Cosmo Films Ltd (CFL) is a leading manufacturer and exporter of Bi-axially Oriented Polypropylene (BOPP) Films in India. The company which is promoted by Ashok Jaipuria is also one of the largest manufacturers of thermal lamination films exported to Europe and US. The company was awarded Top Exporter award from Dun & Bradstreet (D&B India) and Export Credit Guarantee Corporation of India Ltd. (ECGC) in the chemicals, petrochemicals and plastics sector under the large Indian exporters' category.
Upal Roy, Chief Strategy Officer, Cosmo Films Ltd, is responsible for formulating the company?s strategy for medium and long term. He is also responsible for Marketing and IT. Before joining Cosmo in 2007, Upal worked for 11 years in DuPont in a variety of roles ranging from Finance to HR to marketing, his last position being Business Manager ?DuPont Fluoroproducts and Global Marketing Manager for Signage, Fluoropolymer Solutions. Prior to joining DuPont, Upal was employed by Citibank in the Global Consumer Bank Division, in Chennai, India. Upal started his professional career with Texaco (now Chevron Texaco) in Houston, USA in 1992 as a business analyst in the Information Technology Division. He has a B. Tech (Metallurgical Engineering) from Indian Institute of Technology, Kanpur followed by a MS (Metallurgical Engineering), University of Missouri, USA and a MBA from Rice University, Houston.
In an interaction with Anil Mascarenhas of India Infoline, Upal Roy says, ?The challenge is now operational excellence as technology and finance are no longer entry barriers.?
Are you seeing a trend where package sizes are shrinking in food packets? What impact would this have on companies such as yours?
India is a unique market. The packaging requirements are generally over specified as food has to be packed keeping in mind different temperatures as they are sent to different parts of the country. There is a trend in reducing the size of packages to bring down the unit cost per pack. There is also a shift to thinner films to reduce the amount of packaging consumed. Abroad, the shelf life for food products is much lower. In India, the shelf life is around 6 months for most products. Those over-specifications are now coming down.
In the packaging cycle, where is the entry point your company makes?
Polypropylene resin is a product of the petrochemical industry. We convert this polypropylene (or PP) resin into a film. We then sell it to a converter who does the printing, lamination and pouching, which is a separate industry. The converter then sells it to the end customer which could be for example one of the large FMCG companies We come in where the resin is converted into a film. Cosmo Films is one of the leading players in production of biaxially oriented polypropylene (BOPP) films. The product is used mainly by FMCG players. It is mostly used for biscuit packaging, potato chips, textile packaging and cigarette packaging.
What is the size of the industry in India and abroad?
The packaging industry globally is around US$ 450- 500bn. This includes all substrates such glass, plastics, paper, metals etc. and the converted products. It is growing at 3-4% annually.. Globally, flexible packaging (eg plastics) is growing at a much faster rate than other substrates. Within the flexible packaging space, Biaxially oriented polypropylene (BOPP) is the material of choice and is consumed around twice as much as other materials like polyester.
In India, the consumption of BOPP is same as polyester. Traditionally, India has been a polyester market and is slowly switching over to BOPP. The yield is much higher in BOPP as it is a lighter material compared to polyester.
The market in India for BOPP is 160,000 to 170,000 tons per annum while globally it is 4.7mn tons and growing at 6%.
What is growth being witnessed?
There is a lot of capacity expansion happening. Around four years ago, the capacity utilization globally was around 72-73%. Because of strong demand globally, in the last two years, it has risen to around 77%. As is the case with most commodities, when the utilization levels start increasing, people are willing to add more capacities.
In India, the BOPP market is growing at around 15-20%. The trigger here has been wide growth in the organized retail industry. Globally, 70% of BOPP consumption is by the food sector. In India, it is only around 40% because food packaging is still unorganized. As more organized retail players come into India, the growth of BOPP will only increase as food packaging drives the growth for BOPP.
You are also in the thermal lamination space.
In wet lamination which is most common in India solvents are used. Some of these solvents are not good for the environment. In thermal lamination, which is dry lamination, heat and pressure are used. Thermal lamination is more environmentally friendly and the yield is much higher. Globally there is a trend towards dry lamination.
What is your current capacity? What are your expansion plans?
We recently announced an investment of Rs150mn for buying 2400mm wide metallizer for further capacity addition in our metallizing business.
At present, our capacity is around 56,000 tpa (tons per annum) for BOPP. Thermal lamination is currently at 21,000 tons. In our metallizing business, the capacity is 3,600 tpa while for coated products it stands at 1800 tpa.
Going ahead, BOPP would be 96,000 tpa early next calendar year. By the end of next calendar year, we see our BOPP capacity at 136,000 tpa. Thermal lamination would be around 25,000 tpa by the end of this calendar year. Metallization would be 9,600 tpa by middle of next year and our coating capacity would remain the same at 1,800 tpa for some time.
What is the capex plan for the expansion? How is it being funded?
The capex plan for BOPP?s first line would be Rs1. 35bn while for metallization, the spend would be Rs150mn. Around Rs1bn to Rs1.1bn would be debt. The promoters would bring in additional equity by warrants, which is around Rs300mn to Rs350mn. The rest would come from internal accruals. Our exports are close to 60% in value terms with sales amounting to around Rs3.32bn for the year ending 2008.
Brief us on your financials.
PAT increased by 79.3%. Total income for the financial year ending 2008 was Rs5.91bn as against Rs5.39bn during financial year ending 2007. EPS improved to Rs22.89 from 12.77.
What are the entry barriers in this business?
The challenge is now operational excellence as technology and finance are no longer entry barriers. BOPP is not easy to manage and you need to be efficiently running your lines to be most cost effective.
What is the cyclicality in this industry? How do you hedge against the cycle?
The industry becomes cyclical when people start expanding capacity without understanding the demand. The cyclicality is also linked to oil prices as there is 60-70% correlation of resin prices with oil. So far, we have been able to pass on the higher input costs.
One way of hedging is by product diversification and that is why we have thermal lamination. We are adding value added products like labels. The other hedge is diversifying the customer base which is something that we have been able to do successfully. We have an equal split between our domestic and export revenue (export 57%, domestic 43% for year ending March 31, 2008).
Is there a slowdown in the western countries in BOPP?
There is no downward trend in consumption. But there is some migration happening in the BOPP manufacturing base. Many units in North America, Europe and Japan (earlier in 1990 almost 70% of BOPP manufacturing was concentrated in these countries, now it has dropped to under 40%) are being shutdown as it is not very cost-effective to run them. This is where companies like ours benefit and that explains our higher exports too.
What is your message to shareholders?
We are very optimistic about the future and are going ahead with capacity expansions. Packaging will remain a key growth story in India given the changing trends.
Cosmo Films has a lot of inherent strengths. One of our key strengths has been our strong R & D and ability to innovate. Thermal Lamination is an example of this. We also work very closely with our immediate transactional as well as with the end customer to jointly develop packaging solutions.
We participated in Interpack 2008, the largest global exhibition for packaging at Dusseldorf held every 3 years and another exhibition related to printing. The response was very encouraging. European countries are looking at emerging markets for sourcing their needs and Cosmo Films is geared to meet this demand.