Company Name – Cosmo Films Ltd (Cosmo Films) Current Share Price – INR 1,035 (June 28, 2022) Market Cap – INR 2,821 cr |
1. What is interesting about the stock?
COVID-19 came in March 2020 and life as we know got disrupted with lockdowns and masks. Business cycles were also impacted. It was not all gloom and doom for many sectors including Chemicals and Films, which got benefited due to disruption in demand-supply leading to higher margins and return ratios (ROE/ROCE).
Cosmo Films is one such specialty film manufacturer. The business was started in 1981 by Mr. Ashok Jaipuria. Cosmo Films is amongst the top four players in Biaxially Oriented Poly Propylene Films (BOPP), specialty films for packaging, lamination, labeling, and industrial applications. The company’s sales from specialty films stand at 63% by volume in FY22 and 70% by value. Caveat - We are using the specialty term in the “loose” sense as it is a commodity business (explained later).
BOPP is a film that has been stretched both mechanically and also in manually using cross direction technique. Due to its benefits, BOPP film has become one of the most popular and highly demanded films across the world. One of the use cases of the film is to put on the packaging of food product packets.
The manufacturing footprint of the Company is:
The product portfolio of the Company is:
The revenue mix based on the product portfolio is:
Cosmo Films derives 46% of its revenue from exports.
Key attributes of the BOPP business are:
BOPP is made using crude oil derivatives and the price of basic raw materials is pass-through. So, the revenue of the Company is highly co-related to the global crude oil pricing
Value add = Variable Cost of Manufacturing (typically INR 15-20 per kg) + Gross margin per kg
Gross margin of the Company varies based on the demand-supply situation in the global BOPP market. Business goes through the cycle when the tight demand-supply situation leads to a high gross margin which leads to an increase in capacity by industry players. This increase in capacity leads to supply ahead of demand and a fall in prices. The typical business cycle in the manufacturing industry. In the past management has said that the normalized gross margins in the industry are ~ INR 20 per kg. Gross margin per kg and corresponding EBITDA margin are:
With the profits and cash flow booming, the Company is looking to enter into new business lines like:
Specialized BOPET - Shrink labels, Heat reduction films. Other key players in India are Uflex, Polyplex, Jindal, Garware, SRF, Chiripal, Ester, and Sumilon
Specialized Chemicals – Masterbatch (concentrated mixture of pigments and additives used for imparting specific desired properties and coloring in plastic), textile chemicals, and adhesive
Pet Care – “To tap the opportunity, we have planned a structured technology savvy platform to address all needs of pets. Accordingly, the Company has launched Pet care in Q2, FY22 with simultaneous launch of website, first mobile van and its flagship stores under the brand name “Zigly” which will provide a unique value proposition to Pet Parents with Omni-channel presence.” Any consultant can question the “right to win” in the business for the Company!!
Current India BOPP production capacity is ~700,000 MT per annum with domestic consumption of ~550,000 MT per annum and the remaining being exported. Key drivers in the industry in India are:
Low penetration of packaged foods – expected to rise in future
Increase in organized retail and change in packaging from rigid to flexible
Key players in BOPP industry are:
Global – Dow Chemicals, SABIC, Tian An, Jiangsu, Treofan, Taghleef Industries
India – Uflex, Polyplex, Jindal, Cosmo Films, SRF, Chiripal
Future Prospects
The expansion plan in the films business is:
Specialized BOPET – INR 400 cr with estimated commercial production by Q2FY23
BOPP – INR 350 cr expected to start production in FY25
CPP – INR 140 cr
Other businesses:
Management is planning to scale up the Specialized Chemicals business in FY23
D2C Pet Care businesses (15-20 nos of experience centers and enhanced online business during FY23)
The Company is targeting revenue of INR 4,500 cr by FY25 implying a growth rate of 14%. My view is that it could be achieved if the oil price remains around the current levels.
Why invest in Cosmo Films?
Industry expected to grow faster than GDP growth – increase in modern trade and packaging
Strong financial position. Sustained annual cash generation of INR 400-500 cr
Focus on R&D to increase the proportion of specialty in business
2. Key Historical Financials
Revenue grew significantly in FY22 on the back of higher crude prices
EBITDA margin has expanded from 7% in FY19 to 19% in FY22 due to a higher mix of specialty chemical business and higher gross margin per kg in BOPP
Cash conversion days increased in FY21 as Company increased inventory level to avoid supply chain disruption
CFO/EBITDA has been stable at around 85-90%
ROCE/ROE jumped from 14%/16% in FY20 to 31%/39% in FY22 – management expects the normalized ROCE to be ~20%
3. What is my view on company valuation?
The share price has increased by 270% in the last 5 years vs ~60% increase in Nifty 50 so the Company has significantly outperformed the market.
Cosmo Films trades at an EV/EBITDA multiple of 5.8x vs Polyplex at 5.2x, Jindal Poly Film at 3.2x, and Uflex at 3.7x. Company is currently at P/E (TTM) multiple of 7.1x vs Polyplex at 13x, Jindal Poly Film at 3.9x, and Uflex at 3.8x. Long-term P/E (5 year) at 6.1x is also close to the current multiple.
The Company seems to be fairly valued. However, as the business is cyclical and the industry seems to be at the peak of the cycle (high BOPP gross margin and current ROCE being significantly higher than management expectations for the long term), it may be prudent to wait for the cycle to turn and invest in the next trough.
Additionally, Cosmo Films has entered into unrelated businesses like pet-care which reflect poorly on the capital allocation policies.
4. What are the risks to the investment analysis?
Risks to the analysis are:
COVID-19 disrupting the typical business cycle and creating a longer-term upcycle in the industry
Capex funded using debt could create challenges when the cycle turns
About the Author
I have over 17 years of experience in venture capital, private equity and investment banking in India and Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in Middle East, to look after investments, M&A and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB) and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.
I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).
I am an Insignificant Investor in the public market and co-founder of SocInvest.
Disclosure
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.