Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Mumbai
August 12, 1996
Equity Research
Huzan Mistry
Tel : (91-22) 288 2460/70
Fax : (91-22) 288 2312/13
HIGHLIGHTS
BOPP film to witness strong demand growth of 22% CAGR in the period 1996 to
1999
Flexible packaging, which contributes 41% of BOPP film consumption, is the main
driver of this predicted demand - flexible packaging is predicted to grow at a CAGR of
30% during the period 1996 to 1999.
Oversupply a looming concern. Supply to double by FY99
EBIDT margins in the range of 25% in FY95 and FY96 coupled with predicted strong
demand growth has attracted fresh investment. Supply is expected to increase by 200%
in the next three years and the domestic industry will have an excess supply of 38,000
MT - 47% of installed capacity. The imminent supply increase is driven by the expansion
plans of two players, Cosmo and Flex.
Initiating Coverage
UNDERWEIGH
TABLE OF CONTENTS
HIGHLIGHTS ........................................................................................................................................................... 1
VALUATION ............................................................................................................................................................ 3
Table 1 : Valuation Multiples.............................................................................................................................. 3
Table 2 : Profitability Indicators.......................................................................................................................... 3
DOMESTIC INDUSTRY .............................................................................................................................................. 4
Chart 1 : Growth in Capacity Vs Growth in Consumption ................................................................................... 4
Chart 2 : Capacity Utilisation.............................................................................................................................. 5
DEMAND SCENARIO ................................................................................................................................................ 5
Table 3 : Current and Future Domestic Demand.................................................................................................. 5
SUPPLY SCENARIO .................................................................................................................................................. 7
Table 4 : Capacity Build - Up ............................................................................................................................. 7
Chart 3 : Capacity Break - Up ............................................................................................................................. 7
SUPPLY - DEMAND BALANCE .................................................................................................................................. 8
Table 5 : Surplus Capacity .................................................................................................................................. 8
Chart 4 : Surplus Capacity .................................................................................................................................. 8
GLOBAL MARKET ................................................................................................................................................... 8
DEMAND SCENARIO ................................................................................................................................................ 8
Table 6 : World Consumption............................................................................................................................. 8
Chart 5 : World-wide Consumption Growth ........................................................................................................ 9
SUPPLY SCENARIO .................................................................................................................................................. 9
Table 7 : Location - Wise New Capacities........................................................................................................... 9
GLOBAL SUPPLY - DEMAND BALANCE ................................................................................................................... 10
Table 8 : Global Supply - Demand Balance....................................................................................................... 10
Table 9 : Increase in Absolute Global Surplus ................................................................................................... 10
PRICES AND MARGINS ........................................................................................................................................... 11
Chart 6 : BOPP film vs. Raw Material Prices .................................................................................................... 11
Chart 7: EBIDT Margins .................................................................................................................................. 12
Table 10 : Sensitivity - Export Prices ................................................................................................................ 13
Table 11 : Sensitivity - Domestic Prices ............................................................................................................ 13
THE PRODUCT....................................................................................................................................................... 14
OTHER END-USE APPLICATIONS - DEMAND GROWTH ............................................................................................ 15
COMPANY PROFILE
COSMO FILMS LIMITED ......................................................................................................................................... 17
VALUATION
In India, BOPP film is a supply developed market and we believe it will continue to remain so. In mature
economies, BOPP film is a commodity business and a cyclical play. This is not true of developing countries like
India, where demand is still growing at 20% plus CAGR. Demand growth is expected to remain firm but consequent
to the overcapacity expected in the domestic market, domestic realisations are expected to follow the international
trend more closely. The entire Asian region is looking at a surplus scenario and as such will be a price taker / seeker
of exports.
We do not expect that the increase witnessed in EBIDT to 25%, seen in the last year, is sustainable. EBIDT margins
are expected to remain in the 17-19% range. This is based on our assumption of a balanced supply - demand
scenario internationally and the domestic manufacturers successfully exporting surpluses. The domestic industrys
success in establishing itself as a quality supplier will consolidate its position in the international market.
We expect that valuations will be EPS driven and not supported by PE expansion. This view is based on the
imminent oversupply expected in the domestic market. With most manufacturers having just completed an
expansion or in the process of doing so, EPS will improve on account of increased volumes. Volumes will be
increasingly contributed by exports. We have considered only Cosmo Films and Gujarat Propack for our valuation
purposes. Based on FV/EBIDT and P/BV both Cosmo and Propack appear cheap, but since Propack has a small
market capitalisation we prefer Cosmo Films for exposure to this fast growing industry. We consider Cosmo Films
as the only investible stock in this industry. A full discussion of our valuation thesis on Cosmo Films is given in the
Cosmo Films research report section of this publication.
Table 1 : Valuation Multiples
PE Multiples
Market
Cosmo Films
Gujarat Propack
Firm Value / EBIDT
Cosmo Films
Gujarat Propack
P / BV
Cosmo Films
Gujarat Propack
FY 96
FY 97E
FY 98E
14.9
5.1
3.8
13.5
5.0
3.7
11.8
5.2
2.9
9.7
3.6
5.8
4.8
5.5
3.5
0.58
0.45
0.66
0.35
0.61
0.34
FY 92
FY 93
FY 94
FY 95
FY 96
FY 97E
FY 98E
12
23
13
15
39
20
22
36
21
29
19
24
16
23
17
18
14
19
20
19
18
22
14
21
18
15
16
19
DOMESTIC INDUSTRY
The domestic industry can be regarded as having occupied three distinct phases; 1980 - 1986, 1987 - 1992 and
1993 - 1996.
Chart 1 : Growth in Capacity Vs Growth in Production
(MT)
20000
Phase I
Phase II
Phase III
15000
10000
5000
0
1980
1982
1984
Capacity
1986
1988
1990
1992
1994
Production
(%)
100
20000
16000
80
12000
60
8000
40
4000
20
0
0
1989
1990
1991
Capacity
1992
Production
1993
1994
1995
Capacity Utilisation(RHS)
As can be seen from Chart 2, 1992 to 1996 saw utilisation levels increase to almost 100%. These levels were a direct
outcome of increased demand from the flexible packaging sector.
Industry Restructuring - A Fall Out from Phase II
The persistent losses incurred by Maxxon, Biax and Mupnar Films from 1987 to 1992 forced a reorganisation of
these companies. Biax has been amalgamated with CIMMCO International Ltd (1994) and is now a division of the
company, Mupnar Films was taken over by Supreme Industries Ltd. and renamed Supreme Oriented Films Ltd
(1993) and Maxxon was merged with Max (I) Ltd. (1993).
DEMAND SCENARIO
Demand to Grow at 22% CAGR
We estimate that aggregate demand for BOPP film will grow at a 22% CAGR, with applications like flexible
packaging being the major contributor. The following table shows the present break up of end-user demand and the
estimated scenario by FY99.
Table 3 : Current and Future Domestic Demand
End - User Industry
Flexible Packaging
Adhesive Tapes
Print Lamination
Cig. Overwrap
Capacitors
Release Film
Syn. Paper & Others
Demand (MT)
FY96
7,500
% Share
FY96
40.8
3,300
2,750
2,100
1,500
800
450
18,400
17.9
14.9
11.4
8.2
4.3
2.4
100.0
4,636
4,752
2,431
2,930
1,065
989
33,280
% Share
FY99
49.5
13.9
14.3
7.3
8.8
3.2
3.0
100.0
In order to understand the demand dynamics in this industry we need to focus on the flexible packaging segment
which currently contributes approximately 41% to consumption.
BOPP film has inherent properties of a good oil and moisture barrier. Internationally its usage in the food packaging
business is very high. BOPP film is also a cheaper substrate compared to PET film and aluminium foil. While PET
film is a high performance film with a higher gas and odour barrier and higher tensile strength, its superior
properties are not required in all the food packaging applications in which it is currently being used in India.
Despite this, the domestic industry has favoured PET film. BOPP film was a relatively slow starter in the flexible
packaging segment. This slow start can be attributed mainly to the following reasons;
Quality of BOPP film produced by the industry in the eighties was poor. In addition supply was inadequate.
PET film, an alternative substrate, is easier to handle. The machines available at the time in the converter
segment were not equipped to handle BOPP film but could handle PET film easily.
Quality of printing inks available was poor. BOPP film has a low odour barrier and in the case of poor quality
inks, the odour of the inks permeates to the packed food. This restricted usage of BOPP film in food packaging.
The awareness level of the end-user industry was low.
These issues have since been resolved. Increased sophistication and better equipment within the conversion industry
and availability of quality printing inks have boosted consumption of BOPP film in the laminate. The added catalyst
was the steep increase in prices of PET film relative to BOPP film. The price differential between these two
substrates increased substantially, from Rs 35/kg in 1992 to Rs 75/kg in 1994 and 1995, compelling converters and
end-users to look at cheaper options, like BOPP film. As a result, in the last two years some applications have
shifted from PET film to BOPP film. The largest shift has been witnessed in the usage of Metallized BOPP film as
the middle layer in laminates used for pan masala, zarda, potato chips etc. BOPP film consumption has grown from
500 MT in FY86 to 7,500 MT in FY96.
The biscuit overwrap market, included in the flexible packaging segment, has been witnessing increasing usage of
BOPP film. Wax paper which was the substrate used earlier is proving uneconomical in terms of cost and
effectiveness in retaining freshness compared to BOPP film. With its moisture barrier BOPP film is a far superior
substrate in which to pack biscuits which require a high level of resistance to sogginess. Wax paper today costs
7.5/sq.mtr compared to Rs 6.5/sq.mtr of BOPP film, making BOPP film not only a better but a more economical
packaging material.
Hence we estimate that while PET film for flexible packaging will continue to grow at a healthy pace of 25%
CAGR, BOPP film should witness a higher growth at about 30% CAGR in the next two to three years. With new
coatings like PVDC and Acrylic being introduced by film manufacturers, the barrier property of the film will
improve further. This should further enhance the usage of BOPP film in applications where PET film continues to
dominate the laminate. In view of these developments it is estimated that flexible packaging will consume 16,500
MT of BOPP film by FY99.
Other contributors to BOPP film demand growth have been discussed in Annexure 2.
SUPPLY SCENARIO
Supply to Increase by 200% in the Next Three Years
High profitability conditions in the last two years and the expected increase in consumption level of BOPP film has
attracted fresh investments in this sector. Supply is expected to increase by 200% in the next three years.
Manufacturers believe that additional capacity will be absorbed by high growth in the domestic market and that
interim surpluses will be easily exported. We remain sceptical of this uniform manufacturer view as the industry has
exported marginal quantities of film in the past. We believe it will take domestic manufacturers some time to
establish an export presence.
The estimated capacity build - up and total tonnage expected is tabulated below.
Table 4 : Capacity Build - Up
(MT)
Cosmo Films
Gujarat Propack
Sup.Ori.
Biax
Max (I)
M.M. Rubb
MPUP
Flex Industries
Hind. Adhesives
Note : (1)
FY95
4,800
3,400
2,400
3,900
3,150
800
800
FY96
11,800
3,400
2,400
3,900
3,150
800
800
19,250
26,250
FY97E
11,800
4,500
2,400
3,900
3,150
800
800
15,000
1,200
43,550
FY98E
11,800
7,500
2,400
3,900
3,150
800
800
30,000
1,200
61,550
FY99E
26,800
10,500
2,400
3,900
3,150
800
800
30,000
1,200
79,550
J.K. Leatherlite is planning a Joint Venture with Thai Films. Details are not available.
(2) Biax and Supreme Oriented also have expansion plans, the same have not been included as they are less firm
Source : Industry, ICICI, I-Sec Estimates
All the capacities mentioned above are in a position to roll film ranging from 8 micron to 50 micron. Hence all
manufacturers are in a position to supply film to all end-use segments. All the new lines have a regranulation facility
which will reduce production wastage from 15-20% to about 4-5%.
As can be seen from Chart 3, the capacity build - up is largely a function of Flex and Cosmos expansion plans.
Combined they will contribute 71% of industry capacity by FY99. The industry capacity could range from 64,000
MT to 85,000 MT based on the fructification of their plans for FY99.
Chart 3 : Capacity Break - Up
FY95
M.M. Rubb MPUP
4%
4%
Max (I)
16%
Hind. FY99E
Adhesives
2%
Cosmo
26%
Cosmo
34%
Flex
Industries
37%
Guj.Pro.
18%
Biax
20%
Sup.Ori.
12%
Source : Industry, ICICI, I-Sec Estimates
MPUP
1%
M.M. Rubb
Max (I)
Sup.Ori. Guj.Pro.
1%
Biax
13%
4%
3%
5%
FY95
19,250
17,325
FY96
26,250
23,625
FY97E
43,550
39,195
FY98E
61,550
55,395
FY99E
79,550
71,595
15,400
1,925
12.5
18,400
5,225
28.4
22,500
16,695
74.2
27,500
27,895
101.4
33,400
38,195
114.3
(MT)
80000
60000
40000
20000
0
1995
1996
1997E
1998E
Domestic Consumption
1999E
Surplus
GLOBAL MARKET
The domestic industry must export 47% of installed capacity therefore it is necessary to understand the global
market. The future profitability of domestic manufacturers is dependent on their ability to export.
DEMAND SCENARIO
Global Consumption Expected to Grow at 8% CAGR
Global consumption is expected to grow from 1.5 million MT in 1994 to 2.04 million MT in 1998 - an 8% CAGR
over the next four years (Table 6 below). The maximum growth is expected in the Asian region (Asia & Oceania) at
12%. This growth can be attributed to the growing domestic flexible packaging industry and the increasing usage of
BOPP film for overwrap applications.
Industry estimates for area-wise growth in the past and that expected in the future are tabulated below;
Table 6 : World Consumption
(000 MT)
Western Europe
North America (USA &
Canada)
Central & South America
Middle East & Africa
Japan
Asia & Oceania
1984
1989
1990
1991
1992
1994
1995E
1996E
1998E
150
130
280
225
315
242
340
252
380
272
455
318
482
335
511
354
574
394
CAGR
94-98
6%
6%
20
15
115
50
480
65
25
160
192
947
67
30
165
225
1,044
75
30
173
293
1,163
95
45
183
312
1,287
115
50
200
385
1,523
127
54
209
431
1,638
139
57
218
483
1,763
168
66
239
606
2,047
10%
7%
5%
12%
8%
Asia & Oceania - the Major Contributors to Consumption Growth in the Nineties
BOPP film was introduced in the western world in the early sixties. The industry witnessed high growth levels in the
seventies, albeit from a small base. The eighties saw consumption increase at 9% CAGR, the main contributors
being USA, Canada and Europe. In the nineties growth has been predominantly in Asia. While growth in this region
has been increasing at 12-15% CAGR, developed nations have been increasing consumption at lower rates. This is
largely because of the mature nature of these markets. This has translated to growth of 10% world-wide in the
nineties.
Chart 5 : World-wide Consumption Growth
('000 MT)
700
600
500
400
300
200
100
0
1984
1989
1990
1991
1992
1994
1995E
1996E
Western Europe
Japan
1998E
SUPPLY SCENARIO
Global Supply Expected to Increase at a 10% CAGR
Global supply is expected to grow from 2.2 million MT in 1994 to 2.9 million MT in 1999. Asia has been the major
contributor to capacity growth in the last few years and this trend is expected to continue. The table below shows
that thirteen of the total twenty nine lines being set up in the next two years will be in the Asian region. The
minimum economic size being 10,000 MT and the maximum being 35-40,000 MT, industry estimates global
capacity to increase by 0.5 - 1 million MT. We have assumed a growth of about 0.7 million MT.
Table 7 : Location - Wise New Capacities
Location
Western Europe
North America
Japan
Central & South America
Other Asian + Oceania
Rest of the World
No. of Lines
4
3
2
2
13
5
Source : Industry
10
1994
1,523
2,200
69%
1995E
1,638
2,420
68%
1996E
1,763
2,662
66%
1998E
2,047
2,928
70%
Although 70% might appear to be a low capacity utilisation level, old plants not having regranulation facilities
reduce actual saleable capacity available with the industry. All new plants coming up in India will have a
regranulation facility. Saleable capacity is considered at 85% of name plate capacity. On this basis, surpluses
available have been tabulated below.
Table 9 : Increase in Absolute Global Surplus
(000 MT)
1994
2,200
1,870
1,523
1995E
2,420
2,057
1,638
1996E
2,662
2,263
1,763
1998E
2,928
2,489
2,047
Surplus
Surplus / Available Capacity (%)
347
18.5
419
20.3
499
22.0
441
17.7
11
120000
100000
80000
60000
40000
20000
0
1992
1993
Homopolymer-EXF
1994
Copolymer-EXF
Copolymer-Landed
BOPP FIlm
1995
1996
Homopolymer-Landed
Point A in Chart 6 is an outcome of the cross - elasticity impact on prices whereas point B explains the raw material
price increase effect.
Tariff Reduction to Impact Margins
Domestic BOPP film prices historically ruled below landed costs. The 1996 Union Budget reduced duties on BOPP
film, from 50% to 40%, this will eliminate the difference in domestic prices and landed costs. In this scenario, the
entire benefit arising from the reduction in duties on raw material, from 40% to 30%, could have accrued to the
domestic industry. This would have improved EBIDT margins by 1.5% in FY97, but for the imminent oversupply.
In the emerging situation, we believe that domestic manufacturers will pass on the benefit accruing to them from the
decline in raw material costs, in due course. Consequently, domestic prices of BOPP film will rule below landed
prices. The Chelliah Committee has recommended a further decline of 10% on tariffs on both BOPP film and
Polypropylene. These rates have been considered for our projections for FY98.
12
EBIDT Margins
The last time industry capacity expanded significantly was in FY92. At the time, the additional capacity came
largely from new entrants like Max (I), Biax and Supreme Oriented. These new entrants faced teething problems,
operated at low capacity utilisation and incurred losses from FY89 to FY92. The existing manufacturers did not face
a drop in utilisation and continued to do well.
This time around, the capacity additions are in the nature of expansions by existing players and the situation of
FY92 is unlikely to recur. We therefore believe that capacity utilisation levels will drop across the industry, except
for those companies which find export markets. We expect margins to come under pressure and fall from 23-25%
levels in FY96 to about 17-19% levels in the next two to three years.
Chart 7: EBIDT Margins
40%
30%
20%
10%
0%
1989
-10%
1990
1991
1992
1993
1994
1995
-20%
-30%
Cosmo
Guj.Pro.
Sup.Ori. $$
Max (I)
M.M. Rubb
MPUP
Biax
13
Sensitivity Analysis
The change in EBIDT margins is analysed based on a fall in per/kg price of BOPP film in Table 10 and Table 11.
All other variables remaining constant, EBIDT drops by 2 - 3 percentage points for every 10 cents/kg drop in export
prices and every Rs 5/kg drop in domestic prices. Margins are very sensitive to a marginal drop in realisations
indicating a high level of earnings sensitivity. A 20% drop in prices translates to a 75% decline in export margins
and a 58% drop in domestic margins. With the increased dependence of the domestic industry on exports sensitivity
of earnings increases. We estimate that given the surpluses expected in the Asian region export realisations will fall
by about 10-12% to US$2.2 and domestic realisations will be in the Rs 105/kg levels. This will cause domestic
industry margins to contract to 17 - 19%, depending on the ratio of exports to domestic sales.
As can be seen from the following tables todays price for exports at US$2.5/kg produces EBIDT of 26%, if prices
were to decline to US$2/kg, EBIDT would decline to 8%. Similarly on the domestic front a drop in prices from Rs
125/kg to Rs 105/kg contracts EBIDT from 38% to 23%. The sensitivities have been based raw material prices of
US$850/MT for homopolymer resin, US$1200/MT for copolymer resin and a Rs 36 / US$.
Table 10 : Sensitivity - Export Prices
(US$/kg)
Today
2.50
0.93
2.40
0.93
2.30
0.93
2.20
0.93
2.10
0.93
2.00
0.93
0.07
1.00
0.07
1.00
0.07
1.00
0.07
1.00
0.07
1.00
0.07
1.00
Value Addition
Value Addition (%)
1.50
60%
1.40
58%
1.30
57%
1.20
55%
1.10
52%
1.00
50%
Other Variable
Costs
EBIDT
EBIDT (%)
0.84
0.84
0.84
0.84
0.84
0.84
0.66
26%
0.56
23%
0.46
20%
0.36
16%
0.26
12%
0.16
8%
BOPP Film
Homopolymer Resin
Copolymer - Resin
Total RM Cost
Today
125.00
33.43
2.48
35.91
10.77
46.69
2.48
35.91
10.77
46.69
2.48
35.91
10.77
46.69
2.48
35.91
10.77
46.69
2.48
35.91
10.77
46.69
2.48
35.91
10.77
46.69
Value Addition
Value Addition (%)
78.31
63%
73.31
61%
68.31
59%
63.31
58%
58.31
56%
53.31
53%
Other Variable
Costs
EBIDT
EBIDT (%)
30.32
30.32
30.32
30.32
30.32
30.32
47.99
38%
42.99
36%
37.99
33%
32.99
30%
27.99
27%
22.99
23%
14
Annexure 1 :
THE PRODUCT
BOPP Film is a high performance biaxially oriented film made from polypropylene (PP) resin. Polypropylene is the
main commodity thermoplastic produced from propylene. PP is obtained by the polymerisation of propylene in the
presence of suitable catalysts. PP is the lightest of all plastics. These properties have ensured a wide range of
applications for PP. One of them being BOPP film. In comparison with other plastic films, it is characterised by
good tensile strength and elongation, stiffness, thermal shrinkage, good optical properties like gloss and
transparency, good yield, high tear initiation strength, and a good oil and moisture barrier. The table depicted below
compares BOPP film with other competing substrates.
BOPP and Other Plastic Films
Property
BOPP
Specific Gravity
0.905
Tensile Strength (kg/cm 2)
520-2,800
Water Absorption 24 hrs (%)
<0.005
MVTR
0.10
Permeability to Oxygen
160
Permeability to Nitrogen
20
Clarity
Excellent
Gloss
Excellent
Tear Strength
High
Source: Bopp film in Packaging - IIP
PET
1.40
1,380-2,800
<0.8
0.4 - 0.5
3.0 - 6.0
0.7 - 1.0
Excellent
Excellent
High
Cellophane
1.40 - 1.50
480-1,240
45-115
0.16 - 53
0.5 - 0.8
0.5 - 1.6
Good
Good
Low
PVC
1.20 - 1.50
480-700
-0.35 - 2.0
5 - 20
-Fair
Fair
Medium
LDPE
0.91 - 0.93
100-300
<0.01
0.4 - 0.6
500
180
Fair
Fair
Medium
HDPE
0.94 - 0.96
170-420
-0.1
185
42
Poor
Fair
Medium
The following are the different types of BOPP film used today;
Non Heat Sealing (Plain Film), usually a monolayer of PP homopolymer. This type of film is used mainly for nonpackaging uses, such as adhesive tape.
Coextruded Heat Sealable types comprising a thick core of PP homopolymer with relatively thin copolymer
surface layers. This type of film provides the most cost effective route for the production of heat sealable films.
Coated Heat Sealable types, using surface coatings of PVDC, acrylic copolymers and polymer blends or
copolymers of vinyl chloride and vinyl acetate.
Addition Modified Heat Sealable types, offering a low threshold heat seal achieved by modifying a PP
homopolymer with the addition of a resin such as polyterpene. This type is substantially confined to North America.
Voided Core Opaque constructions (which can be White or Pearlescent) or Pigmented Opaque White. These may
be heat sealable and may be coextruded or coated.
BOPP Film - Applications
Plain Film
Co-extruded Film
Industrial
Lamination
Electrical
Tapes
Metallization
Purposes
25-40 m
pressure
sensitive tapes
12-30 m
brochures,
catalogues
shopping bags
4-18 m
cable
insulation
capacitors
Others
20-60 m
flower
overwrap
textiles
General
Pearlized
Packaging
Purposes
Film
Film
High Perf.
Paper
20-40 m
lamination
textiles
metallizing
20-40 m
lamination
snacks,
biscuits
20-40 m
food
packaging
cosmetics
80-200 m
graphic paper
maps
calendars
carton boxes
release films
cigarette
soaps
instruction
cosmetic boxes
tear tapes
overwrapping
labels
manuals
restaurant
menus
stationary
goods (phot
albums,
envelope
windows)
overwrapping
release films
metallizing
labels
advertising
(Print media)
food packaging
15
Annexure 2 :
16