Cosmo Films - A One Bump Trade?
Increasing Commodity Film Spreads
Disclosure: Long on Cosmo Films currently.
This is not investment advice. We are not a SEBI-registered advisors or analysts. These are our personal views, and should be in the same light. We do not take any responsibility for the data provided here, and recommend that you do your own research before trading/investing.
Cosmo Films looks like it is set to do fairly well in Q1FY25 with BOPP spreads doing much better than Q1FY24.
Long story short, contribution margins per kilo (usually referred to as gross margins during Cosmo’s concalls) had come down sharply in FY24 due to the demand-supply mismatch in BOPP supplies in the country. However, through Q1 of FY25, prices for BoPP films have been on the rise, and the contribution margins appear to be increasing. The latest median price for BoPP films for Jindal Films is Rs 141 ( based on price list sourced from dealers of BOPP films - of course, varying volumes of each grade might actually yield a much different figure on a volume-weighted average basis, but we have to work with limited data ).
On the raw material side, the cost of polypropylene is currently around Rs 106 (for film-grade PP). PP prices at the beginning of the quarter were around Rs 104 per kilo. For listed Indian players, variable costs per kilo (sum of packing, freight, spares and other direct variable expenses at an assumed 75-80% utilisation factor) come to around Rs 17-19 per kilo.
Subsequently, contribution margins for commodity films should currently be around INR 18 (141-106-17) - though this would probably be lower when we calculate the blended margin for the quarter. The same number for the entire Q4FY24 was around Rs 12, and Rs 10 in the entire Q1FY24. Hence, commodity and semi-speciality margins could do quite well this quarter and propel profitability upwards (assuming no other cost or other factors play spoilsport). Further, the benefit of renewable energy is expected to start flowing in from this quarter as well.
The entire quarter has seen increasing prices without a commensurate increase in raw material prices, meaning margins would be higher than the previous quarter. Last fiscal, in the first quarter, the contribution margin figure was around INR 10 - of which 80-90% or thereabouts (Rs8-9 per kilo) gets consumed in fixed operating costs (employee costs, other fixed costs divided by total production at an assumed 75-80% blended utilisation - we used numbers from Jindal FY23 AR). Our channel checks suggest that a pure-play commodity film player could even reach breakeven EBITDA at INR 6-8 contribution margin since these players sell in bulk without maintaining large sales teams or with marketing spend. This would indicate a sharp rise in profitability - even without considering the effect of a Rs 30 crore annual savings (with renewable power being used, and a line being shifted from Korea to India), FY25 looks to be a much better year from a profitability perspective. And with Cosmo’s presence in the semi-speciality business (where spreads are around INR 15-20 higher than the commodity spreads), Cosmo is likely to do much better than purely commodity-oriented peers.
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The BoPET business, which remains unprofitable (even at a contribution margin level for a while) due to excess capacity (thanks to a much lower greenfield capex requirement compared to BoPP) - could see a turnaround if some capacity goes offline. In the previous cycle, it was JBF Industries that went bankrupt and the event brought sanity to BoPET pricing (but back then, BoPET was profitable even at the bottom of the cycle). Ester, one of the largest BoPET players appears to have only enough cash at this point to continue operating for two to three more years (despite a fundraise). Let’s see how BoPET plays out.
However, the long-term story remains increasing specialisation in the portfolio, lowering production costs, the profitability of Zigly (a fairly serious cause of concern), and the profitability of BoPET. However, next year we WILL see new capacities come up, perhaps even some capacities that seem like they had been put on hold (for instance, Chiripal’s potential in Jammu) - which should increase capacity by 18% over FY25. An Eastern group’s new plant would be the elephant in the room, and we certainly expect lower margins in FY26. While distributor gossip suggests that the new company wouldn’t want to get into tape textile films (basic commodity films), it seems difficult to believe that a new plant with a large capacity will let go of a profitable commodity opportunity, especially since ramping up speciality and semi-speciality products take significant time and R&D efforts.
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An objection could be that we are looking at domestic capacity data instead of international demand-supply data. However, India and China remain the lowest-cost producers and importing commodity or lower-grade semi-speciality films from China doesn’t make economic sense under usual circumstances due to freight costs and duties. A quick look through Thai film manufacturers or other global mass producers shows that the cost of production per kilo is sharply higher there, compared to India. With barely any imports in commodity films, excess domestic capacity should logically remain the primary factor to watch out for.
To us this could be a potential Q1 trade, or a trade till contribution margin spreads look better than last year. However, FY26’s likely lower profitability would mean that it would have to be a shorter-term play unless one is ready to hold this for 3 to 4 years. Valuations look decent from all angles currently.