Packaging: A Repackaged Delivery
After a harrowing last few years for north-based Cosmo Films, is business turning the corner? The flexible-packaging industry has seen the worst in pricing this past year, despite the fact that a bulk of its revenues comes from a sector that is the booming right now — FMCG.
A host of green field expansions in the packaging sector increased capacities by a third to over 6.2 million metric tonne two years ago. As these new capacities came on stream, polyfilm producers, large and small, started heavily undercutting each other in a bid to corner market share. With it, the fortunes of market leaders such as Cosmo Films and Jindal PolyFilms took a downslide.
Between themselves, both these companies command a market share of more than 50 per cent, with about six other firms accounting for the remaining business. Cosmo Films too took an adventurous capacity expansion back in 2017, and had to bear the brunt of falling BoPP (biaxially oriented polypropylene) and CoPP (copolymer polypropolene) prices soon after, which knocked the wind out of the company’s stellar growth between 2014 and 16.
The firm followed up with another smaller CoPP line in January 2018. While these new capacity additions propelled the company on the revenue front, which zoomed from Rs 1,543 crore in FY16 to Rs 1,812 crore in FY18, the bottom line actually took a dent as costs mounted.
Typically, revenue expansions should have painted a profitable picture, but it impacted profits even more because of rising capacities. Consider this. In 2015-16, Cosmo Films raked in net profits of Rs 135.15 crore, thanks to rising volumes and prices. But come 2017-18, net profits slumped to Rs 85.4 crore. And if the current market dynamics is any indication, profits for FY19 could slump even further. In the first half of FY19, Cosmo Films has just Rs 20.8 crore net profit to its credit for all the capacities it put up.
“We were hit by lower prices with nearly 60 per cent of our revenues coming from commodity products,” admits Pankaj Poddar, CEO, Cosmo Films. “Last November was the worst in terms of product prices,” continues Poddar. 
Demonetisation and GST further exacerbated the pain as volumes took a hit, and coupled with a transport strike last year, which crimped FMCG sales, business took a hit, and costs mounted. What’s more, the Maharashtra government banned plastics and BoPP and CoPP too reeled under the plastic ban impacting sales. “In its effort to ban plastics, they didn’t realise that BoPP is actually the most recyclable plastic. They took some actions without putting much thought into it, which hit demand,” points out Poddar.
But the company now believes that the worst is behind as BoPP films have started to stabilise. “We think the worst is over and we expect a recovery around the corner. No big capacity additions are being planned, while the demand supply scenario is getting better,” avers Poddar.
The demand-supply scenario in the flexible packaging industry is stabilising as no more new product capacities are coming save for one from Jindal Polyfilms. In India, while the current production capacity stands at 5.2 million metric tonne, demand is growing at a healthy 10-12 per cent, thanks to the booming FMCG sector. This is expected to add about 50,000 metric tonne of demand the next year, upping the overall demand to 4.6 million metric tonne in the Indian domestic market.
In the last couple of years, however, Cosmo Films has been gunning for higher market share for its specialty products. The company generates close to 40 per cent of its revenues from speciality products where margins are much better than the commodity prices. “There are a lot of good things the company has been doing in terms of increasing speciality product sales and controlling costs,” says Poddar. 
Specialty products are typically high-end films and laminates that add a bit of gloss to the packaging products. Normally, companies like Cosmo Films incur significant R&D costs to introduce these products in the market. Cosmo Films has, in fact, eight patented products in the market, which gives the company a clean run in profits for five-six years.
In the past few years, Cosmo Films has introduced several such specialty products. The company introduced a thermal lamination product where it has a 15 per cent market share globally. Thermal laminations are very thin layers of packaging that can be seen in products like calendars or diaries. Competitors have not been able to catch up Cosmo on this, which has given the company a huge head-start on margins. Another product that the market has liked is velvet films, which gives a velvet feeling. Cosmo Films has also introduced a scratch-free film. Almost all these products go into the FMCG industry.
Cosmo Films has also embarked on a plan to educate its customers to make the product recyclable at the end user. While BoPP and CoPP are by themselves recyclable products, when it is mixed with other laminates such as rexin or plastics, it cannot be recycled again. Cosmo has been educating companies on the benefits of switching to recyclable products, and also blending these products with laminates that can be recycled.
“We have defined structures between products in such a manner that even after making a laminate you can easily recycle it. We’re trying to educate brands and are providing them structures where they can remove the heterogeneity and move towards more homogeneous structures,” says Poddar.
Additionally, the company is adding capacity on the coatings side which should come up in April 2019, which would add further capacities to the specialty films business, which will increase the revenue mix further in favour of specialty chemicals. In the coming years, Cosmo Films intends to take the specialty films business revenues to about 50 per cent of its overall revenue mix, which will further improve its margins.
Compared to most competitors, Cosmo Films enjoys a better EBDITA margin of five per cent in BoPP films. Overall, the blended volumes of both commodity and specialty products brings the margins close to eight per cent.
What’s also aiding the industry is that crude prices have tumbled from $74 per barrel in September 2018 to $52 a barrel at present. Rising crude prices increases the raw material and working capital costs for almost all players, thus impacting costs for consumers, and hurts demand sentiment. Freight costs too get impacted. Also, the value proposition that plastics brings to the packaging industry also tends to get compared to other packaging products like glass and paper. “A lower raw material reduces the working capital and therefore improves the demand sentiment and to that extent improves the business margins,” says Poddar.
The sector is not seeing a mad-rush to set up capacities just yet, and that brings mighty relief to the players. It’s also quite expensive to set up capacities and it runs to about Rs 250 crore for one production line, which keeps out the smaller players. If things go well from here, prices and margins should remain stable, and give a boost to the company’s profits.
The good news is that commodity is not a bad business. There have been times when product prices have sky-rocketed, and the industry enjoyed high double-digit margins as the sector has seen between the years 2014-16. But till prices skyrocket again, a stable product price environment and a tilt towards specialty chemicals might just stand the company in good stead.
