Cosmo First Q2 FY26: Strong Topline Growth Masks Margin Pressures

The September 2025 quarter presents a tale of two narratives for Cosmo First. On one hand, the company achieved its highest-ever quarterly revenue, demonstrating strong demand for its packaging films across consumer product segments. On the other hand, profitability margins contracted significantly, with PAT margin declining from 6.03% in Q2 FY25 to 5.08% in Q2 FY26, raising questions about the sustainability of earnings growth amid rising input costs and interest burden.

The stock's recent performance reflects this uncertainty, declining 23.62% over the past three months and trading below all key moving averages. With institutional ownership at a mere 3.71% and promoter holding steady at 40.86%, the company faces the dual challenge of restoring investor confidence whilst navigating a challenging operating environment.

Financial Performance: Revenue Surge Fails to Translate into Bottom-Line Growth

Cosmo First's Q2 FY26 results reveal a significant disconnect between topline momentum and profitability. Net sales surged 21.10% year-on-year to ₹919.03 crores, marking the company's strongest quarterly revenue performance on record. Sequential growth was equally impressive at 14.87%, indicating sustained demand momentum through the quarter. However, this revenue expansion failed to flow through to the bottom line, with net profit rising a modest 2.05% YoY to ₹46.69 crores.

The margin compression story becomes evident when examining the profitability cascade. Operating profit (PBDIT) excluding other income stood at ₹103.07 crores with an 11.22% margin, down 25 basis points from 11.47% in Q2 FY25. Whilst operating margins have remained relatively stable, the real erosion occurred further down the income statement. Interest costs surged to ₹36.67 crores in Q2 FY26, up 45.48% YoY from ₹25.20 crores, reflecting the company's increased debt burden to fund capacity expansion.

On a half-yearly basis (H1 FY26), Cosmo First reported net sales of ₹1,719.06 crores, representing 16.00% growth over H1 FY25. However, net profit for the same period grew at just 18.51% to ₹89.56 crores, indicating that profitability growth is barely keeping pace with revenue expansion. The PAT margin for H1 FY26 stood at 5.21%, compared to 5.22% in H1 FY25, essentially flat despite significant topline growth.

Operational Challenges: Rising Debt and Interest Burden Weigh on Returns

Beneath the surface of revenue growth lies a concerning operational picture characterised by deteriorating capital efficiency and mounting financial leverage. The company's return on equity (ROE) for H1 FY26 dropped to 9.24%, significantly below its five-year average of 18.71% and marking the lowest level in recent quarters. This sharp decline in ROE—a critical measure of how efficiently the company generates profits from shareholder capital—signals that the business is struggling to maintain historical profitability standards despite aggressive topline expansion.

The balance sheet reveals the extent of the leverage build-up. Total shareholder funds stood at ₹1,466.43 crores as of March 2025, whilst long-term debt reached ₹1,038.19 crores, resulting in a net debt-to-equity ratio of 0.71x. This aggressive borrowing has been directed towards capacity expansion, with fixed assets increasing from ₹1,509.89 crores in FY24 to ₹1,732.31 crores in FY25. However, the cash flow statement tells a sobering story: operating cash flow declined to ₹166.37 crores in FY25 from ₹245.00 crores in FY24, the lowest level in five years, whilst capital expenditure consumed ₹419.00 crores.

The quality of earnings also warrants scrutiny. Other income constituted 44.29% of profit before tax in Q2 FY26, at ₹25.38 crores against PBT of ₹57.31 crores. This high proportion of non-operating income raises questions about the sustainability of reported profits, as core operating profit (PBT less other income) stood at just ₹31.93 crores. Employee costs have also been rising steadily, reaching ₹83.33 crores in Q2 FY26, up 30.81% YoY, reflecting wage inflation and potential staffing increases to support expanded capacity.

Industry Context: Packaging Sector Headwinds and Raw Material Volatility

Cosmo First operates in India's flexible packaging industry, which has faced significant headwinds over the past year. The broader packaging sector delivered a negative return of -2.44% over the past 12 months, underperforming the Sensex's 9.15% gain. Against this challenging backdrop, Cosmo First managed to outperform its sector peers with a 9.02% one-year return, demonstrating relative resilience despite its own operational challenges.

The BOPP films segment, which forms the core of Cosmo First's business, has been particularly affected by volatile raw material prices. Polypropylene resin, the primary input material, has experienced significant price fluctuations driven by crude oil dynamics and supply-demand imbalances. This volatility makes it challenging for manufacturers to maintain stable margins, especially when customer contracts limit the ability to pass through cost increases immediately. The company's operating margin (excluding other income) has fluctuated between 6.88% and 11.48% over the past seven quarters, reflecting this input cost instability.

Peer Comparison: Valuation Discount Reflects Quality Concerns

When benchmarked against industry peers, Cosmo First presents a mixed valuation picture. The company trades at a price-to-earnings (P/E) ratio of 14.38x, below the industry average of 17x and significantly cheaper than peers like TCPL Packaging (22.55x) and Jindal Poly Film (40.67x). This valuation discount, however, appears justified given the company's deteriorating return metrics and elevated leverage.

Cosmo First's historical ROE average of 18.71% compares favourably against most peers, but the recent decline to 9.09% (latest) raises concerns about whether this historical performance is sustainable. The company's debt-to-equity ratio of 0.71x sits in the middle of the peer group, lower than highly leveraged players like Uflex (0.97x) and TCPL Packaging (0.98x), but significantly higher than conservatively financed peers like Polyplex Corporation (0.01x) and Jindal Poly Film (0.10x).

The price-to-book value (P/BV) ratio of 1.43x suggests the market is valuing Cosmo First at a modest premium to its book value, which appears reasonable given its asset-heavy business model. However, this premium has compressed from higher levels earlier in the year, reflecting diminished investor confidence in the company's ability to generate superior returns on its expanded asset base.

Valuation Analysis: Attractive Entry Point or Value Trap?

Cosmo First's current valuation presents a complex picture. At ₹810.05, the stock trades 38.02% below its 52-week high of ₹1,306.85, suggesting significant downside has already been priced in. The company's proprietary Mojo Score stands at 48/100 with a "SELL" rating, indicating caution is warranted despite the apparent valuation discount.

The valuation grade has fluctuated between "Attractive" and "Fair" multiple times since July 2025, currently sitting at "Attractive." This classification is based primarily on the P/E multiple compression and the stock's decline from recent highs. However, the PEG ratio of 0.35x suggests the stock may be undervalued relative to its growth prospects, assuming the company can maintain its historical growth trajectory.

The enterprise value-to-EBITDA (EV/EBITDA) multiple of 9.60x appears reasonable for a capital-intensive manufacturing business, particularly given the sector's cyclical nature. However, the EV/EBIT multiple of 14.84x is elevated, reflecting the impact of high depreciation charges from recent capacity additions. The EV-to-sales ratio of 1.00x indicates the market is valuing the company at roughly one times its annual revenue, which is modest but not exceptionally cheap given margin pressures.

Shareholding Pattern: Stable Promoter Base with Minimal Institutional Interest

The shareholding structure of Cosmo First reveals a company with strong promoter commitment but limited institutional participation. Promoter holding stood at 40.86% as of September 2025, down marginally from 40.98% in the previous quarter, with the Jaipuria family maintaining substantial ownership through various entities. Notably, there is zero promoter pledging, indicating financial stability at the promoter level.

The most striking aspect of the shareholding pattern is the near-total absence of institutional investors. Mutual fund holding has collapsed from 0.63% in September 2024 to just 0.01% currently, indicating that domestic fund managers have largely exited the stock. Foreign institutional investor (FII) holding has remained stable but minimal at 3.24%, with 52 FII entities holding small positions. Insurance companies have zero exposure to the stock.

This lack of institutional interest is concerning, as it suggests professional investors see limited upside potential or are wary of the company's operational challenges. The non-institutional category holds 55.42% of shares, indicating the stock is primarily held by retail investors and non-institutional entities. This shareholding structure can lead to higher volatility and limited liquidity, as institutional buying or selling can significantly impact the stock price.

Stock Performance: Significant Underperformance Across Timeframes

Cosmo First's stock performance has been disappointing across most recent timeframes, with the share price declining 23.62% over the past three months compared to the Sensex's 5.29% gain, resulting in a negative alpha of -28.91%. The stock trades below all major moving averages—5-day, 20-day, 50-day, 100-day, and 200-day—a technical indicator of sustained bearish momentum.

The six-month return of 32.96% represents an outlier, driven by a sharp rally earlier in the year that has since been completely reversed. Year-to-date, the stock is down 11.47% compared to the Sensex's 8.52% gain, resulting in negative alpha of -19.99%. The one-year return of 9.02% roughly matches the Sensex's 9.15%, but this masks significant volatility, with the stock exhibiting a volatility of 57.34% compared to the Sensex's 12.33%.

The risk-adjusted return of 0.16 is substantially lower than the Sensex's risk-adjusted return of 0.74, indicating that investors are not being adequately compensated for the heightened volatility they're bearing. The stock's beta of 1.35 confirms it is significantly more volatile than the broader market, amplifying both gains and losses. This high-risk, medium-return profile makes Cosmo First unsuitable for risk-averse investors seeking stable returns.

Investment Thesis: Quality Concerns Overshadow Valuation Appeal

The investment case for Cosmo First rests on four key parameters: valuation, quality, financial trend, and technical positioning. The company's Mojo assessment reveals a mixed picture with more negatives than positives.

The valuation grade of "Attractive" is the sole positive factor, driven by the stock's significant decline from its 52-week high and below-industry P/E multiple. However, this valuation discount appears justified given the deteriorating fundamentals. The quality grade of "Average" reflects the company's declining return metrics, with five-year EBIT growth at -3.69% indicating operating profit has actually contracted over the long term despite revenue growth of 8.09%.

The financial trend classification of "Flat" for Q2 FY26 captures the mixed performance—strong revenue growth offset by margin compression and rising costs. The technical trend remains "Sideways" with the stock trading below all moving averages, indicating persistent selling pressure and lack of buying interest.

Key Strengths & Risk Factors

Outlook: What to Watch in Coming Quarters

The near-term outlook for Cosmo First hinges on the company's ability to translate its capacity expansion into improved profitability. Management must demonstrate that the substantial capital deployed can generate adequate returns whilst simultaneously managing the elevated debt burden. Investors should closely monitor quarterly margin trends, debt reduction progress, and any signs of institutional investor re-engagement.