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ICICI Securities and Finance Company Ltd.

Mumbai
August 12, 1996

Equity Research
Huzan Mistry
Tel : (91-22) 288 2460/70
Fax : (91-22) 288 2312/13

Biaxially Oriented Polypropylene Film (BOPP Film)


INDIA A WORLD PLAYER!!

For private circulation only

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

Export success vital


Given the oversupply exports will be the key success factor in future viability.
Historically, Indias export presence was minimal and Indias players will have to
capture 1.8% of the world market to ensure high capacity utilisation. World-wide
consumption of BOPP is expected to grow at 10% p.a. but in the context of a balanced
global supply - demand picture. Capacity growth in developed nations being insufficient
to match demand growth new capacity addition in Asia is not likely to lead to an Asian
regional surplus as Asian players compete for export markets.
Margin sensitivity analysis belies fears over quantum leap in supply. EBIDT to fall
from 25% to 17-19% in FY 98
The quantum jump of 200% in capacity expansion - domestic production will be 214%
of domestic consumption by FY99 - leads to fears of margin compression from FY 95
levels of 25%. Sensitivity analysis performed on the basis of a decline in prices (of 12%)
both in the domestic and international markets leads us to believe that margins will
contract to between 17-19% for the leading players. A steeper price fall, in the region of
20%, would see margins compressed to 15%.
Increasing cross-elasticity
Traditionally PET film was more expensive than BOPP film and until 1993 - 94 Indian
players did not have the technological skills to exploit the BOPP medium. In 1994 - 1995
PET and BOPP film were priced at Rs 210/kg and Rs 135/kg respectively - a price
differential of Rs 75/kg (or 56%), which had increased from Rs 35/kg (or 25%) in 19931994. This wide differential encouraged large converters to invest in technology and
switch from PET film to BOPP film. This shift contributed to a demand growth in BOPP
film of 25% CAGR from 1994 to 1996. Today, with the increased sophistication of the
converter / client segment, cross elasticity will largely depend upon the differential price
between PET and BOPP film. We believe the future outlook for PET film prices is
relatively soft, due to oversupply and a decline in raw material prices of DMT/PTA;
consequently BOPP film demand growth from substitution will, at the margin, be slowed
by narrowing of the differential, which has already compressed to Rs 65/kg.
We recommend investors to underweigh the sector, opt for the FCD conversion in
Cosmo Films Ltd. and Hold the underlying stock.

The Indian BOPP Film Industry

ICICI Securities and Finance Company Ltd.

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

The Indian BOPP Film Industry

ICICI Securities and Finance Company Ltd.

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

Source : I-Sec estimates

Table 2 : Profitability Indicators


RONW (%)
Cosmo Films
Gujarat Propack
ROCE (%)
Cosmo Films
Gujarat Propack
Source : I-Sec estimates

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

The Indian BOPP Film Industry

ICICI Securities and Finance Company Ltd.

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

Source : Company reports

Evolution of the Domestic BOPP Film Industry - 1980 - 86


The first phase saw the introduction of BOPP film in the domestic market, with M.M. Rubber setting up the first line
in 1980. Cosmo Films Ltd. (Cosmo) and M.P. United Polypropylene Ltd. (MPUP) set up capacities in 1981,
increasing industry capacity to 2,400 MT. The industry fared well with applications like print lamination, adhesive
tapes and cigarette overwrap absorbing production. In 1985, Gujarat Propack Ltd. (Propack) entered the segment
with 800 MT. This increase in capacity was also absorbed. Demand received an added boost when a large
cellophane manufacturer discontinued production and cigarette manufacturers were forced to opt for BOPP film for
overwrap applications.
High Profitability Attracted Fresh Investments - 1987 - 92
The industry fared well and high profitability attracted new players; i.e., Maxxon Ltd. (now Max India Ltd.), Biax
Ltd. (now a division of CIMMCO Ltd.) and Mupnar Films Ltd. (now Supreme Oriented Films Ltd.) This marked the
beginning of the second phase. Existing manufacturers also increased capacity, partly due to industry fortunes and
partly due to the increase permitted in licence capacity. Total industry capacity increased to 15,200 MT by FY92.
Demand growth was not commensurate with supply, as charted below, and all the new entrants reported negative
EBIDT margins. Existing players at the time were successful in maintaining EBIDT margins largely because all the
new entrants had teething problems on the quality front. This ensured good capacity utilisation for Cosmo and
Propack despite the industry capacity utilisation being as low as 51%. This phase was marked with supply
outstripping demand.
Demand Catches Up With Supply - 1993 - 96
In the phase commencing FY94, demand caught up with supply. Derived demand from flexible packaging was the
main driver of BOPP film consumption growth in the nineties. From an almost negligible quantity, it now accounts
for 41% of total BOPP film consumption. With other applications like adhesive tapes and print lamination also
witnessing growth in the 15 - 20% range, aggregate demand for BOPP film increased at a 26% CAGR in the last
three years. This period saw a balanced supply - demand scenario.

The Indian BOPP Film Industry

ICICI Securities and Finance Company Ltd.

Chart 2 : Capacity Utilisation


(MT)

(%)
100

20000
16000

80

12000

60

8000

40

4000

20
0

0
1989

1990

1991

Capacity

1992

Production

1993

1994

1995

Capacity Utilisation(RHS)

Source : Company reports


Note : Years ending March 31,

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

Estimated Growth Estimated Demand (MT)


FY96-FY99 : CAGR
FY99
30%
16,478
12%
20%
5%
25%
10%
30%
22%

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

Source : Industry, ICICI, I-Sec estimates

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.

The Indian BOPP Film Industry

ICICI Securities and Finance Company Ltd.

Flexible Packaging - The Future Growth Determinant


The flexible packaging market in India is growing at an average of 25 - 30% p.a. The flexible pack or the laminate is
constructed of two or more substrates; i.e. PET film, BOPP film, Aluminium Foil, Polyethylene film. BOPP film
ranging from 10 to 15 micron is used in the flexible packaging laminate by the domestic industry. The construction
of a laminate is determined by:

The product to be packed


The state of the conversion industry in terms of quality of machines
The availability of substrates
The price of substrates

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.

The Indian BOPP Film Industry

ICICI Securities and Finance Company Ltd.

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%

The Indian BOPP Film Industry

ICICI Securities and Finance Company Ltd.

SUPPLY - DEMAND BALANCE


Domestic Industry Faced with an Oversupply Scenario
The domestic industry is once again headed for an oversupply scenario. By FY99, for every one MT of film
consumed in the domestic market, one will have to be exported. Viability of domestic manufacturers will be
dependent on successful exports. Surpluses available for the international market are tabulated below. The increase
in surplus as a percentage of consumption is particularly noteworthy.
Table 5 : Surplus Capacity
(MT)
Installed Capacity
Available Capacity
(@ 90% Utilisation)
Domestic Consumption
Surplus
Surplus / Domestic Consumption (%)

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

Source : Industry, ICICI, I-Sec estimates

Chart 4 : Surplus Capacity

(MT)
80000
60000
40000
20000
0
1995

1996

1997E

1998E

Domestic Consumption

1999E

Surplus

Source : Industry, ICICI, I-Sec Estimates


Note : Years ending March 31,

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%

Source : K:95 Presentation (Solvay)

Asia & Oceania - the Major Contributors to Consumption Growth in the Nineties

The Indian BOPP Film Industry

ICICI Securities and Finance Company Ltd.

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

North America (USA+Canada)

Central & South America

Middle East & Africa

Japan

Asia & Oceania

1998E

Source : K:95 Presentation (Solvay)

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

Industry Witnessing Structural Change


In 1994, 63% of world capacity was in the developed nations. This ratio has declined from approximately 82% in
1984 indicating the emergence of the Asian region as the new contributor to capacity. With increased competition
from Asian manufacturers, which cater mainly to the basic low value added film market (homopolymer / coextruded), large producers in the developed nations have shifted focus to more value added products. Given this
trend one envisages Asia being the largest supplier in the years to come.

10

The Indian BOPP Film Industry

ICICI Securities and Finance Company Ltd.

GLOBAL SUPPLY - DEMAND BALANCE


Supply - Demand to Witness Similar Growth Internationally
Supply growth internationally is estimated at about 10%. With demand also growing in the same range, the balance
witnessed by the industry in the last year is expected to be maintained. Capacity utilisation levels will rule at 6670% in the next two to three years.
Table 8 : Global Supply - Demand Balance
(000 MT)
Demand
Supply
Capacity Utilisation

1994
1,523
2,200
69%

1995E
1,638
2,420
68%

1996E
1,763
2,662
66%

1998E
2,047
2,928
70%

Source : Industry, ICICI, I-Sec estimates

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)

Name Plate Capacity (NPC)


Available Capacity (85% of NPC)
Demand

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

Source : Industry, ICICI, I-Sec estimates

Asia & Oceania - the Key to Prices


Despite capacity utilisation being maintained, absolute surpluses will witness a small increase from 347,000 MT in
1994 to approximately 441,000 MT in 1998. While the ratio of surpluses to available capacity is expected to remain
in the 17 to 22% range, margin compression is possible. This can be attributed to the changing industry structure. In
the past surpluses have been with large existing chemical conglomerates in the West, having depreciated plants. In
addition, BOPP film forms a small part of their total operations. The new players coming up in the Asia & Oceania
region are largely single product companies and could resort to aggressive pricing strategies, in order to operate at a
utilisation level covering their funding costs. We believe that this could translate to a pressure on prices. It is
estimated that prices could compress to US$ 2 - 2.3/kg in the next two to three years down from US$2.5-2.7
currently. We analyse the impact on margins in the Sensitivity Analysis of the Prices and Margins Section below.
India to Account for 2.8% of World Supply
World capacity is expected to be 2.9 million MT by 1998. Assuming that all capacity additions materialise, India
will account for 2.8% of world name-plate capacity in the same period. With domestic consumption expected to
grow at 22% CAGR, India will have a surplus of about 40,000 MT for the international market. This amounts to
1.4% of world capacity and 6% of Asian consumption. Although the excess is large when compared to domestic
capacity, it is not substantial in the global scenario.
India is in a Position to Cater to Most Markets
Domestic manufacturers are in a position to cater to film requirements for most applications ranging from 9 - 50
micron. Hitherto, domestic manufacturers have been manufacturing and exporting thin films for lamination and
extrusion coating. North America and Canada consume thin film in the range being manufactured by Asian
manufacturers. With some deficit expected in this region, Asian exporters including India will continue targeting
these markets.

11

The Indian BOPP Film Industry

ICICI Securities and Finance Company Ltd.

PRICES AND MARGINS


Impact of Cross - Elasticity on Prices of BOPP Film
In the domestic market, mid - 1993 onwards, prices of PET film (a competing substitute in flexible packaging
applications) started increasing due to favourable supply - demand conditions. With this increase in prices of PET
film, the comparable nature of BOPP film allowed BOPP manufacturers to extract price increases from customers.
BOPP film prices were increased from Rs 95/kg to Rs 105/kg in June 1993.
BOPP Film Prices Track Raw Material Prices
Polypropylene homopolymer resin constitutes over 95% of raw material costs for BOPP film. Currently, 65% of
total domestic requirement of homopolymer resin is imported. In a tight market, domestic prices of BOPP film have
more or less tracked landed costs of homopolymer resin. Domestic availability of this resin will improve with the
Indian Petrochemical Corporation Ltd (IPCL) and Reliance Industries Ltd (RIL) capacities for polypropylene
coming on stream by FY97 and FY98. By FY98 supply - demand is expected to be in balance. However, no
significant difference in raw material costs for BOPP film manufacturers is anticipated, as domestic manufacturers
are expected to price homopolymer resin on an import parity basis.
Chart 6 : BOPP film vs. Raw Material Prices
(Rs/MT)

Cross elasticity impact (A)

Raw Material Price Impact (B)

120000
100000
80000
60000
40000
20000
0
1992

1993
Homopolymer-EXF

1994
Copolymer-EXF

Copolymer-Landed

BOPP FIlm

1995
1996
Homopolymer-Landed

Source : PDS, Platts, Industry

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

The Indian BOPP Film Industry

ICICI Securities and Finance Company Ltd.

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

Source : Company reports

Biax

13

The Indian BOPP Film Industry

ICICI Securities and Finance Company Ltd.

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

Source : ICICI, I-Sec estimates

Table 11 : Sensitivity - Domestic Prices


(Rs/ kg)
BOPP Film
Homopolymer Resin
Copolymer - Resin

Today
125.00
33.43

120.00 115.00 110.00 105.00 100.00


33.43 33.43 33.43 33.43 33.43

Add : Duty (30%)


Total RM Cost

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%

Source : ICICI, I-Sec estimates

14

The Indian BOPP Film Industry

ICICI Securities and Finance Company Ltd.

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

The Indian BOPP Film Industry

ICICI Securities and Finance Company Ltd.

Annexure 2 :

OTHER END-USE APPLICATIONS - DEMAND GROWTH


Tapes - 12%
Pressure Sensitive tapes and Adhesive tapes use BOPP film with 25-30 micron thickness as the base film. The
current size of this market is about 3,300 MT and we expect it to grow at 12%. Currently Biax is the major supplier
to this segment. These applications are mass market products and fetch lower realisations, approx. Rs 105/kg
currently. It is estimated that consumption by this application will grow to about 4,600 MT by FY99.
Print Lamination - 20%
The increasing usage of lamination on paper and board for gloss, durability etc. contributed 2,750 MT to BOPP film
usage in FY96. Increasing sophistication of print medium advertising will ensure that this segment will continue to
grow at 20%. BOPP film for print lamination is plain homopolymer film, an undifferentiated low value product
priced at Rs 130/kg. Manufacturers however continue to target this segment as it is a fast growing segment in the
domestic market.
Cigarette Overwrap - 5%
Prior to 1984, cigarettes were overwrapped in cellophane paper. The upper end cigarette manufacturers shifted to
BOPP film when a large cellophane manufacturer discontinued production in the early eighties. This helped BOPP
film to increase market share and consolidate position in this segment. As on date, all the upper end cigarette brands
have shifted to BOPP film. However with the cigarette industry itself growing at marginal rates of about 4 - 5% , we
do not see substantial growth in consumption by this application. Total consumption of BOPP film by this industry
is expected to be 2,400 MT by FY99 from a current level of 2,100 MT. There has also been some talk of wrapping
bidis in BOPP film. This could provide substantial added demand for the film; however the poor awareness level
of the price sensitive end-user segment, has prevented this shift from taking place.
Capacitors - 25%
BOPP film required for this application has a thickness of 6 to 9 micron. Domestic manufacturers lack the skill to
manufacture good quality film in the 6 - 8 micron range and requirements of this grade are met through imports.
Nine micron thick film is manufactured by some domestic manufacturers. While M.M.Rubber has largely targeted
this market, the other manufacturers who also cater to this segment are Cosmo and Propack. The demand for BOPP
film arising from this application is expected to be 3,000 MT in FY99.
Synthetic Paper - 30%
Synthetic paper is a value added application for BOPP film developed by Cosmo in India. This application earns a
high realisation and Cosmo is the only manufacturer in India apart from two other players world-wide. Synthetic
paper is used in visiting cards, maps and presentation material because of the lasting quality imparted to the paper by
BOPP film. This is a niche segment and consumes about 450 MT of BOPP film but the realisation is much higher at
Rs 260/kg. The export potential from this segment is very high given the limited number of suppliers. As such we
estimate that growth in the next two to three years will be 25 - 30%, albeit from a small base.

16

The Indian BOPP Film Industry

ICICI Securities and Finance Company Ltd.