Cosmo ferrites - bet on growing electronics and EV theme

Stock Opportunities Untested - but worth a good look
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Cosmo ferrites is part of cosmo group.
Jaipuria family is promoter of this company.
Company is getting good support from big brother Cosmo first (Old cosmo films)

Established in 1986, Cosmo Ferrites Limited is one of the largest manufacturer of Mn-Zn based Soft Ferrite cores used in Power Electronics Industry

There are very few companies in India in this soft ferrites core manufacturing and growing EMS and EV/renewable sector augur well for this only pure listed soft ferrite company.

Capacities :
Ferrites Powder 3,600 Tons (plan to enhance to 6,000 Tons from Q4 FY23)
Mainly used internally to produce components.

Ferrites Component (core) 2,400 Tons (plan to enhance to 3,600 Tons from Q2 FY 23)
Then plan to enhance to 3900 tons per year by adding high permeability cores.

Export 46% (mainly europe - 34%, and Rest of asia - 10%)
Domestic (India) 54%

Global soft ferrites ind is 14000 cr or so. Cosmo ferrites revenue around 140 cr.
Market share 1% right now, aims to have 5% market share in future.
If we calculate, global current capacities are around 2,30,000 ton/year.
So cosmo can scale if demand is there.

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(source: screener)
Profits and efficiencies has improved in recent time with modernization of plants.
Till 2019-20, whenever material costs hit 40%, this co went in operating loss, but now it has changed with recent results showing OPM 18-20% even when material cost is 40%.
Some difficulty in passing raw material cost is also apparent.

Recent presentation of company

Some of customers :

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Company has a division called , Alisha coils. Not mentioned in presentation or even in recent annual report. Annual report has some bifurcation of revenue mentioning coils, we can assume this is alisha division, sales of which last year just reached back to pre covid level (around 15 cr).

Risk factors:
(1) Intense competition especially from imports. HS code based data till July 2022 showing both imports and exports are growing with imports growing faster.
(2) lack of pricing power. Currently co is making 100 rs OP per kg core sold. Not sure of sustainability of the same.
(3) Change in technology and some new materials replacing Mn-Zn cores.

Views are invited.
Disc: Holding from lower levels

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As per the management, their new soft ferrite manufacturing capacity has already kicked off operations at the end of Q1, which IMO should translate to higher top and bottom line in the coming quarters. The Company has also placed order for a Top Hat Kiln to meet customers growing demand for higher permeability ferrite cores (technologically advanced ferrite cores) which is expected to start operations from FY24 and will further improve sales mix towards value add products. This appears to be high margin product.

Also promoters have been buying the shares from open market during Mar & Jun quarter.

Discl: Invested.

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had recently studied this company. few points:

  1. low margin high competition business
  2. has been making profits in past 1 year as sales have doubled - not clear how this has happened and whether it is sustainable. It could be due to some temporary imbalance in supply from international players. But not sure what is the reason.
  3. Expansion is large compared to current FA and debt funded. New product/ process.
  4. Promoter purchases are very small
  5. Price has run up from 15 in March 2021 to 400 currently. Profit booking will prevent price from increasing.

All in all it appears to be a high risk with moderate returns at best. Very high chance of price correction from here.

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yes even I am not sure of sustainability of margins as freight rates are coming down and imports are going up. Still some positive can be…

  • PLI scheme giving some benefits over imports for future capacities
  • China +1 for exports and Exports are also going up
  • Domestic manufacturing industry as a whole growing fast with help of government
  • Changed some old kiln with newer, which is helping to reduce manufacturing cost
  • USA entry
  • This is small scale company in large pond, can eat others’ share, but for that scale and perfect pricing is needed. (Business is never easy)

There are multiple negative points here.
What they are aiming, like 5% global market share, multiple capex are needed and capacities are needed to scale upto 10,000 to 12,000 tons/yr which is definitely not easy task.
Asset turn is almost 2 for this company, and to reach 5% share, it needs 200 cr odd capex over recent expansion. This needs long term support from government, otherwise cards can fall other way too.

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some good reads on the topic

Disc : Invested

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Currently 46pc Exports are happening to Europe and due to slow down in Europe, how orders will be affected ? Do you have study than pls share it
Also in past earnings were volatile only since last 3 to 4 quarters it is increasing sequentially.
Also stock has run up crazily. Who all are other competitiors world wide and hows there stocks valuation we need to study.

Also management quality needs to be checked here.

Disclaimer
Not Yet Invested Kept it in watch list

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Export for soft ferrite is stable and good till August 2022 as seen from the link below…
https://tradestat.commerce.gov.in/meidb/brc.asp?ie=e
https://tradestat.commerce.gov.in/meidb/default.asp

HS code : 85051110
Other HS codes which can be useful : 85045010 , 85049010

TDK Japan is a large soft ferrite player but it has many other businesses and can’t be compared.
I am not aware of any other listed pure play soft ferrites co.

Management - we can trust. Not found any red flag in either cosmo first or cosmo ferrites.

Yes, a bothering point is fluctuating price of final products co is making.
So how will margins swing, not sure on this.
Import prices for HS 85051110 went down significantly , but surprisingly export prices are firm and above import price in August 2022 !!! May be china +1 is playing out here. Lets observe the trend.

Thanks

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Perhaps true. In other segments i found that Mahindra CIE and Magnets and Amorphous Cores Manufacturer | MMG India Private Limited, Chennai are manufacturers of ferrite cores.

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By any chance, is there a DRHP of Cosmo Ferrites. I couldn’t find it online. Maybe that will have details about the industry structure, competition, market size and growth rates.

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Company have submitted the application to government for the imposition of anti dumping duty? Anyone with idea on how much time government generally take to check if anti-dumping should be applied?