Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA-/Stable/CRISIL A1+'  ratings on the bank facilities of Cosmo First Limited (CFL).

 

The rating factors in healthy revenue growth of 33% achieved by CFL in fiscal 2022, supported by higher realisation in both, the BOPP base (commodity) films as well as value added products. The volumes also grew due to high demand of end products during pandemic. However, the realisations have seen a decline in H1 fiscal 2023 due to material increase in industry capacities. The BOPP segment added around 20% of additional capacities during the last six months which lead to pressure in the realisations and margins. Going forward, the realisations are expected to remain impacted.

 

Consequently, the operating margin of CFL declined to 15.8% for the first half of fiscal 2023 from 18.9% during fiscal 2022. It must be noted that the margin was exceptionally high last fiscal due to healthy demand and comparatively constrained supply.

 

The company is in the process of enhancing its capacities and is expected to incur capex of Rs 500-550 crores going forward (in fiscal 2024 and fiscal 2025) for capacity enhancement of its CPP and BOPP segment. The company recently commissioned specialised BOPET capacity in Q2 fiscal 2023 however operations are yet to start. Despite the heavy capex, the debt coverage and capitalisation ratios in the company are expected to remain adequate in the medium term, with interest coverage to remain higher than 10 time and gearing to remain less than 1 time.

 

The ratings continue to reflect the healthy business risk profile of the company, supported by its market leadership across both commodity and specialty flexible packaging segments in India and abroad, its high operating efficiency and comfortable financial risk profile. These strengths are partially offset by vulnerability to volatility in raw material prices and demand-supply dynamics, and debt-funded capacity expansion.

Analytical Approach

For arriving at its 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.

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:

Market leadership in packaging films industry: With capacity of 196,000 tonne per annum (TPA), CFL has the second largest installed BOPP capacity in India and accounted for 22-23% of the installed BOPP capacity in the past five years. In the value-added segment, the company has 80% share in coated labels in the domestic market and is the world's second largest producer of thermal labels with 15% market share in thermal lamination globally. With capacity of 67,000 tonne to be added by March 2025, the company should maintain its dominant market position in BOPP. It commissioned its specialised BOPET lines (of 30,000 TPA) in the second quarter of fiscal 2023, but operations are yet to start.

 

Healthy operating efficiency supported by focus on specialty products: CFL has been gradually moving towards the value-added segment with specialty products contributing ~73% to revenue in fiscal 2022 compared with 30% in fiscal 2017. The company has also been investing primarily in research and development (R&D) and capex involving value-added products such as thermal and coated labels and specialty BOPET, and catering to customised requirements of clients in various end-user industries. The rising share of specialty films should improve realisations, keeping profitability comparatively resilient as specialty margins are relatively less susceptible to cyclicality compared to commodity products.

 

Comfortable financial risk profile: Networth remained healthy at Rs 1,356 crore as on September 30, 2022, sustained by improvement in operating performance and cash accrual. Capex of Rs 325 crore for the BOPP plant and of Rs 140 crore for CPP over fiscals 2024 and 2025 will be funded through debt and internal accrual in the ratio of 75:25. This will keep the ratio of debt to earnings before interest, tax, depreciation, and amortisation (Ebitda) high at 1.5-2.0 times in fiscals 2024 and 2025. Improving profitability and gradual reduction in debt will help limit gearing to below 1 time despite significant addition of debt. Any new, large, debt-funded capex or acquisition could adversely impact the financial risk profile and will remain a key monitorable

 

Weaknesses:

Susceptibility to volatility in raw material costs and 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 60-65% of sales. With the increased demand last year, players had added capacities (~40% added by BOPET and ~20% by BOPP players in the past six months), which led to a fall in realisations and margins of packaging players, with BOPET players seeing a steeper fall compared with BOPP players. The profitability of CFL remains susceptible to such fluctuations, though partially shielded by value-added products, the prices of which are linked to raw materials to some extent.

 

Debt-funded capacity expansion: CFL has ongoing capex for CPP and BOPP lines. The company also recently commissioned BOPET line. The total cost of these project will be Rs 750 crores (Rs 250 crores of capex done in YTD fiscal 2023 and Rs 500-550 crore going forward in fiscal 2024 and fiscal 2025), which is being funded in a debt-to-equity mix of 75:25. While the financial risk is expected to remain adequate despite the addition of capex debt, the risks related to cost and time overruns, timely stablisation of the new capacities and offtake risks for such facilities remain monitorable. The capex plan is substantial at ~40% of the net worth as on September 30, 2022.  Further, any large new capex which will be primarily funded by debt may impact the credit metrics and remain a key monitorable.

Liquidity: Strong

The liquidity will remain strong driven by expected healthy cash accrual of Rs 230-260 crore. The fund-based limit out of the total bank lines of Rs 670 crore was utilised 24% on average over the 12 months through September 2022. The company had sufficient cash equivalent of over Rs 450 crore as on September 30, 2022. Internal accrual, cash and equivalent, and unutilised bank lines will be sufficient to meet debt obligation and working capital requirement. However, the company may resort to debt to fund additional capex or working capital requirement.

Outlook: Stable

CRISIL Ratings believes that the operating performance of CFL will benefit from its increasing share of specialty products segment and commencement of its BOPET capex plant in the medium term.

Rating Sensitivity factors

Upward factors

• Significant increase in the scale of operations while sustaining the operating margin, driven by greater market share and product diversity, leading to sustained net cash accrual of Rs 400-500 crore per fiscal
• Improvement in the financial risk profile and sustenance of liquid surplus

Downward factors

• Significant additional debt-funded capex (including any cost overrun), sharp moderation in profitability, delay in ramp up of capacity and higher-than expected capital outflow for unrelated diversifications, leading to weakening of the financial risk profile; for instance, a sustained increase in the debt to Ebitda margin to 2.8-3 times
• Substantial moderation in market share and operating profitability

About the Company

Established in 1981, CFL manufactures BOPP films and sells in India and abroad. Its products are used for packaging, lamination and labelling across various industries. The company entered the specialised BOPET segment in fiscal 2023 and has commissioned capacity though operations are yet to start. The daily operations are managed by Mr Pankaj Poddar (chief executive officer) and Mr Ashok Jaipuria (managing director).

 

CFL is also involved in other businesses such as pet care supplies and specialised chemicals. However, each of these constitutes less than 10% of the revenue.

Any other information: Not applicable

Annexure - Details of Instrument(s)

*Unsecured

Annexure - List of entities consolidated

Name of the entity	Extent of consolidation	Rationale for consolidation
CF (Netherlands) Holdings Ltd BV	100%	Business and managerial linkages
Cosmo Films Japan, GK	100%	Business and managerial linkages
Cosmo Films Singapore Pte Ltd	100%	Business and managerial linkages
Cosmo Films Korea Ltd	100%	Business and managerial linkages
Cosmo Films Inc.	100%	Business and managerial linkages
CF Investment Holding Private (Thailand) Company Ltd	100%	Business and managerial linkages
Cosmo Films Poland SP. Z.O.O.	100%	Business and managerial linkages
Cosmo Speciality Chemicals Pvt Ltd	100%	Business and managerial linkages
Cosmo Speciality Polymers Pvt Ltd *	100%	Business and managerial linkages