Cosmo Films - Diffentiated player in commodity business


(chirag jain) #1

Cosmo Films
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.
BUSINESS :
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.
INVESTMENT RATIONALE:
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


(Sarav) #2

Hi Chirag, A good write up. This looks promising. Rise or drop in raw material cost will be passed on to the customer sounds good and equally bad as well. You had mentioned that, the new line with all the new state of the art tech will reduce the cost of production per KG, do you have any numbers or percentage of reduction? And any idea on the Debt cost? Thanks!

Regards,
Sarav


#3

Chirag, Thank You for the write-up. I will add commentary from the management.

Co-orporate Presentation:

Expect strong volume growth in FY18: Cosmo Films

Expansion on-stream by Jan; FY17 EPS to top FY16: Cosmo Films


(tbhavesh) #4

An interesting article from Mudar Patherya ( Bit old though )

Story to unfold once their expansion kicks in over the next 2 quaters

Disc : Invested. This forms 5% of my portfolio.


(chirag jain) #5

(chirag jain) #6


(Saji John) #7

Thanks Chirag for the write up. Interesting pick especially since it has corrected a bit. What was the reason for the liquidation of the Netherlands unit? Since cosmo will always have low margin, cost cutting/improving efficiency is of utmost importance.
discl: I have a starter position as an opportunistic bet


(Jiten Parmar) #8

Good write-up Chirag. Cosmo Films is my largest holding. I also have a flexible laminates unit and are users of BOPP films. Cosmo Films is a class company.

We must also understand that margins will be lumpy. Recently BOPP prices were cut. There is also over-capacity in the industry (current utilization is 70%). Cosmo has value-added products where margins are a bit higher. India BOPP consumption will grow at 10-12% and ROW at 4-6%.

-Jiten Parmar


(sanjay09) #9

@chiragjain1976 nicely presented sir.

i just wanted to ask that whether arrow greentech company and cosmo films have similar product or not… i found that arrow greentech is in water soluble film, which is also used in packaging agro chmeical and many other product…
if their product are on similar page then arrow has a advantage of patents which their have in their pocket.

if you could help me out
thank you


(Ajith) #10

Finally a thread about Cosmo Films. Thanks @chiragjain1976 for initiating a thread about Cosmo Films.
I am tracking and holding Cosmo for a year now. From what I have observed, the management is honest, does walk the talk, and since Pankaj Poddar joined, the company seems to be doing all the right things. The dividend yield for last year was around 2.5%. While there is no doubt that the BOPP films consumption is going to grow in India for the next few years, I have two reservations that I closely monitor, it would be much helpful to know your view on it as well.

  • Right now there is over capacity in the industry as pointed out in one of the posts.

  • As you rightly pointed out, the cost of raw materials is passed on to the customer. So the drop in prices of crude oil (which is the main raw material for Polypropelene) will reduce the cost of raw materials and this advantage is passed on to the customer and vice versa. But in realty the company performed better when the crude is down for the past three years. This question was asked in their Q1FY17 earnings call. This was the reply from management

So there is no direct correlation with crude?.
Answer is “no”. If you really see the crude has fallen from $120 to $45 which is more than 65-70% reduction. But if you talk about polypropylene prices, the peak polypropylene prices were like $1500-1550 and it is still
sitting at $1050 as on date, which is a drop of 30-35%. But on an average what people
normally try and predict is that the change in oil price, 50% of that normally gets passed onto
polypropylene over a period but the simple reason that polypropylene is not a direct
derivative of oil. There are in between 2-3 stages before oil becomes polypropylene. So at a
broad level you can say that whatever is the percentage change in oil, polypropylene price
may change by half of it but I am not an expert on the matter.

So the falling/increasing prices of crude will definitely affect the cost of raw materials.But how well this cost is cascaded to the customer is still a gray area for me and if the company is in a position to dictate the changes in prices without losing customers as there are also other players like Jindal Poly Films in the industry.

Disc: Holding from lower levels and forms 8% of my long term portfolio.


(Kumar Saurabh) #11

If i remember arrow greentech thread on vp, the scuttlebutt of fellow investors raises lot of questions about the existence of manufacturing capability of arrow greenteck, any views on that ?
Disc : invested in cosmo approx 4 percent of portfolio


(Vijay Gattani) #12

Hi, I have recently started tracking Cosmo Films post article in RJ site about investment of Dolly Khanna in the company. Also management pedigree looks decent.

I had evaluated the financials for last 10 years from screener and going through last 2 annual reports;
Few Observations:

  1. Sales growth was about 13% CAGR for last 10 years with operating profits in the range of 15% (Mar 08) to 5%(Mar 14).
  2. Growth was funded by capacity expansions all along (which should be the case)
  3. However, Profits for the last 10 years were not sufficient to fund expansion as Capex in these years was about twice the net profits. Hence debt / equity levels are consistently in the range of 1.6x to 1.0x.
  4. ROE good in years when Crude prices are low and had fallen in years when Crude price rises.
  5. In the last AR management had hinted that Operating margins are going to be stable at current levels 11%-12% due to cost optimization initiatives undertaken. (Not sure how, as there is cost plus component for its products?)
  6. Debt is expected to go up again due to ongoing expansions, as mentioned by the management in the AR.
  7. Management is shareholder friendly as always maintained dividend payout of 25% to 30%. Last year they paid highest dividend in their history.

Based on reading so far, it appears that business is competitive, highly dependent on Crude prices for margins and growth is dependent on expansions, which always requires external sources of capital (can’t be funded by profits). Management is good aspect of this Company, that could be the reason that it trades at premium as compared to Jindal Polyfilms (Jindal have its own share of Issues).

a) Current expansion is in the differentiated product along with more efficient plant.
b) Market leader in Value added Products, Focus on increasing revenue from value added products from 50% to 60%.
c) Cost rationalization are already done, although shows management commitment and focus on cost control measures but beyond a point can’t add to margins.
Not sure how much margin expansion due to above items.

Based on above I feels its best to invest in such business when Crude prices are really very high as compared with current scenario, as high crude prices will suppress margins and business may be available at attractive valuations. In a scenario when Crude prices are set to increase, there are chances that margins may decline and consequently the share price.

Request view from others on above observations, calculations enclosed .Cosmo Films_01.xlsx (46.6 KB)

Disc: Tracking position.


(Vijay Gattani) #13

Although on trailing basis it is available at quite cheap valuations but that can rapidly change as seen in the past years. So we need to check on sustainability of margins as achieved in the last 1.5 years.or atleast how much of these margins are sustainable, irrespective of the raw material cost.


(Kumar Saurabh) #14

I too had similar feeling but there is one more point . If you look at last 2 year, part of incremental margin is attributed to 3 factors 1. Crude 2.cost control 3. Product mix .key will be to find an approximate break up of these 3 for finding true value range it deserves . I dont ve the best possible answer available but working on it


(sanjay09) #15

the manufacturing plant of arrow greentech is might be a thread, i had a word with their company secretary and i asked for plant visit. so i am waiting for their reply. but what my question was arrow greentech has 30 patents in their pocket and they have the patent related to watersoluble film which used for similar packaging what cosmo film is doing. so if their are in similar film then cosmo film have to pay royalty. which can benefit to arrow greentech?


(Jiten Parmar) #16

In addition to good performance over the years, one more point I would like to add. Consistent dividend. I’m holding this for 6 years now. Even in the year they made losses they did not skip dividend. %age of dividend of course varied.

-Jiten Parmar


(tbhavesh) #17

I agree - management is investor friendly…with their expansion going live, the company will restart on its growth trajectory for the next 2 years at minimum. They are also discussing adding new capacity even before the new plant goes live…One can hold this for long…

Dsc : Invested.


(Jiten Parmar) #18

This is a cyclical biz. U have to buy when they are making losses (which almost invariably is when crude is high). There is overcapacity in the industry. So do not expect any fireworks, but expect lumpy earnings (including current quarter, which I think can be soft).

If few remember there was a super time in 2009-10 in polyfilms stocks (BOPET manufacturers) and Polyplex and other PET manufactures made huge profits in a year. And stocks like Polyplex was 5x in 6 months.

Cosmo is a pure BOPP manufacturer. Which had slightly better time than BOPET manufactures in last couple of years.

-Jiten Parmar


(Jiten Parmar) #19

I will start a new thread on my experiences with commodity and cyclical plays.


(shikhar mundra) #20

the ebitda earned per unit of product kind of remains constant for the company. So just looking at the fluctuating margins and classifying the business as cyclical would be a bit inaccurate. The company mentions in its AR report its ability to pass on the changes in RM prices to its customers. Lets say , the price of RM goes down , so the company passes it on to the clients. This causes the EBITDA margin to look inflated as the same EBITDA is earned over a smaller sales number. Converse is also true.

Disc - Not invested