Detailed Rationale

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

 

The reaffirmation factors in the comfortable business risk profile, supported by the diversified product portfolio with majority of the revenue (~64% in fiscal 2024) coming from the specialised packaging films segment. The ratings also factor in the company’s established market position across both commodity and speciality flexible packaging segments in India and abroad, and comfortable financial risk profile. These strengths are partially offset by vulnerability of operating performance to volatility in raw material prices, demand-supply dynamics, and risks associated with timely commissioning and ramp-up of additional capacities.

 

Revenue in fiscal 2024 declined 16% to Rs 2,592 crore from Rs 3,071 crore in fiscal 2023 due to fall in raw material prices and lower realisations following oversupply in the flexible packaging industry despite marginal increase in volume. Though revenue improved ~5% on-year in the first half of fiscal 2025 due to improvement in the prices of biaxially-oriented polypropylene (BOPP) and biaxially oriented polyethylene terephthalate (BOPET), sustenance and quantum of improvement in performance over the medium term remains monitorable. Operating margin also improved to 11.9% in H1 fiscal 2025 against 7.8% in fiscal 2024 (12.9% in fiscal 2023), though it remains below the normalised margin of 12-13% during the pre-pandemic period. Return on capital employed also remained subdued at 5.6% in fiscal 2024 (against pre-pandemic levels of 13-14%), impacted by low margin and ongoing capital expenditure (capex), the benefit of which is yet to be seen.

 

The industry had witnessed excess supply as new capacities came on stream in both the BOPP and BOPET segments, leading to sharp correction in prices from the second quarter of fiscal 2023. Steady domestic demand (accounting for ~75% of sectoral volumes) and negligible capacity additions over fiscals 2024 and 2025 will partially offset the demand-supply imbalance this fiscal. This shall stabilise realisations and improve capacity utilisation levels, which are expected to drive improvement over the medium term, though the extent and sustenance of this improvement remains monitorable. 

 

The financial risk profile is supported by a comfortable liquidity, with cash and equivalent of over Rs 400 crore as on September 30, 2024. The company has a policy of maintaining a cash balance equivalent to more than 2 years of debt obligation. The capital structure remains strong, with gearing below 1 time despite an increase in debt for funding capex. Interest coverage ratio had moderated significantly to 2.5 times in fiscal 2024 (against 7.5 times in fiscal 2023) owing to muted operating performance. This is expected to improve in fiscal 2025 but remain moderate at 3-4 times.

Analytical Approach

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 them.

 

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 the packaging film 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 H1 fiscal 2026, the company should maintain its dominant market position in BOPP. With only a few players present, CFL remains a strong performer in the value-added segment of the flexible plastic packaging industry. It commissioned its specialised BOPET line (30,000 TPA) in the second quarter of fiscal 2023.

 

• Increasing focus on speciality products: CFL has been gradually moving towards the value-added segment, with speciality products contributing 64% to the revenue in fiscal 2024 against 43% in fiscal 2020. The company has also been investing in research and development and capex involving value-added products such as thermal and coated labels, rigid packaging and speciality BOPET; apart from catering to the customised requirements of clients in various end-user industries. The rising share of speciality films should improve realisations, keeping profitability comparatively resilient as speciality margin is relatively less susceptible to cyclicality compared with commodity products.

 

• Comfortable financial risk profile supported by liquidity cushion: Networth remained healthy at Rs 1,428 crore as on September 30, 2024. CFL has planned (balance) expansion capex of Rs 275 crore for the BOPP plant in fiscals 2025 and 2026, which will be funded through debt and internal accrual in the ratio of 60:40. 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 monitorable. The company has a policy of maintaining a liquidity cushion equivalent to 1.5 years of debt obligation, which supports it during downturns.

 

Weaknesses:

• Susceptibility to volatility in raw material costs and demand-supply dynamics: The BOPP and BOPET industry, especially the commodity 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, which account for 65-70% of sales. With the boost in demand during Covid, players had added capacities (~45% added by BOPET and ~25% by BOPP players between fiscals 2022 and 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 material prices to some extent.

 

• Timely commissioning and ramp-up of newly added capacities: CFL has ongoing capex for BOPP lines, which is expected to cost Rs 350 crore and is being funded in a debt-to-equity mix of 60:40. While gearing is likely 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.

Liquidity: Strong

The liquidity is supported by expected healthy cash accrual of Rs 250-380 crore in the next three fiscals. The fund-based limit of Rs 595 crore was utilised 26% on average over the 6 months through June 2024. Cash equivalent was sufficient at over Rs 400 crore as on September 30, 2024. Internal accrual, cash and equivalent, and unutilised bank limit will be adequate to meet debt obligation and working capital requirement. However, the company may contract debt to fund additional capex or working capital requirement.

Outlook: Stable

The operating performance of CFL is likely to benefit from its increasing share of the speciality products segment and completion of its BOPP capex plant over 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, driven by high power consumption done during the 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 the 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 further strengthening the disclosures over the medium term.
• During the year under review, the 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 governance structure is characterised by 60% 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 ramp up in operations while sustaining the operating margin, driven by greater market share and product diversity and leading to steady net cash accrual of Rs 400-500 crore per fiscal
• Material improvement in the financial risk profile and sustenance of liquid surplus

 

Downside factors

• Significant additional debt-funded capex (including any cost overrun) or sharp decline in profitability weakening the financial risk profile; for instance, debt to Ebitda (earnings before interest, taxes, depreciation, and amortisation) 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 financial risk profile

About the Company

Established in 1981, CFL manufactures BOPP films for the domestic and international markets. Its products are used for packaging, lamination and labelling across various industries. The company entered the specialised BOPET segment in fiscal 2023. 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 total revenue.

Any other information: Not Applicable