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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