Stylam- Decent Fundamentals with Cheap Valuation

Stock Opportunities Untested - but worth a good look
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**About Company :**Stylam is engaged in the manufacturing of luxury grade decorative laminated sheets for both residential as well as industrial applications. More than 75% of its sales are from exports markets like Europe and US.

Capacity & Expansion Plans: Currently company has capacity of 6.4 million sheet with ~75% utilization level. Recently, company has announced addition of a new line with 2.4 miilion sheet capacity, which is expected to be completed by the end of FY16.

Growth Visibility: The company has registered robust sales growth with a CAGR of ~22% (10 years), 29% (5 years) and 32% (3 years) in the past, led by network expansions, entry into new markets for export, capacity expansion etc. Going forward, company is expected to register 20%+ growth in the topline on account of increased utilisation of current capacity and increase in the capacity from FY17 onwards.

Margins: Margins of the companies have been fluctuating due to unhedged currency exposure of the company. Last two quarters OPM was lower due to depreciation of Euro & Pound (~50% of sales).

Operating Efficiency: Core Assets turnover ratio (exclusing capex for BPO centre) of the company has been improving over the years due to increase in utilization and efficient working capital managment.

Returns Ratio & Profitabilty: ROE of the company has improved over the years and is above 20%.Net profit of the company has increased at a CAGR of 35% (10 years), 89% (5 Years), 22% (3 years)

**Earning Check:**The Company has been able to convert its profits in to cash flow from operations. PAT for last 10 years (FY2005-14) is INR 26 cr. whereas the CFO over the similar period is INR 38 cr, which is a good sign.

Concerns: The Company is doing capital expenditure in an unrelated field of business process outsourcing (BPO) in Panchkula, with the expected outlay of ~30 cr.As a result of which debt of the company is at higher level of ~2x.

Valuation: The company is trading at a decent valuation of 7x TTM and worth looking at. It has better financials as compated to its listed peer Greenlam and trading at significant discount.

Note: Let me know your views on the same so that we can dig further into the company.

Disc: Invested

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The BPO diversification was my biggest worry - they are getting into domestic BPO of all things where existing players themselves are struggling with margins. Seems like a case of capital mis allocation which is the biggest worry - I am surprised they are getting into BPO themselves - they could have at least found a partner or acquired someone.

If such a small company is diversifying into an unrelated business where they can’t make profits for at least 2 years, I think either steam has run out in their existing business orthe management is not keen on ramping it up.

For the life of me, i cannot understand why someone would want to diversify from a steady growth market like laminates into a declining market like domestic BPO - look at how 3i and first source are struggling with realizations after two decades of operations and for them to come up the learning curve starting today is the equivalent of a mini miracle.

On capital allocation front, this would be a clear no - it’s draining their cash flows and loading debt on top it.

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Its not exactly a BPO Business. Their plan is to rent it out to BPO Companies.

i think reason for diversifying is desire to own a Real Estate property.

This is concern for sure but valuation provides a comfort.

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The below is what company said in the AR. I guess it’s both setting up a BPO and also renting out a part of premise to other IT/BPO players. Otherwise, the company has no business of buying property in a tech park i guess.

“As a part of support in the existing business set-up, the company has
planned to set-up BPO. The company has already purchase land
admeasuring 59964.62 sq. ft. in Panchkula Technology Park, Haryana. The
construction at site is under process. The company has planned to use
part of building for its own purpose and the part will be leased out to
other IT and BPO players. The company has taken term loan of Rs.2100.00
lacs, as part finance for the project. The project is estimated to be
operational in the year 2015-16.”

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@armchairinvest_ Looping him in. He has done quite a bit of work on the company

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Yes the valuations are at great comfort compared to peers which are trading at more than 20PE.
Company track record is also good. Stylam Executive Director got first generation entrepreneur award also.
I feel their idea of setting up BPO unit may work out well as they are planning for their own business instead of outsourcing it and remaining portion will be leased out which generates other income. Of-course capital miss allocation in new field is always a concern.

Disc: Invested

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@mmvravindra comparing it with peers who are a brand may not be right thing. Greenlam etc have invested in creating a brand in the domestic market. These guys are majorly exporting to many countries. Thus margins,/multiple etc are not strictly comparable.

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@rohitbalakrish_ I do agree with you. But every company starts as a small company and grows over time. Stylam being a small cap struggling with margins, still manages to grow at 20%+ over last few years and it has every chances to continue with 20% growth rate. Going forward PE will expand along with margins hence could generate huge wealth. GST will be a huge advantage. In next few years manufacturing will shift to India from china due to labor cost. This shift has already started in Textiles.

Disc: My views may be biased as I am invested in it.

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Yes, they have delivered 20% topline growth and things should improve going forward as they increase their utilisation and expand capacity.

Stylam also has good brand, distribution network and clientele in the export markets like Europe. Checkout its website for details:
http://www.stylam.com/

Current valuation is very attractive and provide margin of safety.

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@ravijain88 how do you factor in the debt into the overall scheme of things? As far as my understanding goes, there is not really a ‘brand play’ in the export markets. Its more of a white-labeling and tieing up with distributors. Growth can come because of the small base, but how sure are we, what are the drivers for Stylam and what sort of competitive advantages they will have vis-a-vis competition these are all open questions which we should ideally try to answer.

Also, if and when they expand into the domestic market then they will also incur S&M expenses which may depress their margins.

The expanded capacity will also need debt/equity dilution. Which may further deteriorate the Balance sheet

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@ Rohit
Debt Concern: We can divide the existing debt of the company in two parts. Long term debt of the company is mainly for the BPO, which is unrelated diversification and is the main concern. Short term loan is mainly packing credit which is a short term facility available at very low interest rate (thats why interest outgo is minimal in the income statement) as stylam is recognized as export house. So if strip off numbers for BPO center, debt situation looks comfortable (1:1). As per management, company would require around 30 cr for the addition of new capacity, which would be funded through internal generation, bank loan and loan from the promoters.

Success Factors: I think critical success factor for this business is innovative designing, customization (thickness, size, texture) and distribution network. Considering this, they have build good trust, relationship with the institutional clients and retail customer in the export markets like france, germany, UK and other european market etc. They also conduct exhibition regularly in order to showcase their brand.Further, The company has been investing heavily on R&D to stay ahead on the innovation curve in the global Laminate Industry and can customize products (thickness, quality, design) as per the requirement. Given below are the few links for its brands:

http://www.stylam.com/brand-stylam/
http://violam.in/
http://www.stylam.com/fascia/
http://www.stylam.com/walk-on/

Excerpts from a report “Apart from the coveted CE certification, Stylam Exterior laminates have also been certified with ETB certification for conformance to Exterior Balcony application by MPA BAU Laboratory, Germany. And TNO Quality Service B.V. investigated the resistance to artificial weathering according to EN 438‐2 of its different kind of High Pressure Laminate Sheets, Netherlands Stylam Exterior laminates are also used for building cladding as well as temporary houses/site‐offices system”-Not sure about its importance

**Growth Drivers:**Growth is expected to come due to low base, established network, addition of products (designs, thickness, texture), increased focus in low base export markets and addition of capacity.

**Increased Focus can be Catalyst:**There was few things which indicates that management has increased its focus on the business, which can be catalysts for the re-rating. This initiatives include increased PR activities, complete revamp of their website (it looks much better than what it used to be six months back)

As per the management, company would continue to focus more on the export markets. However, just read a article of their entry into Gujarat market.

Comparison with Greenlam: If we compare stylam financials with the Greenlam, Stylam looks much better due to

  • Higher ROE (20%+ vs greenlam ROE of ~10%) despite lower base.
  • Similar Debt to Equity (2:1) despite unrelated diversification
  • Cheaper Valuation (Stylam is trading at 7x TTM vs Greenlam PE of 40x based on diluted EPS)

However, we need to compare both these companies in detail to arrive at a conclusion.

Request old veteran of VP to share their thoughts on the same so that we can have better understanding of the company.

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A point that everyone has missed is that BPO biz and a consumer play trade at vastly diffferent valuations - BPO at 10-12 x PE and consumer at 20x PE

The point is as long as one is confident of generating growth in the consumer biz, why would they invest into a BPO biz - it’s the equivalent of an apple getting into a commodity PC industry where brands etc. do not matter.

Typically, managements do this when they think they are running out of steam in their existing business - otherwise, BPO is not even a sunrise biz and there is plenty of competition - from a 20 % ROE biz to a 13-14 % ROE biz IMHO is capital mis allocation - they should have sold the land or leased it rather than do it themselves.

Has anyone talked to the management to undertand their reasons ?

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Could not get clear answer on the BPO front.

Anybody has other insights on the business and view on the valuation?

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Very good numbers from stylam.
Stock already rallied in last month.I thing results are factored in stock price
http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/0654DA39_EF2F_415C_99A1_14B033E52C1F_122647.pdf

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Surprised to see Stylam annual report in company website. Didn’t get any mail from company, not updated in bse site also.
http://www.stylam.com/wp-content/uploads/2015/02/ANNUAL-REPORT-FINAL-2014-15.pdf

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I haven’t spent a lot of time on this but here are a few observations being familiar with the Chandigarh/ Panchkula area.

The plot that they are developing in the Panchkula technology park was allotted to them around 2008. In the boom years of 2005-2008 , Chandigarh/Panchkul/ Mohali felt left out and the govt rolled put plans for setting up technology parks in the three towns. Except a mild response for Chandigarh from the likes of Wipro/Infosys, there was almost no response shown for Panchkula and Mohali. The main reason given then was that the city has no air connectivity and an IT company can’t work without that. In those days you had to take a flight to Delhi and then take a Shatabadi train to Chandigarh station which is a few kilometres from Mohali/Panchkula. Chandigarh airport has since been renovated and gets around 20 flights a day today and from today it will also start getting international flights.

While this was going on, the bubble burst and even the mild response vanished. At this time, some of the local businessmen of the area moved in and plots esp in the Panchkula technology park were allotted to them. Most of these companies were real estate companies and had very little to do with IT. The plots were given to them with the undertaking that they will develop the plots within 8 years of allotment.This is the reason that you see a flurry of activity to finish projects in 2016.

I could be very wrong here but to me this whole BPO business looks no more than a front for real estate activity. They will in all probability put up a small BPO front end to meet the govt obligations. However, there are no takers for office property for lease at the moment in that area. There are prime office properties in the heart of Chandigarh/ Panchkula that have been lying vacant for years and no hope of any occupation in the near future. Therefore, servicing the loan that they have taken for this real estate activity with no occupants will be a challenge.

This group also has another group company called Amravati developers which was in deep trouble a few years ago. They had announced a township about 20 kms away from Panchkula and the response was very tepid. So please be aware that this group has their fingers in a number of real estate projects in and around Panchkula and not all of them are doing well.

Will talk to my local contacts and try to dig out more info.

Disc- Not invested.

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Hi Piyush,

Very good info you have provided. But one thing i would like to rectify. Total Employee Benefits Expense are Rs. 13,21,54,927 i.e.Rs 13 Crores not Rs 1.32 Crores. And the amount taken by Promoter/Directors + CS is 1.36 Cr. This is nearly 10% of total Employees cost. This is normal in case of SME business.

As far as the Panchcula Plot is concerned, this is given in Annual Report

“To put all the inventiveness measures under one roof, this includes development of new designs,
finding of new vendors, to study product dynamics and to explore market for export and domestic
business; at their separate location at Panchkula Technology Park, Haryana. The construction of
building having built-up areas of 20697.200 sq. mtrs is almost complete. The company has planned to
lease out portion of constructed building to other players for commercial office space and for service
sector businesses. The building will be operational before the close of this financial year.”

It seems like they had bought plot in Good Times and got stuck with it. Now they are trying to construct
& lease it. Also will move their operations to that instead of their current office.

Generally the office space scenario is not as bad in real estate as compared to residential one. If they are able to lease out some good chunk of it then it would clearly add to bottom line as the plot cost has aleardy been paid couple of years ago and accounted for.

On the other hand if they had not done some construction, then the plot would have been seized by Developement Authority for non compliance. That would have been a big lose for them.
It seems that they were caught in Catch22 situation and this was the only way forward for them

Interesting to know about their real estate Activites of Amravati developers. Are they still doing it?
If they are, then this is a red flag and we need to be aware of. If you get any more info please update.

Disclosure : Invested

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Thanks for the correction on the wages front. Had a quick look and got the decimals wrong. I will edit my post to delete this section.

I have some personal experience in the commercial property in Chandigarh/ Panchkula and can confirm the situation is really bad. This technology park is in the new section of Panchkula beyond the Ghaggar river which is some way out of town. However, this group has been in the real estate business for some time and they might be able to swing some lease rentals, but that remains to be seen.

Yes they are still doing real estate development under the Amravati banner. But to be fair to them, they have completely disclosed the relationship in the related party section.

On the office consolidation front, their main office is in Sec 17 Chd which is unlikely to be relocated. They also seem to have some office in the Panchkula industrial area along with their factory. Yes I agree that some of it can be consolidated. My point is that the BPO business doesn’t look like a serious venture that they are trying to pursue. This group has only done laminates and real estate till date.

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Disc: Invested

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Decent numbers from Stylam

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/6E7F0EB0_2B03_4ED1_8F57_CE0A9CECCF2C_121953.pdf

Disc: Invested