Cosmo Films Limited BSE Id: 508814 NSE Code: COSMOFILMS

CMP (BSE) : Rs. 162.50

CMP (NSE) : Rs. 162.55

Industry : Packaging

Cosmo Films Limited (CFL) promoted by Mr. Ashok Jaipuria in 1981, is one of the global leading manufacturers of Bi-axially Oriented Polypropylene Films (BOPP). Since inception CFL has maintained market leadership in both the domestic and export market. CFL has an annual capacity of 96000 MTPA spread between its two plants located at Aurangabad in Maharashtra and Vadodara in Gujarat.

CFL is also India's largest producer of thermal lamination films, which is mainly exported to Western countries. CFL also had 22000 MTPA capacity of thermal lamination films. In addition to this they have even set up a captive power plant of 8 MW to ensure uninterrupted power supply. In addition to this CFL is also planning to set up a new BOPP line of 35000 MTPA that is proposed to be commissioned in 2011-2012.

CFL's acquisition:

In order to strengthen its position in thermal lamination film segment, CFL acquired GBC's Commercial Print Finishing Business from ACCO Brands corporation of USA at a throw away price for almost $ 17.1 million. This business has manufacturing facilities in US, Netherlands and South Korea. This acquisition made CFL the largest producer of thermal films in the world. This acquisition also helped CFL strengthen its presence in the global markets including the key markets of Europe and USA.

Industry Analysis:

The demand for packaging film is growing strongly at around 8% globally and over 16% in India. To cater to the demand, CFL has expanded its capacity at a cumulative growth rate (CAGR) of 7.4% over the last 5 years., with nearly 12800 TPA capacity added in FY09.

(1) BOPP Films: They are a part of the flexible packaging industry and has emerged as one of the most popular high growth films in the world. Lower costs and convenience has added to the growth of BOPP in the last few years. Moreover, the growth in demand has been substantial both in developed as well as emerging markets on account of its recyclable nature and applications in a variety of non-food and food products. BOPP films is used in various markets such as food industry, tapes/adhesives, tobacco, certain industrial products, etc.

The worldwide demand for BOPP films has been increasing since 2002. The global BOPP film industry has expanded by 72%. Geographically, Asia is the largest market for BOPP followed by Europe and USA. In the last few years, the emerging economies have witnessed an improved standard of living, urbanization and increased per capita consumption, and this has all led to an increase in the demand for BOPP films. Although the BOPP industry has continued to witness growth, it continues to be plagued by the problem of overcapacity as well as raw material prices, particularly PP resins.

(2) Thermal Lamination Films: The demand for thermal lamination films where CFL is now a global leader is expected to grow rapidly as the traditional solvent based lamination is environment unfriendly. At the same time, the scenario on the raw material front is likely to be comfortable due to expected oversupply conditions in polymer industry with new plants coming up in Middle East and China.

Risk Factors:

• The capacity additions in the industry are far excess as compared to the increase in the demand.
• CFL is unable to completely pass on the unpredictable increase in raw materials costs due to competitive pressure which may affect its operating margins adversely.

However in order to mitigate its risks CFL's diversified product range, customer base, continuous emphasis on cost reduction, product innovation, etc came to its rescue to gain an edge over its competitors.

CFL has an equity base of just 19.44 crores. Its sales are almost double of its current market capitalization keeping in well within the attractive zone. It is quoting at almost its book value, at 1.08 times its book value. It is quoting at a PE of 6.45 in an industry where the average PE is 8.49. Its earnings for FY10 was Rs. 23.57. Comparing the half year earnings of FY11 to FY10 earnings, they stand at Rs. 13.11, which can be considered good. With the company completing its 35000 MTPA BOPP film expansion, I expect even more earnings which will put CFL in a growth trajectory. It is a regular dividend paying company. It paid a dividend of Rs.5 per share for FY10 which brings its dividend yield at 3.08% at the current market price, which is very good.

It has shown a consistent growth in its sales as well as its earnings over the past 5 years, which is very impressive. Along with its growth in sales, its debt has also increased over the years mainly to finance its expansion and acquisition plans. But since its major acquisition and capacity expansions are done (except the 35000 TPA BOPP expansion), there would be more cash flows from the increased and the newly acquired capacities and this will eventually lead to repayment of the debt. Thus it will eventually put CFL in a comfortable position and will lead to even more earnings for its shareholders. Even with the additional debt raised, its debt equity ratio stands at 0.9 which is well within the comfortable zone. Its earnings are able to cover its interest almost 5 times, which puts CFL well within the safety zone.

CFL looks very attractive for long term investment based on its post expansion earnings prospects. The supply in this industry is more than the demand, but looking at CFL's widespread reach it seems in a very good position. CFL is also a company that has been present in both domestic as well as export market since its inception. Thus I am very optimistic about this company and think it will turn out to be a very good long term investment. Buying at current levels and on dips would be good.

Happy Investing