Cosmo First Limited (COSMOFIRST) Earnings Call Transcript & Summary

Good day, and welcome to the Investor Call of Cosmo First Limited to discuss the Q4 and FY '24 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 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 the Q&A. Thank you, and over to you, Neeraj Ji.

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. Our financial results for March '24 quarter and investor presentation, both are available in company's website. We will first discuss brief on the performance of the company for the March '24 quarter, which may be followed by questions. Frist talking about the financial results. Consolidated sales for March '24 quarter is INR 641 crores, which is higher by 3% compared to December '23 quarter, which is banned yearly by the higher volumes. The EBITDA for the quarter reached INR 67 crores as against INR 56 crores during the previous quarter. So during March '24 quarters, the improvement in EBITDA, primarily for two factors: higher specialty sales and improvement in domestic BOPP fund margin effective March '24. The specialty sales has increased to 66% of total volume in quarter 4 compared to 64% for the full year [ FY '22 ] and 61% in December '23 quarter. It may be noted that even in such a challenging scenario, the company's specialty margin broadly impact in line with the last year, except for some sales mix change impact uneven orders from the specialty export customer, which has high margins. We are glad to advise that these orders are now received by the company from quarter 1 FY '25. BOPP film margin has been running at INR 12 per kg during March '24 quarter versus INR 9 per kg in December '23 quarter. The industry margin for the BOPET film, which is close to 8% of our top line continue to be remain in negative. For BOPET film what we are going to focus now is to be selective in terms of the volume. So we will first rationalize the volume to reduce on the loss-making sales and focus more and more on the specialty film and strengthen sales. It will also be noted that if we separate out the new vertical performance, which include these specialty chemicals, BOPET, Petcare and rigid packaging, the BOPP sale EBITDA for quarter 4 was 11.6% as against reported EBITDA of 10.5%. Moving to outlook. So quarter 1 FY '25 outlook for BOPP margins remained steady, in line with the March '24 month approval, further the company's expected improved sales of specialty BOPP film as well as some rationalization in costs. First specialization on renewable power should add to the bottom line starting from April 2024. We expect annual impact to be close to INR 25 crore. Another core specialization related to shifting both Korea plant to India is moving as per plan. Both relocation to India, this production line should rationalize the cost by close to $1 million with improved capacity utilization of the line. We expect this line to start commencement of operation in India from quarter 2 FY '25. Now I will move to Specialty Chemicals. So during March '24 quarters with Specialty Chemicals subsidiary EBITDA has improved for 2 primary reasons: one is better realization of specialty chemical coatings and some refinement in quarter. So in quarter 4, EBITDA for the Specialty Chemical was close to 15%. What we've seen now is the specialty chemical subsidiary is all said to make double-digit EBITDA next year in FY '25 with more than 20% ROCE. Moving to corporate additional things, so the board has recommended a dividend of INR 3 per share. Beside this, during the quarter, the company's credit rating has been reaffirmed by CRISIL as AA minus with a stable outlook. Moving to packaging growth projects. We started 2 new business vertical related to packaging in previous quarter, in December '23 quarters. First, metallized capacitor film, sorry I'll repeat metallized capacitor film, which will serve the electronic industry and rigid packaging, which is largely serve the FMCG industry. Both are moving and working well as per plan even for metallizer we have reached close to 2/3 capacity utilization in quarter 4. Work on our BOPP and CPP lines are progressing in line with the plan. Both the lines will be world's largest production capacity line and will increase company's production capacity by close to 50% in a sales manner over next 12 to 15 months. With these high-speed lines, it should rationale cost of production between 3% to 5% depending on the product. Now I will move to petcare division, Zigly. So for Zigly, our focus for FY '25 is going to be same-store sales growth, with current monthly GMV from Zigly reached INR 4.5 crores, largely on the back of the retail footprint of 23 stores and increased online sales. EBITDA loss from Zigly for the full year is INR 24 crores in FY '24. Zigly is progressing now, I think, and developing the IT structure, making it future ready for harnessing the exponential growth of the petcare industry in India. Now we instinctively move to growth and demand there is label of the company. We are looking for close to INR 300 crores to INR 350 crores of BOPP CapEx in the next one year, which will be largely on BOPP production level. The financials remains strong. The company's net debt stand at INR 561 crores, which is 2.2x to EBITDA and 0.4x to equity. We expect net debt reduction to start from FY '26 onwards. So with this, I will take a pause here and we would like to open the call for the questions, please.

[Operator Instructions] The first question is from the line of Amit Aggarwal from Leeway Investments.

Asking about the rigid packaging, how much revenue we generated out of rigid packaging in this quarter? And what is the current monthly run rate?

So we are not sure, your question is about rigid packaging revenue number, is it?

Yes, rigid packaging. How much turnover we achieved in last quarter? And how much of it is run rate of this quarter?

So, rigid, we just started in the quarter 3 and last quarter, quarter 4, we are close to INR 15 crores of the sales.

And how much are we expecting to achieve in this year? Hello?

Sorry, say again, please.

How much turnover we're expecting in terms of rigid packaging this year?

[ So we see ] -- I mean, as we indicated earlier, at full capacity utilization, it should generate close to INR 125 crores of the sales. The utilization of the capacity is increasing month-on-month. So we expect from the second half of the FY '25, we should be close to 80% capacity utilization.

And my last question is regarding Petcare business. So what is the growth rate right now for same-store sales?

I'm sorry, you need to say again, your voice is not very clear.

This is regarding your Zigly business, what is the growth rate of same-store sales for Zigly?

So in Zigly last year, FY '24, we have grown close to 40%.

I'm talking about the same-store sales, sir.

So that is also growing in line with these broader numbers.

And do we expect to close on some stores, which are not doing well or are all these are doing it very well as per the expectations?

Sorry, I'm not able to understand fully your question.

I'm asking do you think any of the stores is supposed to shut down because the sales are not as per the expectation? Or all the stores are doing very well?

Say, if you look at it broadly, we have opened 23 stores, there may be a possible one of the store may lead to shutdown and reopen again at different locations. But that is part and parcel of the overall plan. But as such, the sales is growing. You can see in the number, as we indicated in the GMV, we have reached INR 4.5 crores monthly. And we started GMV close to INR 3 crores of GMV. So that growth is coming [indiscernible].

And my last question is regarding the Zigly, only. Do we achieve both turnout from health care or it's just -- we just achieved the turnout from the product sales? My question is regarding vet business, are we doing the [ vet ] business?

The vet business is also growing. So they've increased focus in the retail space, where we are going to focus more on these services, including vet.

The next question is from the line of Kevin Gandhi from CapGrow Capital Advisors.

Yes. So basically, I had a few questions. First question was on the Petcare business. So what is the current store economics of the business? And how do we see our Petcare business being profitable? And so basically -- okay, so one more part of the question was, by the year-end FY '24, we were assessing around INR 30 crores of losses at the EBITDA level. And now we have almost achieved INR 24 crores. So are you seeing an increase in the EBITDA being positive for any of the stores or for the business as a whole? So that's my question on the Petcare business. Secondly, on the basic BOPP business, what is the trend of the spreads right now in the base film business and how do we see getting back to the INR 40 per kg [ suite ], as we had achieved in March 2022. So how do we see that actually coming?

In time, we'll be able to gather them. Request if you can ask one question at a time.

Sir, my first question was on the Petcare business. So basically, how do we see the store economics right now? And what is the framework? What's the path ahead of the Petcare business to turn profitable in the coming 2 years? That's my first question.

The stores which are more than one year old, they are moving towards profitability. They are not profitable, but they're moving in that direction. What we could see is that their month-on-month sales is improving, and it's a matter of time before some of them, if not all of them, will become profitable. As far as we grow to profitability for review overall, unless we start touching INR 150 crores, INR 200 crores, profitability would not come. What we are certainly trying is that let first some stores start becoming profitable. Online business is even more difficult to be profitable, if we continue to sell brands of other companies. Therefore, our focus is on launching home brands, where the gross margins are more. That is a process we have just started. And we expect that within the next 12 months, we will launch lot of home brands. So to be profitable, unless we achieve a decent scale, profitability will take some time.

Okay. And sir, how much is the proportion of the online sales and the stores? So basically, the online and the offline part.

So, roughly 70% sales is retail and 30% sales is online. We do not want to push online sales too much, though it's not a very difficult task for us. But intentionally, we are not pushing it because till the time we do not have our own private label or house brands, it may not be a great idea to scale it up. So what we are actually -- online business right now is more from a data acquisition perspective and our analytics perspective in terms of [indiscernible] and so on and so forth. So right now, it's more of a data acquisition strategy. And once we start launching our own house brand, then is the time and we'll start scaling it up much more aggressively.

And sir, 2 years down the line, are you seeing any private equity [ infusion ] for us to expand the business on a further scale?

These are things which nothing has been accepted at this stage. Obviously, we are here for a long term. So I don't think we can answer this question.

Sir, my next question was on the [ base ] film business. So right now, as you can see, the spreads have increased from INR 9 to INR 12 per kg. How do we see this trend over one year or like more than one year. So basically March 2022, we were at the top of the spreads around INR 40 per kg. How do we see that traction coming? And so what's the current scenario? Are there any factories being shut? Or are there any new capacities coming? So any brief idea on the same would be helpful.

In BOPP, the demand growth is quite good. And there are no new players coming up in the next 2, 3 quarters. So it's by logic, I believe the margin should go up. However, it's anybody's guess, nobody can project that. When it comes to polyester, Polyesters margins are still in a very difficult terrain. Right now, even at a contribution level or a gross margin level Polyester continues to net losses.

The next question is from the line of Jatin Damania from Swan Investments.

Just wanted to understand on your specialty business, as in the last couple of calls, we have always been maintained that our margin in our contribution to the specialty business remains steady state and don't see much volatility. But when you compare with the FY '23 number, for the full year basis, the contribution margin for the stability has declined substantially. So what was the main reason behind that?

Yes. See, there are 3 categories we have, specialty, semi specialty and commodity. When you talk about specialty, the margins are intact, there could be very minor plus or minus, because of mix change within specialty. Semi-specialty, we've always said that they are tied to the commodity margins. They are always on a delta over commodity, but their margins will go up and down with the market. So right now, the change that you see is largely because of semi-specialty and commodity margins.

No. But sir, if you look at in your presentation on Slide 7 and if I look at the FY '23 number, the specialty margin contribution remained at INR 70 in FY '23. But otherwise same has come down to almost [ INR 55 ] so I was unable to understand why such a steep fall when our mix and volume and speciality is going up year-on-year?

Actually this is one category of films that we've explained earlier, where business was not happening, but the good news is that it has started to happen from quarter 1 of this year. These are minor change, and this will also get better in the coming quarters.

So what was the contribution of that particular claim in FY '23 and how much it dropped in FY '24?

There was no volume for that till last year or a very insignificant volume. It will go back to the original volume and the margins will go up because of that.

So from the first quarter of FY '25, we'll start seeing the contribution of that film to start kicking in, right?

Yes. The specialty margins will go up.

So then again, it will be back to the normal range of INR 65, INR 70 which is [indiscernible].

Yes.

And sir, secondly, for the growth project, we will be spending there about INR 300 crores, INR 350 crores of the CapEx in FY '25 so post the completion of the entire CapEx, what will be our net debt figure?

You're asking net debt?

Yes. Post our expansion on of INR 350 crores that will be completed in FY '25. So end of FY '25, what will be a our big debt?

You see, currently we are at INR 560 crores of net debt. So here, we do not expect much change in the net debt level except that there maybe increase INR 20 crores, INR 30 crores, INR 50 crores. That will be clearing at the end of the March '25. From [ their hole ], as we indicated earlier on the con call you may expect some reduction in the [ next term ].

And sir, last question. Just wanted to understand, see, on the BOPP we are doing, I mean, definitely the scenario has improved from what it was last quarter. Specialty, we'll see an improvement starting from the first quarter because of the new trends kicking in, and we are also planning to launch uncontrolled payment and many other [ plans ]. But when you look at our entire ROCE, because of the Petcare business, there is a substantial drag in our retail issues' performance. So as a company, what is your take on Petcare, are we looking in some sort of demerger or the some sort of restructuring in the Petcare business or the entire business model to...

See, there are two parts to your question. One is on the ROCE. ROCE, if you look at there's still significant part of the CapEx, which is in the CWIP, which means that part of the CapEx is not earning anything. So I'm sure once that CapEx commence the operation, the ROCE profile of the company will increase. With respect to your second part of your question, which is health care, health care the investment size is not that significant. So of course, OpEx is more CapEx is lower in Petcare business. But as we announced today morning to stock exchanges, we have initiated the process of having the pet care venture in a separate structure.

So I mean are we looking at funding the separate subsidiary? I mean, additional funding for FY '25, '26, or probably we'll be looking at the investment from the outside? I mean I just wanted to understand that the Cosmo First will continue to support the cash flow to the Petcare business because they will be continue to making loss till the time the revenue of INR 150 crores, INR 200 crores doesn't range?

You see, as of now, the [ TAM ] is not [ one ] down. So we have just initiated the process in the form of having a sector subsidiary in place, which will have in future, the Petcare business. So with the time, definitely, we will announce further.

The next question is from the line of [ Ketan Chedda ], an Individual Investor.

My first question is with respect to the gross margins. If you compare the data of 2019 versus FY '24. Our volumes for the specialty and semi-specialty has increased significantly. And even for individual categories, you have shown, our spreads are better in FY '24 as compared to FY '19. Now with this movement in the specialty and semi-specialty contribution increasing in the overall mix we will expect the EBITDA margins to improve. Your gross margins are better, but your EBITDA margins have not improved even on a stand-alone basis, that's the case when [ I make up ] results. So could you explain why is this happening? Why our EBITDA margins are not improving as compared to FY '19 levels?

It depends on many factors, actually. First is what is going to be the raw material price because that primarily determine the sales in terms of the value. Very clearly [ give ] a big margin in these specialties, but you need to see, it will be compared for the company as a whole, you need to see what is the performance of the formality part of business as well because, of course, the EBITDA margin improved both the specialty as well as the formality, while I do not have ready numbers compared to FY '19 for you to discuss. But you need to look at the comprehensive and then we can always have a chat.

And sir, I'll reach out to you all for this clarification. My second question is with respect to the Zigly business. In your presentation, you mentioned about the demerging of the business at two different slides. But on one side, you mentioned it will be in short term and the other side is mentioned in the medium term. So there's a confusion. What clarification I'm seeking is, do you have some sort of a time frame, a tentative time frame, that are very, very definitive, like maybe like 2 years down the line or 3 years down the line, you will [indiscernible] in a different, you'll demerge the business.

So as we announced the stock exchanges today, we have today initiated the process by incorporation of a separate subsidiary for, which will have the Petcare venture in the future. But that time frame is not yet finalized. As in when it gets finalized, definitely we will inform the stock exchanging of...

And my third question is with respect to the margins of the specialty chemicals. Now your Specialty Chemical margins are very, very low currently. So any future outlook you could provide that like by when they -- we can expect the margins to improve further, like it will take how long and to what level should we expect the margins to reach?

You see, as we said at the beginning of the call, there was very specific specialty orders, which have not come in FY '24. That's why you see a change in the spreadsheet overall margin. Although if you look at it fee wise, that change is not there. [indiscernible] beginning of the FY '25 quarter 1, we have started getting those orders again, which we definitely have positive impact only in FY '25.

Sorry, my question was on specialty chemicals. You have shown in your results the Specialty Chemicals have a separate segment. So my question was more with respect to the Chemicals and not with the respect to sales. I'm assuming that sales would be covered in the other category.

Specialty chemicals, few things has happened. One is better realization of the coating chemicals and secondly, the companies could work on better recipes for some of specialty chemicals, which is working well in terms of [indiscernible]. So these 2 things taken together was highly impact -- auditing impact on the EBITDA. As we said in our commentary for FY '25, we expect this enhanced level of EBITDA to continue for the Specialty Chemicals [ consumer ].

The next question is from the line of Vipul Kumar Anopchand Shah from Sumangal Investment.

Could you break down your 64% sales of specialty and semi-specialty? How much is specialty and how much is semi-specialty?

Roughly 50-50%. That's right.

And sir, regarding Zigly, how much more support we will have to give that venture till it is demerged and till it becomes self-sufficient. Any figure you can spell out so that it gives clarity to the investors.