SECURITY ANALYSIS -

ESTER INDUSTRIES (LTP: INR 144.55)

DATE – 20-10-2021
PREPARED BY: VANSH KHANUJA
CONTACT: vanshkhanuja78@gmail.com
______________________________________________
Disclaimer
I have investments that are bullish on Ester Industries. These
investments include common stocks.
This report is based upon my reading of the company’s annual
report and other public documents.
I have endeavored to distinguish clearly between facts and
opinions and tried my best to include all necessary information.
If, however, I have made any errors, or if any readers have
additional facts that I have not considered, I would welcome
hearing from you.
As to opinions expressed here, others may disagree with some
or all of them. I urge anyone interested in Ester to read its
public filings and to consult whatever other sources they deem
appropriate in order to form their own opinions on the topics
covered in this report.
This report is not intended as investment advice to anyone. 1

1 For more reports, visit my website

____________________________________________________
TABLE OF CONTENTS:
1. BUSINESS
2. FINANCIALS
3. VALUATION
____________________________________________________
1. BUSINESS -
Ester Industries is a packaging company and manufactures
Polyester chips, specialty polymers, polyester films and
engineering plastics.
The company reported INR 999 crore in revenues(total) and INR
142 crores in net profit for FY20-21. The revenues decreased y-
o-y (from INR 1030 crore) because production was affected
during the first half of FY21. The company still reported high
profit growth (FY19-20: INR 99 crore, FY20-21: 142 crore)
because of better product margins and richer product mix.
To explain it simply, the company is consistently increasing the
sales of higher margin products. The company has also formed
a subsidiary ‘Ester filmtech Limited’ and has invested INR 96.35
crore (as of 31 March, 2021) to expand BOPET film capacity. 2
This new BOPET film plant will be operational from October
2022. The company is also relocating the expansion of

2 In case you do not understand the products, read my original report on Ester available here
Engineering Plastics SBU from ‘Khatima’ to Gujrat which will
improve margins on account of better logistics.
This concludes the necessary information needed for Ester’s
business overview. I have explained the business before in my
original report on Ester. I recommend you to read that as well.
How I see Ester’s business -
Ester’s business is relatively simple and involves capital
allocation skill. For every dollar invested in the business, the
returns have been phenomenal until now. The packaging
industry is a medium growth industry and the competition is
not too extreme. There are some good competitors but Ester is
a better alternative in terms of value for money. I mentioned a
few investments the company has made (In EP SBU and BOPET)
which highlights the capital allocation skill I look for. In the long
run, I believe sales will go much higher and margins will
increase as well.
The only thing left to discuss is competitive advantage -
Well, there’s no serious advantage this company has, this
sounds frightening but I have a huge margin of safety. I
purchased Ester at an average price of INR 132.
The price was INR 138 when I uploaded the original report but
soon plunged to 120s as soon as I made the first purchase.
Those who were skeptical because of volatility in price exited
instead of averaging down. I do not recommend you to buy any
particular stock but my advice with any stock purchase is to
average down instead of looking for an exit. If you made a
decision to buy at 138, it makes no sense to fear and exit when
you receive a discount.
Continuing with the business part, I believe the experience of
the CEO and overall business setup is good enough. I will talk
more about safety that comes with price in the valuation
section.
2.FINANCIALS 3
The only concern I have for Ester is financial solvency. The non-
current borrowings stand at INR 99 crores and current
borrowings are at INR 73 crores. Although the company’s
balance sheet is strong enough to withstand adverse changes in
the packaging market but the concern is primarily about
expansion. The company should expand aggressively while
maintaining a strong balance sheet.
The income statement shows reduced direct expenses which
resulted in higher profits. My story for valuation would be
based on higher profits but lower free cash flows initially.
3.VALUATION:
The reinvestment for FY19-20 was INR 43 crore which resulted
in increased profits but decreased revenues. I will assume the
sales-capital ratio of 1 and EBIT margin of 20% (it is currently
20.36% and I expect higher margins but I’m going with 20 to be
conservative). Reinvestment for FY20-21 was INR 104.5 crore. I
3 Unlike previous reports, I am not going into details to make concise reports.
will take tax rate at 30%. Revenue growth for the first 5 years
will be 12% and 10% for the next 5. Discount rate at 6% and
perpetual growth rate at 2%.

My growth rates are in line with industry’s growth rate and

sales-capital ratio of 1 might sound too conservative to you.
The reason I’m using these low rates and numbers is margin of
safety. As mentioned earlier, the company does not have any
significant competitive advantage and so conservatism is
essential.
My DCF model for Ester is in the next page.
[If you are unaware about the DCF model and how it works, I
have made separate reports on it which are available in my
website. I have also made a separate report explaining my
investment philosophy. The DCF report can be found in the
‘Investing concepts’ section under reports and the report on my
investment philosophy can be found in the ‘Equity Analysis’
section under reports. Feel free to contact if you have any
doubts]
 THE STORY
Ester is a packaging company that will grow with the industry and maintain high margins. The
company will expand and
reinvest heavily that will result in lower Free cash Flows.
CASH FLOWS (INR in crore)
Operating
Revenues Margin Net Income Reinvestment FCF
0 999.70 20.36% 141.80 104.50 37.30
1 1119.66 20% 156.75 119.96 36.79
2 1254.02 20% 175.56 134.36 41.20
3 1404.51 20% 196.63 150.48 46.15
4 1573.05 20% 220.23 168.54 51.69
5 1761.81 20% 246.65 188.77 57.89
6 1937.99 20% 271.32 176.18 95.14
7 2131.79 20% 298.45 193.80 104.65
8 2344.97 20% 328.30 213.18 115.12
9 2579.47 20% 361.13 234.50 126.63
10 2837.42 20% 397.24 257.95 139.29
Terminal Year 3121.16 20% 436.96 283.74 153.22
THE VALUE
(In crore)
Terminal
Value 3907.1
PV (TV) 2181.7
PV(FCFs) 555.9
VALUE 2737.7
TOTAL SHARES 8.3
₹
VALUE/SHARE
328.65 Ester was trading at 143.95 at
the time of
valuation

Visit my website for more reports.