MANAGEMENT DISCUSSION AND ANALYSIS
Indias GDP grew at a healthy 8.6% in 2010-11 as compared to 8.0% in 2009-10surpassing estimates of an 8.5% growth at the start of fiscal 2010-11. This growth waslargely due to the significant growth in the agriculture sector at 5.4% (0.4% in 2009-10);the services and industrial sectors maintained their previous year growth momentum. Theaccelerated growth in the industrial sector in the first half of 2010-11 was hit byinstability in the capital goods segment in the second half of 2010-11.
The confidence in the Indian growth story was witnessed in the record FII inflows inthe economy and the revival in domestic investor confidence which helped the Indian stockmarkets to regain the pre-crisis record levels. Net capital inflows increased USD 13.7 bnto reach USD 36.7 bn; foreign exchange reserves grew USD 20 bn to cross the USD 300 bnthreshold at about USD 305.49 bn.
Even as the macroeconomic numbers displayed a strong performance, they were marked bysignificant volatility evident not only in the numbers but also in the sentimentsprimarily driven by the global clues and policy responses to cater to inflation.
The inflation witnessed a relentless rise during the first half of 2010 and remained indouble digits for almost five months of 2010. The uneven monsoon during 2009, domesticsupply side constraints coupled with the rising international prices of food grains hadpushed the prices of primary food articles, which eventually drove inflation in themanufacturing goods as well as service sectors.
Business segment 1
Thin BOPET films
PET is a versatile plastic used to produce a wide spectrum of packaging material forbeverages, food, personal and home care, pharmaceuticals, as well as other consumer andindustrial products. PET is a strong, lightweight, non-reactive and inert material.Accordingly PET film is ideal product to protect food, beverages & pharmaceuticalsagainst oxidation and aroma loss so as to achieve long shelf life. Health-safety agenciesaround the world have approved PET as safe for use with foods and beverages. The PET Filmindustry comprises of both thin films (50 micron and under) and thick films (above 50microns)
Overview: Global BOPET Film industry is estimated to grow at CAGR of about 8 - 9% overnext five years which is higher than the CAGR of about 7% p.a. during 2004-2009.Currently, Asian countries account for the largest market share for BOPET films with 65-70% of BOPET Films produced and consumed within this region.
Growth and drivers: BOPET film sector is expected to grow at about 8-9% per annum inthe next five years primarily on account of
Growth in new applications such as LCDs, touch screen panels, smartphones, solar panel back sheets and photovoltaic cells
Changes in demography & lifestyle in fast developing and emerging economies
Ester is exploring options to enter into this High Growth High Marginsegment of BOPET Films.
Overview: India has an installed capacity of about 400,000 MTPA of Thin BOPET films andaccounts for about 17% of the global installed capacity. Over 65-70% of the Indiasproduction is consumed domestically while exports account for the balance. Continuouscapacity addition over the years strengthened Indias position in the global markets.Domestic demand for Thin BOPET film is growing at a CAGR of about 15%. Ester is engaged inthe manufacture of Thin BOPET Films.
Growth and drivers: The growth in India is driven by demographic and lifestyle changes(rising middle class population), increasing investments in supermarkets, hypermarkets andorganised retail sector. This is resulting in greater demand for sophisticated andattractive high quality printed packaging. Government Regulation to improve quality andsafety of the packaged food products continues to enhance demand for Thin BOPET Films.
Indias per capita packaging consumption at 0.24 Kgs as compared to 0.80 kgs inthe developed economies (worldwide average of about 0.40 kgs) offers tremendous growthopportunities. According to an industry body and Ernst & Young study on the Indianfood industry Flavours of Incredible India Opportunities in the FoodIndustry, (October 2009), investment opportunities in the Indian food industry areset to grow by 42.5% by 2020. This is expected to accelerate the demand for BOPET films.
Thin BOPET Films the mainstay of Ester
|Capacity ||Contribution to the Companys revenue ||Team ||Products |
|57,000MTPA as at 31st March 2011 ||79% during 2010-11 ||390members as at 31st March 2011 ||About100 |
|Shop floor ||Innovation ||Market place ||Project |
| Increased PET chip production by 19.5% from 36,177 tonnes in 2009-10 to 43,219 tonnes || Developed new Value Added products like High Barrier Clear Films which offer excellent potential in terms of volume and margins. || Increased sales volume of BOPET films by 5.2% from 29,842 tonnes in 2009-10 to 31,379 tonnes || Commissioned the PET Continuous Polymerisation (CP) plant of 71,000 MTPA in November 2010 |
| Increased BOPET film production by 6.6% from 30,122 tonnes in 2009- 10 to 32,116 tonnes || || Increased the sales of valued-added films by 43% || Commissioned an additional PET film line with a capacity of 30,000 MTPA in January 2011 |
| Increased metalised film production by 22.6% from 4,936 tonnes in 2009-10 to 6,051 tonnes || || Extended global presence across 25 nations; taking the global footprint to 75 countries || Expanded metalising capacity by 7,200 MTPA in November 2010 |
Ester is the second largest Thin BOPET Film producer in India in terms of installedcapacity. The Companys vertically integrated operations based out of Khatima,Uttarakhand comprise of PET chips, Thin BOPET Films and Metalised Thin BOPET Filmmanufacturing facilities.
Sold under brand name UmaPET, Ester offers a diversified portfolio of ValueAdded plain and metalised BOPET Films. The Company enjoys long healthy business relationswith marquee clients across India. Its global footprint extends over 75 countriesincluding the US, Europe and Latin America.
Ester is the second-largest Thin BOPET film producer in India in terms of installedcapacity with a global marketing footprint across 75 countries including the the US,Europe and Latin America.
|Polymerisation ||Film making ||Metalisation |
|PET chips Backward integration with a PET chip manufacturing capacity 1,07,000 MTPA ||BOPET films Manufacturing capacity of 57,000 MTPA ||Metalised films Forward integration with a metalising capacity of 13,200 MTPA |
|Utilises about 60% of capacity for captive consumption. Residual quantity is available for sale ||New plant based on cost effective CP and Direct Casting technology second in India and only third in the world. ||Metalised Film constitutes more than 20% of overall BOPET Film sales and fetches higher realisations. |
|In future this excess capacity can seamlessly support a new BOPET film line of 30,000 MTPA. considerably reducing capital cost for expansion. ||Post commissioning of Line 3, the first two lines would concentrate on manufacturing value-added products. || |
Scale: Ester consistently invested in increasing operating capacity throughmodification, balancing equipment and brownfield expansions, making it the second largestplayer in its space, providing economies of scale and the ability to seamlessly cater togrowing demand.
Technology: Ester is the second manufacturer in India and globally thirdmanufacturer to install the cost-effective Continuous Polymerisation (CP) and DirectCasting technology, significantly reducing capital cost, energy cost and overall cost ofproduction.
Integrated operations: Vertical integration enables low-cost operations and superiorproduct quality consistently. Forward integration into metallised Films and other ValueAdded products provide sizeable premium which improves profitability.
Capacity utilisation: Esters passion for continuously raising the internalefficiency bar is reflected in over 100% capacity utilisation over the past few years,making the operations cost-effective and providing additional volumes for business growth.
Product portfolio: Ester offers the widest variety of Value Added BOPET Films amongpeers; proportion of volume from value-added products stood at about 23% in 2010-11.
Reach: Esters diversified geographic presence domestic and global derisks the organisation for geographic concentration. The widening global presence allowsit to strengthen the growth momentum.
On the marketing front, the team is working to establish a foothold in large number ofcountries with key focus on advanced economies as they constitute significant share ofBOPET Film consumption (per capita consumption in the US is about 4 times that in India).
Ester is working on development of various new Value Added products. Esters hascommitted to incur capital expenditure on account of:
Installation of coating capacities for manufacturing high- end value addedproducts,
Balancing equipment for optimum capacity utilisation and improving operatingefficiencies.
The Companys thrust would be on increasing proportion of Value added productswith close to 50% share from export markets.
Outlook for future
While performance in 2010-11 has been strong due to operational and structural reasons,we expect margins to come under pressure going forward. The recent ban on the use ofplastic films for domestic pan masala / tobacco product ("pan masala / gutka")packaging is likely to impact our business since 25-30% of polyester films domestic demandemanated from this sector in India. The matter is sub-judice in the Supreme Court of Indiaand a decision is expected by the second quarter 2011-12.
Business segment 2
Engineering Plastics Business
Engineering Plastic is a group of Polymers comprising PBT, Nylon 6, Nylon 66, ABS and PC compounded in about 200 different grades under the brand nameEstoplast. These find applications in automobiles, white goods, electrical andelectronics industry.
Overview: The Indian Engineering Plastics compounds business has a capacity of about80,000 MT and is growing at 20% per annum as its growth is dovetailed to growth inautomobile and electrical sectors. In the automotive segment, the engineering plasticcompounds are used to replace metals and glass components. This enables reduction in thevehicle weight and improvement in fuel efficiency apart from being more cost effective.
Substitution of traditional goods with plastics: As per ICIS (market intelligence firmfor global chemical and energy industries), currently per capita usage of plastics is 5.5kg in India compared with the global average of 12 kg. However, with plastics increasinglyreplacing traditional materials such as metal and glass in many applications, the Indianplastic-compound business is expected to see significant growth in the years ahead.
Automobile segment: The Indian automobile industry is geared to double the passengercar manufacturing capacity by 2015. According to a study by global consultancy firm Ernst& Young, the Indian market will clock the fastest compound annual growth rate (CAGR)between 2009 and 2020, more than double of China. Besides, the auto-components industry,at USD 26 billion will jump to USD 103-113 billion in the next ten years, as per thereport.
Electrical segment: Indian electrical segment is estimated to grow at 18% annually.Growth in the sector is coming from shift to energy efficient lighting products such asCFLs, FTLs & LEDs duly supplemented by robust growth in construction. Demand forElectrical Appliances / White Goods is expected to grow at about 15% due to change inlifestyle and the growing disposable income.
The Company is accredited with the TS 16949:2002 certificate for TechnicalSpecification for manufacturing plastic compounds, an essential pre-requisite to marketits products to automotive companies, especially MNCs.
|Capacity ||Contribution to the Companys revenue ||Team ||Products |
|14,400MTPA as at 31st March 2011 ||11.6% during 2010-11 ||40members as at 31st March 2011 ||About 200 customised offerings as at 31st March 2011 |
During the financial year 2010-11, Engineering Plastics compounds and blends businessregistered a top line growth of 17%. We enhanced our customer base in the automotive andappliances segments through focused development efforts. The development efforts weresupported by addition of analytical equipment for advanced testing such as ComparativeTracking Index and Surface & Volume Resistivity. With the foundation laid, this isexpected to yield a healthy sales growth of PC-ABS compounds as well in 2011-12.
Following the increase in crude prices, prices of base polymers also started hardeningin the later part of the year. Despite intense competition, Ester succeeded in passing onpart of the cost increase to the customers.
The overall Engineering Plastics market in India is growing at a steady rate of 13-15%.The largest user of Engineering Plastics is the automotive industry which accounts foralmost half of the consumption, with the 4-wheeler and 2-wheeler segments growing at 25%and 10% respectively. Other major consumers include the electrical & electronicsappliances industries. Within the electrical segment, the market for Energy Saving Lampsis growing at 20% and that for low voltage switch gear products like MCB, ELCB &contactors at 15%.
Key drivers for the Indian plastic-compounds market
With a combination of light weight, high strength and adaptability in variousenvironments, Engineering Polymers are being increasingly chosen over metals for a varietyof high performance applications.
A steady increase in demand for engineering plastics compounds is expected,driven by the double digit growth rates of end consumers such as the automotive industry,electrical (appliances, wires & cables) industry, electronics & telecomindustries.
With plastics increasingly replacing traditional materials such as metal andglass in many applications, the significant gap in per capita consumption of plastics inIndia as compared to the global average is expected to be bridged rapidly, resulting insustained demand growth in coming years.
Reach: The Company has customer base across India in Engineering Plastics. About 60-70% of sales are in the Northern region resulting in not only shorter lead time but alsobetter margins on account of lower freight cost.
With the rapidly growing (@25%) automotive industry accounting for almost half of theEP consumption in India, enhancing our market share in this segment would be one of ourkey focus areas. We have accordingly developed suitable formulations and embarked on theapproval process with several OEMs in 2010-11. In 2011-12 we would be focusing on securingthese approvals and driving rapid commercialisation of the same.
We would also be focusing on similar approvals with OEMs in the electrical andelectronics appliances industries. The low voltage switch gear market (with products likeMCB, ELCB & contactors) is another area that is growing rapidly (@15%) owing toinvestment in the infrastructure segment coupled with enhanced safety awareness. We wouldalso be working towards developing green compounds (non-halogenated FR and pigments) forthe electrical industry, as a growing demand for these compounds can be expected in theyears ahead.
With the government actively promoting usage of energy saving lamps (CFL) in Indianhomes & factories, this market is growing @20%. This being a price sensitive andintensely competitive market, a strong presence in this area would need to be maintainedthrough cost leadership coupled with consistent quality and supply reliability.
In order to bring in the desired level of robustness within the EP business segment wewould be broadly focusing on the following areas:
Enhancing market share in the automotive & electrical segments
Achieving customer delight through consistent product quality & supplyreliability
Enhancing Brand visibility through participation in exhibitions / industryforums
Achieving cost leadership through productivity improvement, waste reduction andimproved capacity utilisation
Building strong R&D capability for new product / application development
Exploring opportunities for long-term relationships with customers / suppliersfor greater stability
Outpace the industry growth and strengthen profitability
Establish direct contact with OEMs for Polycarbonates and ABS compounds
Strengthen product development capability through organic or inorganicinitiatives for developing new products which open new markets for the Company
Key financial highlights
The year under review witnessed best ever financial performance in the history of theCompany. The performance during the year under review was exceptionally good on account ofquite favourable demand supply scenario.
A. Profit and Loss Account
Revenue grew by 67% from Rs.395.4 crore in 2009-10 to Rs.661.0 crore
EBIDTA grew by 260% from Rs.61.9 crore 2009-10 to Rs.223.2 crore
PBT grew by 367% from Rs.41.3 crore in 2009-10 to Rs.193.4 crore
PAT grew by 365% from Rs.27.9 crore in 2009-10 to Rs.129.5 crore
EBIDTA margin grew from 15.7% in 2009-10 to 33.7%
PAT margin grew from 7.0% in 2009-10 to 19.6%
EPS increased from Rs.4.85 in 2009-10 to Rs.20.59
Net sales grew 67% from Rs.395.4 crore in 2009-10 to Rs.661.0 crore in 2010-11 the highest topline growth in the previous five years. This was largely due to the hugegrowth in the BOPET Film business.
| ||2009-10 ||2010-11 ||Growth over the previous year |
| ||Amount ||Proportion of net sales ||Amount ||Proportion of net sales || |
| ||(Rs. crore) || ||(Rs. crore) || || |
|BOPET film ||291.8 ||73.8% ||523.2 ||79.2% ||79.3% |
|Engineering Plastics ||65.7 ||16.6% ||77.0 ||11.6% ||17.2% |
|PET Chips/others ||37.9 ||9.6% ||60.8 ||9.2% ||60.4% |
|TOTAL ||395.4 ||100% ||661 ||100% ||67.2% |
Thin BOPET film business: Revenue from the business grew by 79.3% from Rs.291.8 crorein 2009-10 to Rs.523.2 crore in 2010-11. As a result, its contribution to theCompanys revenue increased to 79.2% in 2010-11 from 73.8% in 2009-10. This robustgrowth was due to:
Sizeable increase in realisation on account of favourable demand supply scenario
Volume of value-added products increased by 43% strengthening realisations andprofitability
Increased volumes primarily in the last quarter of 2010-11 consequent to thecommissioning of additional capacities
Engineering Plastics: Revenue from the business grew 17.2% from Rs.65.7 crore in2009-10 to Rs.77.0 crore in 2010-11 through a mix of increase in quantity and improvementin per unit realisation.
Export earnings: Exports grew 170.2% from Rs.79.9 crore in 2009-10 to Rs.215.9 crore in2010-11.
The Companys operating cost increased 31.3% from Rs.333.4 crore in 2009-10 toRs.437.8 crore in 2010-11 in line with operational scale. Interestingly, operating cost asa proportion of total income declined from 84.4% in 2009-10 to 66.2% in 2010-11.
Raw materials: The expense increased by 34.9% from Rs.243.5
crore in 2009-10 to Rs.328.5 crore in 2010-11, primarily due to increased cost offeedstock besides increased requirement to feed expanded capacities.
Personnel expenses: Commissioning of new capacities in both business segmentsincreased the team size and personnel expenses from Rs.20.5 crore in 2009-10 to Rs.30.0crore in 2010-11 commensurate to the enhanced level of operations.
Power and fuel: As a result of full impact of increase in State Power Tariff inOctober 2009, substantial increase in prices of feed stocks for energy and increasedproduction on account of new capacities resulted in an increase in the energy bill by45.9% over the previous year. The current year is expected to witness the benefit of thenew energy-saving Continuous Polymerisation and Direct Cast technologyreducing the energy cost per tonne of film produced.
Selling expenses: Selling expenses increased 61.9% from Rs.12.3 crore in 2009-10 toRs.20.0 crore in 2010-11 primarily due to increase in freight outward (in line withsignificant increase in export volumes) and an increase in commission on sales forincreased export sales.
B. Balance sheet
Net worth grew by 56.1% from Rs.177.7 crore as on 31st March 2010 to Rs.277.4crore as on 31st March 2011
Net block grew by 120.2% from Rs.172.4 crore as on 31st March 2010 to Rs.379.7crore as on 31st March 2011
ROCE improved from 19.5% in 2009-10 to 39.1%
ROE improved from 16.2% in 2009-10 to 47.5%
Capital employed increased 114.4% from Rs.244.7 crore as on 31st March 2010 to Rs.524.7crore as on 31st March 2011 owing to an increase in reserves and surplus and secured debtportfolio. The judicious application of each rupee invested in business is reflected inthe improved return on capital employed (ROCE) from 19.5% in 2009-10 to 39.1% in 2010-11.
Sources of funds
Shareholders funds: Net Worth increased 58% from Rs.172.3 crore as on 31st March2010 to Rs.272.5 crore as on 31st March 2010. This was largely due to an increase inreserves and surplus -- from Rs.140.8 crore as on 31st March 2010 to Rs.241.0 crore as on31st March 2011 as business surplus worth Rs.100.2 crore or 77.4% of the net profit for2010-11 was ploughed back into the business. The equity capital remained unchanged atRs.31.44 crore comprising 6,28,93,706 equity shares with a face value of Rs.5 per share.The promoter group held 72.1% in the Company as on 31st March 2011.
External funds: The debt portfolio increased 311.3% during the year. The Companysdebt (fully secured) stood at Rs.223.7 crore as on 31st March 2011 as against Rs.54.4crore as on 31st March 2010. The debt-equity ratio stood at 0.82 as on 31st March 2011compared with 0.32 as on 31st March 2010 on account of the additional debt takenfor part-funding the recently commissioned expansion projects and consequently increasedworking capital requirement. As a result, interest cost increased 89.8% from Rs.6.3 crorein 2009-10 to Rs.11.9 crore in 2010-11.
Application of funds
Gross block: The gross block increased from Rs.409.3 crore as on 31st March 2010 toRs.642.0 crore as on 31st March 2011. It also resulted in an increase in the provision fordepreciation from Rs.1,415.32 lacs in 2009-10 to Rs.1,792.58 lacs in 2010- 11(consistently provided on the straight line method). The Company has strategised for acapex of about Rs.50.0 crore in the current year which includes balancing equipment forthe recently commissioned BOPET film capacities and creation of a corporate officebuilding which would be funded through a prudent mix of debt and equity.
Working capital: The Companys working capital is used for purchasing rawmaterial, managing overheads and customer credit. Net current assets increased 91.68% fromRs.78.1 crore as on 31st March 2010 to Rs.149.7 crore as on 31st March 2011. The currentratio improved from 2.52 as on 31st March 2010 to 2.60 as on 31st March 2011. The financeteam used the surplus cash generated from the business to reduce its working capitallimits with the banks optimising the interest cost. The Company utilised low-costfunding options namely packing credit and LC backed discounting among others to optimiseinterest cost on working capital loans it utilised only 25% of its cash creditfacilities with banks
Receivable management was strengthened. The Company assigned credit limits to itscustomers and maintained a strict vigil on timely receivables. The sales mix has shiftedtowards exports which has caused a rise in the debtors cycle from 44.3 days in2009-10 to 62.5 days in 2010-11. In addition, the Company maintained its commitment to payits vendors on the agreed due date consistently strengthening trust in the Company.
Risk is the face of business uncertainty, affecting corporate performance andprospects.
The Companys risk management framework comprises a clear understanding ofstrategies, policies, initiatives, norms, structured reporting and control. It ensuresthat the risk management discipline is centrally initiated by the senior management andprogressively decentralised, extending to managers across hierarchies, facilitating riskmitigation at the transactional level. Consequently, only those business decisions aretaken that balance risk and reward, ensuring that the Companys revenue-generatinginitiatives are consistent with the risks taken, so that shareholders get their desiredtotal return.
Company classifies the risks broadly into Strategic risks, Operational risks, Financialrisks and Information Technology risks. Risks in each classification are identified andaggregated to form a library of risks. The Company reviews the library of risks from timeto time to update and modify its mitigation strategies with the changing risk scenario.There is a reviewing and monitoring mechanism in place to ensure effectiveness ofmitigation plans.
People are Esters key assets that transform dreams into reality.
The Company implemented major initiatives for strengthening the organisationsfoundation and intellectual capital.
In 2010-11, the Company engaged one of the worlds most reputed consultants thathas globally recognised name in HR management for competency mapping and development ofthe entire team, leadership development and succession planning for critical roles withinthe organisation.
As a first step, the consultants identified the key competencies of the organisation(grouped under four clusters Leading through result, Leading through self,Leading through others and Champion growth) and worked to map,develop and align individual competencies in line with that of the corporate. As part ofsuccession planning, the HR team along with the Consultants identified the critical rolesin the organisation, suitable successors and developed (training and development programs)the road map for their grooming to undertake the additional responsibilities.
They accurately aligned the performance management system with the reward andrecognition programme to allow for dispassionate performance appraisal and rewardingperformance, strengthening motivation and building transparency within the team.
The Company also conducted an Employee engagement survey to identify the improvementareas in the organisation and to undertake initiatives for their resolution.
Internal control systems
The Company has a structured Internal Control System in place, which assures the Boardof Directors and the management that there is an effective system for
Planning and achievement of goals
Reliable financial and operating reporting and legal and regulatory compliance
Adequate control against fraud and negligence
Review of performance
The integrated financial accounting system, supported by in-built controls, ensuresreliable and timely financial and operational reporting. Controls and legal compliancesare periodically reviewed by audit systems. The financial accounting and audit systemsensure prevention and detection of frauds and negligence.
The Company has plans to leverage its existing ERP systems for optimal utilisation ofresources and further improving operating efficiencies. To achieve this, the Company isplanning to embark upon technical and functional upgrade of its existing ERP system.
Corporate Social Responsibility
CSR continues to be an important and essential part of Esters commitment to alignour Company's activities with the social, economic and environmental expectations of ourstakeholders. Our corporate social responsibility (CSR) programs are designed to providelong-term benefits to our employees, customers, shareholders, partners, and individuals incommunities in which we operate. Our approach to corporate social responsibility (CSR)aligns responsible business practices and social investments to create long-term value forour business.
In 2010-11 we worked on several programs aimed at improving the livelihood of theeconomically disadvantaged sections of society by making contributions directly tobeneficiaries and through charitable institutions. We continue to support the Make-A-WishFoundation, a global organisation that has enriched the lives of children withlife-threatening medical conditions through its unique wish-granting work.
We will continue to support socially relevant programs in 2011-12 and are looking atnew CSR initiatives such as setting up medical and educational facilities in the vicinityof our manufacturing facility.
Statements in this section relating to future status, events, circumstances, plans andobjectives are forward looking statements based on estimates and anticipatedeffects of future events. Such statements are subject to risks and uncertainties andaccordingly are not predictive of future results. Actual results may differ materiallyfrom those anticipated in the forward looking statements. The Company cannot beheld responsible in any manner for such statements. The Company undertakes no obligationto publicly update these forward looking statements to reflect subsequent events orcircumstances.