15, March, Cosmo Films. Going from strenght to strenght

Transcription

1 15, March, 2016 Cosmo Films Going from strenght to strenght

2 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Initiating Coverage Recommendation BUY Snapshot: Cosmo Films is one of the lowest cost BOPP manufacturer and CMP (Rs.) Rs.257 is the fifth largest player in the world. The company manufactures packaging films, lamination films, label films and industrial films for Target Price (Rs.) Rs.400 (Upside 45.5%) various packaging applications. Stock Details BSE Code Bloomberg Code Market Cap (Rs. cr) Free Float (%) 52- wk HI/Lo (Rs) Avg. Volume (Monthly) Face Value (Rs) Dividend (%) (FY 15) Shares o/s (Crs) CFLM IN / Relative Performance 1Mth 3Mth 6Mth 1Yr CFLM IN (%) NIFTY (%) Cosmo Films Nifty INVESTMENT RATIONALE Net Profit to clock 76.8 per cent CAGR over FY15-FY18: Rise in valueadded 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 crore in FY15 to Rs 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. Shareholding Pattern as on 31 st December, 2015 Promoters Holding 43.5% FIIs 0.2% DIIs 0.9% Public & others 55.4% Manish Ostwal Sr. Research Analyst ( ) id: manish.ostwal@nirmalbang.com 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 riskreward 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. Particulars (Rs Cr) Net Sales Growth (%) EBITDA PAT EPS (Rs) P/E (x) FY' % FY'16E % FY'17E % FY'18E % P a g e

3 BUSINESS MODEL ANALYSIS Cosmo Films has a business model based on business to business (B2B) with strong presence in global and domestic market. The company caters to clients in more than 100 countries with a major presence in USA, Europe, Japan and India. With a diversified client base and complete solution to packaging sector, Cosmo has positioned uniquely to tap increased opportunities in the BOPP films industry. The company sources polypropylene (a key raw material) from domestic oil & gas companies like RIL, IOC, HPCL and imports from Middle East (10 per cent). Raw material cost is ~ 64% of operating revenues and the company doesn t get benefit of lower input cost in the P&L due to cost plus operating model. Sustainable improvement in EBITDA margin is largely dependent upon product mix strategy, better capacity utilization and efficiency in operation (like savings in power cost and automation reducing man hours etc.) Business model Raw material - Polypropylene a derivative from crude oil - Price of poly propylene is highly correlated with crude oil price Manufacturing BOPP Films (Traditional + Specialty films) Traditional films are commoditized products Specialty films command premium pricing (70% into export market) Domestic and exports are 50:50 Traditional films and specialty films contribute 65% and 35% respectively to net sales) Customer profile & base Leading global & domestic FMCG companies Leading consumer electronic / IT companies Key converters Raw material cost 64% Gross Profit margin 36% EBITDA margin 11.6% Product margin profile (on marginal cost basis) As a percentage of selling price Polypropylene Conversion cost Cost of goods sold BOPP Films Contribution Selling price Source: Nirmal Bang PCG Research Per cent 72 p.c. 11 p.c. 83 p.c. 17 p.c. 100 p.c. 3 P a g e

4 INVESTMENT RATIONALE Net Profit to clock 76.8 per cent CAGR over FY15-FY18 Cosmo Films has returned to high profitability and healthy volume zone with better demand supply equation in the BOPP films industry. The company posted very strong core operating performance with 22 per cent growth in gross profit and 105 per cent growth in EBITDA during 9MFY16. Increasing contribution from high-margin specialty films in total sales, savings in power cost (around Rs15 crore) and turnaround in US subsidiary s profitability are key drivers for improvement in profitability. We expect specialty films contribution in total sales to increase from current 35 per cent to ~ 45 per cent by March, In terms of volume growth, we expect sales volume to grow ~10 per cent CAGR over FY16-FY18. We believe upgradation of existing facilities, capacity expansion (60,000 MT, taking total capacity 1,96,000 MT), sales mix tilt with specialty films, US subsidiary s improving profitability and operational efficiency measures will drive EBITDA margin expansion and net profit growth over FY16-FY18. 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 volume growth and expansion in EBITDA margin over FY15-FY18. Strong Profitability (FY15-FY18) Rs. crore Volume to grow 10% over FY15-FY % 11.1% 11.0% % 8.0% 6.0% 4.0% 9.0% % 0.0 FY15 FY16E FY17E FY18E 0.0% FY16E FY17E FY18E EBITDA PAT 4 P a g e Source: Company, Nirmal Bang PCG Research

5 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. The company has improved core working capital as percentage of net sales from 14 per cent in FY14 to 11 per cent in FY15, aiding to operating cash flows. The company has announced a capacity expansion of 60,000 MT costing ~Rs200 crore funded by internal accrual (20 per cent) and debt (80 per cent). The company has already obtained financial closure on the project. Post the expansion, installed capacity is expected to increase to 1,96,000 MT by January We expect free cash flows to increase from Rs crore in FY15 to Rs 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. Working capital cycle Free cash Flows Core working capital / Net sales Free cash Flows (Rs in crore) 16% 14% 12% 10% 8% 6% 4% 2% 0% 14% 11% 11% 11% 11% FY14 FY15 FY16E FY17E FY18E FY14 FY15 FY16E FY17E FY18E Source: Company, Nirmal Bang PCG Research 5 P a g e

6 Attractive Industry Outlook Global BOPP demand is estimated to be ~ 72 lakh MT growing 5-6% annually with balanced demand-supply situation. Domestic BOPP Films industry has grown 12 per cent CAGR aided by strong growth in flexible packaging industry over the last five years. During FY12-13, the industry saw sharp decline in profitability due to intense pricing pressure and significant over-capacity leading to lower utilization. Cosmo Films and other players in the industry also witnessed steep decline in gross profit margin and EBITDA margin during the same period. Now, pricing, profitability and demand-supply trends have reversed in FY15-FY16. At present India s BOPP production is estimated at approx. 5 lakh MT per annum. Domestic BOPP consumption is approx. 3.5 lakh MT per annum and export from India is about 1.1 lakh MT per annum. The Indian BOPP Industry has been growing at almost double of India s GDP growth rate. Current demand-supply scenario coupled with capacity utilization shows reasonable stable trend on pricing power front. In order to benefit from attractive industry outlook, Jindal Poly and Cosmo Films are expanding BOPP capacity over the next two years by MT and MT respectively. 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. 6 P a g e

7 Operational efficiency, turnaround in US subsidiary and tax benefits from SEZ Cosmo Films is also working towards operational efficiency by cost-containment measures. The company will save power cost around Rs. 15 crore and Rs. 25 crore in FY16 and FY17 respectively due to change in power procurement from State grid to long-term power purchase agreement (PPA) from private players and lower power consumption. Upgradation of manufacturing facilities will increase automation in plant operation and reduce power consumption per unit of production. We believe that power cost-saving / automation measures along with efficient raw material procurement make Cosmo Films the lowest cost BOPP film manufacture in the world. Moreover, refinancing of existing loans at lower rates will reduce interest cost in coming years. The company has net debt of Rs. 390 crs, of which Rs. 220 crore are foreign currency loans with natural hedge in the form of exports revenues and financial hedge. The company s US subsidiary is also witnessing operational improvement on the back of new products launches, increased sales force, plugged wastage and acting as a warehouse for products manufactured in India. We believe positive earnings from US subsidiary will aid consolidated net profit growth over FY16-FY18. Notably, there was negative contribution of the US subsidiary amounting to Rs25.3 crore at normalized consolidated PAT level during Cosmo Films s Shendra plant (dedicated to export business) will claim tax exemption from FY15-16 onwards, dropping overall effective tax rate to per cent. The company is entitled to claim 100 per cent profit exemption for first five years and 50 per cent profit exemption for another five years on export business from its notified SEZ. 7 P a g e

8 We believe cost-containment measures, turnaround in US subsidiary operation and lower tax rate will also support net profit growth over the next two years. Sustained entry barrier in specialty films and no threat from China Cosmo Films enjoys significant entry barriers in specialty films segment. The company has built unique small size production lines for specialty films to offer customized and innovative product for premium consumer products. Notably, specialized films are selling 2.5x premium to traditional BOPP films, a key profitability driver over the long term. The company is one of the lowest cost manufacturer of BOPP films in the world. The difference between manufacturing BOPP films in India and China is very minimal. Moreover, import duty of 7.5 per cent along with freight cost attached to imported films makes import an unattractive option for domestic BOPP end-user industries. Hence, BOPP films imported from China will not adversely impact pricing power and supply scenario in domestic market. Competitors Major competitors are Jindal Poly ( MT), Max Films (54000 MT), Nahar Poly (30000 MT), Taghleef UAE ( MT) and Terofan ( MT). We believe fullfledged BOPP films product portfolio, lowest cost of production and diversified client base are key strengths to sustain profitability and improve market share. 8 P a g e

9 RISKS & CONCERNS Sharp volatility in raw material price Sharp fluctuation in polypropylene price may result in volatility in EBITDA margin and the company might see inventory losses. Notably, raw material cost stands at ~ 64 per cent of net sales. Delay in expansion plan Cosmo Films is expanding its capacity by MT. New capacity will start commercial production from April Any delay in new capacity may affect net sales and earnings growth in FY18. 9 P a g e

10 Apr-10 Jul-10 Oct-10 Jan-11 May-11 Aug-11 Nov-11 Mar-12 Jun-12 Sep-12 Dec-12 Apr-13 Jul-13 Oct-13 Jan-14 May-14 Aug-14 Nov-14 Mar-15 Jun-15 Sep-15 Dec-15 Initiating Coverage VALUATION AND RECOMMENDATION Cosmo Films has been delivering strong core operating performance over the last few quarters. 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 (RoCE) and Return on equity (RoE) 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. EV/EBITDA multiple band EV/EBITDA Avg Peak Bottom Source: Bloomberg, Nirmal Bang PCG Research Relative Valuation 9MFY16 CMP M Cap Net sales EBITDA EBITDA margin PAT RoE ROCE TTM PE TTM EV/EBITDA M Cap / sales Jindal Poly % Cosmo Films % Nahar Poly % Industry Average Source: ACE Equity, Nirmal Bang PCG Research 10 P a g e

11 COMPANY BACKGROUND Cosmo Flims is a leading manufacturer of BOPP films and specialty films with ~ 20 per cent market share. The company offers cost-effective innovative packaging solutions to leading FMCG and global brands. Over the years, the company expanded product portfolio to improve profitability and growth. Its products include newer products like thermal, coating and metalizing films besides the traditional BOPP films. The company has three manufacturing facilities in India and one each in Korea and USA. It caters to clients in more than 100 countries with major presence in USA, Europe, Japan and India. The company derives 50 per cent sales from export market and balance 50 per cent from domestic market. Out of export sales, 70 per cent is value-added high margin specialty films. The company reported sharp improvement in profitability with 105 per cent Y-o-Y growth in EBITDA in 9MFY16. Healthy volume growth, improving EBITDA margin and strong net earnings growth are key trends from 9MFY16 result. Product Portfolio S No Brief detail 1 Packaging Films Print and pouching films, Barrier films and Overwrap films 2 Lamination Films Dry lamination and Wet lamination 3 Label Films Pressure sensitive label films, direct thermal printable films, in-mould films and Wrap around label films 4 Industrial Films Synthetic paper and Tape and textile films Manufacturing facilities Location BOPP Thermal Coating Metalizing Waluj, Aurangabad, India 5 Lines 2 Lines 2 Lines 1 Line Karjan, Vododara, India 2 Lines 2 Lines 2 Lines 1 Line Shendra, Aurangabad, India 1 Lines 3 Lines 1 Line 1 Line Korea, Choongnam USA, Hagerstown 1 Line 1 Line Total Installed capacity TPA TPA TPA Source: Company 11 P a g e

12 Growth and Profitability Rs in crore Standalone Consolidated FY14 FY15 9MFY15 FY14 FY15 9MFY16 Net sales EBITDA PAT Normalized PAT Source: Company Management Team S. No. Name Profile 1 Mr. Ashok Jaipuria, Chairman & Managing Director 2 Mr. Pankaj Poddar, Chief Executive Officer Founder Chairman & Managing Director has more than 40 years of experience of the Corporate World. He is a Member of the Executive Committee of the FICCI, president of the Golf Foundation, a member of the Board of Governors of IIT- Patna and among the Board of Directors of DPS, Gurgaon. Mr Pankaj Poddar s career spans over a period of 20 years in finance, advisory, assurance and various leadership as well as management roles. Before joining Cosmo, Pankaj has worked with automotive & FMCG industries. His last stint was with Avon Beauty products as Director Finance. Pankaj has also worked as the India CFO for Delphi Automotive Systems, Regional Head Assurance Services for Reckitt Benckiser and Manager Advisory & Assurance Services in Ernst & Young. 3 Mr. Neeraj Jain, Chief Financial Officer 4 Mr. Satish Subramanian, Vice President - Global Sales & Marketing Source: Company presentation Mr. Neeraj has over 16 years of experience in finance, business planning and strategy, taxation and risk management. Neeraj is with the Cosmo Films from March 2013 and has worked with Havells, Aditya Birla Group and Bajaj Allianz before joining Cosmo Films. Mr. Satish has over 20 years of sales experience in B2B & B2C and has expertise in Global Account Management, Business Development, Multi-Channel Sales, Solution Selling, Strategy Development, Retail Supply Chain, Product Management and P&L Management. 12 P a g e

13 13 P a g e Financials Rs in crore FY14 FY15 FY16E FY17E FY18E Income Statement Net sales EBIDTA Other income Depreciation EBIT Interest expense Profit before tax Tax expense PAT Normalised PAT Balance sheet Equity share capital Reserve & Surplus Networth Debt Other non-current liabilities Current liabilities Total Fixed assets Other non-current assets Inventories Trade receivables Cash and bank balances Short term loans and advances Other current assets Total Cash Flow Statement Operating cash flow CAPEX Free cash flow Cash flow from investing Cash flow from financing Change in cash Opening balance Closing balance

14 FY14 FY15 FY16E FY17E FY18E Ratios Growth Net sales 16.0% 12.6% -2.5% 10.8% 11.6% EBIDTA % 91.3% 16.8% 16.0% PAT % 25.0% 21.0% EPS % 25.0% 21.0% Margins Gross profits 32.0% 30.2% 36.6% 36.9% 37.0% EBIDTA margins 7.4% 6.3% 12.4% 13.1% 13.6% EBIT 4.8% 4.5% 10.6% 11.2% 12.0% PBT -0.1% 2.3% 8.3% 9.3% 10.1% PAT -0.4% 1.7% 6.3% 7.1% 7.7% Return Ratios ROE -1.6% 7.5% 23.7% 23.8% 23.2% ROCE 7.8% 8.2% 19.0% 19.4% 19.7% Leverage Gross Debt / Equity Net Debt / Equity Net Debt / EBIDTA Efficiency Inventories days Debtors days Creditors days Working capital turnover Working capital days Per share data EPS DPS BVPS Price to earnings (x) Price to book (x) EV/EBIDTA (x) Source: Nirmal Bang PCG Research 14 P a g e

15 Disclaimer Nirmal Bang Securities Private Limited (hereinafter referred to as NBSPL )is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX stock Exchange Limited. We have been granted certificate of Registration as a Research Analyst with SEBI, Registration no. is INH for the period to NBSPL or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst. NBSPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBSPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. 15 P a g e