Cosmo Films - Diffentiated player in commodity business

For Cosmo the commodity margin peaked in Q4 and has softened a bit. Q1 and Q2 it will not have any additional film capacities, hence I expect a sideways kind of QoQ performance. It would be great it they are able to hold on to bottomline acheived for Q4 (lower margin on commodity neutralized by additional margin from growing speciality film volumes).

Q3 & Q4 fresh capacity will come and rampup of utlization from BOPET facilty and topline should grow, but bottom line would most likely still be sideways/marginal increase. Overall I expect a ~5% bottomline improvement in FY23.

FY24-26 is when we can expect both topline and bottomline growth kicking in within a range of 15-25% CAGR.

This stock deserves a significant re-rating IMO as visibilty of margins and stickiness has improved tremendously. Management also seems to be getting aggressive and more confident by the day. If stock multiple continues to be low going into Q3, I can also think of management considering a buy-back as they have very healty cash flows and low debt situation and 3 years capex projection is not very high comparitively.

Disc : Invested. This is not a recomendation.

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Company is targeting North American market.

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Commodity Margins were lower than my expectations. Management basically expects it to remain soft for a couple of quarters before it firms up. To me it means Q2 will be lower than Q1 and Q3 might come back to Q1 level.

Speciality Chemical ramp up looking good. Don’t have clarity on when the capacity addition can materialize for that. I believe Cosmo should be driving hard on this area with ahead of time additions as capex risk is low in this business.

Zigly guidance for 15 crore is a disappointment. I was expecting a more start up kind of mentality and an aggressive rampup riding on excellent cash generation from the films business. They believe they are going fast though.

While FY23 results will be damp given commodity margin decline, Cosmo will have an opportunity to showcase its de-commoditized business model. If it sails thru well enough and BOPET plant goes onstream smoothly, then I would like to bet on two things :

  1. Buy back. - management has no good use of cash being generated @100 crore per month. Capex is strategically debt funded as export credit is cheap. Assuming 1000-1200 crore capex over next 3 years , Cosmo might need to put in 500-600 crore max. The best potential use of accumulated cash would be a maximum allowed buy back of 25% of reserves value and keeping dividend at 20% distribution rate or even lower. Q3 seems logical for this.

  2. Re-rating - likely to follow buy back completion + 1-2 quarters. The biggest challenge is market had historically always valued it in mid single digits multiple. Going to double digits will need some good set of relatively larger investors to come in potentially or a bull run in small caps.

Disc - invested. No recommendations. DYOR.

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I am quite happy that they are going slow… They are very new to this business and it is always better to play safe when you are new… They are still watching the game and I hope that they are going to give a boost when they will be confident enough to go fast…

Discl: Invested

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i am invested in the company and following it for the last 3 years now. company is trying hard to get higher valuation. de- commoditizing the business, entry in to chemicals, petcare, target 20%+ ROCE and increasing there opportunity market size are some of the few steps taken to achieve higher valuations.

In last 2 years, the company share price rally was purely because of higher margins of there comodity business (can’t say if it is due to higher share of speciality packaging) .stock price has gone up around 3x. however in last 6 months the stock price has struggled to sustain the level as the same has corrected more than 20% while there peers like ployplex and uflex and even garwaare hitech films have stayed stable. I feel this is purely because Cosmo may be fully utilized as compared to there peers who had expanded in last 2 years. everyone have witnessed fall in margins except cosmo whose profit is also coming down sequentially. hopefully we might see some rally post commercialization of BOPAT capacity.

I attended the q1 fy-23 call. long term future looks promising but difficult to understand how the short to medium term will span out because of the following reasons:-

BOPAT line- company is very optimistic about the BOPAT line as the same can offer high margins (maybe 20%+) however in short run it will be pure commodity and slowly they will move to speciality. i feel that management is very confident of fully utilizing the capacity in a short span of time and are targeting revenue of around 350 cr from BOPAT line (450cr at full utilization) by end of next FY. but since BOPAT commodity margins are under pressure now there is possibility of impacting there overall margins.

chemicals:- not much details are known on there adhesive business. The company claims that there are only 3 to 4 players. textile chemical is a large market and there are many players however company is focusing on niche areas. Although the chemical business has high asset turns (8 to 10x) and high ROCE (25%), the margins are very less ( management clamied 10 to 12%). so even if they acheive the target of 10% contribution from chemicals in the next 3 to 4 years, there profit contribution in overall group might not be that much because of lower margins. And similarly although ROCE is high in this business, the contribution in overall group ROCE will be less.

Unable to understand how can the price get re-rated from here. i think only when margins of comodity business goes down significantly and if cosmo manage to sustain the margins at the time while keep higher ROCE can see re- rating happening.

Disclosure: invested since lower levels

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Q1 demonstrated that resiliency IMO. Jun/Jul have run with commodity margins at half of earlier level (likely 20-25/kg). Wght Avg according to management for Q1 was at 35 down 20%+. Q2 will further help clarify on this point. I believe prices are simply depressed due to lower margins prevailing in the market. The moment margins correct to 35+ the same traders will be driving it up.

You have correctly articulated that Cosmo had no new capacity for last 2-3 years. Let me further add that new capacities coming in will take 1-2 years to achieve reasonable margins and 3-4 years to get to 20%+ ROCE. Zigly, ideally should be an investment case for next 3-4 years till they drive it up beyond 500cr. Speciality Chemicals won’t be a big contributor bottomline wise, unless it is driven to 1000 cr levels over 3-4 years.

Yet, I believe a re-rating is due within 4-5 quarters. Market don’t wait to see the actual results come in - it just needs to believe it will come in and that the business has insulated itself against commodity fluctuations. A buyback is a very strong signal towards that - and that is why I believe re-rating will follow buyback. And buyback will happen when margin visibility is stable and BOPET line has gone on track smoothly. I expect Q3 results will show the way.

Also management seems to be harping a lot on ROCE. Buybacks and dividend payouts are a great aid to boost ROCE and ROE. Another factor is Polyplex. If they do a buyback Cosmo will likely follow.

Let’s see how things pan out …

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From where do you track the commodity spread/margins? Can you please share. It will be really helpful. Thank you

Even I would like to. This specific margin related info was there in an interview given by the CEO today.

Any idea about Heat Control Film they are going to launch soon.
Company keeps on talking about the same in AR and recent concall.
They are doing R&D for same. Margins in these filim are great… Garware films is the listed player in the market.
Mostly these films are imported from China. Cosmo is trying to develop its own film. No further information is available. Heat control film is a niche area… if they are succeeded it may be a reason for re reating.

Discl: Invested

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3M is a premium player in heat control films. These films find applications in both building and vehicles.

Would require creation of distribution network and investing in branding to realize value. Margin will depend upon where they are able to place themselves between Garware and 3M.

The new BOPET line will have Value added assets to produce the same. Allow for a couple of years at least to start building up meaningful volumes.

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Would anyone here on this forum have data on film production capacities in Europe at aggregate level or better still by country (both BOPP and BOPET)? I believe Europe production is going to hit dramatically over next 2 quarters (owing to power issues - availability and cost) and it will fill shortfall from exports. Should lead to very robust margins despite capacity additions which has caused current lower margins.

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The company plans to open 150 stores of its pet care business “ZIGLY” in the next five years (6 of which have already opened) and also looking to expand it globally in the next three to five years.

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13x compared to what? One year back it started the journey. You start at 0. No matter where you end up at the end of a measurement period starting from 0, you can’t ascribe a multiple. Extremely poor reporting.

Zigly has many ingredients to be a fantastic business. Booming sector, people spending lavishly on pets, low and unorganized competition and above all timing is perfect - given present climate VC funded cash burning will be subdued so less likelihood of 5 startups turning up and handed cheques of 100 crore.

Website is decent. Merchandising, store layout all seems nice from the photos and videos. Team seem to have started well, though a bit too slow IMO. They should be upping the ante and using cash from Films to rollout faster and create a mass and cement first mover advantage. I would have liked them to achieve monthly revenue of 5 crore+ by Mar23. They seem likely to hit around 3+, given 60lakhs turnover in July.

If played well (incl slightly more aggressiveness) , Zigly has potential to command valuation equal to present Cosmo valuation in 3-4 years time, if they hit 500crore+ topline and are profitable. I believe there is a decent chance of that happening.

Disc : Invested and very impressed by Zigly play.

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Over this week Promoter has done three purchases. Small quantity only (23K). Maybe signalling to market that share is grossly undervalued ?

I hope this open market purchase doesn’t take away the option of doing the buyback around Q3 as I expected. May I add further to the wish - a max buyback of 25% on tender mode, with promoter not participating or participating partiality at a rate of approx 1200-1300. Great opportunity for promoter to shore up his holding.

On a different note, a good part of Cosmo’s loans are in Euro and most exports are in USD. Sounds like the possibility of a double bonanza.

Let’s see.

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6 stores are now operational in NCR. 5 delhi and 1 Gurgaon.

  • FY23 projection at 15 stores.
  • when will they hit other geographies? NCR can potentially accommodate 15.

Rollout still slow for my liking. Few other companies are funded and working in this area. VC’s scale up funding very fast if things are going well. The current adverse climate for funding, however, does give additional breathing space.

Promoter + ESOP trust bought 10k shares today and yesterday.

  1. Commodity margin to be around Rs.30 level per kg in Q2. This is good as it is stable now at this level per Pankaj Poddar interview.

  2. BOPET plant is live now. Next quarter we can see topline growth on both YoY basis and QoQ basis.

  3. This quarter EPS will likely be subdued due to
    a. Slightly lower commodity margin (~3% overall impact)
    b. depreciation and interest for new plant
    c. inventory losses as raw material prices have corrected this quarter. (Another 3% maybe)
    d. Zigly losses as it has started scaling up. I would expect Zigly to be EBITDA -ve till FY24. (1%?)

How much these will be offset by higher speciality film volume (2%?) and higher sales in speciality chemicals is to be seen(1%?). Net net I expect a fall QoQ basis. (~5%). Q3 not likely to be impacted by 3a and 3c. And we should be able to see some contribution from new BOPET line.

  1. Promoter purchase is surprising. Does it any way inhibit ability to do buy-back? Doing a buy back in next 2 quarters will be a smart move. If this hampers ability to do it - it will be pity. Given Euro weakness are they retiring some debt early? Maybe that.

  2. The price is nearly 40% off ATH. All these are factored in and more IMO.

Note : Invested. No reco. DYOR.

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