| Cosmo Films Limited | ||||||
| Rated amount enhanced | ||||||
| Rating Action | ||||||
| ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its 'CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank facilities of Cosmo Films Ltd (CFL).
CRISIL Ratings had on June 03, 2021, assigned its 'CRISIL AA-/Stable/CRISIL A1+’ ratings to the bank facilities of CFL.
The ratings reflect a healthy business risk profile, supported by a strong market position across various commodity and specialty flexible packaging segments in the domestic and global markets, improving operating efficiency and a comfortable financial risk profile. These strengths are partially offset by vulnerability to volatility in raw and thereafter material prices and demand-supply dynamics, and to risks related to capital expenditure (capex) implementation stabilisation of the additional capacity risk.
Rising shift of consumers towards hygiene consciousness and in-house consumption of food as a result of the pandemic is likely to keep demand buoyant for the packaging industry. Additionally, with higher focus of higher margin specialty packaging, CFL is expected to grow by 10% to above Rs. 2500 crores in fiscal 2022. Decline in raw material prices and normalization of crude oil prices as well will aid in sustenance of operating margins at 17-18% during the fiscal as well. In the first quarter of fiscal 2022, the company has reported revenue of Rs. 688 crores with operating margins of 19.1%
Increased focus on specialty biaxially-oriented polypropylene (BOPP) films, steady demand during the Covid-19 pandemic, and a healthy market position in the domestic and global markets, resulted in a compound annual revenue growth of 9% over the five fiscals through 2021. The company has been able to maintain steady operating performance during the pandemic-driven national lockdown due to healthy demand for packaging and value-added films, resulting in sustenance of revenues at Rs 2,285 crore in fiscal 2021. The proportion of specialty films in overall revenue has increased to 62% in fiscal 2021 from 47% in fiscal 2019 and should improve further over the next two fiscals. Expected capacity expansion, diversification into specialty chemicals and other segments along with healthy demand for BOPP films should result in revenue growth 8-10% per fiscal in the medium term.
Increased proportion of specialty products, and a favourable demand-supply situation have resulted in sustained improvement in the operating margin to 17% in fiscal 2021 from 7.7% in fiscal 2019. An expected increase in the proportion of specialty products and ramp up of new capacities should keep the margin healthy in 14-17% in the medium term. Any changes in demand-supply dynamics of the industry adversely affecting profitability will remain a key rating sensitivity factor.
Despite debt-funded capex of Rs 315 crore over the next two fiscals, the financial risk profile is expected to remain comfortable over the medium term. The capex is to be funded through a debt:equity mix of 80:20. Healthy annual cash accrual of Rs 220-300 crore, yearly debt repayment of Rs 130-170 crore and prudent funding of capex will result in sustained improvement in the debt to EBITDA (earnings before interest, taxes, depreciation, and amortisation) ratio to below 2 times before peaking in fiscal 2022 to 2.5 times due to large debt addition for the planned capex. Any further large, debt-funded acquisition and its impact on the credit risk profile will remain a monitorable.
Liquidity remains healthy with cash and equivalents of over Rs 300 crore as on March 31, 2021, while the working capital facility of Rs 75 crore is unutilised. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of CFL and its wholly owned subsidiaries on account of operational and financial linkages among the entities, which are together referred to herein as CFI.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths: * Strong market position in the packaging films industry CFL is the largest exporter of BOPP film in India and one of the largest BOPP manufacturers in the world with a capacity of 196,000 tonne per annum (TPA). It also has a global leadership position in the high-value thermal lamination and industrial application films segment. The company holds a dominant position in other niche high-end specialty films such as labels, synthetic paper, and digital thermal print (DTP) films in India. It has a diversified revenue profile with 62% contribution from specialty films and 38% from commodity films. Over the years, the company has developed a strong product portfolio across packaging films (55% of overall revenue), lamination films (20%), label films (13%) and industrial films (13%).
Expanding the specialty portfolio, capacity addition in specialised biaxially-oriented polyethylene terephthalate (BOPET) films along with ramp up in specialty chemicals (masterbatch, textile chemicals and adhesives) should result in greater revenue diversity over the medium term.
* Sustained improvement in operating efficiency supported by a focus on specialty products The company has been gradually moving towards the value-added segment with specialty products contributing to around 62% of revenue in fiscal 2021 from 47% in fiscal 2019 supported by investment in research and development and capex for adding value-added products. Customised requirements of clients, and higher value addition catered by specialty products has resulted in sustained improvement in contribution per kilogram and in operating profitability. Improved operating profitability, prudent capacity addition and ramp-up of new capacities will ensure return on capital employed remaining over 15% in the medium term.
* Comfortable financial risk profile The financial risk profile is likely to remain comfortable, supported by steady cash accrual and prudent capacity addition. The net worth was sizeable at Rs 854 crore as on March 31, 2021. Strong turnaround of operating performance, low capex and efficient working capital management resulted in improvement in the financial risk profile over the past few fiscals. Total debt remained at Rs 750-820 crore in the past three fiscals but is expected to increase to Rs 950-1,000 crore in fiscal 2022 due to the ongoing capex of Rs 315 crore for a BOPET plant.
As a result, the debt/EBITDA ratio will remain elevated at 2-2.5 times in fiscal 2022 and improve thereafter to below 2 times. However, cash surplus should remain healthy at over Rs 300 crore per fiscal. Hence, on net debt basis, the net debt/EBITDA ratio should remain comfortable at below 2 times over the medium term. Any new, large, debt-funded capex or acquisition will remain a key rating sensitivity factor.
Weaknesses * Susceptibility to volatile raw material costs and to demand-supply dynamics The BOPP industry, especially the commodity BOPP business is cyclical. Product realisations have fluctuated in the past depending on the demand-supply gap. Also, the industry is highly fragmented and players tend to add large capacities when prices improve, leading to a fall in product realisations. Profitability is also vulnerable to volatility in raw material prices as raw material cost accounts for 55-60% of sales. Players have tended to add large capacities whenever there is improvement in prices, leading to a fall in product realisations subsequently. Further, the key raw material, polypropylene granules, is a derivative of crude and hence, profitability is susceptible to volatility in crude prices. However, the extent of fluctuation is not as severe as that in crude given the lower correlation of poly films, as compared with other downstream products, with crude prices. Further, players have the flexibility to pass on raw material price fluctuations to customers to an extent.
* Exposure to risks related to debt-funded capacity expansion The company is entering into the specialised BOPET segment with its first line to commence from July 2022. The total cost of this project is about Rs 315 crore, which is being funded in a debt-to-equity mix of 80:20. While the financial risk remains comfortable despite the addition of capex debt, any new debt-funded capex is likely to impact the credit metrics and remains a key monitorable. Also, given the substantial size of the capex (almost 40% of the networth as on March 31, 2021), the company is exposed to risks relating to timely implementation and stabilisation of the project. Any delay in ramp-up of new capacities, or any new, large, debt-funded capex or acquisition could adversely impact the financial risk profile and hence will remain a key monitorable. |
Liquidity: Strong Cash accrual was healthy at Rs 250-300 crore in fiscal 2021. The fund-based bank limit was utilised at an average of 60%, with undrawn lines of Rs. 75 crore, during the 12 months through March 2021. The company also had sufficient cash equivalents over Rs 300 crore as on March 31, 2021. Internal cash accrual, cash and cash equivalents and unutilised bank lines should be sufficient to meet debt obligation and working capital requirement. However, the company may depend on debt to fund capex or additional working capital requirement. |
Outlook: Stable The operating performance of CFL should benefit from the increasing share in the specialty products segment and commencement of the BOPET plant over the medium term. |
Rating Sensitivity factors Upward factors
Downward factors
|
About the Company Established in 1981 by Mr. Ashok Jaipuria, CFL is one of the largest manufacturers of BOPP films in India for packaging, lamination and labelling applications. Its operations include manufacture of BOPP films, cast polypropylene (CPP) films and soon to be offered BOPET films. It has capacities of 1,96,000 tonne per annum (TPA), 40,000 TPA, 20,000 TPA and 22,000 TPA for BOPP, thermal, coating and metalising films, respectively. The manufacturing plants are at Aurangabad in Maharashtra, Vadodara in Gujarat, and Korea.
For the three months ended June 30, 2021, the CFL (consolidated) reported operating income of Rs 688 crore and a net profit of Rs 87 crore as against operating income of Rs 481 crore and a net profit of 47 crore for the corresponding period of the previous year |
Key Financial Indicators
|
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*100% interchangeable with Non fund based ^INR 20 Crs interchangeable with Non fund based |
Annexure - List of Entities Consolidated
|
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Criteria Details
|