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 Q2 FY '27 results. Today, we have with us from the management, Chairman and Managing Director, Mr. Ashok Jaipuria; Group CEO, Mr. Pankaj Poddar; Group CFO, Mr. Neeraj Jain; CEO, Zigly and Head, Corporate Development, Mr. Saurabh Jain. Starting off with the statutory declaration, certain statements in the conference call may be forward-looking. These statements are based on the 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 call is being recorded. Now may I request Mr. Ashok Jaipuria, Chairman and Managing Director, to take us through his opening remarks. Thank you, and over to you, Chairman, sir.

Thank you. Good afternoon, ladies and gentlemen, and a very warm welcome to you for joining us on Cosmo 1st September '26 results conference call. As we enter the festive season, I extend my warm Diwali greetings to all our investors and stakeholders and present and future shareholders. This is the first time that I'm attending a conference call for the investors as I have had quite a few requests that I should be with you. And hence, I am there with you. I would like to mention that we've had a very volatile environment. We have had a very volatile environment. Those environmental issues have really gone beyond any individual or company or the situation because either the Middle East war or the petroleum prices or the conflicts or global uncertainties, these are all working towards where you create uncertainties. We in Cosmo are trying to battle with each and every one of them. Some we are able to anticipate and look forward to and have grown on those challenges. And some we are still grappling with. Now coming to Cosmo, I would like to tell you that I see Cosmo broadly in 2 parts. One is the B2B business, which is our conventional business and one is the B2C business verticals, which have been recently inculcated into the company. Our B2B businesses are profitable, delivering profitable growth and strengthening market position with movement towards specialty sales. At the same time, our B2C businesses, which are fairly nascent are growing strongly, supported by sustained investments in brand building and scale, while profitability in B2C businesses will take some time to mature. However, some of them have reached maturity stage and are now giving desired results. Growth has always been very central to our philosophy, but we are very picky and choosy on the growth as we remain focused on building and scaling businesses for the medium-term. In this journey, we are going to do 2 capacity additions to further enhance the specialty products in H2 of '27, one of the world's most advanced coating film line and 9 barrier sheet line for which we will discuss further details. We have also moved towards a 10-meter line with the highest speed and the biggest capacity in the world on our BOPP films. Polyester films also, we have now gone on new products, which for the first time in India and possibly in the world, to a large extent, we are doing well and we are growing in those businesses of PETG, which we are hopeful that will stand us well in the future. Our focus in films business on accelerating the specialty portfolio, strengthening the core business model and having high level of customer satisfaction, driving superior returns on capital employed. Going forward, the growth CapEx will be increasingly aligned towards the specialty products and products with better margins, differentiation and capital efficiency. Aligned with specialty strategy, we are adding 16,000 tons of high-end chemical coated film capacity in second half of '27. Coming to Specialty Chemicals, we continue to scale strongly with the H1 '27 revenue growing 59% to approximately INR 155 crores, driven by 3 niche verticals of coating chemicals, masterbatches and adhesives. Our medium-term, we see this business building at close to INR 500 crores revenue with a 20% plus ROCE supported by sustained growth across these 3 verticals. Plastics, the other company, which we have initiated 2 to 3 years ago, with H1 '27 revenue growing 73% to INR 75 crores as we continue to expand our presence in Specialty Rigid Packaging. The upcoming 9-layer barrier sheet film with 10,000 metric tons annual capacity will expand our specialty product capabilities and support the next phase of growth with a relatively modest capital investment. Both the consumer businesses, Cosmo Consumer, which is the window films, paint protection film and ceramic coatings and Zigly, our pet care business, continue to scale up with 260% and 58% top line growth, respectively, in H1 '27 year-on-year basis. In Cosmo Consumer encompassing window films, trade protection films and ceramic coatings, our focus is on expanding the distribution network and strengthening market reach. Alongside growing our domestic presence, we are increasing our focus on international markets and exports, creating a larger addressable market for the business. This, as you know, is our ethos and our culture in Cosmo that we believe that we should be competitive in the international market also. Zigly continues to build scale in the pet care ecosystem with its network now spanning on 48 centers, including 3 hospitals with medical care, strengthening our omnichannel presence and service capabilities. Going forward, our focus remains on scaling services, particularly wet services and growing our private label portfolio along with grooming. We believe it will support the sustained growth and an improved business mix vis-a-vis our competition. Going forward, the company's priorities are very clear: deliver sustainable growth across businesses; improve ROCE; reduce our net debt while creating enduring value for all our stakeholders. As you are aware, we have embarked on a CapEx cycle of high investments in the last 3 years, which is roughly about INR 1,250 crores to INR 1,300 crores, and now we will be in a position to fully leverage the CapEx done on various products. The company is also going for further increase in renewable power as we believe both in the environment and economic benefit to the company, which will be currently 2/3 of the next year, which will, not only support environment, but also generate annual power cost savings of approximately INR 25 crores to INR 30 crores as per latest assessment. Coming to Cosmo performance for September '26 quarter, we had a good quarter. Our consolidated sales have grown by 51% and EBITDA has grown by 38% on year-on-year. Now while Neeraj will share with you the financial results of the company, I would also like to mention that with me the management team is here with Pankaj Poddar, the Global CEO; Neeraj, the Global CFO; with Kulbhushan, who is Head of our Film and the direct B2C business -- B2B businesses and Saurabh, who is handling our Zigly Pet Care business. Over to you, Neeraj. Will you please take some of the results with our investors. And then if there are any questions, we will be happy to address them. Thank you.

Sure, sir. Many thanks. So I'm going to first provide an overview of financial results for the quarter 2 FY '27. Consolidated sales for the September '26 quarter is INR 1,388 crores, which is higher by 51% on a year-on-year basis, backed by higher volume by 15% and increase in the raw material prices, which were passed on to the customers. The company has posted EBITDA increase by 38% in September '26 quarter to INR 177 crores compared to INR 128 crores in September '25 quarter. The incremental EBITDA is primarily driven by 5 factors: first, higher specialty volume by 20%; second, higher overall volume of the company by 15%; number three, better BOPP film margin by about INR 7 per kg; number four, enhanced performance of our U.S.A. film business, which has delivered more than 50% growth on a year-on-year basis in quarter 2; and number five, higher EBITDA by our new B2B business verticals by INR 12 crores, which constitute Specialty Chemicals increased by INR 7 crores and Rigid Packaging plastic increased by close to INR 5 crores. Quarter 2 FY '27 EBITDA was also impacted by 2 known repetitive items. First, write-back of additional custom duties by the U.S. subsidiary post receiving duty refund from the government of U.S., about INR 24.8 crores. Second, stock loss of INR 7 crores due to sharp drop in the raw material prices. On a net basis, these 2 nonrepetitive items added about INR 18 crores in the quarter 2 EBITDA. If we exclude both of these, EBITDA for the quarter would have been INR 159 crores, which is 24% higher on a year-on-year basis. Quarter 2 EBITDA margin is at 12.8% compared to 14% in the same quarter last year as revenue increased by 51% on 15% volume growth, which reflects higher raw material prices linked realization. As we discussed in past as well, margin percentage is not the right benchmark to look at for the performance of the industry as raw material prices keep on changing. We generally look at the absolute EBITDA and contribution per kg as the key benchmarks and both have improved on a year-on-year basis. As mentioned earlier as well, the normalized EBITDA for the quarter 2 grew 24% year-on-year. Our BOPP gross margin was running INR 29 per kg in September '26 quarter compared to INR 30 per kg in June '26 quarter and INR 22 per kg in September '25 quarter. On the other hand, BOPET gross margin was running at INR 12 per kg in September '26 quarter versus INR 9 per kg in June '26 quarter and INR 6 per kg in September '25 quarter. You may also like to note that BOPET is a smaller business vertical for Cosmo, which is close to 10% of the BOPP capacity. Our specialty film margin remained broadly stable at close to INR 62 per kg, and that's the reason why the company is focusing more on improving the specialty film sales. Our specialty and semi-specialty taken together is running close to 60% of total volume of the company, which is growing by about 10% CAGR growth rate from last 6 years, although our H1 '27 growth rate has improved to 20% on the specialty side. The company has adopted concessional tax regime, which is popularly known as the new tax regime also from FY '27. Q2 tax includes onetime credit of INR 14 crores arising out of this transition. For FY '27, we expect effective tax rate to be tax income in the range of minus 6% to minus 7%. Now we'll move towards the business vertical-wise performance. Specialty Chemicals, the subsidiary continues to perform very well with 80% plus top line growth backed by 60% volume growth on a year-on-year basis. Q2 posted 23% EBITDA by the subsidiary. Rigid Packaging for Cosmo Plastech, quarter 2 was our second consecutive profitable quarter with revenue of INR 39 crores, up by 90% compared to last year and with 8% EBITDA margins. Brand sales for the Plastech rose to 67% from 50% a year ago. As Chairman mentioned, the business vertical is going for an expansion in second half of the FY '27 with 9 layers barrier sheet line with annual capacity of 10,000 metric tons, which will further enable higher and improved specialty products with a very minimal CapEx. Moving to consumer businesses. Both of our consumer businesses, Zigly and Cosmo Consumer continue to scale up. For Cosmo Consumer, revenue grew by 70% in quarter 2 and 2.6x in H1 of FY '27. The EBITDA loss for the quarter 2 has increased to INR 4.5 crores for the business vertical as it has started brand building with TV advertisement from the July '26 onwards. Domestic paint protection film market is close to INR 500 crores in this size, which is growing by 30% year-on-year. And hardly there is 1% to 2% penetration of paint protection film in the industry as against 15% penetration in China. So to tap the opportunity, we have increased our paint protection film dealers from 150 till last quarter to 250 in this quarter. Window film dealers have also grown to 150 with more than 100 cities presence. We also now have 4 Cosmo car care centers. Moving to Zigly, our pet care division. Zigly has grown by 47% in quarter 2 on a year-on-year basis. The business mix is moving in a very good direction. Services were 68% of the offline sales in quarter 2. Also private label sales has grown, in fact, more than doubled in quarter 2 on a year-on-year basis. Moving to a few corporate. Net debt at the September '26 has reduced to INR 1,057 crores, which is 1.9x to EBITDA. This is as against INR 1,159 crores at March end. And this reduction of close to INR 100 crores despite net working capital increase by INR 148 crores due to increased raw material prices post West Asia war. Needless to say, there is a very clear focus to reduce the net debt substantially in the next 2 years as no major CapEx is planned in the short-term. It is also clarified that majority of the debt related to 2 growth CapEx mentioned by the Chairman is already included in September '26 balance sheet. Well, on that note, we conclude our opening remarks and would be glad to discuss any questions, comments or suggestions which you may have. Thank you.

[Operator Instructions] The first question is from the line of Nirav Jimudia from Anvil Wealth.

Heartening to hear the comments from Chairman sir, we wish that this would continue in the quarters to come. Sir, a few questions from my side. So first on -- you touched upon the specialty side of our business, and you also touched upon the U.S. market, which is now picking up in terms of volumes and you are seeing the increased traction over there. So just wanted to have your thoughts in terms of how much is the room of growth in terms of top line from the U.S. geography, like what we are at currently and what optically it looks like in second half or, let's say, for FY '28, if you can share your thoughts? Also with respect to the capacity utilization, what we have achieved in second quarter for the film business as a whole, how much is further room in terms of improvement in volumes? And I guess there would be improvement on the specialty side also, but some understanding in terms of the volume side, that would also help. And thirdly, in terms of the newer BOPP capacities which are coming up. So if you can share your thoughts here in terms of time line of those capacities coming online, that would be helpful.

U.S. has grown 35% in the last quarter. It is expected to do roughly $70 million in this financial year. Our highest was during COVID time in the FY '22 when we did $60 million. And then when the duty was implemented last year, it came down to roughly $50 million. We are anticipating this to grow even further next year, and our target is to exceed $100 million target for the next year. From the volume perspective, we are roughly 90% utilized, and we still have roughly 8% to 10% potential to increase our volumes further. BOPP lines, most of them will be coming or getting commissioned over the next 2 years. But what we have seen is that, whenever multiple lines are being planned, some may get deferred. So we have to really see what happens. But then India is poised to easily consume 1.5 to 2 new big lines every year. And then as we had stated many times in the past, that we are far more focused on growing the specialty on growing our exports, and we will continue to be on that track. In fact, we have recently commissioned a new coating line also to grow our specialty films.

So just a follow-up here. In terms of specialty volumes, anything in our mind in terms of the percentage mix in FY '28, a; and b, you touched upon reducing the debt, which is our main focus currently. So given the reasonable spreads in the commodity BOPP and the reasonable assumption of the specialty as well as the semi-specialty films, what sort of internal targets we have set in terms of reduction in the debt over the next 2 years?

So this year, we should be doing around 60% specialty with an increase in volume that we are overall seeing. So even on our increased volume, we should be doing roughly 60%. Our next year target should be anywhere between 65% to 70%. And in the medium-term, we would ideally like to take this number to close to 80%. What was the second question?

The net debt.

Yes. The net debt, we are expecting to reduce by roughly INR 300 crores to INR 500 crores over the next 2 years.

The next question is from the line of Aman Agrawal from Nuvama AMC.

Congratulations on good set of numbers. My question was mainly related to BOPP spread. If I remember correctly, last quarter, you did highlight that excluding the one-offs, it would have been INR 20 on per kg basis, while the reported number was INR 30, but excluding the gains, inventory gains and everything, it would have been INR 20 per kg. Now this quarter, if we see the margins are still at elevated levels of somewhere around INR 29 per kg, which is the base BOPP spread I'm talking about. So -- and this is despite an inventory loss of INR 7 crores that you reported. Can you please help us understand how should we think about this in terms of per kg spread? And what is the current spread that is prevailing?

Last quarter, actually, we reported INR 30 per kg in the quarter 1. And as you rightly picked this quarter, quarter 2, we had INR 29 per kg, so broadly aligned. But as you rightly pointed out, quarter 2 had onetime nonrepetitive stock loss of close to INR 7 crores, while the quarter 1 had actually stock gain. So that's why the reconciliation may not be visible upfront, but this is how the margins were.

Sir, actually, my question was from -- for 1Q, if you see, you did say in last call that excluding those one-off gains that you mentioned, 1Q margin would have been INR 20 per kg is what I understand you said in last quarter. Now while comparing 2Q number, I'm referring more to that excluding gain number. So INR 20 per kg is more of a comparable number I'm looking over here. And so, on that level, there's a significant improvement in margin, which I'm not able to understand. So just again, asking on this increase.

I think there is some gap. So apple-to-apple comparison was INR 30 for the last quarter.

Okay. Secondly, on FY '27 full year CapEx number, any guidance you would like to give? I think first half is somewhere around INR 90 crores. What's the plan for entire year?

For this year, we are looking at close to INR 100 crores to INR 110 crores of CapEx. For the next year, we have actually -- there will be maintenance CapEx and some possible CapEx around the specialty growth, but that will not be very high kind of the CapEx. So CapEx plan for the next year is although not yet fixed, but it's not going to -- I mean, it's going to be maybe INR 50 crores, INR 70 crores kind of a range, but a little premature to talk.

And lastly, on the Zigly business, sir, we have been talking for a long time of a possible transaction on that business. I understand you had given maybe a scale -- rather reach scale for a particular level of scale and then look at some transaction coming in. Any update on that, sir?

See, the reason for us to talk about a potential transaction was that we believe that the Zigly's valuation is not rightly reflected in the Cosmo's first evaluation. So we continue to evaluate ways to bring that out. We will come back to you and inform the exchanges when we have something concrete to talk about, but we continue to explore options, which help us achieve that objective. The key objective for us is that, Zigly's next phase of growth should not weigh on the Cosmos balance sheet, and that's what we are also trying to address through the various options that we spoke about. So allow us to come back to you when we have something concrete to share with you.

The next question is from the line of Aman Kumar Sonthalia from AK Securities.

I have certain questions regarding this chemical business. So this quarter, we have grown very well. But out of this sale, how much is third-party sale and how much is in-house sale?

Third-party sale was close to 17% in the quarter 2.

So how we foresee this third-party sales going?

Well, the growth rate for the third-party sale is even higher compared to the internal group sales. So that way, in the years to come, you will see that ratio improving maybe towards 50-50 in the medium- to long-term.

Okay, sir. Sir, in the Zigly business and Cosmo Consumer business, the growth is quite good. But if we compare with the previous quarter, the growth rate is quite muted. So what is the reason behind that?

See, let's talk about the 2 businesses separately. If you look at the Cosmo Consumer business, so there is a certain element of seasonality, which comes in Q2. Overall, if you see that the revenue growth even in Q2 was very high at 70% and the H1 was 2.6x of last year. The seasonality was weak because the demand for sun control films peaks in the Q1, which is April to June summer and July to September is slightly lower because of the monsoon.

And about the Zigly business, yes.

Zigly business, again, there is an element of seasonality in Q2 because of summers, the footfall slightly gets lower -- on the lower side. Having said that, again, if you look at from a year-on-year expansion point of view, that's still more than 50%.

So how do we foresee the growth going forward in both the businesses?

See, we continue to project more than 60% growth in both the businesses. And I think we are way on track -- very well on track on both the businesses to achieve that level of growth.

Sir, in the second half, we are coming out with 2 value-added products. It's 1 coating line of 16,000 and 1 as you have seen that 10-meter line of film. So what type of margins we have in this business since you said that's a very high-margin business?

Yes. It is a 9-layer sheet line, which is for barrier sheets and the other is a coating line. Both these have very good margins. In fact, as regards to barrier sheet line, we have only one other competitor in India. We already have 1 barrier sheet line, and we are adding the second one now. As far as coating is there, we are one of the largest players in the world when it comes to films and coatings, and we are again adding our capacity because of the increased demand in the coated. Both businesses have roughly 20-plus percent margins on it.

And sir, we have applied for -- we have participated in the tender of currency note. So any update on that?

It is a confidential matter. Whatever is available in the public domain, that is all we can -- I mean, it is there for the investors to look at. We have NDAs and we cannot share much on this.

And one suggestion to the management, sir. Since our equity is very thinly traded in the stock market. So if you can split the sales, it will be very good for the investors to trade.

Okay, noted.

The next question is from the line of Saransh Gupta from SVAN Investments.

I hope I'm audible.

Yes, sir.

Yes.

Yes. Congratulations on a decent set of quarter, sir. Sir, I have a few questions. Firstly, what is the current spread that is going around in the market for BOPP and BOPET?

Well, broadly, it's in line with the average of the previous quarter.

And we expect that to stay at least for the quarter.

Sorry, say again, please.

And how are we seeing the trend like will it sustain at those levels? And like how is it?

Well, I mean, as you know, quarter 3 generally has a seasonality aspect in the film business because Christmas holidays for the export and in India, you have Diwali festival. So that -- with that seasonality, there may be up or down in terms of the margin. Other than this, we see broadly a normal quarter.

And sir, if I rightly recall, you said that our specialty and semi-specialty segment would contribute around 60% of our BOPP revenue. So I believe that for the target of 65% to 70% next year, like what will be the lever of growth, like where is this growth going to come from and then to 80%?

Next year, we have given a projection of 65% to 70%. And there are multiple business verticals where within the film where this growth is going to come from. We are actually growing in all the business verticals, whether it is packaging, labels, graphic. But our biggest focus lies in graphics, in leading, labels and synthetic paper. And in the times to come, we are also looking at security as one of the critical areas to focus upon.

And sir, secondly, I see that our Consumer business has reported a loss because of the increased advertisement expenses. So what can we assume as a time line for it to become breakeven?

See, we will continue to invest on the marketing cost for the next 2 years to build the brand in India to begin with. And therefore, next 2 years, we expect that there could be some losses on this business. They are not so significant for us. And then we will taper it down as a percentage to our revenue.

And just to add to it, if you exclude the advertisement and the marketing spend, the business is very close to the operationally breakeven.