Scrip Code: 508814 / COSMOFILMS

CMP: Rs. 382.70; Market Cap: Rs. 743.97 Cr; 52 Week High/Low: Rs. 411.40 / Rs. 176.85

Total Shares: 1,94.40,076 shares; Promoters : 84,58,439 shares – 43.51 %; Total Public holding : 1,07,05,241 shares – 55.07 %; Book Value: Rs. 234.01; Face Value: Rs. 10.00; EPS: Rs. 49.61; Dividend: 100.00 % ; P/E: 7.71 times; Ind. P/E: 6.95; EV/EBITDA: 11.67 times. Total Debt: Rs. 422.39 Cr; Enterprise Value: Rs. 1,141.57 Cr.

COSMO FILMS LTD: The Company was incorporated on October 7, 1976 and based in New Delhi. Cosmo Films Limited is a manufacturer of semi-finished products of plastics. The Company is engaged in the manufacturing of bi-axially oriented polypropylene films (BOPP) and thermal films. The company came with an IPO in 1980 with an offer of 4,41,000 equity shares of Rs. 10 each at par. The company gave bonus in March 2003 in ratio of 1:1, and has not given any Split in face value of its shares. COSMO FILMS operates through two segments: Packaging Films and Others (Equipments and Parts). Their geographic segments include India and outside India. Its product portfolio consists of packaging films, including print and pouching films, barrier films and overwrap films; lamination films, including dry (thermal) lamination films and wet (print) lamination films; label films, including pressure sensitive label stock films, direct thermal printable films and wrap around label films, and industrial films, including synthetic paper, and tape and textile films. The Company has manufacturing facilities spread across India, the United States and Korea. It has a manufacturing capacity of over 136,000 metric ton per annum of BOPP films, approximately 40,000 metric ton per annum of thermal lamination films. COSMO FILMS Ltd is locally compared with Xpro India Ltd, Uflex Ltd, Fenoplast Ltd, Caprihans India Ltd, Glory Films Ltd, Essel Propack Ltd, Huhtamaki PPL Ltd, Jhaveri Flexo Industries. Globally compared with Avery Dennison Corporation of USA, Ball Corporation of USA, Berry Plastics Group Inc of USA, Crown Holdings Inc of USA, Packaging Corporation of America of USA, Seal Air Corporation of USA, British Polythene Industries PLC of UK, Huhtamaki Oyji of Finland, Smurfit Kappa Group Plc of Ireland, Vetropack Holding AG of Switzerland, Polyplex (Thailand) Public Company Ltd of Thailand, The Pack Corporation of Japan, Lock & Lock Co., Ltd of South Korea, Greatview Aseptic Packaging Company Ltd of China, CPMC Holding Ltd of Hong Kong, Mpact Ltd of South Africa, Nampak Ltd of South Africa.

Investment Rationale:

Cosmo Films Ltd, established in 1981, today is one of the global leaders and manufacturers of Biaxially Oriented Polypropylene (BOPP) films used for packaging, labels and lamination applications. The company is the largest exporter of BOPP films from India and is also the largest producer of thermal lamination films in the world with plant cum distribution centres in India, Japan, Korea & the U.S along with global channel partners in more than fifty countries. Cosmo Films, being a professionally managed Public Limited Company has a strong presence in flexible packaging films. In speciality films segment beside thermal films, wet lamination, synthetic paper, high barrier films, coated films are key products. Cosmo is the largest producer of thermal lamination films in the world. In commodity, Cosmo manufactures tape and textile films as well as packaging films. Within the packaging segment, company manufactures films such as heat sealable, plain, metallized, opaque films as well as speciality films such as stable slip film, low SIT films, high hot tack films, low COF films and extrusion coat able metallized films. In labels Cosmo has almost a complete range of films for wrap-around, in-mould and self-adhesive applications in transparent, metallized and opaque which can work with almost all kinds of printing inks. Company’s products are popular in domestic and overseas markets. Cosmo is the only company acting as a one-stop shop for laminating solutions i.e. the films and the laminating equipments. In India with economic growth and rising personal disposable income which are the growth drivers for the consumer goods sector, in turn improves the demand for packaging. The Packaging industry is expected to grow around 10-12 % CAGR in the medium term. With Growing rural demand, retail push, planned investments by large MNCs in the FMCG business and with the strong fundamentals of the Indian economy, will boost the growth in FMCG and this will consequently boost the growth for packaging. As per Indian Brand Equity Federation (IBEF), FMCG industry in India is expected to grow at a CAGR of 14.7 % between 2012 and 2020, which will also help the growth of the packaging industry. With the increasing penetration in the rural and semi-urban areas along with the Government initiatives to boost the rural infrastructure is likely to improve the demand for FMCG products, thus in turn would indirectly will benefit the specialized flexible packaging players like Cosmo Films, who offers value addition in the form of both product specific like high speeds on product filling lines, insulation from heat & moisture, high strength for supporting long distance transportation, holographic images etc. & custom designed packaging solutions like brand image protection, protection from counterfeit and cost effectiveness. The management has indicated that certain trends like - use of plastic tubes instead of metal tubes and PET bottles instead of glass bottles would drive its addressable markets. Recent trend of using pouches instead of rigid packs for hair/edible oils would expand its market size further. There is expected to be a strong growth in packaged food industry, change in pack format from rigid packaging to flexible packaging, balanced demand-supply scenario will keep pricing power stable over the medium term. Cosmo’s capacity expansion and product mix strategy will yield better operating performance and superior earnings growth in the industry over the next few years. Cosmo Films is one of the lowest cost BOPP manufacturer and is the fifth largest player in the world. The company manufactures packaging films, lamination films, label films and industrial films for various packaging applications. Cosmo Films has a business model based on business to business (B2B) with strong presence in global and domestic market. The company caters to clients in more than 100 countries with a major presence in USA, Europe, Japan and India. With a diversified client base and complete solution to packaging sector, Cosmo has positioned uniquely to tap increased opportunities in the BOPP films industry. The company sources polypropylene (a key raw material) from domestic oil & gas companies like RIL, IOC, HPCL and imports from Middle East (10 per cent). Raw material cost is 64 % of operating revenues and the company doesn’t get benefit of lower input cost in the P&L due to cost plus operating model. Sustainable improvement in EBITDA margin is largely dependent upon product mix strategy, better capacity utilization and efficiency in operation (like savings in power cost and automation reducing man hours etc.). Cosmo Films enjoys significant entry barriers in specialty films segment. The company has built unique small size production lines for specialty films to offer customized and innovative product for premium consumer products. Notably, specialized films are selling 2.5x premium to traditional BOPP films, a key profitability driver over the long term. The company is one of the lowest cost manufacturer of BOPP films in the world. The difference between manufacturing BOPP films in India and China is very minimal. Moreover, import duty of 7.5 % along with freight cost attached to imported films makes import an unattractive option for domestic BOPP end-user industries. Hence, BOPP films imported from China will not adversely impact pricing power and supply scenario in domestic market. COSMO FILMS being one of the leader in the industry has very strong footing and has strong cash flow which thrusts the growth for the company, and strong financials with sustained cashflow makes it attractive for long term investment.

Outlook and Valuation:

Cosmo Flims is a leading manufacturer of BOPP films and specialty films with 20 % market share. The company offers cost-effective innovative packaging solutions to leading FMCG and global brands. Over the years, the company expanded product portfolio to improve profitability and growth. Its products include newer products like thermal, coating and metalizing films besides the traditional BOPP films. The company has three manufacturing facilities in India and one each in Korea and USA. It caters to clients in more than 100 countries with major presence in USA, Europe, Japan and India. The company derives 50 % sales from export market and balance 50 % from domestic market. Out of export sales, 70 % is value-added high margin specialty films. The Global BOPP demand is estimated to be 72 lakh MT growing at 5-6 % annually with balanced demand-supply situation. Domestic BOPP Films industry has grown 12 % CAGR aided by strong growth in flexible packaging industry over the last five years. During FY12-13, the industry saw sharp decline in profitability due to intense pricing pressure and significant over-capacity leading to lower utilization. Cosmo Films and other players in the industry also witnessed steep decline in gross profit margin and EBITDA margin during the same period. Now, pricing, profitability and demand-supply trends have reversed in FY15-FY16. At present India’s BOPP production is estimated at approx. 5 lakh MT per annum. Domestic BOPP consumption is approx. 3.5 lakh MT per annum and export from India is about 1.1 lakh MT per annum. The Indian BOPP Industry has been growing at almost double of India’s GDP growth rate. Current demand-supply scenario coupled with capacity utilization shows reasonable stable trend on pricing power front. In order to benefit from attractive industry outlook, Jindal Poly and Cosmo Films are expanding BOPP capacity over the next two years by 30000 MT and 60000 MT respectively. There is a strong growth in packaged food industry, change in pack format from rigid packaging to flexible packaging, balanced demand-supply scenario will keep pricing power stable over the medium term. Cosmo’s capacity expansion and product mix strategy will yield better operating performance and superior earnings growth in the industry. Cosmo Films is also working towards operational efficiency by cost-containment measures. The company will save power cost around Rs. 15 crore and Rs. 25 crore in FY16 and FY17 respectively due to change in power procurement from State grid to long-term power purchase agreement (PPA) from private players and lower power consumption. Upgradation of manufacturing facilities will increase automation in plant operation and reduce power consumption per unit of production. We believe that power cost-saving / automation measures along with efficient raw material procurement make Cosmo Films the lowest cost BOPP film manufacture in the world. Moreover, refinancing of existing loans at lower rates will reduce interest cost in coming years. The company has net debt of Rs. 390 crs, of which Rs. 220 crore are foreign currency loans with natural hedge in the form of exports revenues and financial hedge. Its major competitors are Jindal Poly (210000 MT), Max Films (54000 MT), Nahar Poly (30000 MT), Taghleef UAE (410000 MT) and Terofan (132000 MT). We believe full-fledged BOPP films product portfolio, lowest cost of production and diversified client base are key strengths to sustain profitability and improve market share. Cosmo Films has a lean working capital across business cycles, reflecting underlying superior business operation. The company has improved core working capital as percentage of net sales from 14 % in FY14 to 11 % in FY15, aiding to operating cash flows. The company has announced a capacity expansion of 60,000 MT costing Rs.200 crore funded by internal accrual and debt. The company has already obtained financial closure on the project. Post the expansion, installed capacity is expected to increase to 1,96,000 MT by January 2017. It is expected that the free cash flows to increase driven by core operational performance. The company has healthy balance sheet with reasonable leverage like decline in net debt to equity from 1.4x in FY14 to 1.2x in FY15. The lean working capital cycle, reasonable balance sheet leverage and healthy free cash flows are a rare combination in a slow industrial growth environment and makes one of the reason of better investment candidate. At the current market price of Rs. 382.70, the stock is trading at a PE of 6.98 x FY17E and 6.10 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 54.82 in FY17E and Rs. 62.73 in FY17E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.

KEY FINANCIALS	FY15	FY16	FY17E	FY18E
SALES (₹ Crs)	1,646.78	1,620.62	1,766.47	1,943.12
NET PROFIT (₹ Cr)	27.66	96.24	106.57	121.94
EPS (₹)	14.23	49.51	54.82	62.73
PE (x)	22.76	6.54	5.91	5.16
P/BV (x)	1.65	1.38	1.12	0.93
EV/EBITDA (x)	9.30	4.78	4.22	3.74
ROE (%)	7.27	21.09	18.93	18.01
ROCE (%)	18.15	29.06	28.72	28.31

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*As the author of this blog I disclose that I do not hold COSMO FILMS LTD in my of the portfolios.

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