Cosmo Films: New Production Line and Demonetization Impact Volumes 

 

 

We present herewith the December 2016 quarterly result analysis of Cosmo Films Ltd.

Performance Summary

• The company reported flattish (year on year) sales for the quarter ended December 2016.Volumes for the quarter declined 6% YoY. The volume drop was on account of demonetization and shut down on existing lines as the company is in the process of installing a new line with capacity of 60,000 TPA.
  
  

  Financial Performance

  (Rs m)	3QFY16	3QFY17	Change (%)	9MFY16	9MFY17	Change (%)
  Revenues	3,415	3,412	-0.1%	10,872	10,541	-3.0%
  Other operating income	15	18	23.3%	39	47	21.1%
  Total income	3,429	3,430	0.0%	10,911	10,588	-3.0%
  Expenditure	2,948	3,033	2.9%	9,451	9,190	-2.8%
  Operating profit (EBDITA)	467	379	-18.8%	1421	1350	-5.0%
  Operating profit margin (%)	13.7%	11.1%		13.1%	12.8%
  Other income	3	5	53.1%	14	12	-14.1%
  Interest	67	76	12.7%	215	222	3.3%
  Depreciation	79	83	5.4%	232	245	5.4%
  Profit before tax before exceptional item	339	244	-28.1%	1026	942	-8.2%
  Exceptional item	-21	4	-119.7%	-47	-24	-47.7%
  Tax^	-41	-18		185	109	-41.4%
  Profit after tax/(loss)	359	266	-25.7%	794	809	1.9%
  Net profit margin (%)	10.5%	7.8%		7.3%	7.7%
  No. of shares					19.4
  Diluted earnings per share (Rs)					56.5
  P/E ratio (x)*					6.3

  ^ Tax for the quarter is net of reversal of Rs 61.6 million (of which Rs 4.5 million is pertaining to FY16 and Rs 1.7 bn is for 1HFY17.
  *On a trailing 12 months' basis
• Operating profit for the quarter declined 18.8% YoY with operating profit margin at 11.1%, down from 13.7% in 3QFY16. Lesser operating leverage (due to volume drop) and demonetization led to contraction in margins.
  
  

  Cost Breakup

  (Rs m)	3QFY16	3QFY17	Change (%)	9MFY16	9MFY17	Change (%)
  Raw material cost	2,162	2,231	3.2%	7,102	6,812	-4.1%
  as a % of sales	63.3%	65.4%		65.3%	64.6%
  Staff expense	184	200	8.5%	566	589	4.0%
  as a % of sales	5.4%	5.9%		5.2%	5.6%
  Other expense	601	602	0.2%	1,783	1,790	0.4%
  as a % of sales	17.6%	17.7%		16.4%	17.0%
  Total expense	2,948	3,033	2.9%	9,451	9,191	-2.8%
  as a % of sales	86.3%	88.9%		86.9%	87.2%

• Net profit for the year declined 25.7% YoY. This was despite exceptional loss (related to exchange rate fluctuations) of Rs 21 m in 3QFY16 versus a gain of Rs 4 million in 3QFY17. Interest and depreciation for the quarter grew 12.7% YoY and 5.4% YoY respectively while other income grew 53.1% YoY. Net profit was boosted by tax gain (tax exemption in Indian operations) of Rs 18 million, down 25.7% YoY during the quarter
  

What to expect

The new 10.4-meter line with capacity of 60,000 TPA (capacity enhancement by around 44%) has been commissioned ahead of schedule in Feb 2017. As per the management, incremental volumes from the new line and growth in the specialty business will improve performance in the coming quarters. One must note that the new line is also one of the lowest cost production line in the world. At higher capacity utilization, it will help improving the margin profile of the company.
Apart from this, the company's focusing on growth in the high margin specialty film business (enjoys two third market share) and cost cutting are likely to result in better growth and margins in the long term. The company expects improvement in the subsidiaries' performance as well.
At a price of Rs 358, the stock is valued at 6.3 times its trailing 12 months' earnings. We maintain a Buy view on the stock with a maximum buy price of Rs 375.

Disclaimer

Disclaimer : All information given here is for information purpose only. Users are advised to rely on their own judgement or investment advisor when making investment decisions. This blog is not liable and take no responsibility for any loss or profit arising out of such decisions being made by anyone acting on such advice.