Cosmo First Limited (COSMOFIRST) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the investor call of Cosmo First Limited to discuss the Q4 FY '23 results. Today, we have with us from the management, Group CEO, Mr. Pankaj Poddar; and Group CFO, 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 expectation 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 to the Q&A. Thank you, and over to you, Mr. Jain.

Thank you very much. Very good afternoon, ladies and gentlemen. I'm Neeraj Jain, Group CFO at Cosmo First, along with my colleague, Mr. Pankaj Poddar, Group CEO at Cosmo First. Both our financial results as well as the investors presentation are available on company's website. We hope you could go through the same. We'll start the call with a brief on the performance of the company for the quarter 4, which may be followed by the questions. So first, talking about the flexible packaging business. Although quarter 4 was a fairly challenging quarter primarily for the commodity part of the business, however, company could still post 10% EBITDA on the back of the specialty film portfolio. The results are clearly outperformance compared to the industry. During the quarter, commodity margin both on the BOPP and BOPET business has further declined compared to the previous quarter, impairing the profitability of the entire industry. You would notice that from last couple of quarters, BOPP and BOPET industry sales excess supply scenario caused due to bunching of several new production lines together. Although the demand side continues to grow, the bunching of supply caused margin drop and impacted everyone in the industry. Cosmo with over 2/3 of its revenue coming from the specialty film could withstand the margin pressure and clearly outperformed the industry once again in the quarter 4. BOPP Film margin has been running close to INR 10 per kg in March 2023 quarter compared to INR 17 per kg in December '22 quarter and INR 50 per kg in March '22 quarter. So very significant gap in the commodity part of the business. You would also notice that this margin of INR 10 per kg is quite low compared to average historical margin this industry has been earning, which has been close to INR 25 per kg. It may also be noted that even in such a challenging market, the company's specialty margins remained broadly intact in line with the last year. While the commodity margin has gone down to 1/5 of the last year margin, but specialty margin remains fairly firm. Semi specialty product category margins [ have ] also down by almost 40% compared to last year. All of these details are available in our investors presentation. Coming to BOPET Line which was commissioned in FY '23, which continued to focus on the perfecting recipes, processes and quality parameters on various specialty and value-added services. This is in line with the company's larger strategy to enter into the polyester films. There was about INR 5 crores of the EBITDA loss in BOPET during the quarter. The company is working on the key specialty product on the BOPET Line, which are expected to deliver results within FY '24. With objective to promote sustainability and rationalize cost, the company has entered into renewable power agreement to source 40% of its power requirement for its largest plant through renewable sources. The power has already started from May 2023, and, of course, besides promoting sustainability, this will also rationalize cost in a material way. In medium term, the company is looking to source almost 50% of its power requirement through renewable sources, which will serve twin purpose of sustainability as well as the cost rationalization. Moving to flexible packaging outlook for the coming months and the quarter. So the company expect the position to improve in the coming months, beginning and to the quarter-to-quarter decline, which has been happening from last 3 quarters continuously in a row. So there's already a marginal uptick we have seen in May 2023 quarter -- not quarter, month actually -- margins. So besides specialty sales, the company shall clearly focus on cost rationalization measures in FY '24. The company has launched several new specialty films, including [ shrink ] for packaging and non-packaging applications. [ Film ]-- other specialty film for non-packaging applications are also in pipeline, which should hit the market in the coming quarters. All these would, of course, strengthen the company's position in the specialty film business. We'll continue to build on specialty product portfolio to maintain the lead over the industry in the coming quarters as well. Now I'm going to move to March 2023 quarter financial results. So the consolidated sales for the March '23 quarter is INR 715 crores, which is lower by about 2% compared to December '22 quarter. Although volume is higher by about 4%. This drop is mainly due to lower commodity margins and mix change. EBITDA for the March 2023 quarter is INR 74 crore compared to INR 86 crore in December '22 quarter and INR 165 crores in March '22 quarter. The EBITDA is largely lower because of the margins, which we already discussed. The results also include operating losses of the -- it's Petcare division. Despite a drop in the quarter earnings, our financial remains fairly strong with annualized ROCE of 16% and return on equity of 20%, which is, of course, on the leading side in the entire industry. Now we are going to move to specialty film update. Well, if you'll notice, specialty film sales has been growing for us from last 4 years, almost with 13% CAGR growth rate. Specialty growth remained broadly flat in FY '23 and that got slightly impacted second half of FY '23, mainly due to inventory correction in some export markets, primarily in the Europe and the U.S. The company expects a specialty to improve and recover in FY '24. And of course, we are targeting double-digit specialty film sales growth in FY '24. On BOPET side also, the company is in process of launching several new specialty products, including heat control film, security film in Petcare. Heat control film is scheduled to be in market in second half of current financial year. The film will go through the various certification processes and parallelly company shall create the distribution network of dealers. And in the [indiscernible] 1, we will focus primarily on the Tier 1 cities. Now we are moving to flexible packaging growth projects where the company is working. So as we discussed in the past, work on BOPP and CPP line is progressing in line with the plan. Both the lines are world's largest production capacity line and will increase company's existing capacity by almost [Audio Gap] in a phased manner by March 2025. With higher speed large decline, it will rationalize cost of production between 3% to 5% compared to current cost of production depending on the product. So CPP line and BOPP line, of course, beside adding the capacity significantly, it will also promote sustainability because both the lines will offer monolayered structure. Moving to subsidiary on the Specialty chemicals side. The company's subsidiary into Specialty chemicals posted INR 35 crores of sales during March '23 quarter, which is 17% higher compared to similar quarter last year. During FY '23, Specialty chemicals subsidiary has done overall INR 159 crores of sales which is 75% higher compared to last year. The company could reach almost 75% capacity utilization on this masterbatch line, and of course, besides this complementary adhesive business for packaging segment is all set to grow in current financial year. Moving to Petcare division. The company's direct-to-consumer vertical which was launched under brand Zigly in September 2021 is progressing in line with the plan. The company has already started 15 experience centers at March '23 and this is, of course, beside the sales through online portal and online app. The current monthly GMV for the Zigly is close to INR 2 crores, which we are targeting to be 10x growth in next couple of years. FY '23 GMV for Zigly division is INR 13 crores, which is, of course, 9x compared to last year's sales. Zigly so far has served more than 23,000 customers already. And of course, we have 1/3 of the repeat customers. The company's focus for Zigly shall continue to be to grow it multiple times in the next couple of years. Besides organic growth, the company is also looking for inorganic growth in -- for Zigly. So an acquisition opportunity in online Petcare space is almost at the final stage, and we expect it to grow soon. This would further accelerate the company's growth in the Petcare vertical. We will be able to share more detail about it once we [ freeze ] on the agreement in due course. So overall, so Zigly all set to make a substantial impact in India's Petcare industry. Now we'll move to growth and debt level in the company. Company is looking to almost INR 500 crores to INR 550 crores of CapEx in a phased manner by March 2025, which will be largely on the value-add CapEx on the BOPET line, CPP line and BOPP line. The current net debt of the company is INR 433 crores at March '23 and, which is 0.3x of net debt-to-equity and 1x of net debt-to-EBITDA. So fairly healthy financials. Now, of course, in the last but not the least, moving to corporate announcements. The Board of Directors has recommended INR 5.00 per equity share dividend for financial year '23. This, of course, is subject to approval of shareholders in upcoming Annual General Meeting. This dividend, coupled with 1:2 bonus given in June 2022, along with the buyback of shares done in February 2023, reaffirms company's commitment to provide the regular return and share prosperity with the stakeholders. So I think those were the updates for the quarter. Now we would like to open the call for questions, please.

[Operator Instructions] The first question is from the line of Subham Agarwal from Aequitas Investment Consultancy.

Sir, my first question is related to the spread. You mentioned that last quarter, it was INR 10. So I just wanted to understand what is the current trend given that you mentioned that there is some recovery? So what is the current spread trending? And how do we look at the spread for the rest of the year?

Well, actually, Subham, we are not very sure since it's a forward-looking statement, whether we should be able to share the current margins trend. All we can also add here is this is marginal uptick we have seen in the May 2023 performance from the last quarter.

But any -- like directionally, how do you see it, given that this year, there are 2 new lines and next year there are 5 more lines expected to come up? Given the current demand scenario, if you can just help us understand how do we look at this industry?

You see, I mean, there's already industry base which has been growing close to 10% year-on-year. So in any case, industry needs 2 production line minimum each year just to sustain the new growth. So from that perspective, FY '24, new 2 lines should not impact much. But of course, if bunching of line happens in FY '25, this may create some pressure temporarily for a couple of quarters. But other than this, we see over a period of time a balanced demand-supply scenario to come back.

So given that the margins have remained so low, have you seen any closure of inefficient plants in India?

Well, course [ mode ], all lines are running full. So we are -- except the maintenance shutdowns, we have been able to run the -- all the lines fully during the [ quarter ].

I'm talking about industry level, if you have any idea?

Well, there will be some closure at the end of the industry. But so far, Cosmo has been able to run our lines fully.

And secondly, on the specialty sales, so for FY '23, we did some 62% in terms of specialty. Now this also includes semi specialty, right? So what is the percentage of actual specialty in this 62%?

Very broadly, it's 1/3, 1/3, 1/3. 1/3 is specialty, 1/3 semi specialty and 1/3 commodity part of it.

And would it be possible for you to share the semi specialty spread for the current quarter compared to last quarter?

Yes, that should be available in our investor presentation.

No. So in the investor presentation it is given year wise, so it is close to 40% compared to last 50%. I wanted to understand Q-on-Q.

We can share separately, but will be little difficult to reconcile on the quarter.

No problem. And lastly, on the demand side on specialty, how do you expect it to grow for the current year, given that last year we were flattish?

They are very exciting products in pipeline on the specialty side. So company is quite optimistic about the specialty growth in current financial year.

So double-digit is something you are mentioning?

Say again, please?

No, it's okay. And lastly, on the Petcare business, on the acquisition side, you said that something is on the pipeline. So what is the total amount earmarked for acquisition in the current year?

So it will not be a very substantial amount from the payout perspective. But what we are looking for more strategic fitment and that adds value. So our accretion strategy for the Zigly you will notice in alignment to these key parameters. But from the payout perspective, it is only a very significant amount. So we'll of course share the much more detail once we sign the final agreement.

But what is the specific capability that we are trying to address with this acquisition?

If you notice, I mean, the channel which we are trying to create in the Zigly is through the retail distribution as well as the online sales. So in either of these 2 a good fitment, which accelerate the overall growth with a higher kind of the volume. So that's the kind of strategy we are looking for with this [ growth ].

The next question is from the line of Sagar Shah from Phillip Capital, PCG.

I had this couple of questions. My first question is, can you give the volume numbers for this quarter? So basically, can you give us the volume numbers for this quarter for specialty films and for the commodity films?

In percentage terms, so that is also available in our investors presentation. As I said, it's broadly 1/3, 1/3, 1/3 kind of the portfolio. There may be some up or down in a specific quarter, but very broadly, that's the...

And just secondly, I wanted to understand on the demand front. Is the demand right now improving, especially from the FMCG segment?

I mean, seeing the large part of our sales goes to conjunction driven kind of industry, including FMCG, [ text ] sector, textile sector, et cetera, so demand side, we do not see any kind of the issues. The whole of the commodity part of the business got impacted largely because the supply side came with a short time distance. So bunching happened over there, which we see in the demand side has been growing close to 10% year-on-year. So we see that temporary gap should get mitigated over the coming quarters of the year.

The next question is from the line of [ Amit Agarwal ] from [ Leeway Investments ].

Sir, my first question is regarding, sir, specialty products. Sir, 60% of our products are specialty products and their price at cost of raw material plus fixed margin. Is it fair to assume that higher margins are only possible when oil prices rise from current levels?

Sorry, you need to repeat your last part of your question?

Sir, is it fair to assume that higher margin only possible when oil prices rise from current levels?

Not actually, because as you know, even for the commodity part of business also, there's a price reset mechanism available in the whole of the industry. Each 15 days basis the raw material price get reset. And on the same day, we also revise our selling price to the customers. So in a normal balance market, we will already identified price -- raw material price passing mechanism available. The issue these days is more because of the excess supply, but industry from the raw material commodity perspective, it is [ done ] fairly in a mitigated way.

So no, if the oil prices are above $100, so that will pass on to the raw material cost. And that will pass on -- then we have to pass on to our final product also. And then this is a higher turnover as well as higher margins?

That's true for a balanced supply scenario. The passage of the raw material cost is possible, and that has been happening.

And my second question is, sir, last 2 months, we haven't opened a new Zigly store. So are we able to meet -- are we still planning to meet that target of 40 stores by the end of this year?

So we announced for FY '23, and we should be having close to 15 stores, which is the number we targeted and we achieved also. So the current financial year, of course, we are looking for assertive growth, again, in terms of the both, the retail presence as well as the online sales. So we should be able to almost double the number of stores in current financial year.

Earlier -- I think earlier we were targeting around 40 stores, if I'm not wrong?

That will happen over a period of time, not for the current financial year.

And my last question is, sir, how much has been the loss of -- in this quarter relating to Petcare business, in this last quarter?

So you will refer -- our segmental reporting, all of it has quarter-wise and year-wise numbers. So primarily the segment of others indicate the -- in terms of the profitability in the Petcare division.

So won't you like to give the -- last time you give the -- that this much loss. Last time you were able to give us the amount.

Sorry, not able to understand your question?

Last quarter, you were able to give us the exact amount, how much we lost in the third quarter in Petcare business. So is it possible to give right now?

Number is available in the segmental reporting. It should have been closer to INR 7 crores.

[Operator Instructions] The next question is from the line of [ Harsh Mulchandani ] from [ Chris Portfolio ].

I wanted to understand how do we plan to utilize the upcoming CapEx, like, for example, heat control films or for shrink [ PETs ]? I think there are already competitors who are into this stream already. So how do we plan to take market share from them? And do we have any contracts in place, or what strategy will be going forward to make sure that your lines are able to run at optimum utilization? That's my first question, and then I'll come to the second one.

Yes. Window films is a consumer product, and it does take time to scale it up. We have spent a good 3 years to do a lot of research and make some very innovative films when it comes to window films. There are already 6, 7 different categories of products. We are expecting to launch this in quarter 2. And as I said, consumer products do take time. It's not about capacity utilization. It's more about building sales. As we have said earlier, this is a high-margin product category. But building sales is the main, I would say, challenge along with building the right products. So we have already surpassed the right product. Important is to build up sales and educate consumers in terms of the benefit of window firms.

So you are trying -- so in a nutshell, that your product is at par or better than the competitors. And then it will take -- is it fair to assume a couple of years to scale up the sales because it will be more on the retail side?

Yes. We do feel that every year there should be ramp-up in sales. See, right now important thing is in a country like India, very few customers take the advantage of window film and it can reduce the room temperature and even between 4 degrees Celsius to 18 degrees Celsius, depending on the film that is being used. So first important task is to educate the customers so that they get aware and they get interested in buying this kind of a product. Today, most homes in India do not use -- homes or offices or factories do not use window films and the penetration is far lesser versus America. America today we know is a much colder country than India. And the way the Indian temperatures are there, I feel every home, every office, every factory should have a window film, which unfortunately is not the case. So with proper education, we feel that the market can expand many, manyfold.

And similarly, like the other specialty products also which you are building, what I heard from the initial opening remarks, was I think into shrink [ PET ] products and shrink films and I think one more product you mentioned. So again, similar strategy is that even those will take some time to ramp breakthrough. And as of today, there is no breakthrough as such in terms of getting sales. Is that understanding correct?

Shrink already sales have started coming and lot of our products which we were already having expertise in, BOPP, we are able to have sales for them in BOPET. We've also developed a very innovative product for microwave oven. That product also we have recently launched. And I mean, as per our internal study, it has come out very well. So we continue to build new products to the market and build our specialty portfolio.

Just last one question. Where do we see ourselves 5 years down the line with respect to specialty percentage of sales? Like right now, it's around 1/3. So do we expect it to be more than half of our sales, say, 5 years down? Or that is challenging to achieve?

As you always combined specialty and semi-specialty because even in semi-specialty, we are more margins. See, as we had earlier said that we intend to take this number to 80% on a run rate and 75% for the full year basis. What will really happen is in another 2 years' time, we're adding a lot of capacity in terms of BOPP, CPP. And again, we'll have to start building sales for that. So it's an ongoing task. We intend to bring every new line once the existing capacity is largely moved to specialty products. So 5 years from now, it will be fair to say that we'll be sitting somewhere close to 60%, 70% of overall specialty plus semi specialty sales.

So mix would be more or less similar even from here going forward because you'll add capacities across the sector?

Yes.

We have the next question from the line of Nirav Savai from Abakkus Asset Management.

I actually just missed your initial remarks on the spread. You said it's about INR 10 for the quarter. And what was it in the previous quarter and last year Q4?

Previous quarter, it was INR 17 per kg. And last year, similar quarter, it was INR 50 per kg.

So with the kind of new capacities coming in, you said there are 2 new lines which are going to come in FY '24? Sir, what is the base case which you all are assuming internally? What can be the possible margins? Any guidance if you can provide?

So again, first of all, we do not provide any future guidance. All I can share here is March '23 quarter you can say bottomed out because margins have been running closer to the EBITDA breakeven even for the BOPP part of the business. For the BOPET part of the business, it was negative EBITDA. You might have noticed in some of the peer group result, there's a very clear evidence to what we are saying. So to sum up, we do see already it has bottomed out. It should -- there should be uptick in the margins, which we witnessed very recently marginal uptick in the May 2023 results.

And second thing was, you said commodity margins were 1/5 of specialty margins this quarter. Is that right? Or average margins?

Compared to last year's similar quarter, commodity margins were running 1/5 of the March quarter.

And sir, shrink film, any number if you can provide, what is the size of the opportunity in India? And what can be the potential revenue which we can get in that business in the next 2, 3 years? Or maybe just the overall size of industry in India for shrink films?

It can become a very large market. You see there's a market of 30,000 metric ton of PVC films, which we feel shrink film over a period of time should largely replace because there are recyclability related issues in the PVC film. With high shrink [ Petcare ] we should be able to [ address ] much more.

But any number if you can provide, any -- what would be the current size right now, which is addressable market?

150,000 tonnes for [ Petcare ] shrink films.

150,000 tonnes. And in terms of value, if you can have any -- provide any data?

Yes. If you largely multiply it by INR 300, INR 350, you will get the market.

[Operator Instructions] The next question is from the line of Harsh Sheth from HDFC Securities.