Fitch Ratings has today assigned a National Long-term issuer rating of ‘A-(ind)’ (A minus(ind)) to India-based Cosmo Films Limited (CFL). The Outlook is Stable. Fitch has also assigned the following ratings to CFL’s bank loans:

– Existing long-term bank loans aggregating INR811m: National Long-term rating of ‘A-(ind)’ (A minus(ind));

– Proposed long-term bank loans/long term non-fund based limits aggregating INR650m: National Long-term rating of ‘A-(ind)’ (A minus(ind));

– Non-fund based working capital banking lines of INR440m: National Short-term rating of ‘F1(ind)’; and

– Fund-based working capital banking lines aggregating INR1,497m: National Long-term rating of ‘A-(ind)’ (A minus(ind)) and National Short-term rating of ‘F1(ind)’.

Fitch has simultaneously affirmed the National Short-term rating of ‘F1(ind)’ for CFL’s INR100m commercial paper (CP) programme. The CP program is carved out of the fund based working capital banking lines of the company.

The ratings reflect the company’s established position in the domestic bi-axially oriented polypropylene (BOPP) film market, its improving financial leverage and its ability to export a significant portion of production. The company has been able to increase revenues while reducing total debt since FY05, thus maintaining its debt protection measures, despite profitability remaining subdued during this period as compared to FY02-FY04.

The rating is constrained by the supply-led cyclicality that the flexible packaging industry has been subject to in the past; the industry has been facing pricing and cost pressures simultaneously since FY05. The pricing of basic raw material is linked to crude oil prices, and has also trended upwards during this period. But given overcapacity globally and domestically, the industry was not able to pass on full raw material prices; this coupled with intermittent pricing pressure on the finished product resulted in significant reduction in profitability in FY05 and is yet to recover.

CFL announced the addition of two BOPP lines of 40,000tpa each, which will more than double its capacity to 136,000tpa by FYE10. Fitch notes that its domestic competitors are planning significant new BOPP lines in India and abroad, which may again lead to an over-supply situation, putting pressure on profitability, which improved slightly in the nine month period ended Dec07. CFL will also be adding significant debt for its new lines. High leverage for any firm in this industry is a major concern, given its cyclical nature; however Fitch takes a note of CFL’s past efforts in reducing its financial leverage.

Unlike its key domestic competitors, CFL is a focused BOPP player and any impact on this market will affect its entire business. On top of losing its largest producer position in the domestic BOPP market in FY07, CFL suffers from relatively smaller, less efficient production lines, as well as from multiplicity of manufacturing locations, thus increasing logistics costs. However, increased capacity utilisation since FY06 provides some comfort.

CFL’s financial leverage has been improving since FY05, with Debt/EBITDA at 2.33x, 2.96x and 3.37x at FYE07, FYE06 and FYE05, respectively. Debt/Equity, which had increased to 1.92x at FYE04 as CFL raised debt for expansion, has improved consistently to 1.17x at FYE07. Financial leverage will however increase as debt comes on books for the expansions. Although about 35% of CFL’s debt as of March 2007 was in foreign currency, its substantial exports (52% of revenue during FY07) provide a natural hedge against foreign exchange fluctuations. CFL has fund-based working capital banking lines of INR 1,497m.

CFL operates three units – two in the state of Maharashtra and one in the state of Gujarat. As at FYE07, it had six production lines with an aggregate capacity of 56,000tpa. CFL recorded revenues of INR5.35bn in FY07, which have grown from INR3.15bn in FY03.

Sourced From: Sampark Public Relations Pvt Ltd

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