Cosmo Films Ltd Management Discussions.

1. Macroeconomic Overview

According to the recently published International Monetary Funds (IMF) World Economic Outlook, the present global economic situation is an opportune time for policymakers to boost growth. The report predicts that while advanced economies, as a whole are expected to grow at the rate of 2.5% during 2018, up from 2.3% during 2017, the emerging markets and developing economies are expected to grow strongly during the coming two years. The growth rate for these economies is projected around 4.9% during 2018, slightly higher than 4.8% during 2017.

For the Indian economy, FY 2017-18 was marked by a number of key structural initiatives to build strength across macro-economic parameters for sustainable growth in the future

India is projected to regain its status of the worlds fastest growing large economy with an expected impressive rate of 7.4% in 2018, which is set to increase further to 7.8% in 2019, up from 6.7% in 2017. According to the IMF, prospects for the Indian economy are bright, propelled by strong consumption growth and structural reforms. Further, the transitory effects of reforms such as the Goods and Services Tax (GST) and demonetization are fading out.

2. Industry Scenario

The prospects for packaging sector depend on growth of industries such as food processing, pharmaceuticals, retail and e-commerce. The growth of the Indian packaging industry will be heavily influenced by changing demographics such as growing urbanization and the rising proportion of middle class consumers. These changes drive the need for new packaging formats, such as different sizes, materials, and strength.

The packaging industry has experienced rapid growth globally as a result of greater innovation and customer preferences for global brands. Packaging sales in the emerging markets are expected to continue to show strong momentum as both increased consumption and demand for consumer goods drives the need for more sophisticated packaging.

The Indian packaging industry is expected to grow to $32bn by CY2020 as per the Indian Institute of Packaging (IIP). The industry constitutes about 4% of the global packaging industry. The per capita packaging consumption in India is quite low at 8.7kg compared to countries like Germany (42kg) and Taiwan (19kg), as per data from the Indian Institute of Packaging.

A number of significant trends are driving rapid change across the industry such as the increased presence of global multinational companies, consumer brand awareness and products with ‘clean-label messaging that enhance brand transparency and builds purchasing confidence. The demand for smaller and flexible packaging is also increasing due to increase in per capita income, urbanization and growing numbers of working women. Furthermore, the e-commerce industry in India has substantially expanded and is changing the packaging needs, driving requirements for versatile and visually appealing packaging solutions.

3. About Us

Cosmo Films Limited (‘Cosmo or the ‘Company) was incorporated in 1981 and since then the Company has transformed itself into one of the largest manufacturers of Biaxially Oriented Polypropylene (BOPP) Films in the world. The Company is the leading manufacturer of BOPP films and provides a complete solution in the form of specialized and laminations films to the food and beverage industries. Cosmo has successfully entered the flexible packaging sectors from its traditional base in BOPP. Flexible packaging is one of the most dynamic applications in the packaging industry and has become the preferred choice of packaging material due to its print quality, moisture retention properties and environment friendly nature. Company has five state of the art manufacturing facilities spread across India (3), US (1) and Korea (1), with a total installed capacity of 196,000 MT per annum of BOPP films, 40,000 MT per annum of Thermal Lamination Films, 22,200 MT per annum of Metalized Films,10,000 MT per annum of Coated Films and 10,000 MT per annum of CPP Films. The Company has recently added a new line for production of CPP Films and metalized films at Karjan Gujarat. The line is having capacity of 7500 MT per annum. This CPP line is five layered and is designed to produce specialty films for various packaging applications. The new metallizer is equipped with advanced control monitoring system and closed loop auto deposition control system. Cosmo offers a comprehensive range of BOPP Films for flexible packaging, lamination, labelling and industrial applications, including specialty films such as high barrier films, velvet thermal lamination films and direct thermal printable films. In addition to being a market leader in the BOPP sector, Cosmo has emerged as a complete film solutions provider with more offerings and value added services.

Packaging Films 1. Print & Pouching Films
2. Barrier Films
3. Overwrap Films
Lamination Films 1. Dry (Thermal) Lamination Films
2. Wet (Print) Lamination Films
Label Films 1. Pressure Sensitive Label Stock Films
2. Direct Thermal Printable Films
3. In-mould Films
4. Wrap around Label Films
Industrial Films 1. Synthetic Paper
2. Tape & Textile Films

The Companys continuous efforts towards research and development helps in improving its product portfolio. The R&D labs of the Company (in India and US) has sophisticated equipments. Company has recently refurbished the Indian R&D lab to complement R&D team efforts.

Company keeps a watchful eye over its quality. Cosmo keeps monitoring its quality standards time to time with the help of parameters such as no. of complaints/100MT of sale, complaints per million opportunity, complaints sigma level, defective material kgs/MT of sale and sales quality return as percentage of sales.

Cosmo Films continue to innovate with development of new products to meet the industry growing need for convenience and product safety. Some of the recently launched value added products of the Company are-

PACKAGING FILMS LAMINATION FILMS
BOPP Conduction Sealing Film - Universal PET Lidding Film –
Suitable for sterilization process which increases shelf life of products specially for Dairy industry Universal lidding film which laminates with different plastic and paper materials and has easy release
High Metal Bond CPP Film Black & Metalized Velvet Film
High Metal Bonding resulting into good inter-layer bond strength Enhancement of product appearance in Graphic Industry and Velvet cloth like feel which also enriches the colour depth on printed surface
BOPP Films for SOAP Wrapping
Enhances moisture barrier which help to maintains consistent SOAP weight for longer time.
LABEL FILMS INDUSTRIAL FILMS
Metalized Label Film Cosmo Synthetic Papers (CSP)
Mirror Finish Glossy film which can be printed with high speed flexo printing machine. With enhanced features such as quick drying (Labels, Tags, Maps, ID Card, Tickets for adventure parks etc.)
Tape Release Film
Pressure sensitive tapes
Release coated BOPP liners

4. Operational and Financial Performance

In financial year 2018, Net Sales increased by 22% to Rs 1936 crores from Rs 1587 crores in financial year 2017. Sales volume grew by 25% with 20% growth in Specialty films. BOPP film margins continued to be volatile and wiped out gains of volume increase and better product mix.

Companys continuous focus on improving operational efficiencies helped in maintaining EBIDTA level. Consolidated EBIDTA for the financial year 2018 is Rs 168 crores against Rs 169 crores in financial year 2017. PAT and EPS dropped from last year primarily due to higher interest and depreciation of the new BOPP line commissioned last year. Consolidated PAT for financial year 2018 is Rs 64 crores against Rs 85 crores to that of last year. Key focus areas for the financial year 2018 were –

• Creating Customer Centric Culture including Robust Service Offer, New Offices Overseas, CRM, Establishing tripartite partnership between us, Converters and Brand Owners

• Improving Product Mix towards Value Add, in line with objective to de-commoditize the business model. Speciality Films sale grew 20% over last year.

• Improving utilisation of new BOPP capacity commissioned in 2017, which resulted in 25% increase in volume.

• Continuous focus on improving Internal Operational Efficiencies

In the coming year, management focus shall continue to be on expanding speciality, close to full utilisation of capacity and improving internal efficiencies.

5. Liquidity

During the year ended March 31, 2018, the consolidated Net Debt increased to Rs 684 crores from Rs 597 crores last year mainly due to capital expenditure. The Net Debt to Equity ratio is at 1.1 times.

6. Human Resource and Industrial Relations

Cosmo regards its human resources as the most valuable asset of the Company and the foundation of its success. Therefore, at Cosmo, people are always encouraged to do their best in an employee centric, collaborative and empowering work environment.

Cosmos work culture helps employees hone their skills and enables them to deliver superior performance. Individuals are selected and treated on the basis of their merits and abilities and are given equal opportunities within the organization.

To ensure that the organization work climate is engaging and motivating, Cosmo has institutionalized a rewards and recognition programme to honour employees at all levels for their outstanding achievements. Through this programme, we motivate our employees to innovate and improve their performance by providing immediate recognition to their efforts beyond normal monetary rewards. This is a part of the HR function and is a critical pillar to support the growth and its sustainability in the long run.

In FY 17-18, industrial relations across the Company were cordial with no labor unrests or strikes during the year.

7. Internal Control Systems

The Company has an Internal Audit System commensurate with its size and nature of business operations. The Internal Auditors covers all the key areas of the Companys business and reports to the Audit Committee of the Board. Cosmo has also implemented adequate internal controls towards achieving efficiency of operations, management of resources, accuracy and promptness of financial reporting and compliance with the applicable laws, rules and regulations

8. Opportunities and Risks

Opportunities

1) Specialty Films: Specialty films have become need of the hour. Cosmo is working on specialty products for quite some time now and they already form a good mix of our portfolio. Some of the recent specialty products developed by Cosmo include Direct Thermal Printable Films, Universal printable Synthetic Paper and Ultra High Barrier Films.

The major growth drivers for specialty films market are increasing demand from pharmaceuticals and food packaging. Packaging also play a pivotal role in recently increasing trend of e-commerce, online shopping.

2) Fast Growing Asian-Pacific Market: Asia-Pacific region is the fastest growing market for the global packaging industry. Growing packaging industry, increasing automotive production, massive electronics production industry in China and India, and the growing construction industry in various countries in Asia-Pacific region is expected to drive the market during the period 2018-2023

Risks

1) Volatility in Raw Material Prices:

Polypropylene is the key raw material of the Company. Changes in the cost of raw materials such as these are generally a pass through. Time lag, if any, in doing so may impact the margins of the Company.

2) Foreign Currency Fluctuations:The Company, as a result of operating in several countries, is faced with foreign currency risk. Foreign currency loans also expose Cosmo to further risk from changes in the foreign currency rates. The Company has a foreign exchange risk management policy and implements hedges in accordance with the policy to mitigate the risk.

3) Emergence of Competition in Specialty Films: The Company is a leading manufacturer of Specialty Films in India. Emergence of competition in this segment may impact the growth plan of such films in the medium to long term.

The Risk Management Committee of Board meets regularly to evaluate the effectiveness of risk mitigation measures and suggests course correction wherever required.

9. Future Outlook and Strategy

The Company has progressed well in implementing its long term manufacturing strategy with efficient capacity creation. During the Financial Year 2018 the Company has commissioned its second Cast Polypropylene (CPP) Line and fourth metalizer.

Cosmo is focusing on value added films which has higher margins and has a strong pipeline of innovative films to meet the ever changing requirement of the customers. The Companys successful approach towards research and development allows it to continuously innovate customer centric products. Cosmo is well positioned to become the global preferred manufacturer of specialty films with a clearly defined mission:

a) For Customers:

To deliver the finest product and service experience, backed by innovation, people and processes

b) For Employees:

To nurture a working environment that fosters personal and professional growth

c) For Shareholders:

To generate sustainable long term returns on investment with focus on transparency and accountability

d) For Vendors:

To create symbiotic relationships that drives mutual growth

e) For Community:

Contribute to community growth through education, skills development and sustainable green practices

10. Cautionary Statement

This report may contain "Forward Looking Statements" including, but without limitation, statements relating to the implementation of strategic initiatives, and other statements relating to Cosmo Films future business developments and economic performance. While these Forward Looking Statements indicate the Companys assessment and future expectations concerning the development of the Companys business, a number of risks, uncertainties and other unknown factors could cause actual developments and results to differ materially from the expectations. These factors include, but are not limited to, general market, macro-economic, governmental and regulatory trends, movements in currency exchange and interest rates, competitive pressures, technological developments, changes in the financial conditions of third parties dealing with the Company, legislative developments, and other key factors that could affect the Companys business and financial performance. Cosmo Films undertakes no obligation to publicly revise any forward looking statements to reflect future / likely events or circumstances.