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Sunday, June 24, 2018

Ester Industries: Value Added Products

Ester Industries

CMP: 48.8
MCap: 406.96cr
Sales: 824.5cr
Net Profit: 5.29cr

Customer satisfaction through Innovation, Development and Partnership
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. We take pride in offering complete solutions to our customers even for their most demanding needs. We also partner with our customers to derive a sustainable competitive advantage through customized development projects.

Ester Industries Stock has corrected from a high of 78 to 48.8 a 37% drop from its 52 week high..
and quoting close to its 5 yrs (999 days) EMA (exponential moving average) of 42.36.

As you can see the stock bounced back from its 999day EMA levels before..

The company has a pretty good cash flow from operations .. 5 yrs Avg Cash Flow from Operations is: 53.74cr (5 yrs Average!! Wow) while 5 yrs avg Net Profit is 0.33cr.. (profits seem suppressed)

If we look at the Income (Profit Loss ) statement the company has been reporting low profits consistently..

Will the low profit margin change in the future??.. I think so.

1. Company in the past few yrs has been trying to increase its Value added business where margins are better.
2. Company signed an agreement with Dupont in past few yrs to do joint development of products using Dupont ingredients.
3. Based on this agreement and Esters R&D ...Ester has developed number of new products & has filed Product & Process Patents (which have been accepted in US)
4. Shaw Industries Group Inc USA which is a Berkshire Hathaway (Warren Buffett) company and largest carpet manufacturer in the world. Shaw Industries has approved "Stain Resistant Master Batch MB-03" This will impart permanent Stain Resistance to nylon carpets  this is agreement for 90cr worth of sales (2500 tonnes) every year..

This Agreement is for sales of about 90cr.. which is like 10% of its annual sales of 800-900cr..
But I believe every carpet manufacturer would like to sell "Permanent stain resistant carpets" so I'm sure other companies(competitors) will also follow suite and purchase from Ester Industries. Stain Resistant carpets could be the norm .. rather than an exclusion... as carpets are long term purchase item and every manufacturer would prefer stain resistant carpets..

If you look at the March quarterly & year end data.. Q4 Quarterly Profits are 5.42cr and Full year end Net Profit is: 5.58cr... Considering 5 yrs avg Operating cash flow of 50cr.. I would say reporting 25cr net Profit should not be that difficult.. with the new patents and related products sales .. I expect significant Margin improvement .. we can expect over the next few yrs that Ester can report 45-55cr net profit.. which is a 10x increase in Net profit..

there are already 4 products which are patent protected which have been accepted by customers..
with agreement with Dupont.. you can directly get acceptability and open number of doors to new clients..

There are some things of concern such as almost 15% shares in public domain are held by one company  Vettle International limited.. and these shares were issued @ rs 10 per share.. Vettle International initially had some 20% stake and has been selling some stock which could put downward pressure on stock price

Ii would say issuing 20% stake to an unknown company is not possible by promoters.. so Vettle is part of public holding .. but definitely known to the promoters indirectly.

Conclusion: Ester produces value added products using commodity petroleum products.. with agreement with Dupont and getting patent protected products in the market is a big leg up and should improve margins. Company has good cash flows and can easily report 10x increase in profit in the near future.. Stock is attractively priced and available close to its 5 yra EMA (42.36)


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paddy said...

Hello from Chennai.. this is the first interaction with you.. I followed you in MMB days around 2010.. really thrilled... GAEL was the company.. I was frustrated for the non movement for many days.. found out that integrity of the old promoters were not that great.. got out of the stock.. the rest is history.. you won.. of course promoters changed.. Now on Ester Industries very good company.. the only doubt for me is why a Savvy investor like Ashish Kacholia sold/reduced his stake?? your two cents will help.

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