Cosmo Films Ltd Initiating Coverage Research Report By Nirmal Bang

Snapshot: 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.

INVESTMENT RATIONALE

Net Profit to clock 76.8 per cent CAGR over FY15-FY18: Rise in value added specialty films in total sales, cost containment measures and
turnaround in US subsidiary’s profitability are key drivers for
improvement in core earnings over the next two years. We expect
EBITDA margin to increase from 11.6 per cent in 9MFY16 to 13.6 per cent in FY18 on the back of increasing value-added product sales and cost efficiency. We expect Cosmo Films to clock 76.8 per cent growth in net earnings aided by double digit sales volume growth and expansion in EBITDA margin over FY15-FY18.

Lean working capital cycle, reasonable BS leverage and healthy free
cash flows: Cosmo Films has a lean working capital across business
cycles, reflecting underlying superior business operation. We expect free cash flows to increase from Rs. 96.7 crore in FY15 to Rs. 161.0 crore driven by core operational performance. The company has healthy
balance sheet with reasonable leverage (decline in net debt to equity
from 1.4x in FY14 to 1.2x in FY15). We believe lean working capital cycle, reasonable balance sheet leverage and healthy free cash flows are a rare combination in a slow industrial growth environment.

Attractive Industry Outlook: We believe 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. We think 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.
Valuation & Recommendation: Healthy volume growth, improving
margins and strong operating cash flows are key positives from recent
earnings. We believe capacity addition, expansion in EBITDA margin,
marked improvement in return ratio and strong earnings growth outlook
will re-rate the stock over the medium term. We expect Cosmo Films to
deliver 76.8 per cent CAGR in net profit aided by healthy volume growth and expansion in EBITDA margin over FY15-FY18. Return on capital employed and Return on equity will also expand to 19.7 per cent and 23.2 per cent respectively by FY18. At Rs275, the stock is trading at 4.0x FY17 EV/EBITDA and 3.0x FY18 EV / EBITDA, an attractive risk reward proposition. We have valued the company 3.9x FY18 EBITDA translating into a price target of Rs400.

We recommend a “BUY” on the stock with a price target of Rs400 over
a 9-12 months investment horizon.