Detailed Rationale

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

 

The ratings reaffirmation factors in the strong business risk profile of CFL supported by the diversified product portfolio with majority of the revenue (~62% of revenue in fiscal 2023) coming from the specialised packaging films segment.

 

The revenue in fiscal 2023 remained flat at Rs 3,071 crores as against Rs 3,042 crore in fiscal 2022. The revenue has declined by ~18% y-o-y in H1 fiscal 2024 due to lower realisations and decline in exports. Operating margins fell to 8.7% in H1 fiscal 2024 from 12.9% in fiscal 2023 and 18.9% in fiscal 2022 due to adverse demand-supply scenario in the flexible packaging industry. The industry is witnessing excess supply as new capacities came on stream in both Biaxially Oriented Polyethylene Terephthalate (BOPET) and Biaxially Oriented Polypropylene (BOPP) segments, leading to sharp correction in prices from Q2 fiscal 2023 onwards. The industry performance is expected to remain muted in the current fiscal as well with recovery expected from fiscal 2025 onwards. Despite the challenges, the performance of CFL remained better than peers and the same is attributed to the high share of specialised films segment which is comparatively less impacted during industry downturn due to higher bargaining power.

 

The operating profitability is expected to remain subdued at 10-11% in fiscal 2024 and improve to 12-13% thereafter. Going forward, recovery trajectory in operating profitability remains a key monitorable.

 

The financial risk profile of the company is supported by a comfortable liquidity position with cash and cash equivalent over Rs 500 crores as on September 30, 2023. The capital structure remains comfortable with gearing below 1 despite an increase in debt for funding capex. However, interest coverage is expected to moderate to 3.5-4 times in fiscal 2024 from more than 7 times in fiscal 2023 and debt to ebitda ratio is expected to increase to ~3.5 times in fiscal 2024 from ~2.2 times in fiscal 2023. The same is on account of the weakening of profitability and gradual improvement is expected starting next fiscal.

 

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 domestic installed BOPP capacity in the past five years. With capacity of 67,000 tonne to be added by March 2025, the company should maintain its dominant market position in BOPP. CFL remains a strong player in value added segment in the flexible plastic packaging industry with only a few players operating in the segment. It commissioned its specialised BOPET lines (of 30,000 TPA) in the second quarter of fiscal 2023.

 

• Healthy operating efficiency supported by focus on specialty products: CFL has been gradually moving towards the value-added segment with specialty products contributing ~62% to revenue in fiscal 2023 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 1,320 crore as on September 30, 2023, sustained by improvement in operating performance and cash accrual. CFL has planned capex of Rs 350 crore for the BOPP plant and of Rs 110 crore for CPP over fiscals 2024 and 2025 will be funded through debt and internal accrual in the ratio of 75:25. 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 (~45% added by BOPET and ~25% by BOPP players between fiscal 2022 and fiscal 2023), 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 total cost of this project will be Rs 460 crores, which is being funded in a debt-to-equity mix of 75:25. While the gearing 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 ~45% of the net worth as of September 30, 2023. 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 120-300 crore in the next 3 fiscals. The fund-based limit out of the total bank lines of Rs 595 crore was utilised 30% on average over the 6 months through September 2023. The company had sufficient cash equivalent of over Rs 500 crore as on September 30, 2023. 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 the specialty products segment and commencement of its BOPET capex plant in the medium term.

 

Environment, social and governance (ESG) profile

The ESG profile of CFL supports its strong credit risk profile.

 

Flexible packaging manufacturers have a high impact on the environment primarily driven by high power consumption done during their manufacturing process. The sector also has a significant social impact because of its large workforce across its own operations and value chain partners, and due to its nature of operations affecting the local community and health hazards involved. CFL has been focusing on mitigating its environmental and social risks.

 

Key ESG highlights:

• ESG disclosures of the company are evolving; and it is in the process of further strengthening the disclosures going forward.
• During the year under review, company has an efficient water resource management system and a proper waste management system. Along with this, CFL has laid down specific environmental goals such as reduction of carbon emissions and fuel consumption by 5% in the coming fiscals.
• The gender diversity was at 5.49% and attrition rate at 16% which was lower than industry average in fiscal 2023.
• The governance structure is characterized by 67% independent director, effectiveness in board functioning and enhancing shareholder wealth, presence of investor grievance redressal mechanism and extensive financial disclosures.
• There is growing importance of ESG among investors and lenders. The commitment of CFL to the ESG principle will play a key role in enhancing stakeholder confidence given shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

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.
• Material improvement in the financial risk profile and sustenance of liquid surplus.

 

Downward factors

• Significant additional debt-funded capex (including any cost overrun) and/or sharp decline in profitability, leading to weakening of the financial risk profile; for instance, debt to ebitda ratio remaining above 3 times on a sustained basis.
• Substantial moderation in market share and operating profitability.
• Higher-than expected capital outflow for unrelated diversifications impacting the financial risk profile.

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)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Term Loan	NA	NA	Jan-30	100.0	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Jun-24	6.74	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Feb-25	13.63	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Apr-28	28.99	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Apr-24	51.77	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	July-26	34.94	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Oct-29	71.33	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Aug-27	53.81	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Mar-32	169.38	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Dec-34	67.52	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Aug-31	100.60	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Dec-29	98.13	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Jun-31	100.00	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	Dec-35	214.16	NA	CRISIL AA-/Stable
NA	Non-Fund Based Limit	NA	NA	NA	169	NA	CRISIL A1+
NA	Non-Fund Based Limit*	NA	NA	NA	50	NA	CRISIL A1+
NA	Fund-Based Facilities	NA	NA	NA	625	NA	CRISIL AA-/Stable

*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
Cosmo Global Films Private Limited*	100%	Business and managerial linkages

*Incorporated as wholly owned subsidiary on January 9, 2023 %liquidated on September 13, 2023