The Hindu Business Line : Uniply Industries: Invest

AN INVESTMENT can be considered in the initial public offer of Uniply Industries, which makes plywoods and veneers. At Rs 24, the stock is valued at 20 times the FY-05 per share earnings on the post-issue equity base. The stock is stiffly priced, considering that the average price-earnings of the peer companies works out to about 13. However, if the company is able to market even 60 per cent of its expanded capacity, it would be valued at 10 times the expected FY-07 earnings.

Profile

A manufacturer of plywood and panel product, Uniply Industries earned almost 50 per cent of its revenues from exports for the year-ended March 2005. The plywood industry remains highly fragmented and unorganised with a large number of small players. Counterfeiting of major brands is also rampant.

Uniply's initial public offer is expected to mobilise Rs 12 crore. This is slightly higher than the company's net worth. Much of the funds received from the public offer are to be utilised to ramp up capacity from the present 25,000 cubic metre per annum to 50,000 cubic metre per annum and installation of wind electricity generators. In the past four years, capacity utilisation has been about 85 per cent. According to the offer document, if the estimated down-time for machinery is factored in, it may not be possible for the company to raise its capacity beyond the current levels.

Given the growth in demand for plywood from the construction sector and decorative and furniture industry, the increase in capacity is reasonable. The installation of wind electricity generators will help meet the company's entire power needs. It will not only save power costs but also get income-tax benefits for the wind farm too. This will help improve the profitability margins. The operating margins of Uniply have been hovering around 6 per cent, in an industry that typically operates at low margins. The steady growth in the company's topline in the past four years is a positive factor too.

The potential risks to our recommendations are:

The company depends considerably on imported raw materials due to restriction on felling of trees in India. The company, unlike its peers, does not seem to capitalise on the few States that have no such restrictions.

Given that this is the first foray by this group into the capital market, risks relating to judicious utilisation of funds and delays in commercial production are possible.

Uniply Industries is a small-cap company. The offer price values the company at about Rs 30 crore. Trading volumes are likely to be low. Investors need to hold the stock for a long period to get reasonable returns.

The offer of 50,00,000 equity shares of Rs 10 each, priced at Rs 24, is open from June 9-12. BOB Capital Markets is the lead manager to the issue.

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