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RATING: Fitch Affirms Cosmo Films at 'A-(ind); Outlook Stable

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MUMBAI, APRIL 08: Text of Fitch press release onlong-term rating of Cosmo Films Ltd. Fitch Affirms Cosmo Films at 'A-(ind); Outlook Stable Fitch Ratings-New Delhi/Singapore-08 April 2011: Fitch Ratings has affirmed India's Cosmo Films Limited's (CFL) National Long-term rating of 'A-(ind)'. The Outlook is Stable. Simultaneously, the agency has also affirmed CFL's bank loans' ratings, as follows:- INR2,500m fund-based working capital limits (enhanced from INR1,847m): 'A-(ind)'/'F1(ind)'- INR1,590m non-fund-based working capital banking lines (enhanced from INR613.2): 'F1(ind)'- INR3,022.7m long-term loans from banks (enhanced from INR1,496.5m): 'A-(ind)'- INR100m Commercial paper: 'F1(ind)' The affirmation reflects the company's status as the second-largest player in the domestic biaxially oriented polypropylene (BOPP) film market and as the largest Indian exporter of these films. The ratings benefit from CFL's presence in niche thermal lamination films, which enjoys a higher margin than BOPP films. The ratings are based on CFL's consolidated profile. The affirmation is underpinned by the sound sales growth demonstrated in FY10 and FY11 driven by higher volumes in BOPP/ thermal films and inorganic growth from GBC acquisition (net sales of INR1.4m in June 2009-March 2010). Fitch notes the continuous pressure on CFL's operating profitability caused by volatility in the raw material prices (derivatives of crude oil) and lower selling prices of BOPP film on account of further addition of 35,000 tpy capacity in March 2010. BOPP sales realisations in the export market have also been dampened by the depreciation of the euro against the INR, coupled with sluggish demand in the European market. The trend of stable raw material prices in thermal lamination films business reversed and became more volatile during FY10, which also impacted CFL's operating profitability in this segment. CFL's acquired GBC thermal lamination films capacity remained under-utilised in FY10 due to low demand in the US and European markets and incurred EBITDA loss of EUR1.7m (partially on account of one-off restructuring costs). Fitch notes that pressure on CFL's consolidated margins is likely to remain in the near to medium term, and a turnaround in the acquired GBC business will be key to CFL's business and credit profile. CFL has resumed the capex (earlier deferred) for a 35,000 tpy BOPP line at Vadodara with operations expected to begin in January 2013. Overseas capex plans encompass greenfield capex over FY12-FY13. The total INR2,500m capex over the next two years will be funded by INR1,550m debt and INR950m internal accruals. Leverage (net debt to EBITDA: 3.1x in FY10) will increase in FY13 with additional debt on account of capex plans, coupled with margins pressure. However, interest coverage is expected to remain strong with the mostly forex term loans enjoying a lower interest rate. The ratings are constrained by the product concentration on BOPP films and the cyclicality/ demand-supply imbalance that the domestic and export BOPP industry is subject to. Other industry risks include the regulatory changes in importing countries, such as the import duty of 4.25% imposed by US on BOPP film imports since January 2011. Sustained improvement in revenues and profitability alongwith sustained reduction in financial leverage would be positive for the ratings. Conversely, continued EBITDA losses in overseas GBC business, higher input costs or pressure on selling prices or further debt-led capex that leads to sustained deterioration of leverage metrics would be negative for the ratings. CFL is focused on the BOPP market, and it is gradually diversifying into value-added thermal lamination films that yield better margins than commodity films. In FY10, CFL recorded consolidated revenues of INR9.6bn (FY09: INR6.3bn), consolidated EBITDA of INR1.05bn (FY09: 0.9bn) and a consolidated debt of INR3.6bn (INR2.7bn). Compiled by Abhijeet SawantPhone: +91 (22) 66497000. feedback@tickerplantindia.com Copyright (c) TickerPlant Ltd.
Copyright (c) TickerPlant Ltd.


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