Cosmo Films – Diffentiated player in commodity business

Cosmo Q3 Views

1. 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.

2. 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.

3. 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.

4. 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?