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Greenply Industries: Research meet excerpts - Views on News from Equitymaster
 
 
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  • Nov 19, 2007

    Greenply Industries: Research meet excerpts

    We recently met Greenply Industries, the largest integrated manufacturer of interior infrastructure products, to get an insight into the company’s performance and its growth prospects going forward. Following are some of the key excerpts from the meet.

    Company overview
    Greenply Industries is the largest integrated manufacturer of interior infrastructure products in India with a Pan India presence. The company accounts for 25% of the organized plywood and 15% of the organised laminates market. The company was integrated as a saw mill unit in 1984 and over a period of time has emerged as a preferred manufacturer of all products related to interior infrastructure. Greenply has a pan India presences with 24 branches across the country with a strong dealer/distributors/sub dealers and retailers network of more than 7000. The company's state-of-the-art manufacturing facilities are located in Nagaland, West Bengal, Uttarakhand and Rajasthan. Exports contributed to around 22% of the total laminate turnover during year ended 31st March 2007. Greenply exports its laminate products to 18 countries including Far East Asian nations, Dubai, Russia, Syria, USA, Australia, Mexico, Saudi Arabia, China and Israel. The company’s plywood business accounts for nearly 52% of the total revenues, with the rest being contributed by the laminates and veneer and decorative segment.

    Key segments
    Plywood: The market size of the plywood industry in India is estimated to be around Rs 70 bn including decorative and veneers. The industry is highly fragmented and dominated by the unorganised sector, which constitute almost 80% to 85% of the total market share. However, the market is growing at the rate of 15% per annum and in order to gain a higher share, the company has ramped up its capacity from approximately 11 m sq m p.a. (million square metres per annum) in FY06 to 18 m sq m p.a. in FY07.

    This segment accounts for almost 52% of the total revenues. In 1HFY08 the segment’s production increased by almost 49% YoY, with average capacity utilisation being 95%. On account of improved volumes and better realisations, the segment reported almost 53% YoY growth in revenues. The company’s plants are situated at Nagaland, Wets Bengal and Uttarakhand. Of these three sites the Nagaland has abundant timber resources and the company procures its raw materials from private plantations. Further, this region falls under the tax holiday zone, hence, the company enjoys tax holiday for five years and excise benefits for ten years out of which since past two years. The West Bengal plant is located adjacent to the Kolkata port thus facilitating easy imports and the Uttarakhand plant is close to agro forestry giving it proximity to raw material.

    Laminates: In line with the interior decorative industry, the laminate segment is expected to continue to grow at 15% per annum. Of the estimated Rs 120 bn interior infrastructure decorative business, laminate segment’s share is 25% amounting to Rs 30 bn. In this segment also the organised market share is approximately 15% and of the organised market, Grenply’s share is 15%. The company has expanded its manufacturing capacity from approximately 4 m sheets per annum in FY07 to 5.3 m sheets p.a. in 1HFY08. The company’s manufacturing unit is situated at Behror in Rajasthan, which gives it proximity to the major Northern and Western markets of India.

    The segment witnessed 12% YoY growth in realisations due to improved product mix. Further, in FY07, Greenply formed an exclusive marketing and distribution alliance with Dekodur, a high end German metal laminates brand to cater to the premium consumers. The company has also introduced new finishes and designs like American Wallpaper, Wicker finish, Alligator and Caravan Leather, among several others. The division has also registered carbon credits under the UNFCCC by shifting from conventional fuel consumption to mustard husk in its boilers. The revenue from this would lead to accretion to bottomline.

    Decorative Veneer: Decorative veneers are value added products and hence they enjoy better margins. The operating margins of this segment hover in the range of 14% to 17%. The segment reported 22% YoY growth in turnover as the average realisations increased by 23% YoY due to improved product mix. The company expects this division to continue to grow in line with the industry growth rate of 15% per annum.

    Particle Board: The company ventured into particleboard business to improve product mix while bringing down costs which will in turn result into better profitability. The by-products (waste) from plywood constitute nearly 50% of the raw material in the particle board manufacturing process. Thus the move will not only diverse revenue stream while reducing costs but will also enhance margin improvement.

    A look at the past
    As mentioned earlier, the company benefits from tax holidays as the units are situated in tax-holiday zones. These benefits are expected to accrue for another 8 years in terms of excise waiver. The company is a net importer i.e. it exports laminates which account for almost 7% of the total revenues and 20% of the total laminate turnover and imports raw materials such as kraft and design paper, phenol etc which are major inputs for laminates. The company’s raw material costs in terms of percentage of sales basis are in the region of 55% to 58%, which the company expects to come down to 45% to 50% in next 3 o 4 years on account of better product mix & utilisation of waste (particle board new initiative) resulting into enhanced margins and diversified revenues.

    Financial snapshot
    Particulars FY05 FY06 FY07 CAGR 2 yrs
    Net sales 1,634 2,573 3,922 54.9%
    Cost of sales 1,454 2,268 3,452 54.1%
    EBITDA 180 305 470 61.5%
    EBITDA (%) 11.0% 11.9% 12.0%
    Net profit 53 141 225 106.5%
    Net margin (%) 3.2% 5.5% 5.7%
    EPS 20.19
    P/E* 14.9
    *trailing twelve month earnings

    The company has extensive dealer/sub dealer network that helps it to provide better services to the customers. Greenply has expanded its dealer/distributor/sub dealer/retailers network from 3,700 in FY06 to 7,100 in FY07 to penetrate more in the market. The company has also developed corporate tie-ups, which as of today forms merely 10% of the total revenues. Further the company is the most preferred and the largest vendor to Wilsonart Inc. (world’s no. 1 laminate manufacturer). The company is also a major supplier to the leading modular furniture manufacturers in India such as Godrej, Featherlite etc.

    Way forward
    The particle board segment is a highly capital intensive industry and currently is 90% of the particle board requirements are imported. Even in case of other products getting license to set up a plant is an entry barrier as it depends upon the supply of raw materials from plantations. Going forward, as the incremental demand for office space in India is expected to exceed 85 m sq ft by 2008, number of malls to go up to 350 and demand for residential units expected to be around 22.5 m by the end of the 11h plan, the sector is expected to continue to clock growth rate of 15% per annum. The company, given the opportunities, on account of its initiatives, brand building and pan India presence expects to grow at a CAGR of 35% in next 3 to 4 years.

    What to expect?
    At the current price of Rs 300, the stock is trading at a price to earnings multiple of 15 times its trailing twelve months earnings. Considering the opportunities and initiatives taken by the company, a strong growth momentum over the next three to four years seems feasible. However, considering the limited supply of raw materials and dominance of the unorganised sector, maintaining and improving margins remains a concern, which in turn will impact returns to the shareholders.

     

     

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