Over the years, I avoided companies like Cosmo Films on the grounds that they were largely oil price proxies, reporting large (and temporary) profits during years when crude oil prices were weak but reverted to square one when crude oil prices hardened. Appears I have to finally revise my opinion.
In the past couple of years, this Delhi-based manufacturer of speciality films (packaging, label, print lamination, and industrial) is gradually evolving its DNA to emerge as relatively non-cyclical in an otherwise cyclical business. These are some of the ways through which the firm is reinventing itself:
Sweating assets better. Transforming from a singularly manufacturing-focused company to sales and marketing-driven organisation. Emphasising on the globalness of its brand. Educating dealers on its complete product range. Moderating costs. Turning loss-making units around. Graduating from the commodity to the value-added. The transition is visible when you compare the performance of the second quarter of FY15 with the second quarter of FY16.
Last year, Cosmo Films reported a consolidated revenue of Rs 449 crore in that quarter; this year, revenues were marginally lower (due to lower product pricing) at Rs 435 crore. Interestingly, PBDT (profit before depreciation and tax) increased from Rs 18.8 crore to Rs 41.2 crore; interest declined from Rs 9.6 crore to Rs 7.5 crore.
This improvement has not just been the result of an oil play. Cosmo is likely to generate a 10 per cent throughput increase without any capex (likely to be followed by a six per cent increase next year ceteris paribus). There has been a growth in value-added speciality product manufacture from 25 per cent of all sales to 40 per cent. Receivables have declined from 45 days of turnover equivalent to 30 days.
By switching fuel feedstock and investment in new chillers, the company expects to make a saving of Rs 45 crore across two years. There is a likely Rs 8-crore tax benefit on exports. The losing US operation ($5 million a year) has turned around. The company has mobilised fresh 10-year debt at LIBOR plus 0.6 per cent with a three-year moratorium, which will have extensive cash flow (and hence working capital) implications.
If this were not excitement enough, the big story is the projected capacity growth and corresponding cost.
Cosmo is today a 136,000 TPA (tonnes per annum) company, with an investment of around Rs 900 crore; in 14 months, this will be a 200,000-TPA company, with an aggregate investment of Rs 1,100 crore, the incremental capacity being funded with a capital cost per tonne considerably lower than its retrospective average (what an inflation-beater!). Cosmo's new manufacturing lines will be cheaper its lowest cost lines, giving even the most competitive lines in China a run for their money.
For this year and the next, Cosmo expects to grow from moderate top line increase derived from Kaizen-driven throughput increase, but the years to watch will be 2017-18 onwards when the benefit of its expansion will be on show. That's when a Rs 1,700-crore top line company could grow revenues to a peak (as visualised today) to Rs 3,000 crore - at higher margins.
Work out the discounting.
The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed
