Cosmo First Limited (COSMOFIRST) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Cosmo Films Limited Q1 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Saurabh Bhave from Essential Technologies. Thank you, and over to you, sir.

Thank you, Bilal. Good afternoon, everyone. On behalf of Essential Technologies, I welcome you all to Cosmo Films Limited Q1 FY '22 earnings conference call. From the management, we have CEO, Mr. Pankaj Poddar; and CFO, Mr. Neeraj Jain. I request you all to refer to the investor presentation, which is uploaded on the website, which can throw much more light. Starting off with the statutory declarations, certain statements in this conference call may be forward-looking. These statements are based on management's current expectations and are subject to uncertainties and changes in circumstances. These statements are not guarantees of future results. Now may I request Mr. Neeraj Jain to take us through his opening remarks, subsequent to which we can open up the floor for the Q&A session. Thank you, and over to you, Neeraj.

Well, thank you, Saurabh. Very good afternoon, ladies and gentlemen. First, talking about the June 2021 quarterly financial results. The company has posted record consolidated EBITDA of INR 142 crores during the quarter. This is continuous uptick performance by the company from last 9 quarters in a row, which reaffirms that company's strategy is working in the right direction. Consolidated sales for the quarter is INR 688 crores, which is higher by 43% from June 2020 quarter. And there are a couple of factors working behind this, primarily higher specialty sales by 20%, better margins and raw material price increase, which got passed on to the customers. The EBITDA has increased to INR 142 crores during the quarter, which is 53% higher from June '20 quarter, and this was primarily on the back of 3 factors: first, higher specialty sales, which has actually grown 20% year-over-year, better operating margins. BOPP margin has been running at INR 38 per kg during June '21 quarter compared to INR 28 per kg during June '20 quarter. And the third, of course, uptick performance by the subsidiaries. Subsidiaries taken together have performed INR 22 crore of EBITDA during June '21 quarter compared to INR 1 crore in similar quarter last year. And these are largely on the back of higher sales, better margins to improved operation efficiency in subsidiaries. The enhanced EBITDA together with the reduction in consolidated effective tax rate led to increase in PAT by 85%. Even the EPS has increased by 96% higher than the PAT increase, primarily because we did buyback of shares in December 2020. Trailing 12 months EPS now is at INR 151 compared to INR 127 in FY '21. On balance sheet side, net debt to EBITDA stands at 1x and net debt to equity at 0.5x, reaffirming strong financials. Credit rating agency CRISIL has upgraded company's long-term credit rating during the quarter to AA minus and short-term credit rating has also improved to A1 plus with a stable outlook. The upgrade in credit rating reflects a strong financial profile. The company is looking for close to INR 300 crore to INR 330 crores of CapEx during FY '22. And as we discussed in the past, this will be primarily on specialized BOPET line. Value-add CapEx could further enhance the Specialty Films portfolio and specialty chemicals business. The financials are expected to remain fairly strong even after this CapEx. Of course, the bottom line impact for this CapEx will effectively come from the next year. Talking about the specialty tons, which has actually grown 18% year-on-year during last 3 years for us. And in fact, FY '21 growth rate has surpassed 20% on a larger base. June 21 quarters, the specialty sale has grown again more than 20% on a much wider base. The company's growth strategy with continuous investment in R&D, sales and marketing, employee practices, quality and customer satisfaction. As announced earlier, we have increased R&D head count to 30 numbers to further enhance company's focus on R&D. The company is enhancing its Specialty Film portfolio and have launched multiple innovative products, making the product pipeline even further stronger. Some just to name a few products, shrink label film, direct thermal printable film and few other products, which got launched during couple of last previous quarters. From a growth perspective, in coming years, we see growth coming largely from B2B segment as well as B2C segment. Here, B2B segment includes specialty film, packaging films, specialized BOPET line, which will effectively add 20% capacity in specialty chemicals. On B2C segment side, specialty chemicals, including Fabritizer and many more products have been launched and of course, Petcare. Cosmo's Specialty Chemical, 100% subsidiary of Cosmo Films during this quarter forayed into FMCG industry with the launch of a product called Fabritizer, which assures 99.9% protection against viruses and bacteria on clothes. The company's R&D has successfully completed the development of 20-plus textile chemical products, each with unique specific USPs. Some recently developed products includes low temperature soaping agent, soft fill silicon, eco clay which is environment friendly wetting agent. Many of these textile chemical products have received prestigious GOTS approval as well. And of course, customers approvals are already in process, and we expect in the coming quarters, those should also come. Just to indicate textile chemicals is more than INR 10,000 crores market in India and currently being primarily dominated by some MNC players. Progress on specialized BOPET line is broadly running as per plan, even with the significant COVID-related challenges. We are targeting complementary growth in specialized BOPET line, which includes shrink label and other high end specialty. This will partially substitute imports and is an opportunity to convert non-recyclable PVC film market in India, which is close to 30,000 metric ton currently. We are also ready for pilot launch of Petcare in quarter 2 FY '22 under the brand name Zigly, which will be a unique value proportion with omnichannel presence in an industry, which is growing more than 25% today. Progress on Petcare is running very well. The portal, resource building, brand strategy, first customer experience center in South of Delhi, technology, manufacturing tie-ups and other infrastructure are is broadly in line. We are expecting pilot launch in NCR during quarter 2. Moving to sustainability, which is our key focus area. Well, in the last couple of decades, there have been broader challenges like the dominance of climate change discussions because of extreme weather events, the need for an affirmative action of social issues and a diverse range of governance issues impacting companies across the world. All these changes are driving the sustainability agenda, across major economies of the world and emerging economies are not far behind. The sustainability evolution is immensely helpful for companies as more awareness and informed discussions can help in developing business resilience and long-term approach. It's a clear evidence that engagement with diverse shareholders for companies on sustainability issues can create more balanced outcomes. Understanding where they stand on sustainability is an exercise that help companies in identification of blind spots and then in figuring out how to address these issues. At Cosmo Films, we understand the utmost importance of sustainability and business resilience in today's business environment. We are carrying out an in-depth sustainability review and working on Cosmos sustainability report. We want to ensure that all the stakeholders in the company, such as employees, customers, suppliers, investors, analysts, stakeholders, the regulatory bodies, and of course, communities around our plants and offices benefit from the growth and we grow together. With this -- now I will close my opening remarks. Call may be opened for the questions, please.

Thank you very much, sir. Ladies and gentlemen, we will now begin question and answer session. [Operator Instructions] We have the first question from the line of Nirav Jimudia from Anvil Research.

Yes. Sir, I have 2 set of questions. Sir, if I see your 2019 numbers and compare it with 2021, our operating profit on a stand-alone basis has almost doubled, like from INR 164 crores to INR 362 crores. And even in the current quarter, if we see the run rate, we are almost at INR 450 crores run rate on a stand-alone basis. So if you can help us give us a broad understanding as how this incremental INR 200 crores from 2019 to 2021 has come across. So if you can segregate into 3 parts, like one, how increase in commodity margins. So what's the contribution of increase in the commodity margins in rupees per kilo or some quantitative figures or in percentage terms would help. Second is increase in specialty film volumes as well as launch of new products because I was just seeing one of your slides in the presentation where packaging films contribution has gone from 41% to 55% in this 2 to 3 years. So if you can segregate in terms of the benefit from this segment. And third is the cost savings. What cost savings in terms of the process innovation we have achieved in last 3 to 4 years. So if you can segregate the benefit of this INR 200 crores incremental EBITDA into these 3 broad parameters that would be helpful. So this is question number one. And my question number 2 is, sir, if I see your annual reports of last 12 years, I think cumulatively, we have invested almost INR 72 crores in R&D. So if you can segregate this R&D spend into 2 parts, like how much we have spent in terms of introducing new products and the other process innovation like reducing raw material cost and reducing the water consumption, et cetera. Yes, sir. These are 2 set of questions.

Well, thank you for your question. You see only stand-alone basis, primarily, these increases for 3 factors. One is the specialty sales which actually, as we discussed has been growing 20% year-on-year for us. And within specialty, we are able to do even better because we are slightly moving towards the high end of this opportunity. In the commodity film margin has been running well compared to the -- what it was last 2 years back. But of course, with the operational efficiency, including cost rationalization projects, which we did. I'm not sure whether we would be able to bifurcate total increase in EBITDA because of these 3 factors. But broadly, I mean, primarily these 3 factors contributed to it.

But sir, if I rank in terms of the order of benefits like A, B and C, like how much -- so if you want to rank in terms of the order of preference what comes first, second and third, that would also help sir, if you are not able to quantify?

Well we do not have frankly numbers behind this currently and considering more regulatory guidelines as well, I'm not sure whether it will be right to indicate those very specific numbers. But this much I can say that in a larger part of this would be specialty sale increase and better BOPP film margin.

Okay. Got it, sir. And sir, on the second question, if you can give some understanding.

So you see R&D in Cosmo is being done in 2 parts, broadly we look at in 2 parts, one is in collaboration with the large brands where the -- of course, the R&D expense is being shared between the brands and the Cosmo Films. The second, of course, there are a couple of products where at each point of time, I mean R&D team keeps on working on the new initiatives and these days going largely towards the sustainability products. So I think that answers your question because no -- not all R&D cost is being borne by the Cosmo Films. The kind of the initiatives which we are taking is much larger. I mean not restricted to the numbers which we've actually indicated.

[Operator Instructions] The next question is from the line of Shubham Agarwal from Aequitas.

Once again, I would like to congratulate team Cosmo for presenting such a phenomenal number. Sir, firstly, I would like to understand the difference -- so the numbers reported in our subsidiary, if you see Q-on-Q, the total turnover reported has declined from INR 66 crores to INR 40 crores. Whereas on the other hand side, the PAT reported has gone up from INR 10 crores to INR 20 crores. So if you can just help me reconcile what transpired in our subsidiary division?

Sure. I mean difference which you see between the consolidated sales and stand-alone sale is not the subsidiary sales. There are some sales which each quarter happen from the stand-alone India to overseas subsidiaries as well as the India subsidiary now, which gap is eliminated actually at the consolidated level. So when you look at the difference between these 2, it will not actually reflect the subsidiary sale. It will be the subsidiary sale net of the intra group elevation. I hope I answered your question.

Right. So basically, PAT would be the right number to see, correct? The difference INR 20 crores.

EBITDA impact.

Right. So now going ahead, given that Q-on-Q, we have grown almost by 100%. How do you think that will sustain going ahead? And what was the key reason for such a phenomenal growth?

As we discussed, I mean, the factor for the growth you are talking about the subsidiary or the consolidated?

Subsidiary

Subsidiaries, there are 2 factors, actually. A large part of this is because of higher sales, particularly in the U.S. subsidiaries, we won a couple of new contracts, and it's both only the specialized BOPP line -- BOPP films as well as our key products in the U.S. market, which is a thermal lamination film. So that part should sustain because generally, they are the long-term sales arrangements. Second is the enhanced margins. Part of the margin is sustainable, can be sustained fairly well. Part of the margin in medium to long term will not be sustainable, but will not be very large fees.

Right. Yes, that answers my question. Sir, secondly, on the -- if you can elaborate on the current trend that you're looking at in BOPP prices, you did mention that the last quarter average spread was INR 38. So are we seeing this kind of spread sustaining in the current quarter also? And how is the current demand-supply situation, given we anticipate few more lines that will get added very soon?

Well, again, I'm not sure whether it will be right on our part to forecast margins for the coming quarters. But having said so, demand level remains fairly robust and that trend continues.

All right. And sir, in your presentation, you mentioned that based on the current capacity announced in India, new capacities may not be able to address the growing Indian demand. And on the other hand side, we have not announced any BOPP line since a long while now given that we are operating at a very optimum level. So where do we see that thought process playing out going ahead? Are we looking at new capacity addition to be announced soon?

Right now any new capacity cannot come before 3.5 to 4 years because of whatever is happening due to COVID. And now these line suppliers are also supplying newer technologies for battery and other stuff. So right now, the lead time for a new line has become very long. And as far as Cosmo's evaluation, we are continuously evaluating which areas should we invest. And as of now, there is no concrete plan. However, we are certainly evaluating it.

Fair enough. And sir, coming on to the newer initiatives, so how is the response for our Fabritizer product in the market? And secondly, on the masterbatch line, where are we when it comes to the capacity utilization currently, how it is progressing?

As far as Fabritizer is concerned, let me first share with our investors that initially, we made this antifungal, viral, bacterial anti-COVID product for a B2B industry. And it was for 50 washes. I mean we were giving that you wash cloths once and for next 50 washes, the clothes will stay antiviral, bacterial and so on. So it was meant for government and protectors and so on and so forth. However, we were also working to try and address the COVID issue to the extent possible. And therefore, when we made this product, we liked it so much, we said this can become a very strong consumer product. However, the cost of the industrial product was very high, and therefore, we made another product where we gave a claim of 7 days antiviral, bacterial up to 99.9%. And the effect even goes much beyond, but it is that the efficacy reduces from 99% gradually. As far as -- so to be honest, we did not do as good a planning while we launched this as a FMCG product. We did everything with our existing team because we took in a good decision as far as this. However, since then, we have moved really fast. We have started to hire salespeople. We have started doing some marketing around it. And I'm very happy to share that within less than 2 months, we have already sold 1,500 bottles plus. And now the product will be largest available on Amazon, Flipkart. Many of the e-commerce companies have also shown their keen interest to display the product. So it will be soon available at BigBasket, Reliance portal. And very soon, we will start placing this product in the modern trade also. The first one will be modern bazar in Delhi NCR, and we are talking to a lot of other modern retail outlets. In fact, few had agreed, but given that salespeople hiring were still in the pipeline that we said we'll do it once the sales team is on board. So I think you'll have to wait for at least 3 to 4 months to do any sizable scale-up of this product. Having said that, we continue to do marketing and product awareness so that consumers do get aware. I can tell you that the response is variable because there's no other product which is similar to this. A lot of other industrial houses also have shown interest to launch it in, let's say, in other hospitals, hotels and all that. We are evaluating all those things. But I'm sure the bigger sales will start flowing from, let's say, January '22 onwards.

Okay. And on the masterbatch part?

On the masterbatch we've started selling from this quarter to the outside customers also. So month by month, our sales are going up. Sales that we did last year in 7 to 8 months because we started the line in, I think, July or August last year. And whatever sales we did from July was last year until March, the first quarter sales, we have already -- so that clearly shows that there is a growth in the masterbatches too. So I would say from a capacity utilization perspective, we are close to now 50%, 55% utilization. And hopefully, within next 3 to 6 months, we should be running with 100% utilization. And from next quarter onwards, you will start seeing some small numbers for textile chemical because the line will be commissioned in the month of August end. And from October onwards, you will see that also starting commercialization with multiple customers.

Fair enough. Sir, lastly, one data point I wanted, what is the percentage of specialty last quarter?

In value terms, it has exceeded 80%.

Sorry?

Value terms, it has exceeded 80% now.

Okay. Okay. Got it. Got it. And lastly, on the BOPET line, how are we progressing on the CapEx? And when can we expect the commercial launch?

So end of quarter 1 next financial year, and the construction has started now and end of first quarter 1 next year, we will be up and running.

[Operator Instructions] The next question is from the line of [ Vipul Shah ] from Sumangal Investment.

Congratulations sir for very good set of numbers. My question relates to new BOPET line. What is the capacity of the BOPET line and at full capacity what type of turnover we can expect per annum from this line?

So this is a multiproduct line and therefore very difficult to give you a capacity number. If we talk only purely commodity product it can do say 30,000, 35,000 tonnes actual production, more towards 35,000 tonnes, but given that multiproduct line, it will be very difficult to put any number to it. As far as the revenue is concerned, we can expect anywhwere between INR 300 to INR 350 crores.

Per annum at full capacity?

That's right. And see PAT number will also continue to go up as we keep shifting the volumes to speciality. See polyester line is not just a line, beyond this we're having lot of other assets to it. So 1, the line is very unique and special, there is no line like this in the world as of now. But we are not just limiting it to it. It has of course this several other operations that we cannot share in this call port, which will result in speciality films being made from this line.

And sir, you mentioned that INR 38 is the spread. So that is at the gross margin level, right?

That's right.

[Operator Instructions] The next question is from the line of [ Shreyas Bhandari ] an individual investor.

I just have one question. If I'm not wrong, the company has an investment of around INR 130 crores in perpetual bonds. So do you think it is the best use case scenario of that money. Maybe this amount can be used to fund company capital expenditures as an onloading mode?

You can consider it as a watch list fund. We are looking at expansion into different areas, and that is the reason you're seeing that your company has gone and invested into specialty chemicals, masterbatches, Petcare business. So we are diversifying. We are investing in film industry also. And hopefully, in the few years to come from one business, it will become a multibusiness, strong business house.

Yes, but I'm asking that if the money invested in perpetual bonds could be used elsewhere to expand the capital expenditure?

Yes, we are evaluating it, right? Till the time we decide on another capital expenditure, the idle money has to be parked somewhere, right. We not want to keep it idle and therefore has been for the time being invested into perpetual bonds. The moment we go into another investment, some of this money can be taken out of perpetual bond and invested in the capital expenditure.

Okay. And can you tell what is the rate of return on these bonds, average rate of return?

So actually, we invested at a very good time and the return is very good because not just we got the interest on the perpetual bonds, even the -- we also got the yield to maturity. That number is clearly high because now of course that the interest rates went down, and therefore, this -- other dilution profit is also there. Obviously, that will come in the books only once these bonds are redeemed into the market until then these are parked into reserves.

The next question is from the line of [ Ashish Kabra ] from [ Fairdeal Traders ].

Sir, my question is, firstly, can you give some guidance on the FY '22 and for FY '23? And sir, are there any like brownfield CapEx also that you are looking at?

We cannot disclose things as per the SEBI guidelines, so I really apologize for that. And only thing I can say is that we are tracking very well on all the businesses. In the film business our main focus is to continuously grow on the specialty. Investors are very well aware how we have been doing in last 3, 4 years on that. The Petcare business will soon be launched next quarter, it will be in front of all of you. We have done a phenomenally good job there. There consumers will be able to have lot of convenience because of this, and I'm not sure if you are aware that Petcare has been growing at phenomenally fast pace. Similarly, the textile chemicals and masterbatches are again very innovative industries, and we are happy that we're expanding in the right area.

Okay, sir. And sir, one last question. On the raw material side, sir, do you see any pressure on the prices of raw materials in future?

Yes, see raw material in plastics has kind of stabilized now. It was fluctuating a lot in the first COVID wave, but since then I would say it has reasonably stabilized for last few months.