLIGHTS (` in cr) 9M FY18 9M FY17 Y-O-Y(%) TOTAL INCOME % EBITDA % MARGINS % 8.04% 6.70% 134Bps PAT (0.31) (10.08) - Note: Total Income net of taxes Graphical presentation Revenue from operations EBITDA EBITDA % PBT PBT% PAT PAT % EPS Results Snapshot ` in crores Quarter Ended % Change % Change 9Months ended Dec-17 Sep-17 Dec-16 (Q-O-Q) (Y-O-Y) 31-Dec Dec-16 % Change % 14.31% % % 42.53% % 8.21% 7.62% 6.58% % 6.71% % % % -0.44% -2.88% % -2.91% % % % 0.24% -0.34% -1.98% % -1.98% 0.06 (0.08) % % % Page 2

3 DIVISIONS Specialty Polymers Product portfolio consisting of 18 products at various stages of development of which patents have been filed in respect of 7. Existing Product portfolio consists of Product Stain resistant Master Batch, wherein a positive response from customers is there & company is ramping up sales there. Master batch for a Cationic DyeableYarn-- Patent filed under PCT for a Master Batch to produce specialisedpolyester yarn. Gaining strong potential in China and Taiwan. Growth Drivers Strengthening R&D capabilities Develop customized polyester resins based on customer's requirement Focus on developing products which will help transform latent demand into real demand Develop high quality specialty polyesters to ensure competitive advantage for customers PATENT STATUS Source: Company's PPT Polyester Films Company manufactures and markets polyester films under the brand UmaPET. Has manufacturing capacity of 57,000MTPA for polyester films & 13,200 MTPA for metalized polyester films. ValueAdded & Specialty products include transparent barrier film, shrink film etc. Thrust on increasing proportion of value added & specialty products in overall mix by focusing on innovation, development and partnership with customers both in India and overseas which will reduce the effect of inherent cyclicality. Input prices have firmed up recently. Ester Undertook price revision to off-set the impact of rising raw material prices & is Working towards improving share of value added product in the overall mix WAY FORWARD Improving business environment with supply demand equilibrium Cost reduction exercise translating to improving profitability, hopeful of improving operational efficiencies even further Focus on improving profitability by sprucing up product mix; more focus on developing value added products. Value added/specialty products constitutes about 20% of the overall revenue at present emphasis on expanding this to 35% in 2 years Operational efficiencies aligned towards meeting the future goals by optimizing operational cost Focused on offering customers unique value proposition by aligning innovation, development and partnership. Page 3

4 Engineering Plastics Company is well regarded manufacturer of Engineering plastics. Has diverse Product Portfolio comprising of 350+grades. Its products are marketed under the brand ESTOPLAST. Manufacturing capacity consisting of 13,500MTPA, growing at better than industry run rate since the last 3 years. Adverse impact on the domestic business during the first half owing to GST roll-out; the business and sector though should benefit in the medium to long term from GST implementation. WAY FORWARD Enhancing relationships with OEMs & Tier-1/2 customers in the automotive/electrical segments Building R&D capability(in-house or through strategic alliances)so as to cater to specific needs Expanding global footprint through aggressive pursuit of Identified Exports opportunities and participation in international exhibitions to enhance brand visibility. Enhancing Ester s UL-certified product portfolio Company Overview Backed by 30 years of industry expertise, Ester manufactures Polyester Films, Specialty Polymers and Engineering Plastic compounds. Polyester Films find applications primarily in flexible packaging while Specialty Polymers find applications into niche areas including rigid packaging, textiles etc. The Engineering Plastics business processes various materials for industries like Automotive, Electrical & Electronics, Appliances and Telecom. Innovation and Sustainability are at the core of Ester's endeavours and fundamental to its strategy and vision. Valuation Conclusion Company's focus on improving profitability by sprucing up product mix; more focus on developing value added products to 35% in 2 years in the polyester film business, Scaling up Revenue share in the Specialty Polymer business which is currently at 6-7% & plans to take it to 30-40% over 4-5 years(around 5X) at higher margins of around 25% attracts the company's share price. Its Product pipeline for the business continues to remain strong on back of strengthening R&D and execution, expanding global footprint through aggressive pursuit of Identified Exports opportunities and participation in international exhibitions to enhance brand visibility in the engineering plastic business and on an overall Cost reduction exercise translating to improving profitability, is hopeful of improving operational efficiencies even further. Moreover, the new agreement in pipeline with Revenue target of ` cr over 4-5 years, We see a turnaround in the stock- the New Ester, from loss making company past couple of years to delivering profit in the recent quarter & expect the same in the years to come. Going ahead, management is confident of recent efforts towards improving the margin profile of the businesses which will help in delivering better performance going forward. Therefore, we recommend to Accumulate the stock for long term for a target of ` 113. Page 4

5 LTM Net Sales EBITDA Depreciation Op Income Misc.Inc (Exp.) Interest Exp EBT (1.90) 0.58 (0.87) (0.20) (1.42) Taxes (0.80) 0.11 (0.22) (0.07) (0.65) Net Inc(Reg) (1.10) 0.48 (0.66) (0.14) (0.77) Extraord. Items Rep Net Inc (1.10) 0.48 (0.66) (0.14) (0.77) EPS (0.10) 0.06 (0.08) (0.02) (0.09) Adjusted EPS (0.10) 0.10 (0.10) - (0.10) Income Statement and Estimates ( ` in Cr except per share) E 2019E 2020E Sales(Net of Taxes) Other operating Income Total Inc. from operations Operating EBITA Total Inc. from operations TOTAL EXPENDITURE EBITDA Depreciation (30.30) (32.11) (32.36) (29.53) (31.62) (32.32) (33.22) Rep. profit before othrinc., fin.cost,tax & excp. Item Goodwill amortization Rep. profit before othrinc., fin.cost,tax & excp. Item OTHER INCOME Profit from ordinary act. Before Fin.Cost,TAX & Exp.Items Quarterly Results (` in cr except per share) Profit & Loss Net financials Interest income Interest expenses (34.87) (37.10) (36.01) (33.03) (32.49) (27.94) (24.46) Net Financial Items (34.87) (37.10) (36.01) (33.03) (32.49) (27.94) (24.46) Reported Pre-tax profit (16.39) Reported Tax charge (5.74) (1.04) (2.27) 5.44 (1.36) (8.15) (17.09) Reported Net profit (10.95) Minorities P/L OF ASSOCIATE CO Rep. NP after min. Int (10.95) Extra Ordinary income Rep.Net Income after extra ordinary items (10.95) EPS and Dividend Dividend Paid (3.15) Retained earnings (10.95) Reported EPS (1.31) Adjusted Basic EPS (1.31) DPS - originally declared Number Of Shares Opening Balance Issued Bought Back Closing Balance FV Wtd. Avg. no. of shares Note:- The figures shown in the brackets means NEGATIVE. Page 5

6 BALANCE SHEET E 2019E 2020E Equity & Liabilities Shareholders' Fund Share Capital Reserves and Surplus Minority Interests Total Shareholders' Fund Non-Current Liabilities Long-term Borrowings Other LT Liabilities Deferred Tax Liability Long term Provisions Total Non-Current Liab Current Liabilities Short term Borrowings Trade Payables Other current liability Short term Provisions Total current Liab Total Equity & Liab Assets Non-Current Assets Fixed Assets Tangible fixed Assets G/W On Consolidation Non-current Investment Long term L&A Other Non current Ass Deferred tax receiv Total Non-Current Ass Current Assets Current Investments Inventories Trade Receivables Cash & cash Equi Short Term L&A Other current Assets Total current Assets Total Assets Cash & cash equivalents Other int. bearing assets Interest-bearing debt Net interest-bearing debt Net gearing (%) % % % % % 92.09% 68.67% Investments Tangible assets Gross capex (57.19) (36.61) (23.70) (12.33) (10.71) (12.16) (13.74) Sale of fixed assets Net capex (56.99) (36.10) (23.23) (11.61) (10.71) (12.16) (13.74) Depreciation tangibles (30.30) (32.11) (32.36) (29.53) (31.62) (32.32) (33.22) Note:- The figures shown in the brackets means NEGATIVE. Page 6

7 RATIO ANALYSIS E 2019E 2020E Return on assets % 0.65% -1.63% 0.42% 2.53% 5.21% Return on equity % 1.61% -3.84% 0.98% 5.69% 10.97% ROCE % 6.90% 2.47% 6.73% 9.88% 13.87% EBIT Margin % 5.56% 2.35% 4.61% 5.61% 6.63% Pre tax margin % 0.89% -2.32% 0.51% 2.62% 4.50% Net Profit Margin % 0.59% -1.55% 0.34% 1.75% 3.00% Total asset turnover Fixed asset turnover Equity turnover Current Ratio Quick Ratio Cash Ratio Receivable Days Inventory Days Payable Days Conversion Cycle (Days) Financial Leverage Effect Debt to Capital Debt to Equity Note:- The figures shown in the brackets means NEGATIVE. Page 7

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