Greenply Industries — Follow-up call: Buy. Plying high

Investors willing to stay put for one to two years can buy the stock of plywood maker Greenply Industries.

Since our buy recommendation in August last year, the stock has rallied sharply. But fresh investment can still be made given the company’s high potential.

Greenply de-merged its laminates business into a separate entity in November 2014. Last month, the de-merged entity got listed on the bourses as Greenlam Industries and trades at ₹435 apiece now.

The parent company Greenply Industries trades at ₹1,023. We had initiated a buy on Greenply Industries earlier at ₹833.

At the current market price, the stock of Greenply discounts its estimated earnings for 2015-16 by 19 times. In the last three years, it has been trading in the band of 10-23 times.

Greenply now has two segments — plywood and medium density fibre (MDF) boards. It intends to concentrate on these two business segments by introducing new variants and expanding manufacturing capacity. As the non-laminates business is less-capital intensive and more profitable, the company should see return on capital employed improve in 2015-16. Post-demerger, Greenply’s debt burden has also reduced.

Debt-to-equity ratio has dropped to 0.77 times in December 2014 from 1.05 times in December 2013.

Long-term prospects for players in the home interiors space is sound given the growing urbanisation and improving affordability of the middle class in the country.

Also, when the Goods and Services Tax (GST) is implemented, price difference between branded and unbranded products will narrow, enabling more consumers to shift to branded products. This will help players including Greenply in the organised market. Immediately however, what might be a catalyst for growth is the pick up in demand in the residential market. Home loan rates are set to drop with the cut in lending rates by banks.

In the last three years to 2014-15, Greenply has grown its revenue at an annual average rate of 24.5 per cent.

The company’s plywood capacity stood at 32.4 million square metres in 2013-14. Production was 34.68 million square metres with capacity utilisation at 107 per cent.

Sales volume was higher at 44.51 million square metres as the company sourced stock from dedicated outside vendors.

The company intends to increase outsourcing to 30 per cent of sales over the next three years to expand without taking on the burden of additional capex. In MDF however, where the capacity is 180,000 cubic metres and the production is completely in-house, the company is expanding by setting up a new plant of about 3,00,000 cubic metre per annum capacity in Andhra Pradesh.

This is likely to be completed by 2018-19. The MDF capacity had 100 per cent utilisation in the December quarter, up from 76 per cent in March, indicating good demand.

Greenply is also expanding its reach by adding to its dealer/retailer network and setting up base in new towns. At present, the company has a pan-India reach with a network of 1,550 distributors and 10,000 retailers in 300 cities. Even in the not-so-great economic conditions, the company has put up a good show.

In the recent December quarter, its sales grew 19 per cent year-on-year while profit registered a stronger 33 per cent increase. Revenue from the MDF segment (29 per cent of sales) was up 38 per cent while that from the plywood division (71 per cent of sales) was up about 13 per cent.

In the coming quarters, Greenply’s operating margins should improve.

One, with increasing demand, capacity utilisation rates should remain high or get even better. Capacity utilisation in MDF has risen from 73 per cent in the December quarter of 2013 to 100 per cent now.

Further, with the company entering high margin products in MDF like laminated flooring, margins should get a boost. The company expects margins to improve by 50-70 bps in 2015-16.

In the December quarter, the company’s margins expanded only marginally despite strong MDF sales. Operating margin was 13.6 per cent, only a tad higher than the 13.4 per cent a year ago. This is due to higher marketing costs — ad expenses as a percentage of sales were 2.7 per cent, up from 1.3 per cent last year.

Given the company’s drive to expand its reach, marketing costs could remain high. But higher operating leverage and an improved product mix should more than offset the impact on profitability.

COMMENT NOW