Cosmo First Ltd Q4 FY23 Earnings Conference Call Insights

Key highlights from Cosmo First Ltd (COSMOFIRST) Q4 FY23 Earnings Concall

Management Update:

• [00:03:36] COSMOFIRST said that despite the challenging market, the company’s specialty margins remained intact, while semi-specialty product margins were down compared to the previous year.

• [00:04:49] COSMOFIRST entered into a renewable power agreement to source 40% of its fixed power requirement from renewable sources, aiming to source 50% of its power requirement through renewable sources in the medium-term.

• [00:05:42] The company expects the flexible packaging position to improve in the coming months and aims to strengthen its position in the specialty film business through the launch of new specialty films.

• [00:09:32] COSMOFIRST is progressing with the expansion of BOPP and CPP lines, which will increase capacity by almost 45% by March 2025, while also promoting sustainability.

Q&A Highlights:

• [00:15:21] Shubham Agarwal from Aequitas asked about the current trend in spreads and how they are expected to change for the rest of the year. Neeraj Jain Group CFO replied that it is unsure of the current margin trend but added that that there has been a margin uptick in May 2023 compared to the last quarter.

• [00:16:13] Shubham Agarwal of Aequitas also enquired about COSMOFIRST’s perspective on the industry given the addition of new production lines and the current demand scenario. Neeraj Jain Group CFO replied that the industry is growing at 10% YonY, so two new production lines in FY24 should not have a significant impact. However, if there is a bunching of lines in FY25, this could create some temporary pressure. Over time, demand and supply are expected to balance out.

• [00:17:12] Shubham Agarwal with Aequitas queried that given the margins have remained low, if there were any closure of inefficient plant in India. Neeraj Jain Group CFO said there will be some closures in the industry, but COSMOFIRST has been able to run its lines fully.

• [00:18:43] Shubham Agarwal of Aequitas asked about the expected growth of specialty demand for the current year, given that it was flat last year. Neeraj Jain Group CFO answered that COSMOFIRST has exciting products in pipeline on specialty side and is optimistic about its growth in FY24.

• [00:21:41] Sagar Shah at PhillipCapital enquired if the demand improving in the FMCG sector. Neeraj Jain Group CFO replied that the demand for its films is strong, but the supply has been disrupted by a short-term increase in production. COSMOFIRST expects this temporary gap to be mitigated over the coming quarters.

• [00:24:34] Amit Agarwal from Leeway Investments asked if the company is still planning to meet its target of opening 30 to 40 Zigly stores by the end of the year. Neeraj Jain Group CFO said the company opened 15 new stores in FY23 and plan to open almost double that number in the current financial year.

• [00:26:47] Harsh Mulchandani with Kriis Portfolio asked how the company plans to utilize the upcoming capex. Neeraj Jain Group CFO replied that COSMOFIRST has spent 3 years researching and developing innovative window films in multiple categories and is expected to launch them in 2Q. The main challenge is building sales and educating consumers about the benefits of window films.

• [00:30:14] Harsh Mulchandani with Kriis Portfolio asked if the company expects specialty products to account for more than half of its sales in 5 years. Neeraj Jain Group CFO answered that the company plans to increase the percentage of specialty and semi-specialty sales from 33% to 60-70% in 5 years.

• [00:33:19] Nirav Savai from Abakkus Asset Management asks about the size of the shrink film market in India and the potential revenue for the company in the next 2-3 years. Neeraj Jain Group CFO replied that the shrink film market has the potential to become very large and replace the 30,000 metric ton PVC film market due to recyclability issues with PVC film that can be addressed with high shrink Pet-G film.

• [00:34:42] Harsh Sheth at HDFC Securities queried about the current breakdown of exports and domestic sales, and which geographies it’s planning to expand into in the next year. Neeraj Jain Group CFO clarified that export and domestic is close to 50:50. And biggest target market is Americas.

• [00:36:40] Vipul Shah from Sumangal Investments asked what type of capacity addition can be seen from the BOPP and CPP lines that COSMOFIRST is planning to complete in 2025 and the ROE and ROCE expectation. Neeraj Jain Group CFO said that both put together should be close to 80,000 tons. In a normal market payback period should be close to 4 years.

• [00:37:19] Vipul Shah of Sumangal Investments also asked about the capex for chemical and pet care business for next 2-3 years. Neeraj Jain Group CFO answered that the Zigly business is expected to generate INR100-150 crores in revenue. The chemical business can double its revenue from existing capex without any major capex until 80% utilization is achieved.

• [00:40:27] Anuj Salian enquired about the revenue and margin expectation from the master batches segment and the competitors. Neeraj Jain Group CFO replied that the company is mainly in the film-related masterbatch market, which is dominated by multinational competitors. 70% of the company’s total revenue in CSC comes from masterbatch.

• [00:41:20] Anuj Salian asked about any industry-wide capacity additions in the packaging business in next couple of years. Neeraj Jain Group CFO said some polyester lines are coming up in ’23 and ’24. In BOPP, two more lines are coming until ’24 and six lines in ’25. Many players are sensibly delaying their projects to ’26 and ’27.

• [00:43:42] Varun Gupta from Augmenta Research enquired if the inventory correction is complete or will there be more in 1Q. Neeraj Jain Group CFO answered that most inventory corrections occurred in 3Q and 4Q; none are expected next quarter.

• [00:44:37] Navneet Bhaiya asked if the BOPET line is now operating at full utilization after slow 3Q utilization due to poor market conditions. Neeraj Jain Group CFO replied that 4Q utilization was 60-65% due to new product development; full utilization is not expected in 1Q.