If a company is buying a small %age of its stocks, a open market repurchase perhaps make more sense from a time and effort perspective. Is it however, open to abuse. For example, it may be gamed and used to bail out an investor or group of investors (dont think an Infy would ever do that, but theoritically possibility exists).
On the other hand when you want to buy a larger % of outstanding stock, it makes sense to put in time and effort to do the same by tender route. It is equitable to all class of shareholders. In Cosmo’s case, for example, their FY22 standalone networth is around 1100Crores. In tender route they can do a buyback of say 250 crores (vs 100 crore in open market). Given they have 400Crores sitting in investments in shares and debentures/bonds/MF’s etc, it makes emminent sense to go whole hog, when the company has literally nothing better to do with the money and is earning decently every quarter.
The value of a company doing buyback typically goes up. It is immaterial whether it is thru tender route or open market route. The amount of buy-back is the determining factor, rather than mode. If you are doing a 1-2% buyback, generally in lieu of dividend, it won’t move the needle much. If you do a larger one, say a 5%+ range, it moves the needle significantly.
As a final point, in open market route, 20% of the buyback tax is totally wasted from a share-holders perspective. In tender route, part of it is realized by the shareholders depending upon the acquisition price.
I am personally biased towards tender route as it is transparent, more tax efficient and gives choice to shareholder whether to participate or not.
Yes. BOPET is in bad shape. BOPP too but relatively better. Q3 may see bottoming out of BOPP margins in short run. BOPET, there is lesser clarity on it.
The capacity addition of approx 40% over 3 years may not actually materialize. When industry goes thru such phases companies often delay the projects and sometimes scrap it altogether too. So there is an additional balancing mechanism which is there in the mid term 12-36 months range.
So, things may not turn out as bleak in the mid term as it seems. But definitely, difficult times ahead.
Each of the listed players have been announcing Capex and Capacity Expansions in their presentations, Investor Calls, Earnings Calls, etc. -
So are we expected to understand that these Companies did not factor in Capacity Announcements and Additions by their peers? and then suddenly from Q1 FY23 they added the Capacity of all the Peer Companies and did the math of Total Capacity Vs Total Demand and saw Over Capacity by 25-% to 30%?
That seems to be the Gist - not taking away the fact that in the last few weeks, most of these Companies are continuously making new 52 week lows
SRF results came in. Poor show from the Packaging Films business. Taking out 2 excerpts from their concall:
Our Packaging Films Business reported a revenue of INR1,203 crore in Q3 FY ’23. The business faced headwinds with several new lines getting operationalized, both in the BOPET and BOPP film segments in India and overseas. In addition, a decline in global demand, elevated energy costs in Europe, adversely impacted our Hungary operations. Surplus supply in the near term are unlikely to get corrected. But we do believe that BOPP will start to witness an improving trend going forward.
This business has a supply situation that is there in the market today, especially in BOPET. We believe that while there will be some negatives around it, we should be better off given our customer contracts, given our value-added product profile, given our R&D capability and given our position with some of our key customers. So while the industry will go through, let’s say, to a certain extent an extended lull, BOPP should still do better that BOPET
Takeways -
Packaging Films industry is in for tough time for next few quarters (“extended lull”). BOPP will be relatively better off than BOPET.
Cosmo should outperform industry being heavily concentrated in BOPP and its claim towards speciality portfolio which is by and large insulated from capacity glut.
I maintain my views that Q3 will be the bottom for Cosmo (business performance wise) and then it will move up from there. How fast? Depends upon
(a) pace of commodity margin revival to an extent
(b) whether they are able to increase their BOPP speciality sale (Q2 was down compared to Q1) and
(c) when BOPET speciality products starts selling
Q4 will see some demand revival as global intventory levels correct out and post christmas ordering begins. But I guess real pace in EBITDA growth will pick up Q1 FY24 onwards. In any case EPS will get a 3.84% boost in Q4FY23, ceteris paribus, thanks to buyback.
Cosmo should hive of pet care business and raise PE in that business separately. it has negative cash flows and dynamics are different. They have housed it Cosmo for tax benefit of negative cash flow till now… similar to what ITC did for FMCG business…
But i think now Cosmo should hive off Zigly.
IMO, they have possibly done the right thing as things stand today.
Lower VC appetite for funding
The earlier you go to VC - the more equity you give away
Interference of VC
Cosmo has literally no use of cash it already has and generates every quarter. Even the buyback they should have done double, if not max. What will they do with the cash? Already there is capacity glut - they can’t put more capacity.
If they are able to push it to 15-20 Crore monthly sales runrate by end of FY24, they can raise capital relatively cheaply and in good quantum. Hope they distribute the shares (at least partially) to shareholders in the hived-off entity, rather than keeping it all in the corporate.
And finally as you said, it saves taxes too , bsedies giving the operating team freedom to operate without bothering where the next cheque is going to come from. Start up founders spend a hell lot of time raising finances and are continually in that mode.
Bottomline for me - till Cosmo figures out what to do with Cash, it should keep investing in Zigly and ramping it up. Much more aggressively then they are doing at present. At an opportune moment, when it is ripe to be priced well in the market then hive it off.
Agree. Also hiving off also helps inM&A which is a good way to achieve scale and break even quickly.
They could possibly start the process now and complete in a few quarters.
Hope they announce positive numbers this quarter.
EBITDA margins now at 9% for Q3. Had mentioned earlier that 20% is not sustainable. Margins across BOPET/BOPP film companies have come down. Supply overhang is there.
Agree. Their EBITDA margin does not seem so superior to their competitors now that the film spreads have reduced. So wondering how specialty is helping.
Also, I thought i heard on the call that the capital so far for Zigly is 50cr - can someone confirm? I thought in the previous calls it was mentioned that capex was very small so was puzzled at this number. Has anyone been to Ziggly stores or done any scuttlebutt on Zigly? Would be interested to hear the experience.
They also seem to be getting into so many new products.
@jitenp Given your knowledge of this industry do you think the speciality films share that the management talks about are really sustainable way to improve margins ? Their target for this year also seems ambitious at 80%
80% mix of semi-specialty and specialty looks extremely difficult. The management said so in the call too. Also, my views have been clear on this specialty nomenclature. Lot of specialty becomes semi-specialty in a while, and lot semi-specialty becomes commodity in a while (maybe a year or so). Competition comes in, except in a very few products, which also don’t have big volumes. One needs to understand that business is cyclical, specialty or no-specialty.
I think that is one of the reasons company is spawning new business like pet care, etc. If it succeeds it can be a high-growth opportunity. This biz remains a high-risk bet. We will know in future whether it was good capital allocation or a diworsification. One needs to keep tracking closely.
As anticipated Q3 was poor and will be the bottom
(a) somewhat worse than expected
- inventory losses (this evens out across quarters)
- much steeper fall in speciality sale (single most negative thing in the quarter for me)
- fall in volumes higher than expected
- despite a higher other income (which I ignore in my version of EBITDA - I look at purely operational earnings)
(b) this is the rock bottom - Q4FY23 and FY24 will be better.
Silver lining - large part of the downcycle has played out itself in 2 quarters flat for BOPP, thanks to a lot of factors. Stock price also have corrected 50% from ATH. Investors can watch out for better performance from Q4 FY23 itself.
Speciality and semi speciality - Despite the poor show in Q3, I personally, still buy on to this story. Cosmo is no longer a commodity company. Its a “semi-commodity” play and likely to remain so for next few years. De-commoditization of the company is not likely over 3 years as new capacities kick in. What it essentially means is lesser variability in performance than other players.
Management Commentary (and my interpreation on it)
4.1 BOPP
margins are similar level from Q3 so far, should improve but dont have timeline - Good news, things are not likely to go further south on this account
Capacity addition - 2 lines in FY24 and 5 lines in FY25. I assume an average of 40K MTA each line. An additional 80K MT in FY24, should not cause much damage if demand holds up and we should be able to see a commodity gross margin in the range of 20’s in FY24. FY25 can again be dicey with 200MTA getting added. Hence, I assume, that BOPP won’t be likely seeing margins in 30’s and 40’s over next 2 years and more likey than not to be in range of 15-25.
Speciality sale - hit due to inventory corrections and typical lower Q3 demand globally. Balance inventory corrections likely to be over in Q4. If management commentary is serious/reliable - I would expect FY24 to have something like a 70% volume on speciality/semi speciality. For that Q4 needs to go back to 62-65% kind of levels.
Exports price realization - could improve going forward.
4.2 BOPET
margins in 10-13/kg range. With zero value add / speciality film as of now -results into EBITDA -ve territory. I think a blended margin of ~20/kg is required to go into EBITDA +ve zone. Can’t see it till Q1FY24 at least(unless margins improve), till they are able to launch speciality in BOPET and drive that to 12-15% volumes levels. Maybe be by end of FY24.
FY25 BOPET margins should correct significantly as only 2 lines are expected between now and then. Would be a much needed relief as BOPP margins are likely to be choppy in FY25.
4.3 Zigly
Run rate of 1.3 Crore with 11 stores and ~25% revenue from online.
Next year 20-25 stores likely. I will take a simple 2 stores per month (though they could change their mind and be aggressive and do 3 stores per month to reach 50 by end of FY24).
I would take a 8-10 lakh sales per store per month and another 30-40% on top of that for online. Would expect investment (incl -ve EBITDA) of approx 30-40 Crore on Zigly in FY24, if they go aggressive (as they should)
4.4 Speciality Chemicals
Not very clear. At 75% internal use - to me its basically pilot sales program at present.
Adhesives launch is perpetually delayed. Now promised for current quarter.
Can it add 20-25 Crore to EBITDA in FY24? 250-300 Crore sales with a 7-8% EBITDA margin? This should be the bare minimum expectation.
Bottomline :
A decent FY24 on cards, followed by Choppy FY25 & somewhat choppy FY26(primarily on BOPP commodity margins).
lower base effect from FY23 (3 relatively poor quarters)
Zigly ramp-up to some meaningful mass - 40-45 Cr topline and physical brand presence (&warehouses) in major metros incl Mumbai, Bangalore, Hyderabad besides NCR and Chandigarh at present. (Kolkata/Chennai?)
Relatively, improved BOPP commodity margin and further rampup of Speciality sale
Electronics Film kicks in with PLI benefits (30 crore investment - rampup of production and margins not understood at all presently. Management will hopefully provide specific commentary in May with Q4 results call)
BOPET speciality play starts and BOPET starts postive contribution to EBITDA towards H2 FY24.
Potential scale up of Speciality Chemicals to a topline of around ~300 Crore and decent EBITDA.
ve’s
higher interest costs
forex losses on loans in Euro?
BOPP 7 lines addition over next 2 years, when we already are in excess supply scenarios - is worrisome.
too much on the management plate, too soon? - from being purely BOPP B2B play, now having fingers in BOPET, Zigly, Speciality Chemicals and Electronic films across B2B and B2C?
Guess I slipped up and Q4 was acutally worse than Q3. Though at EBITDA levels it wasnt that bad given what happened to others, particularly Polyplex.
This worsens the outlook for FY24 somewhat. Moreover:
They will go slow on Zigly as they may not want to increase losses from there, given the main business is going thru an extremely rough patch (Management says the margins in commodity business are at level which is EBITDA -ve). Likely Acquisition of some online pet care company (small one) seems to point out that the store rollout will be scaled down in FY24 and more emphasis on online sales. This is corraborated from the fact that there seems to be no new store launch in last 2 months, to my knowledge.
The speciality chemical business doesnt seem to be taking off the way it was expected. Management doesnt want to add capacity immediately which means, it is performing below target.
This quarter they did not report the speciality sale for the quarter, but gave for the year. Doing a bit of calculation, it seems flat QoQ - which while not good, at least, is not bad news.
Balance Sheet and Cash remains very healthy which is heartening, and they can still fund the entire capex of 450-500 Crore for next 2 years from internal accurals, though most likely they will fund a large part thru cheap export based debt.
Bottomline, ROCE is under pressure in the short term, falling below 20%. Let’s see whether Q1 is better. Management did say that in May some marginal improvemen is there. Comparitively, the quality of business of Cosmo does seem significantly superior to Indian PFB business of competitors and I am more convinced about its transition to semi-speciality or semi-commodity business (as one may want to look at it).
Disc : invested
