Cosmo First Limited (COSMOFIRST) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Investor Call of Cosmo First Limited to Discuss the Q1 FY '23 results. Today, we have with us from the management, Group Chief Executive Officer, Mr. Pankaj Poddar; and Group Chief Financial Officer, Mr. Neeraj Jain. Starting off with the statutory declaration, certain statements in the 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. [Operator Instructions] Please note that this conference is being recorded. Now may I request Mr. Neeraj Jain to take us through his opening remarks, subsequent to which we can open the floor for Q&A session. Thank you, and over to you, Mr. Neeraj.

Well, thank you. A very good afternoon, ladies and gentlemen. I'm Neeraj Jain, Group CFO at Cosmo First, joined by my colleague, Mr. Pankaj Poddar, Group CEO at Cosmo First. Our financial results for the June 2022 quarter and the Investors Presentations are available on the company's website. We will request you to look at our new Investor Presentation uploaded on company's website, in which actually we have tried to provide a comprehensive perspective on the Cosmo First. Now I will repeat, although the statutory declaration first. Certain statements in this con call may be forward-looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. These statements are not guarantees of future results. Well, now we will start the call with a brief on the performance of the company, which may be followed by the questions. First, on Flexible Packaging business; during June 2022 quarter, the flexible packaging industry experienced pressure on the margins due to commissioning of several new production lines within a short span of 3, 4 months. The bunching of capacity expansion caused actually temporary imbalance in the demand and supply scenario in the industry. BOPP film margin has been running at INR 35 per kg during June 2022 quarter compared to INR 45 per kg during March 2022 quarter. The corresponding figure for the last year June '21 quarter was INR 34 per kg. So as you can clearly see, almost INR 10 drop in the BOPP film margin. Well, our sustained efforts on specialty from last couple of years, an ongoing improvement on the top of it in terms of internal efficiency. There are the 2 key factors actually, which helped the EBITDA to post -- I mean, the higher EBITDA compared to last year similar quarter. The demand-supply balance, we feel that should get restored over the next few quarters because the domestic demand as well as the expected export demand, particularly from the Europe region is expected to restore. The domestic demand remains fairly robust in fact, because the key factors behind the domestic demand be it low packaged food penetration in India still, the rising personal disposable income, the investment in organized retail industry and change in pack format from rigid to flexible, the basic fundamental demand drivers in [ ACCO ]. In the meantime, our Specialty Film portfolio, which account for almost 65% in volume terms, which is growing quarter-to-quarter. This should enable us to hold our margins strong compared to commodity business. Moving to June '22 quarter financial results, the consolidated sales for the quarter is INR 843 crores, which is 23% higher compared to June '21 quarter. This is backed by 8% volume increase and remaining is primarily impact of higher raw material price got passed on to the customers. The EBITDA has increased to INR 150 crore during June '22 quarter, which is 6% higher compared to last year's similar quarter. The enhanced EBITDA is only primarily backed on 2 factors. First is on the higher specialty sales. The specialty sales accounted almost 68% during the June '22 quarter. And second factor, which contributed for posting better EBITDA is better export margins. Subsidiary performance has little dropped due to lower margins post raw material price increase from April 2022, and this has happened across the industry. On the top of it, there were foreign currencies like the JPY in Japan and the KRW in Korea; those were depreciating against U.S. dollar. This also contributed in a little pressure on the subsidiary margins. Our PAT for the quarter is higher by 7%, which is largely backed by the higher EBITDA. Annualized ROCE and return on equity stand at 27% and 36% respectively. And our trailing 12-month EPS has improved to INR 150 per share. These, in fact, are one of the best in the industry. The company's net debt stand at INR 359 crores at June '22 quarter, which translates to 0.6x of net-debt-to-EBITDA and 0.3x to net-debt-to-equity, confirming strong financials. Moving to Specialty Films; in Packaging business, we expect growth generally to continue with the specialty service. Our continued focus on innovating films with lower carbon footprint would further, in fact, strengthen our leadership position into specialty. The specialty film has been growing year-on-year from last more than 3 years at 18%, and the growth journey continued in quarter one as well. The company's specialty sales now stands at 68% in June 2022 quarters. We are in process of ordering several other value-add assets for further growth in the specialty sales and is looking for almost 80% volume target to come from specialty by the end of 2024. Some of the key products which will drive specialty sales growth include synthetic paper, coating films, technical films and thermal lamination. These will become future growth engines for specialty films. New products such as DTP will also contribute. The company is also soon going to launch heat control films, which will be used largely in offices and homes. We expect this launch to happen within FY '23. This will give further push to subspecialty sales. Moving to Flexible Packaging growth projects; the company is targeting to add close to 70% capacity in the next 3 years, which will add key growth engines for the coming years. As announced earlier, the capacity addition shall be in specialized BOPET line, BOPP line and CPP line. Specialized BOPET line commissioning may start from quarter 2 of FY '23 or I would say, late of quarter 2 or beginning of quarter 3 of FY '23. The line will add close to 18% to 20% capacity. The company is targeting complementary growth from a specialized BOPET line, which is shrink label and other high-end specialty. This will particularly substitute imports and is an excellent opportunity to convert non-recyclable PVC market in India, which is close to 30,000 metric ton industry. The company has placed order for the new BOPP line, which will be world's largest production capability line. And this will increase company's production capacity by close to one-third. We expect this new BOPP line to commission operations from late FY '25. The company has also announced CPP line with 25,000 metric ton capacity, which will commence commercial production in about 2 years from now. CPP film actually will promote sustainability, and it will be -- it will offer mono layered structure. So to sum up 3 capacity additions, BOPET line, BOPP line and CPP line will allow the company to further expand in specialty. Moving to Specialty Chemical Vertical, the company's subsidiary into Specialty Chemical has posted INR 47 crores sales during June '22 quarter. This is compared to INR 91 crore of sales last full year, means FY '22, it was INR 91 crores, in one quarter we did INR 47 crores. We have reached about 75% capacity utilization for Master batch first line. And now, of course, the company shall evaluate expansion of Master batch in coming quarters. Textile Chemical business, which started in the quarter 2 of FY '22 is growing quarter-on-quarter. The company has commercialized 50-plus products, which applies to 50-plus customers. The complementary adhesive for Packaging segment is planned to be launched in quarter 3 of FY '23. The Specialty Chemical operation has been PAT positive, in fact, in first year of operation itself, which is FY '22. FY '23 will be a year of scale up for these specialty chemicals. Moving to Pet care. The company's pet care vertical, which was launched under the brand name Zigly progressing in line with the plan. With Zigly, the company is targeting direct-to-consumer digital-first only channel presence in the products and services in the industry, which is growing more than 25% year-on-year. The company has already started 4 experience centers and plans to increase the sales to 15 in current financial year FY '23 and eventually to 150 experience centers in next couple of years. The company is first in Indian industry to launch app in the pet care space during the June 2022 quarter. Zigly has served more than 5,500 customers so far with 54% repeat customers. The company is targeting INR 15 crore of GMV in FY '23 to come from pet care verticals. Moving to company's CapEx plan; the company is looking for about INR 250 crores of CapEx during FY '23, which will be largely spent on value-add CapEx on the BOPET line, the CPP line and the BOPP line. The financials are expected to remain fairly strong even after this CapEx, considering robust cash generation. The bottom line impact from the CapEx will start in the coming years. Now I would like to summarize the growth summary. In coming years, B2B segment, which is specialty sales, specialized BOPET line, world's largest BOPP line and CPP line and B2C segment, which is direct-to-consumer Zigly operation and specific specialty chemicals, these together will drive the growth. Now I would like to move to corporate announcements. Considering that company's business activities now have expanded beyond films into specialty chemicals, which include, of course, the Master batches, coating, textile chemicals, direct-to-consumer, pet care and soon to launch films for consumer applications. The shareholders of the company have approved change in the name of the company from Cosmo Films Limited to Cosmo First Limited. Accordingly, the new certificate of incorporation has been obtained on 8th of July, 2022 from the Registrar of Companies, Delhi. And with this, name of the company stands changed to Cosmo First Limited. Second, corporate announcement during June '22 quarter was bonus issue, which was announced in May 2022. That was completed ahead of time in fact, and trading in bonus shares commenced from June 29, 2022. The bonus share issue, of course, reflects management's continued commitment to share prosperity with the shareholders. I think these were the few updates from the company side. Now we would like to open the con call for questions, please.

[Operator Instructions] The first question is from the line of Ravi Naredi from Naredi Investments.

Poddarji, you have done extremely well and you are doing. Sir, you said in the investor presentations, new production line opened in short span in 4 to 5 months, so many new production lines. So it will hamper margin in time to come for a long duration.

I did not understand your question.

Sir, you have mentioned in investor presentation today so many several new production lines open in short span in 4 to 5 months of other companies. So our margin is down in quarter one. So this margin will be down for longer term?

No, this should not be longer term because demand is growing at a robust pace. 65% of our sales are on specialty, where our margins are not impacted. It's only on the 35% margins are impacted, and we are consciously trying to increase the specialty sales.

Okay, okay. And second, as regard Pet care, you gave all international figure and projects, very good picture. But nowhere you gave quarter one, financial year '23 number, what are the numbers? That is my question.

We will -- we are looking whether to give segmental reporting. Legally speaking, until we reach 10%, we are not supposed to give. However, we would like to give them earlier than the statutory guidelines. And just to let you know, right now, we have reached close to $75,000 run rate of sales.

In one quarter?

In one month.

In one month, oh, very nice. And we are -- everything we are outsourcing.

Services, we are providing by our own people, while products we buy from outside, and we sell it at our stores and digitally.

Approximately INR 2 crores turnover we will get in this quarter, right? Approximately, I'm not binding you, but just.

If you go by run rate, yes.

Yes. And what is our future planning for pet care? Can you tell more about this?

Yes. So we are looking to expand it exponentially. During this quarter, we launched our app, which is the first time in India, as Neeraj said earlier. And we have launched it on Android. We are also going to launch it on iOS. We are going to test it thoroughly. And once we are done with that, we are then going to market it more aggressively. So digital ecosystem will get ready completely by December and as far as the stores are concerned, we've already opened 5 stores till now within a short span of 8, 9 months. And this year itself, we are looking to open 15 stores by March end. And next year, we would like to again experience a number of stores. There are a lot of franchise inquiries also coming, but we are not giving franchisee as of this stage because first, we want to create a brand and then only look at franchisee option.

Okay. Okay. They were very fantastic. And what will be our margin?

Our gross margins are above 40%. And so we expected to make it above 50%, given that once we have more volumes, then I'm sure it will result in better gross margins for the company.

The next question is from the line of Abhishek Maheshwari from SkyRidge Wealth Management.

Sir, a couple of questions. Regarding the realization, what kind of trend are we seeing right now?

Sorry, can you repeat the question, please?

Yes. Regarding realizations, what kind of trend are we seeing right now considering that there are recessionary kind of situations in Europe and U.S. and all?

We just clarified on the margins that.

No, realizations, just realizations.

Realization, right? Yes. So on our specialty realizations are linked to raw materials, so our margins are intact. Commodity goes as per the market. So 35% is linked to the market right now.

Okay. No, what I'm trying to ask is how do you protect your EPS saying that a lot of your sales are linked to raw material pricing. So if raw material price goes down, you will also have to pass on the benefit to the customers, right? So even if we're able to maintain margins, the absolute EPS still goes down, right? So that is I'm trying to understand what measures you are taking to protect that EPS growth.

The EPS remains protected. There is no impact to EPS because we have shared to our customers, if raw material goes up, we charge them higher. If raw material comes down, we charge lower. But that has no implication to our EPS.

But sir, absolute profit number goes down, right?

Absolute profit number also, there's no change on specialty with the raw material changes.

Okay. Okay. And secondly, sir, regarding demand, are we still seeing a robust demand from U.S. considering that even Walmart is cutting their sales [indiscernible]?

Yes, demand is very robust. It's growing at a good pace.

Okay. And thirdly, sir, regarding new BOPET facility. Have we started speaking to the customers you already have and the new customers -- taking in the supplies that will come in?

Yes, yes. So all our customers are aware that we are coming up with the polyester line, and we have tied up with many of them. So once our line is there, initially, we will get into packaging segment. But our objective is to move out from packaging and stay in the other segments and keep only some volume in Packaging segment. So we are on track with that. I mean all our innovation and research is going very strong on this.

Okay. And last question. Sir, how much revenues can you expect to come in from this new BOPET facilities at peak utilization?

At peak utilization, we expect that it will be close to INR 450 crores.

Okay. So 20% growth is still achievable for the next year on sales?

Yes, you can say that.

The next question is from the line of [ Mukesh Panjwani from Value Securities ].

Sir, my question is what kind of revenues can be generated by current capacity of master batch, chemicals and adhesives? Yes. What kind of revenue can be generated?

Yes, revenue growth, I mean, these are very large industry segments. And I mean, these are very large markets which is going to take time to scale it up in quarter one. Year-on-year basis, we have grown 3 times. And I mean, ideally speaking, with these 2, 3 sectors that we have started, we can look at reaching very sizable numbers in 4 to 5 years.

Okay. But with the current capacity, I wanted to know the current capacity we have.

Yes. Our current capacity can take us to roughly, say, INR 300 crores, INR 350 crores.

Okay. That's great. And as of now, what revenues we are getting from synthetic paper?

These are numbers we can't share. These are very specific questions. These are not available in the public domain.

Okay. And sir, one more question that when we talk about Master batch, chemicals and adhesive business, are these like commodity business or specialty business where R&D is required and it is difficult for other players to replicate.

So see, we are always picking niche areas. I mean, textile chemical in general, if you see there are close to 100 producers in India who does textile chemicals, but we are looking at very niche segments to enter with technology. Adhesives, we are going to complement with our film business. We are entering the similar segments [indiscernible] with same set of customers. And in adhesive, I would say, even more niche area because there are hardly 4, 5 players who does adhesives.

The next question is from the line of Shrinath M. from Motilal Oswal AMC.

My question was on the CapEx plans. 2 things have happened. One is there's a slight overrun. In your previous presentation, we had said that the CapEx would be about INR 890 crores. Now we are saying it is INR 940 crores. So any reason for that? I think the BOPET project is seeing INR 50 crores overhang.

See, basically, we are going for more value-added assets. And therefore, this addition is there. So there's incremental CapEx that we have committed in last one quarter.

Right. So that is one. And the second is the commercial production also seems to have been deferred a bit, like BOPP earlier we had said will commence by FY '25. Now we are saying it is H1 FY '26 and similarly.

The project will commission by FY '25. The sales number will come from FY '26.

So 6 months' time? H1 FY 2016, you said?

No, no. So it's like -- we are expecting that March '25, the line will get commissioned -- so we should start getting revenue.

Okay. So no revenue in FY '25 from BOPP?

At this stage, no, because the delivery times are too long. Since it's the supplier, and we are hoping that this can improve -- as you know worldwide there is a lot of shortage of electronics and that's part of delays. So as of now, it looks like that March '25.

The next question is from the line of Yash Shah from Investec. The next question is from the line of [ CA Garvit Goyal from Nvest Research ].

So my first question is, our target was to sell 80% of the volume of specialty segment by FY '23, but in investor presentation, you just mentioned that you will achieve by financial year '24. So can you please clarify this?

So this is actually the volume number. So 80% in volume we target to achieve by end of FY '24 but in revenue this figure we should be able to achieve in FY '23.

Okay. Right. Then in spite of our growing focus of specialty segment as our target is 80% value as you were saying in financial year '23, you continuously keep mentioning that our margins are protected because these are linked to the raw material prices. So what is the reason behind this 200 basis point fall in our operating margins as compared to Q1 FY '22?

As you see, I mean we of course every time mention that our specialty film is to a large extent protected from these up and down of industries. But our 1/3 of volume, which is the BOPP plane film, which is of course, the pricing is linked with the industry and it is prone to industry ups and down. And as we explained at the beginning of the call, there has been lot of new capacity which has hit the market in a bunched manner. So that's why there is a temporary demand-supply gap in Indian industry. So that caused a little drop in BOPP film margin.

Understood, sir. And sir, how your new segments like Masterbatch, PetCare, and specialty chemicals are performing, how much contribution do you expect from each of these segment by the end of FY '23?

See, as we try to explain specialty chemical is doing fairly well and so is the PetCare division. In specialty chemical in quarter 1, we did INR 47 crore of top line as against the last year full top line of INR 90 crore. So that's a clear indication these business is fairly, I mean taking the right direction. Now on the top of it we are going to launch now the adhesive also in the quarter 3. So that should further support the growth plan for the specialty chemicals. In the first year of operation itself, the operation is profitable at the PAT level. Coming to PetCare, as we mentioned, we -- I mean, the broader business plan which we form is moving in the right direction. We already opened 4 stores so far and we are looking to open 15 new stores during the FY '23. And of course, eventually in the long term and we're looking for 150 stores. Besides this, the online sales, online app, all of these are in place now. So I think -- and the plan is intact on the PetCare as well.

So are we getting any revenue for full year basis, financial year '23 having any figure, any estimated figure for PetCare?

As we mentioned in our investors presentation, we are looking at GMV of INR 15 Cr from PetCare in FY '23.

Understood. And from the Masterbatch side, you are saying it is 75% utilization already. So is it entirely internally or we are doing the external sale?

So this has a mix of both third-party sale and internal sale.

And one more thing, what are the developments from BOPP line side, like who are your competitors and what will be the market size and, what will be our target share in BOPET line?

BOPP industry as we again mentioned actually is close to 800,000 metric tonne industry in India.

No, our BOPET line?

BOPET is almost, I mean 700,000 metric tonne industry in India. And of course they are established players, I mean this is not an industry where you will find generally unorganized players, because you need significant amount INR 250 crore, INR 300 crore to put one production line. So there are selective players already and, but I mean the plus point with Cosmo is we have been serving BOPP films to almost all FMCG players in India and overseas as well, so that ways, we have established customer base to whom we need to just add on the portfolio with respect to the BOPET line.

Okay. And just a clarification. In your presentation, you mentioned that the flexible packaging industry experienced pressure on margin side. So my question is regarding what do you mean by this flexible packaging industry? I'm asking this, because I have a little confusion on your product portfolio like are we the suppliers of these BOPP Films only or do we also manufacture the final product, basically the wrappers like we see for chips, biscuits and chocolates et cetera?

So flexible packaging predominantly is the BOPP and BOPET, but I mean...

See, let me clarify. Film, we manufacture only the film and flexible packaging is a very broad term where we're also a part of it and the companies who do printing on the film and who also do conversion, they are also considered as a part of flexible packaging. But to answer your question specifically, we are just making films. We do not do conversion of it.

Okay, sir. Understood. And are we looking towards any kind of entering into the conversion like forward integration type things?

Partially, not at all. We do not want to compete with our customers.

Okay. So how do you see our topline shaping up for next 2 to 3 years based on these CapEx right now like BOPET line is coming into picture and what will be our targeted OPM percentage, overall basis, going forward?

FY '26, I mean we are looking at close to 70% capacity increase.

See, there is the capacity increase but in terms of top line growth I'm saying.