CMP : 330 Promoter holding : 43.51%
Martket Cap : 650 crores FII and DII : 5.08%
Industry : Packaging industry Public : 49.99%
Company Overview :
Founded by Mr. Ashok Jaipuria in 1981, Cosmo films is the 5th largest and one of the lowest cost manufacturer of Biaxially Oriented Polypropylene ( BOPP ) films globally. It is also India’s largest BOPP film exporter.
Cosmo offers comprehensive range of BOPP films for flexible packaging,lamination,labelling and industrial applications including films such as high barrier films, velvet thermal lamination films and direct thermal printable films
Basically BOPP film space is a commodity films----low margin business which manufactures tape,textile and packaging films,
While in speciality films space it manufactures thermal films, wet laminations, synthetic paper, high barrier films and coated films which finds applications in packaging sector.
Cosmo films enjoys 20% market share in the BOPP film space and 2/3rd market share in speciality films space.
Company has 3 plants in india ( 2 in Maharashtra and 1 in Gujarat ) and 2 international plants ( 1 in korea and 1 in USA )
Cosmo films exports in 80 countries. It’s customer base includes leading global flexible packaging and label face stock manufactures like Amcor, Constantia, Huntamaki, Avery Dennison etc.
It service brands like Pepsico, CocaCola, Unilever, P&G,CP, ReckittBenckiser,Nestle,Mars etc.
It also has extensive network of channel partner across the world for dustrubution of its range of lamination films.
Cosmo is the B2B supplier of the BOPP films as well as the speciality films which find application in flexible packaging, FMCG and other industrial sectors. Exports contributes 50% of the topline. On product mix both traditional and speciality films contribute 50:50 to the topline.
Raw material accounts for 64-68% of the cost of production. Key raw material is polypropylene which is the two step down derivative of the crude oil. It Sources it’s raw material from RIL, HPCL,OIL and also marginally imports.
Company works on cost plus model and thus does not benefit from the lower input cost and has to transfer the benefit to the customer.
Growth drivers : Capacity expansion of 44% to drive volume growth for next two years.
Profitability drivers: Increase in value added products from 50% to 60% over next two years. New upcoming facility is more efficient. and ( said to be having lowest costing in the world )
Valuation: Stock trades at attractive valuation.
Strengths & sustainability of the business model–The company has a simplistic business model and is well placed to take up the opportunities thrown open in BOPP films pace over the next few years As a B2B vendor to a renowned set of clients globally, the company has a vision of becoming the most preferred supplier by 2020.So in this space of a ‘commoditiesed’ business model like Cosmo Films for 3 keyreasons.
1)The company has built-invarious value-drivers into its business model and is investing in R&D capabilities inabid to drive profitable growth. ;
2) the company enjoys leadership position in the value added filmsegment
3) the company’s initiatives to leverage on superior technology and focus on costsaving sto create further value. The company’s business sustainability going into the future stands on these 3pillars of strength.
Capacity addition to drive profitability growth
The company is in the process of expanding capacity at its Vadodra Plant. The company is adding a new line of 60,000MT of BOPP films & another line of 7,200MT of metalizer films .This expansion entails a capex of~ 200crs .The capex will be funded through a mix of 80:20 debt to internal accruals. This expansion will boost total capacity of BOPPfilms by ~44% taking total capacity of BOPPfilms to 196,000MT. While for the metalizer films this expansion will boost capacity by~48% taking total capacity to22,200MT. The expanded capacities are expected to be commissioned by the end of FY17. Meaningful ramp up of these capacities is expected during the course of FY18. At peak capacity utilisation the newline can add~500crs.to the topline.The newline being added is of state of the art technology which will enable the company to reduce cost of production per kg for it films and hence boost profitability. The newline has an extended width of 10.4mtrs.vs.the maximum width of 8.7mtrs available in India. This feature of the newline will enable the company to reduce wastage a swellas power consumption during production. The company expects the newline to consume30% lesspower vs. its average consumption on existinglines. We believe the newline will help add to the profitable growth of the company for next two years.
Value added Films contribution to increase further:
The current contribution of the value added films is 50:50 in terms of value and 60:40 in terms to volume. The margins of the value added product is 1.7-1.8x of the traditional products.The company enjoys 80% market share in the labels and 75% market share in lamination films.It is the global leader in the thermal coated films worldwide with 15% market share. The company operates at 60% utilization level and does not intend to increase the capacity in near future ( apart from the current expansion ). The company intends to increase the share of the value added product to 60% of sales by next two years.
Investing in R&D to find new business opportunities:
With the collective R&D experience of over 100 person years the company is well ahead of its peers in innovation cycle. It was first in the thermal lamination films and first BOPP player to do direct film coating. Company is spending 0.4% of sales on R&D. The company is also starting two new R&D lab to drive innovation.
Cost saving, product mix and operational efficiency to drive profitability:
Cosmo films expanded its margins from 6.3% to 11.8% on account of increase throughput, improved product mix and power cost. The company saved 25 crores in various initiatives for power cost and has implemented the same in 2 out of 3 plants and plans to implement the same in the third plant. The company use to procure power from the state grid and now have replaced it with long term PPA’s with the private players. The commissioning of the new line will further enable the company to achieve the economy of scale and can further improve margins by 100 -120 bps.
Turnaround of US Subsidiary:
The US subsidiary suffered a loss of $5m in FY15 has been down to $2.5m in FY16. The company targets to turn EBITA positive by FY17.
Healthy Demand Growth & increased penetration for BOPP films:
BOPP films has better barrier properties and environment friendly. India’s packaged industry is the key growth driver for BOPP films as superior packaging increases the shelf life of the product. BOPP films will witness the growth of 12 -15% CAGR over the next decade.
Disclosure : Invested