STOCK ANALYSIS

Ester Industries

Prepared By:
Vansh Khanuja
Vanshkhanuja78@gmail.com
June 16, 2021
PREFACE
This analysis report covers various aspects of stock selection.
Although my report is not something you should solely base
your investments on, but I'm sure it can surely serve as a guide.
Stock selection is a process of elimination, with an approach
like this, one should constantly find reasons not to buy the
stock. This will help you make better investment decisions as
stock selection can be quite tedious.
The reasons for eliminating a stock can be different and does
not necessary give a negative opinion about the company.
Everyone has different investment horizons and different risk
appetite; this makes it tough to make an analysis that will serve
everyone equally because of the bias towards different
companies we all have. Thus, it would be better for me to
explain my perspective so you can better understand the
reasons I select/reject a stock.
I’m looking for undervalued growth stocks. My time horizon
varies with kind of stocks but generally you expect it to be at
least 5 years. The company should have excellent management
and display consistent growth over a long term. While the latter
can be easily known just by analyzing the financials, The major
concern is regarding how to check if the management is
competent enough.
The only thing one could do is again try to gain some insights by
looking at the financials. A healthy growth rate added with
better than average margins will display managerial
competency. Along with this, careful scrutinization of
management’s discussion section in the annual reports over the
last few years can surely yield some insights.
Valuation is the last step in stock analysis. The basic role is to
use all the facts obtained to find a price that is justified. This is
probably the most controversial part because there is no
perfect way to value a company. I will be using a DCF
(Discounted Cash Flow) model and use the risk-free-rate as the
discount rate. I understand the conventional method of DCF
includes calculation of weighted average cost of capital that is
used to discount the cash flows but I'm not using it because I
will deduct 25% of the calculated value to get a margin of
safety. Furthermore, I will be conservative in my projections so
using risk-free-rate is appropriate.
Given the fact that the intrinsic value of any given company
cannot be calculated with exact precision, it is important to
consider that I can be wrong in my projections. This is the
reason I will be deducting 25% of the calculated value. If then
the stock is selling at around the price I calculated, then only I
will be bullish on that particular investment.
The strategy I just mentioned is a rough explanation of what I
will follow. There can be certain adjustments that will vary
according to the company. Note that the valuation is based on
forecasts of Future Cash Flows (FCFs) and thus carry an
inherent flaw I.e., predictions. Given that there are many
variables that can disrupt cash flows, you are advised to invest
only after you’ve understood all the points I've mentioned and
if you can hold the stock patiently for years until the
discrepancy between the price and value is fixed. This process
can be frustrating and you’ll be tempted to sell in bear markets,
but if you truly understand the principles of investing, I expect
you to buy more during such conditions. If there are any
questions concerning any phase of the report, I would welcome
hearing from you.
TABLE OF CONTENTS:

(1) Overview
(2) Risk Factors
(3) Financial Statements and Valuation
(4) Conclusion
(5) Appendix
(6) References
 (1) Overview
Key details:
CEO& Chairman: Mr. Arvind Kumar Singhania
Sector: Packaging
Last Traded Price: Rs 138.0
Market Capitalization: Rs 1150Cr
Earnings-Per-Share (TTM): 16.49
Price-Earnings ratio (TTM):8.37

Ester Industries is engaged in the business of manufacturing

polyester films, specialty polymers and engineering plastic
compounds. Its polyester films product lines include special
chemical coated films, isotropic film, heat seal films, retort film,
shrink sleeve film, matte films, white opaque films, gold films,
embossable films, Transparent high barrier film, insulation film
and twist films. Its polymer range includes polybutylene
terephthalate (PBT), engineering plastics, polyamide 6 and
polyamide 66 engineering plastics, polyethylene terephthalate
(PET) engineering plastics, Polycarbonate (PC) engineering
plastics, Acrylonitrile Butadiene Styrene (ABS) engineering
Plastics, and alloys and blends. Its specialty polyester business
is engaged in manufacturing polyester chips of normal and
masterbatch grades. The company manufactures engineering
plastics under the brand name of ‘Estoplast.’
In case you do not understand the mentioned products:
Polyester is a versatile plastic film that excels in having an
exceptional combination of optical, physical, mechanical,
thermal, and chemical properties. Polyester is also known as
Biaxially Oriented Polyethylene Terathalate (BOPET). It has a
variety of uses because of its high tensile strength, insulation
properties and other properties. There are many kinds of films
available with different applications. In simple terms, the
company produces many types of polyester films.
Engineering plastics are those which possess physical
properties enabling them to perform for prolonged use in
structural applications, over a wide temperature range, under
mechanical stress, and in difficult chemical and physical
environments.
Specialty Polyesters include polyester chips of different grades.
These are mainly used for making Polyester Filament Yarn like
PTY, FDY and Staple Fiber, which are widely used in the Textile
Industry.
The promoters hold a major stake (61.45%) mainly through a
company called Wilemina Finance Corp based in Mauritius.
Wilemina Finance Corp holds 53.86% of the company of which
Mr. Arvind Singhania is a beneficial owner. Mr. Singhania
himself holds only 150 shares.
During the year FY19-20, the company earned a Net Profit after
Tax (NPAT) of Rs. 99.50 crores, a significant improvement as
compared to NPAT of Rs. 31.10 crores earned during FY 2018-
19. Revenue from Operations during the year under review
stood at Rs. 1038.70 crores as compared to Rs. 1028.06 crores
during FY 2018-19, a marginal increase of 1.0%
Main factors for significant enhancement in profitability of the
company are substantially improved performance of Polyester
Film and Specialty Polymers on account of higher volume as
well as better margins. A significant increase in revenues of
Specialty Polymers from Rs. 30.42 crores to Rs. 73 crores, both
on account of higher volume and selling price, contributed
towards overall increase in sales revenue.
Growth in demand helped in bridging the demand supply gap,
thereby contributing towards improved unit margins for the
Polyester Film business. Demand for Polyester Film continues
to grow at the rate of 10% - 12% (domestic) and 6%- 6.5%
(global). The profitability for the Polyester Film SBU witnessed
an improvement in EBIT from Rs. 120.34 crores to Rs. 182.64
crores – EBIT margin improving from 14.98% to 22.69%.

Engineering Plastics SBU registered a negative growth of 17.4%

in value terms (10.1% in volumetric terms). The higher drop in
value terms was on account of ~8% drop-in unit selling price
(compared to the previous year) consequent to the steady drop
in polymer prices for the first 10 months of the year. Reduced
market demand resulted in negative growth of 1.8% for the EP
compounds in volumetric terms (catering to end-use segments
such as automotive, electrical & electronics and appliances).
The profitability for the Engineering Plastics SBU witnessed
marginal improvement in EBIT from Rs. 7.69 crores to Rs. 8.63
crores – EBIT margin improving from 3.95% to 5.37%.
Engineering Plastics (such as Polybutylene Terephthalate,
Polyamides and Polycarbonate) possess enhanced mechanical
and/or thermal properties and dimensional stability as
compared to commodity plastics (such as Polystyrene,
Polypropylene and Polyethylene). Engineering Plastics usually
exhibit a combination of improved properties that make them
suitable for applications in various industries such as
automotive, electrical & electronics, construction, medical,
consumer durables and telecommunication.
Mr. Singhania has been with the company for 35 years and in
my opinion, there is a lot of room for growth still. With a
market cap of just 1.1K Cr, we can see this stock as the next
multi-bagger if the management continues to prove efficient.

In the next part, I’ve listed out the key risk factors.
 (2) Risk Factors
I will avoid mentioning the obvious risk factors like interest rate
risks, exchange rate risks, etc.
The risk factors associated with the company that can prove to
cause permanent damage is credit risk.
The company needs to expand a lot from this stage to prove a
worthwhile investment. The company might be tempted to
fund that expansion through debt. The current debt level is
around 170Cr (source: Economic Times) The company is
constantly repaying its debt and is also BWR BBB+ rated (The
debt level at year ending 31 March, 2018 was 260Cr). The
current equity stands at 516Cr so the debt-to-equity ratio is at
0.32.
The other main risk factor is competition. Companies like Jindal
Poly Films and Cosmo Films can hurt ester’s growth prospects.
(I don’t see any other major risk factor apart from the ones
mentioned above, there are innumerable uncertainties but our
focus should be on the ones that could be easily known, If you
think I have missed something, I would welcome hearing from
you)
 (3) Financial Statements and Valuation
In this section, I will provide a basic overview and financial
summary of the company. I will also provide key ratios used to
measure performance and at the end, I will value this company.
I will review the financials for the year FY19-20. The quarterly
reports for this year (FY20-21) are available but the full annual
report is not published yet.
THE BALANCE SHEET: (as of 31 March, 2020) [INR]
The company has 691 Cr worth of assets with 408 Cr in equity.
The balance sheet is really strong given that the total
borrowings are at 131 Cr only. The inventories at 110Cr makes
15% of the total assets. The company has .23Cr in cash and 15.8
Cr in bank balance out of which 15.7Cr are subject to lien of
lending banks for securing letter of credit and bank guarantee
facilities sanctioned by them.
Current assets: 285Cr
Current Liabilities: 160Cr
The company has adequate working capital added with
reasonable amount of debt. The company has 8.7Cr of loan
assets. The total borrowings have significantly reduced during
the year from 228Cr to 131Cr.
THE INCOME STATEMENT:
The company had 1038Cr of revenues for this year as against
1028Cr for the last year. The NPAT (Net Profit After Tax) stood
at 99.4Cr for FY19-20 as against 31.1Cr for FY18-19. The
marginal increase in revenues and almost three times increase
in profits was because of the sale of high margin products
(mainly specialty polymers). The financing costs were also down
by 10Cr on the account of lower working capital costs (signaling
efficiency). The other line items on the P&L statement were in
proportion to the previous year except for COGS (Cost of Goods
Sold) because of better margins (as previously discussed).
THE CASH FLOW STATEMENT:
The CFFO (Cash Flow from Operations) for FY19-20 were 175Cr
as against 117Cr for FY18-19. Capital expenditures stood at
43Cr for FY19-20 and 25Cr for FY18-19.
This implies a FCF (Free Cash Flow) of 132Cr and 92Cr for FY19-
20 and FY18-19 respectively.
The company also paid 5Cr for dividends (including taxes) for
the year. At the end, the net cash position stands at 23 lakhs
(0.23 Cr).
KEY RATIOS:
GROSS MARGIN: 41.4%
OPERATING MARGIN: 15.9%
NET MARGIN: 9.64%
CURRENT RATIO: 1.78
DEBT-EQUITY RATIO: 0.69
INTEREST COVERAGE RATIO: 6.74
DEBTORS TURNOVER: 8.46
RETURN ON NET WORTH: 30.83
INVENTORY TURNOVER: 8.76

VALUATION:
The net profit for the year FY15-16 was 45 lakhs. For FY19-20, it
is at 99Cr. A huge jump. The company has announced to setup
a new plan in the city of Hyderabad which is going to contribute
to growth in earnings in the coming years. There is no doubt
that the company is going to have a significant jump in earnings
in the coming years. In its 35 years of existence, the compound
effect has started to show its power.
I will do a DCF valuation for this company.
DCF:
FCF at 132Cr as against 92Cr for the previous year and 35Cr for
the year before that (FY17-18).
I will use a growth rate of 15% for the next 5 years, 10% for the
years 6-8 and 8% for the years 9-10. Perpetual growth rate
would be 1.5% and 6% as the discount rate (current risk-free-
rate). I will deduct 50% (not 25% as mentioned because of high
growth rates) to arrive at a reasonable valuation.
Year Nominal Cash Flow Discounted Value
0 132
1 151 143
2 174 155
3 200 169
4 230 183
5 265 198
6 292 206
7 321 214
8 353 222
9 381 226
10 412 230
10 10511 5869
TOTAL: 7815
The value we get is 7815Cr. If we deduct 50%, we get 3907.5Cr.
The current market cap is 1.1K Cr only.
 (4) CONCLUSION
The stock is deeply undervalued as per my calculation. You
would feel that maybe I am missing something but that is the
psychological effect you need to fight. The market clearly does
not agree with our calculation as of now but to quote Mr.
Benjamin Graham:
“A stock investor is neither right or wrong because others
agreed or disagreed with him; he is right because his facts and
analysis are right.”
My conclusion for this stock is that it is a strong buy. I was
relatively conservative with my estimates; I also followed the
margin of safety principle by deducting half of the calculated
value. I understand the basic risks and I expect you to be
mentally prepared for it if you choose to invest in it.
NOTE: I do not know when the discrepancy between the price
and value would be fixed. The company has strong growth
prospects and the management is really good. I believe the
stock should be held for a really long time. If you expect to
make 3-4 times your money in a year with this stock, then you
are speculating.
I am not responsible for any losses you incur; I expect you to
use this analysis as a guide to investing, invest only when you
are mentally and financially ready for it.
 (5) Appendix
When to sell a stock?

This question confuses many investors. People buy in hope of

making great returns but the dilemma of when to sell confuses
a majority of individuals.
Suppose you buy a stock A at 100$ and calculated its value to
be considerably more (because intrinsic value is not precise).
Now, the stock rises 50% in a year and everyone is bullish on
the stock. Your calculations say that the intrinsic value can be
anywhere around 135-160$/share. This is a classic example in
which the investor is stuck and cannot make a decision.
Let’s say the investor decides to sell at 150$ and then the stock
rises to 200$, His loss would be 50$ or 50% of his original
investment. In the other extreme, what if the stock tumbles
down back to 100$?
In both the cases, the loss would be of the same magnitude. Is
the investor better off by booking a profit as soon as the price
reaches his intrinsic value calculation?
The correct answer is not specific, it depends. When you buy a
stock, you are buying into a business with prospects of growth.
You are supposed to write down the reason for buying, this will
help you decide when to sell.
To explain this further, I will modify the above given example.
Let’s assume that the investor’s original hypothesis was that
the stock’s current intrinsic value is 135-160$ but it has the
potential to grow 10 times in long term. This would obviously
mean that the investor is better off to hold the stock no matter
what the market does.
If the investor would’ve brought the stock with an arbitrage
strategy (To use mispriced opportunities to your advantage)
then it would be perfectly reasonable to sell at 150$ no matter
how bullish the trend may seem. The reason is that if the
investor changes his theory based on price movements, then
he/she is speculating.
Hence, an investor should always understand the reason to buy
the stock, without that, it would be speculative. The investor
could get stuck with a stock without a proper plan.

With this, I end my report on Ester Industries. In the next

section, I have provided all the references.
 (6) References

• Ester Industries: Annual report. [Online] 2020. Available

from https://www.esterindustries.com/investors/financial-
reports/annual-report
• Ester Industries: Annual report. [Online] 2019. Available
from https://www.esterindustries.com/investors/financial-
reports/annual-report
• Ester Industries: Annual report. [Online] 2016. Available
from https://www.esterindustries.com/investors/financial-
reports/annual-report
• Ester Industries: Financial results. [Online] 2021. Available
from https://www.esterindustries.com/investors/financial-
reports/quarterly-and-annual-result
• Money: Ester Industries. Company. [Online] 2021.
Available from https://www.msn.com/en-
in/money/stockdetails/analysis/nse-ester/fi-ahhpsm

(Accessed 18th June, 2021)