Cosmo Films

Cosmo Films’ recent acquisition at an attractive price could propel it to a high-growth zone
THE year gone by might not have been great for Cosmo Films, but the future certainly appears exciting considering its recent acquisition of GBC Print in the US at a throw-away price. Long-term investors should not miss this opportunity for a healthy capital appreciation and an attractive dividend yield

Business:

Cosmo Films (CFL), promoted by Mr. Ashok Jaipuria in 1981, is one of the global leading manufacturers of Bi-axially Oriented Polypropylene Films (BOPP) with an annual capacity of 91,000 tonne spread between its two plants located at Aurangabad in Maharashtra and Vadodara in Gujarat. BOPP film is used in packaging most consumer goods ranging from soaps, food & soft drinks, toys to cigarettes.

CFL is also India’s largest producer of thermal lamination film, which is mainly exported to Western countries. Exports represent a major chunk of the company’s business representing nearly 45% of its FY09 net sales. However, the proportion has come down from 56% in FY08 due to the economic slowdown in the US and Europe.

Growth Drivers:

To strengthen its position in thermal lamination film segment, the company acquired GBC Commercial Print, a division of ACCO brands of USA, in June 2009 for $17.1 million. GBC is an industry leader in thermal films and equipments with three plants in the US, Netherlands and Korea. The deal values GBC at around one-sixth of its annual revenues of $100 million. In comparison, Cosmo is right now trading at around one-third of its annualised topline.

The demand for packaging film is growing strongly at around 8% globally and over16% in India. To cater to the demand the company has expanded its capacity at a cumulative annual growth rate (CAGR) of 7.4% over last five years, with nearly 12800 tonne capacity added in FY09.

The demand for thermal lamination, where the company is now a global leader, is expected to grow rapidly as the traditional solvent based lamination is environment unfriendly. At the same time, the scenario on the raw materials front is likely to be comfortable due to expected oversupply conditions in polymer industry with new plants coming up in the Middle East and China.

Financials:

Over last five years, the company’s net sales have increased at a CAGR of 13.5%, while the profits have grown at 44.1%. During FY 09, the company’s performance was under pressure as the economic slowdown affected its exports. Still the company posted a jump in its profits due to Rs 44.7 crore written back towards change in depreciation method.

The company has gradually improved its gross profit ratio to 16% in FY09, however, the net profit ratio weakened marginally to 6.5% from 7.6% in the previous year. The company has a long history of generating healthy operating cash flows. The debt-equity ratio stood at 1 as at the end of March 2009.

Valuations:

At the current market price, CFL is trading at 5 times its earnings for past twelve months adjusted for extraordinary income. The company has proposed Rs 5 per share as dividend for FY09, which gives a yield of 4.8%. Other companies in similar business are trading at earnings multiples of 3.5 to 7. With the acquisition of GBC, the company’s consolidated net sales for FY10 are likely to jump to Rs 1,189 crore with net profit around Rs 71 crore. The current market price is less than three times the estimated earnings for FY10.