Cosmo First Ltd Q1 FY24 Earnings Conference Call Insights

Key highlights from Cosmo First Ltd (COSMOFIRST) Q1 FY24 Earnings Concall

Management Update:

• [00:02:00] COSMOFIRST said there was a sharp correction in the prices of RM towards the end of the June ’23 quarter, which caused a non-repetitive inventory loss of about INR20 crore during the quarter.

• [00:02:23] The company expects the demand-supply balance for BOPP film to get restored in the coming quarters.

• [00:02:30] BOPET margins are likely to remain under pressure as the supply is far in excess of the demand.

• [00:05:22] COSMOFIRST said it shall focus on various cost rationalization initiatives during FY24, aggregating close to INR50 crore to INR60 crore annualized impact.

• [00:09:32] The company is looking for close to INR500 crore of capex by March 2025 in phases, which will be on the value-add capex on the BOPET line, Technical Films, CPP line, BOPP line, and some capex in the specialty chemical and Zigly.

Q&A Highlights:

• [00:11:00] Nirav Jimudia from Anvil Research asked how much has the capacity of the Indian BOPP industry increased over the past 1-1.5 years. Pankaj Poddar CEO said that the BOPP capacity is close to 75,000 tons per month, with domestic sales varying from 52,000-58,000 tons and exports close to 15,000-20,000 tons. The BOPP market is largely balanced, with some pressure on margins during dull months. Since 2021, four lines have been added in the domestic industry with a producible output of around 160,000 tons per annum.

• [00:13:45] Nirav Jimudia from Anvil Research enquired if there are plans to add new BOPP production lines in India in the next 1-1.5 years. Pankaj Poddar CEO replied that in one year, there are no new BOPP lines. In 1-1.5 years, there will be one line if it does not get delayed. In 21 months, the Cosmo line is also getting added.

• [00:14:31] Nirav Jimudia from Anvil Research queried about the potential cost savings from using renewable power and other cost-saving initiatives. Pankaj Poddar CEO answered that about 70% of the cost savings will come from power, with moving to renewables as the main initiative. The remaining 30% will come from raw materials and other minor initiatives.

• [00:15:38] Nirav Jimudia from Anvil Research asked when the impact of INR50-60 crores will accrue on a sustainable basis, whether it could happen next year or for 2H24. Pankaj Poddar CEO answered that the impact of INR50-60 crores will accrue in phases, with one phase already starting to accrue from 2Q. Within one year, all of this will start accruing in the P&L.

• [00:16:24] Aditya Rathi at Aequitas Investment asked about the reason why the specialty margin fell when comparing the average of FY23 to the 1Q average and how it should trend going forward. Pankaj Poddar CEO replied that Specialty films have not been impacted by the decline in export volumes, while semi-specialty margins have come down by 30% from last year, and the specialty sales are expected to grow again in the next six months.

• [00:20:55] Aditya Rathi at Aequitas Investment enquired about company’s plans on rigid packaging and the expected revenue and margin. Pankaj Poddar CEO said that rigid packaging and flexible packaging are similar in terms of customers and RMs. As a part of both flexible and rigid, COSMO will make containers for the food industry. On the revenue and margin front, it will initially take some time to scale up.

• [00:22:41] Harsh Sheth with HDFC queried about the outlook for the industry, considering the addition of two new lines this year and the anticipated arrival of five more lines next year. Pankaj Poddar CEO replied that the BOPP market has experienced some oversupply in the last 3-4 quarters, but the demand-supply balance is expected to be restored in the coming quarters.

• [00:24:27] Harsh Sheth with HDFC enquired about the net debt number at the end of 1Q24 and the outlook going forward. Pankaj Poddar CEO answered that net debt is around INR450 crores. COSMOFIRST plans to have incremental capex of close to INR400-450 crores over the next 2 years, which is expected to be funded largely by internal accruals, with the overall debt expected to go up depending on the company’s profitability numbers in the next 2 years.

• [00:25:13] Harsh Sheth with HDFC asked about the status of specialty chemicals and the market outlook. Pankaj Poddar CEO said its specialty chemicals has shown significant growth, with a revenue of close to INR170 crores last year, and the company is focusing on innovation in products such as adhesives and coatings, which have the potential to become large businesses in the future.

• [00:26:27] Bhavesh Chauhan of IDBI Capital asked when the company expects Zigly to be profitable at operating level. Pankaj Poddar CEO said it expects it to be profitable in 2 years, with good QonQ growth and a focus on innovation, while projections for hyperscaler company stocks are uncertain, and the specialty chemicals industry is projected to grow in emerging markets.

• [00:29:22] Gunit Singh of CCIPL enquired about the overall margin expectation for FY24. Pankaj Poddar CEO answered that the company expects improvements QonQ, but due to regulations, cannot give forward projections.

• [00:33:49] Nihar Dave from Vallum Capital asked what changes are expected in the internal usage of CSC and what kind of cost savings are expected once CSC starts expanding. Pankaj Poddar CEO said COSMOFIRST expects new growth to come from external sales, and the company is investing in future growth, which is taking away some of the EBITDA, while the EBITDA numbers are lower for CSC due to investment in R&D, manufacturing, and sales teams.

• [00:36:22] Namit Bhaiya asked about the inventory loss of INR20 crores in 1Q, despite the industry mostly operating on a cost-plus basis. Pankaj Poddar CEO replied that COSMOFIRST experienced an increase in RM costs during the COVID period, which led to a substantial profit, but there was a major correction in RM prices post-COVID, and the company expects RM costs to start going up again.

• [00:38:00] Namit Bhaiya enquired about the current capacity utilization of the BOPET line with 30,000 empty capacity and if there will be any issues in ramping up utilization. Pankaj Poddar CEO said it intends to largely produce specialty films in BOPET, including shrink label and microwave oven films, and has already picked up close to 150 tons of monthly volumes on specialty films and expects this to go up going forward.

• [00:40:12] Namit Bhaiya asked about the current utilization of the specialty chemicals plants. Pankaj Poddar CEO replied that the company’s utilization rate was lower in 1Q due to equipment challenges. It will take some time for the company to fully utilize its new capacity, especially in the adhesive business.