The Hindu Business Line : Cosmo Films: Sell

The company faces a number of challenges in its business and there are many other players in the flexible packaging industry such as Jindal Poly Films and Polyplex Corporation, which are better-placed to take advantage of growth opportunities.

Sliding prices of its films and a potential rise in the prices of polypropylene, the feedstock, could further shrink Cosmo Films' margins.

The company faces the threat of capacity expansion from its competitors too. Cosmo Films reported a sharp drop in earnings of 82 per cent for the first quarter of FY-06. The operating margins fell 12 per cent in the same period.

To reduce its dependence on the domestic market, Cosmo Films has increased its focus on exports, which have been growing consistently.

The growth, however, has not compensated for the poor showing on the domestic front.

Cosmo Films is a major player in the polypropylene film business and has been adding capacities in recent times. Its products are used in the food packaging and adhesive tape business.

The lucrative returns for the industry players in recent times have resulted in over capacities in the domestic market. Cosmo Films faces the threat of domestic expansion from Jindal Poly Films, which proposes to more than double its capacity in the polypropylene business.

After Jindal Poly Films' capacity expansion, Cosmo Films would be left way behind in the polypropylene film business in terms of size of operations. In FY-05, a 25 per cent growth in revenues failed to boost Cosmo Film's earnings; on the contrary, it reported a 66 per cent drop in profits.

Excess capacity in the flexible packaging industry has reduced the realisations of its films.

Fresh capacity expansion by Jindal Poly Films could further dampen the market. Prices of polypropylene have risen sharply and continued into the first quarter, increasing the raw material component to about 70 per cent of its revenues.

A rise in crude prices could further inflate the price of its raw material, which would shrink its margins further.

Rise in inventory levels and a longer debt realisation cycle have also impacted its cash flow from operations.

With over capacity prevailing in the domestic market, Cosmo Films' topline growth prospects too do not look bright.

It would have to look at new markets, but with the anti-dumping duties imposed on polymer films from India by the developed world, that too is likely to bechallenging. Margins on exports too may not be as lucrative.

Cosmo Films would have to compete on an unequal footing with manufacturers in the developed world. As of now, exports contribute 34 per cent of its revenues.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page