Rudra Shares recommend Ester Industries as a dark horse | Fundamental Analysis | Stock Recommendation | Demand supply mismatch improving | Strengths | Indianotes.com
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 Rs 1700-2000 cr by 2022 & at Rs 900-950 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 .
Agreement with Shaw Industries
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 Rs 900 million per year which is more than double the Company’s FY2017 Specialty Polymer revenues which amounted to Rs 430 million.
OUTLOOK- WAY FORWARD
– 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 polymer products
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.
– 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.
Valuation and 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 Rs 1700-2000cr 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 Rs 113.
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