Assured Growth - Ester Industries

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Ester Industries (EIL) is into the manufacturing of polyester films, chips and engineering plastics. This sector has witnessed the highest-ever demand  in CY10, leaving a very positive impact on the financial performance of the company. EIL has a very good growth potential going forward. The price of polyester films has gone up from USD 2 to more than USD 4.5 per kg globally. While the rising product prices have enabled the company to improve upon its fundamental strength, the icing on the cake is a dividend yield of 2.6 per cent that the stock offers at its current price.
The lower EV/EBITDA level is another factor which goes in favour of this stock recommendation. The company mainly manufactures polyester films besides which it is also into the production of engineering plastics. It also has a presence in the metallised polyester space where the film is coated with aluminium after being produced. Ester has expanded its capacity by 30,000 tonnes per annum which has doubled its overall capacity to 60,000 tonnes per annum.
The management believes that they will be able to achieve Rs 700 crore in revenues by the end of FY11 and in the first nine months of the present fiscal it has already grossed Rs 450 crore in revenues. If it can achieve another Rs 250 crore in the remaining one quarter with noteworthy net profit, the stock may witness a good run in the days to come. Polyester films find a wide range of applications and are used across many industries, for instance, bottle labels, security labels, cable insulation and also the ‘jari’ that is used in the fashion industry. Last year, a robust demand globally for its products has enabled the company to report a very healthy financial performance.
The demand has been growing at a steady pace of 6 to 8 per cent globally and India has witnessed a demand growth of more than 15 per cent in this segment. On the financial front, the company has performed well for both 9MFY11 and Q3FY11 on a YoY basis. The topline witnessed a growth of 62.47 per cent on a YoY basis at Rs 456.18 crore for 9MFY11 as against Rs 280 crore during the same period last year. The bottomline too has witnessed a stellar growth for the same period with the net profit jumping four-fold to Rs 98.25 crore as against Rs 19.97 crore for 9MFY11.
The employee cost has been rising significantly with the company having to make some ex-gratia payments to its employees due to better performance while the interest cost is high due to the term loan which has been charged to the profit and loss account. This term loan was taken for the polyester chips plant that was commissioned in November 2010. On the valuation front, the company discounts its trailing 12-month earnings by 2.34 times. The EV/EBITDA stands at 4.54 times and the return on equity stands at 18.23 per cent. The other parameters that need to be highlighted are that the company has a very low debt to equity ratio of 0.35 times and the dividend yield stands at 2.6 per cent. We believe that going forward the company can be an ideal candidate to find a place in one’s portfolio with an expected return of 20 – 25 per cent from the present levels in one year.