Uniply - Bet on new mgmt. bringing scale, brand & operating efficiency + GST


(Raj Panda) #1

Background

  • Company was previously under a different management. So looking at the history of company won’t provide much idea on the future. Suggest to look at it form vision of new management (Keshav Kantamneni) as shared by him publicly and consider what he brings to the table and his future plans for the business.
  • in Feb’15, Keshav bought 36 per cent of Uniply , held by BL Bengani and others, for ₹2.5 crore !!! and made an open offer at Rs. 13.50/- to buy 26% (45 lac shares; spending 6 odd cr.) + Company had debt of 115 cr.
  • Keshav is form investment banking background, did his MBA from the famous Kellogg school of management and hails from a business family. They have business interests in wood logging in parts of Africa and trading of ply doors (earlier manufactured by a Chinese partner) and investment banking (Globality Partners) and few other business interest like retail in different countries.
  • Few things happened in close succession which led to Keshav buying stake in Uniply 1. Their ply door trading business which was manufactured by a Chinese manufacturer, it’s second generation was no longer interested in the business and Keshav was looking for another manufacturer for ply doors. 2. Uniply approached Globality Partners looking for a buyer. This led to Keshav to consider buying Uniply in his individual capacity.

Current Valuation - MCap - ~65 cr. Debt - 90 , EV - ~155 cr. (Debt has come down from 115 to 90 cr. post new mgmt take over)

First few points on plywood industry business dynamics

  • Main raw material for ply is raw forest wood and wood logging is currently banned in India. Only the plantation logging like rubber/poplar is allowed and those are not good raw material for standard quality plywood. So, raw material is sourced from outside India. Burma was earlier the largest source but then Burma has banned logging since 2012, so the new source is mainly Vietnam and some parts of Africa. Importing raw materials of this nature involves risk on quality of raw materials, as sometimes the seller may show different quality and ship different quality of materials and it’s hard to tell the difference until it’s too late.

  • A good quality ply is made from pressing together sheets of vineer using chemical and glue. Vineer is made from peeling the logs and doing other processes on it. Lower quality/priced ply is mostly made by un-organized players by putting veneers (sourced from organized players, Uniply almost owns this market supplying 90% of this requirement) only on the top & bottom layers and using rubber/poplar and other termite prone wood and leaving more hollow space in the middle layers and hence preparing lower density/weight of finished product. Those are sold for lower price.

  • Since year 2000, there is a supreme court ruling saying , there will be no new plywood mfg. license issued. Only the existing players can continue. Most of the players in unorganized industry are not licensed players and do the business the way they do. Introduction of GST would impact these players the most as they will lose a good portion of their low sell price advantage.

Current Status & Future Plan of Uniply

  • Company’s main markets till date have been Karnataka, Tamilnadu,Kerala in south & Punjab, Rajasthan in North & few other states and it did 172 odd cr. of business in 2014 and 127 cr. in 2015.
  • Out of a market size of say 6000 cr. GreenPly does ~1500 cr. and Century ~1000 and Uniply is at no.3 in organized space at ~170 cr, other major players are Archiply and sharda ply, and the rest of market is all with small and unorganized player leaving a wide scope of improvement for Uniply.

Keshav’s vision for Uniply’s improvement is based on these lines of thought.

  • Increasing Plant utilization - Currently capacity is utilized at only 40% level leaving huge scope for growth without capex.
    -Keshav and his team have partners (from Investment banking contacts?) in various parts of the world to take care of the sourcing of raw material and present some advantages in sourcing as compared to previous management. Uniply’s earlier management was doing ok, when raw materials were sourced from Burma, but business started faltering after raw material was sourced from Vietnam.
  • Doing better business in Andhra - Keshav is form Andhra, and with the big construction going on in Andhra after new CM and new Capital being built are known stories. This helps Uniply to focus on project business and scale up sales. Currently Uniply does about 12 cr. sales per year from Andhra compared to market size of ~60 cr. leaving good scope for growth.
  • Currently the company has 12 dealers across the southern region and company plans to have 30 dealers very soon, dealer agreements are in place and a senior person hired from a competitor is leading this effort.
  • Company plans to focus on brand building through TV ads, wall paintings etc and also work with architects, contractors and via promotions etc. In the last 20 years, company has never done ANY kind of promotion. and the brand is built on the single premise that they supply quality goods. Company has good manufacturing process built by previous management and the business goodwill is built on that premise. The company has hired an Adv. agency for the first time in history of the company and they are working on a campaign. Company intends to keeps the sales & marketing budget in range 4-5% of revenue going forward.
  • Acquisition & Capex Plans - Company currently has 1 main plant and 2 sub facilities, all in Chennai. Ply is transported to far off places like Punjab,Himachal in north and Maharashtra in west regions from the Chennai facility adding significant cost burden and distribution inefficiencies. So company plans to acquire 2 more small mfg. units 1 each is north and west spending at about 20-25 cr. to facilitate efficient mfg. & distribution.
  • High cost of borrowing - Old management had borrowed capital from banks at cost of 17%, which is way too high than standards rate and new management thinks the borrowing cost can be improved a lot in short time and also they have started paying off debt (from 115 to 90 cr. in last 3 months). So aggressive debt repayment is also among top priority.
  • End of this FY, management expects a good top line growth and top notch industry standard bottom line margins.
  • Starting July’15, company is going to introduce a new product line which will be of global industry standard. Currently none of the Indian products are in that category and most export order(if any) are specially manufactured to cater to the order.
  • With this, the company is also setting itself up as a possible exporter to Australia & New Zealand where it has advantage in shipping cost (closer to India) compared to Chinese players. In 2-3 years company sees >30% revenue coming from exports.
  • As per Keshav, Uniply purchase was made for 3 primary reason, he can source raw material cheaper, he can sell better and can sell to more countries.

Numbers
Company posted a fantastic last Q in terms of margins , posted 6.2 cr. of EBITA on a 27 c.r of revenue & 3 cr. of NP (no tax paid due to accumulated losses?)and turned to profit for the full FY15 from a loss of 2.95 cr. for FY14.
I am expecting it to get to a ~10% EBITDA (industry top player standard ?) on a sustainable basis over next 2-3 years.
Am expecting it to reduce debt significantly as indicated by mgmt.

Welcome feedback/brickbat/brain storming the idea.

Disc: Brought recently with a low PF allocation %tage, might add more once price stabilizes, it’s been on circuits for few days now.


(JatinK) #2

Interesting find Raj.

After reading a bit on the company, a few questions that come to my mind-

  1. Banned in India, banned in Burma. What if Vietnam also puts bans? Will the whole industry sustain after say a decade or natural wood will have to be replaced by some other raw material (like artificial leather is replacing natural leather)?

  2. Keshav has any prior experience of running business? Can an ex I-banker manage to do well in a tough looking industry- sourcing Raw material, managing cost, Building brand… nothing looks easy.

  3. Debt down from 115 cr to 90 cr since he took over… Balance sheet is neither showing 115 cr nor 90 cr… As per Balance sheet, debt was 55 cr in FY14 & has increased to 60 cr as per latest balance sheet.
    How is there so much difference?


(Raj Panda) #3

Hi Jatin,

  1. Difficult question with no easy answers. If something like the artificial leather comes up for ply, then good for humanity. If not, then we don’t know. Come to think of it, even artificial leather is a petroleum bi-product which is exhaustible and with no easy replacement found so far. Natural leather may be more easily replaceable, though not at the rate the world wants. You may like to read on a recent editorial topic about why Indian firms have acquired 1.5mn acres of land in Ethiopia, it’s very thought provoking. So let’s say this is an opportunistic allocation as this isn’t an industry that you would like to buy once and hold for ever. Play the operating leverage and growth cycle of an aspiring Promoter (3-5 years?) who seems to have some right answers to tough questions and get out once that story ends. Something similar to what happened in Atul Auto story I think.

  2. He is from a business family. Due to his father passing away at an early age, the family had taken a decision to go slow in business until the next generation is eligible to take over business. He is also dealing with ply door trading business, investment banking firm and few other stuff. I tend to like management who can explain their business and their plans for it in plain understandable manner, which seems to be the case here. Check out the below interview links and see if you get comfort on that front.

  3. Good point, i too struggled with that. But i gave the management a benefit of doubt, considering the fact that, the take over happened in Feb and the interview from which I quoted Keshav on debt figures happened in May. Also, was he talking about the current debt as “short term debt + payables” quoted in March’15 results ? that comes to ~90 cr, but then he should have reduced the receivables too ?. and long term debt is close to 0. This will need some more probing.





(NMB) #4

This is very interesting. If this guy can maintain Q4 eps throughout the next year, we will get annual EPS of approx 6.8rs and if that happens, we potentially have a consumer stock at 5.4x PE.

And to take a bull case that they manage to grow 20% over Q4, that could be 6.8 + 1.3 approx = 8.1 EPS…which makes the stock ridiculously low.

Well, execution is the key risk. But this could be a low risk play with a very high potential for upside.


(manish) #5

i got interested in uniply when it was below 15 but the stock ran up too fast.
also the fact that the promoter paid abt 13rs / share and the open offer also was around same price didn’t give me comfort. Why didn’t the promoters bought more if they knew that the business is worth so much.
The debt levels are high. the last qtr results were good, but the mgmt doesn’t have much of a track record.
lets see.


(Sandeep Bhandari) #6

One observation:
Key contributor to profitability is that other expenses came down from 3.76 crores to negative 80 lakhs.
One should take same into consideration before extrapolating current quarter numbers.


(Raj Panda) #7

@neil991 I am taking last Q as kind of aberration and not as trend setting. Main reason is, this takeover transaction itself took place around Feb and we don’t know how much Keshav’s thought process played a role in running the operation in this March Q.

I am willing to go by management’s guidance that they will aim for industry best margins. So let’s take the example of largest player in Industry - GreenPly,CenturyPly - the EBITDA margins are in range of 10-14% over last many years. So am hoping they can catch the bottom end of that range (10% EBITDA margins) over next 2-3 years. In near future they will have to make higher sales & marketing expense due to the new initiatives mentioned above, so to expect last Q’s margins may be too optimistic.

I would like to see them to grow revenue at a faster rate due to the low market share they have currently.

@manishinlucknow, I get a sense, the previous promoter’s stake came to Keshav at a throw away price (at the rate of ~7 cr. for whole equity stake). From the Open Offer, he got only 900 shares :slight_smile: Probably, he could have got more shares only at a price, higher than 13.5, which was offered. so, yes this could become a sore point for promoters in the future and a decision they may come to regret. But i’ll not be surprised , if management does some kind of preferential allotment to themselves for raising further funds. Let’s be ready for that mentally :wink:

@SandeepB, Which line item are you referring to ? Also, Keshav mentioned in the interview that forex loss contributed to past loss. Was it something turn around in Forex position, no idea. I agree, shouldn’t the last Q result as guide.


(Varadharajan Ragunathan) #8

I really like the idea here but given that real estate and infra are not in the best of shapes, I am not sure if it is easy to shift market share for Uniply so easily.

Below 25-30 , there is a good margin of safety but the key issue is what beyond the low hanging fruits ? I am sure keshav is good enough to wring out inefficiencies for one to two quarters.

thinking of watching it closely. thanks for the idea initiation. could be a multi-bagger


(NMB) #9

He does mention that the company should grow by 25-30% from hereon and if they are able to increase margins, then this investment should work out very well.

Uniply is a proper brand and I believe this guy scooped a BIG WIN for himself by buying the entire stake at 13rs odd. If the management gets it right, the price can go much higher.


(Ritesh) #10

Hello - i have following reservations

  1. please visit Keshav’s linkedin profile (https://www.linkedin.com/in/keshavnarayankantamneni). He got his MBA in 2011 and has 3 years investment banking experience. No mention of wood logging family business, US forex / i.banking experience. Only mentions Globalit investment bank’s 3 years business. Which is a start up. He gave impression to me that he is a big swinging dick from one of the bulge bracked investment bank of NY. He also mentioned in the videos 8 years experience - But his linked in profile does not mention any such thing - The reason I anchor to linkedin profile is because a US MBA holder would always keep his linkedin profile up to date and shining

  2. He ensures no forex losses and rather making money on forex - is he not deviating from his Uniply’s mandate? And it is a big sales man pitch to say making money on forex - And there he also adds that he did forex structuring in US. But his linked profile does not say anything about this.

  3. His numbers are all over the place - Revenue of Greenply and Century are different to what he is saying. More importantly the debt reduction from 115 to 90 cr is a blatant lie

Gist - He has no operational or business management experience apart from the degree he got + it is worth a gamble for him as his basis is very low: he bought the shares at around 4 bucks per share and it is already at 36 bucks without doing any improvement except a bit of talk + he comes from Kellogg, a school known for marketing management which means he would be able to brand his ply but for turning the business around, I have my reservations!

And big question is why the existing business sold the business so cheap (sales price per share of around 4 when BV is around 16)


(Raj Panda) #12
  1. On your point one,I take strong objection to the language used “He gave impression to me that he is a big swinging dick from one of the bulge bracked investment bank of NY.” @Administrator - please let me know, if am wrong in the objection here.
    Let’s be civil in our comments while expressing our individual opinion on anyone. LinkedIn update - well good if it’s maintained well. But i won’t put much emphasis on it. Specially for people who are not looking for jobs.

One drawback of the youtube interview is, only the answers are captured, and the questions are not. So some of the section’s appear a bit incoherent. On my part, i took the explanation on the forex thing, as a kind of explanation of how things work and not necessarily what Uniply’s focus will be. There are many companies which earn a bit on account of good forex management and I don’t see any harm in it as long forex gain are not the reason why the company exist. If he just makes sure, there are no forex losses, that’s great.

I don’t know, how you figured out it’s a gamble for him ?. Is it based on the stock price appreciation ? We as individual investor have the liberty to sell at this sudden stock price jump. But a promoter doesn’t have it so easy. If he sells, he has to inform exchange and the news itself will probably take the price to where it all started from.
The way, i see is, this guy with 42 cr. networth (from SEBI filing ) was willing to invest 2.5 cr. + 6 cr.= 8.5 cr. (20% of his networth) into a loss making company with huge debt, only based on his conviction that he can turn around things. I am viewing it as a positive trait rather than saying he did all this, so that he can talk his stock up and sell and run.

On the question about why existing business sold so cheap - please check the debt figures, the accquirer has taken the liabilities also. So what seems to us as a mere 2.5 cr. for 36% should be seen in the light of Enterprise Value (Mcap + Debt) at which the business was valued.


(Subash Nayak) #13

I see bunch of risk here.

  1. Illiquidity risk : Very small mcap cos, with razor thin liquidity. Such scripts needed to be bought with way higher margin of safety. Seems no one has considered this !!!

  2. Unproven management: Whatever be the interview of the management, whatever be the educational track record, running a business is a different ballgame, and hence due margin of safety needs to be taken to accommodate this

  3. Valuation risk : Frankly, I am not yet able to decipher what should be its fair value of this. Add to the fact that the new guy has bought it at way low valuation, and the open offer is at 1/3rd of cmp.

Considering these 3. at cmp 40, it looks prohibitively expensive to me. I would prefer buying these type of cos at 1/3rd of sale (which would be around 33cr mcap and price of 20 odd).


(Raj Panda) #14
  1. Yes, that’s a risk. If one’s PF size is big and no meaningful allocation can be made to this. Then yes, it’s a risk and does make sense to look at it. At current price it’s 70 cr Mcap and 45 cr. Free float.

  2. Yes, it’s a risk.

  3. From valuation angle, am willing to leave the fact out that he bought it really cheap. That’s a thumbs up to his negotiation & bargaining skills. Plus remember in the eyes of previous mgmt. Keshav was taking higher risk because, they weren’t able to run the business properly and probably lacked ideas on how to do it either. Where as we are trying to partner with a promoter who has on paper shown ideas that he think will work. If it will really work or not, only time will give the answer.
    If Keshav can continue to acquire more assets at similar bargain prices (which he indicated in interview) for Uniply, shareholders will gain.

On the valuation part, my suggestion is, try to look at it from perspective of EV/EBIT. IMHO sales multiple as a valuation tool leaves too many things out (debt, business margins) from consideration. Now look at what other listed and well run peers are valued at and then think how much discount we have for Uniply given all the uncertainties and see if it makes sense. So IF (that’s a big IF) the things turn around then we will not only have valuation catchup game but also the increased earnings to enjoy. If earnings growth doesn’t materialize, then we may lose some :slight_smile:


(Vishnu Ch) #15

First off, kudos to @rajpanda for picking a turnaround story in the early stages (relatively :smile: ).
It does look very interesting and worth it.

Couple of points from my side re: Keshav’s Management qualifications.

  • I would prefer to give the benefit of the doubt given the
    transparency in highlighting his plans for the future. He was
    conservative enough not to give any guidance for FY16 when queried on
    it.
  • For those who have pointed out his inexperience, i would like to quote Warren Buffet -

“I am a better investor because I am a businessman, and a better businessman because I am an investor.”

Further details based on points highlighted by Raj Panda in OP

Uniply Industries is in talks to acquire two plywood plants in Gujarat and Haryana, said chief executive officer Keshav Kantamneni. The company also plans to set up a greenfield plant in Andhra Pradesh to take advantage of the incentives being offered by the Andhra government.
“We are in talks to acquire the two plants. We look at Andhra as a potential state, as this industry is coast-dependent for logistics. In all, it will mean an investment of about Rs 50 crore,” Kantamneni said.
The company is also focusing on research and development to increase the product range, and the results are likely to be visible in July, he said.

The proposed new plant in Andhra could generate 800 to 1,000 jobs, Kantamneni said, claiming that Uniply is a leading player in South India and has good market shares in Punjab and Chandigarh.
Source: http://www.mydigitalfc.com/news/uniply-buy-two-plywood-plants-719

Mr. Kantamneni, who addressed media persons here on Wednesday, said that he sees a huge market potential in Andhra Pradesh and Telangana, the former particularly in view of the new capital proposed and associated developments.
The firm is evaluating plans for a plant in coastal Andhra Pradesh with an estimated investment of Rs.30-Rs.35 crore. Proximity to seaport and Chennai plant were factors to influence the choice of location.
The plan, for a 7,500 NA (notional area) per day capacity plant, however, would depend on the fiscal incentives offered to new investments in Andhra Pradesh, he added. The company is also planning to double the dealership in the two States from 12 to 30 shortly.
The emphasis was on improving the utilisation of Chennai facility, whose capacity is 20,000 NA/day. This will help improve the bottomline, he said.
Source: http://www.thehindu.com/news/cities/Hyderabad/uniply-to-set-up-a-unit-in-coastal-andhra-pradesh/article7227214.ece

Reasoning behind the Uniply acquisition?

He is convinced that with increasing prosperity, people will start demanding interiors with better quality plywood.
Another problem plaguing the industry is lower-priced imports from China. “Prices in China are hardening. This is the right moment for us to move in. Uniply has been exporting its products and has won awards. We will expand on that.” The imminent introduction of the GST is another reason Kantamneni feels positive about the future. “This is going to happen quite soon. The unorganised sector will lose most of the price advantage it enjoys. That will create a level-playing field for us.”
Kantamneni has big plans for the company. He is getting machinery to expand product range. He plans to add value to Uniply’s existing business and strengthening supply-chain linkages. He is reaching out to each and every dealer across the country to re-engineer the entire business process, cut down wastages, improve delivery mechanism, and generate consumer awareness to help them make informed choices. Uniply is already number two in Punjab. He wants to acquire manufacturing facilities for commercial ply in Punjab and expand Uniply’s dealership network from the current 22 to 35 there.
Source: http://www.financialexpress.com/article/fe-columnist/plywood-manufacturing-holds-promise/73460/

Disc: Not Invested. Planning to buy an initiating lot once the UC breaks.


(NMB) #16

I personally think that Uniply is worth atleast 110 bucks a share if what the CEO says comes true in terms of expected growth rates, higher margins, benefits of GST in 2017, high barriers to entry as new PLY licenses arent given any more, ability to source raw materials, availability of unbranded ply assets in Northern regions at extremely cheap prices, ambition to increase dealer network by 50% etc.

Best of all, this guy is full of ambition and thats what we need really. AMBITION is a quality which is rare. I picked up some shares today @ 41 as an initiation investment.

I am sure that this promoter has got pedigree and surely will be investor friendly.

Disclosure - I own Greenply and also Uniply now.

Cheers
Neil Bahal


(Manish) #17

I had a looked at Uniply. Not much i could get from past data as explained irrelevant but promoter pledging, high debt to mcap, low margin, need for equity dilution, etc i would give it a pass.The thesis looks good so can evaluate it after few quaters.


(Punit) #18

This is a very interesting post not because it is an interesting find or its a great turnaround story. I’m not making any judgement on how this bet will play out. To decide to invest in Uniply or not is a reflection of your psychology and philosophy on investment.

There are many variables/factors that determines future outcome and investors goal is to understand and determine probabilistic outcome of each of these variables in order to gauge the risk/reward ratio. This process will help you understand the downside risk and upside probability. Some simple ways to determine these variables is to look at past execution record, business quality, management quality, porter analysis etc. In case of Uniply we cannot get any insights from past record. So the natural human misjudgement arises from taking a wild guess on future based on biased opinion such as entrepreneurial spirit/ambition of the new management, accepting only what they say (without knowing what they are not saying) etc. Other macro variables such as GST, consumer aspirations, regulatory ban etc will play out equally well for other plywood players, giving no edge to Uniply.

So my guess is that the bet here is on Mr.Keshav and his entrepreneurial ability. I’m not making any judgement on Mr.Keshav’s competence, integrity, knowledge or ambition, but we really need to question the basis of concluding that everything will play out exactly the way he is planning. As Howard Marks said in his memo “Future should be viewed not as a fixed outcome that’s destined to happen and capable of being predicted, but as a range of possibilities and, hopefully on the basis of insight into their respective likelihoods, as a probability of distribution”

The biggest mistake we can make is to look at upsides without understanding variables and the probabilistic outcome of each variable. If you are not doing that you can think of it as a speculative bet.

In this case, in my personal opinion, I cannot judge the variables that will definitely lead to positive outcomes but can see many variables that can lead to permanent loss of capital. Please think hard before betting your hard earned money on speculative activities in a hope to make quick money.

PS: I’m not commenting or judging anybody’s investment skills or analysis here, so please do not take these as personal remarks.


(Vishnu Ch) #19

Thanks @punitm306 for playing the Devil’s Advocate. :smile:

I agree, there are many variables, which is why the uncertainity factor is high.
But, based on the price action Mr.Market is factoring in the best case scenario (unusually) and thus the series of UC’s.
I expect couple of iffy quarters as the story develops which will give oppurtunities for fresh entry.

On the other hand, more the number of variables, bigger the Lollapalooza effect.

I again cannot speak for others, but i have bought an initiating position which is less than 1% of portfolio.
As the mgmt starts to deliver, i am willing to average up.

If the foundation is laid by FY16 beginning before GST Rollout through certain measures such as:

  1. Better capital structure - lowered debt and better Working capital mangament
  2. Operating efficiency and higher capacity utilization
  3. Follow through on the Brand Awareness and Acquisitions.

Then one could take the call and take the fat pitch!

Disc: invested


(Raj Panda) #20

The below article has news of some interesting developments from China.

I quote

  1. China will push forward its Natural Forest Protection Program and phase out all commercial logging of natural forests by 2017.

  2. China’s commercial logging of natural forests stands at nearly 50 million cubic meters annually, and the phase-out program will be carried out in three steps

  3. A pilot program kicked off last year, and all state-owned forest farms and areas will be banned from commercial logging of natural forests from next year, Zhang explained, adding that a similar ban on collectively-owned and private forest farms would follow in 2017.

  4. China now has 198 million hectares of natural forests, 127 million hectares of which have been put under the administration of reservations since the launch of the Natural Forest Protection Program in 1998.

  5. China is the world’s largest importer and second largest consumer of timber, with annual timber consumption amounting to nearly 500 million cubic meters. The country’s timber imports now stand at 20 million cubic meters per year.

http://www.china.org.cn/environment/2015-06/11/content_35794574.htm

Let these facts just “stand alone” right now. As we collect more pieces of the puzzle, we will try to connect the dots.


(Raj Panda) #21

Report from Hindu Buinsiess Line
June 11, 2015:
Uniply Industries has informed the exchanges that a meeting of the directors of the company was held on Wednesday to take on record the change in management of the company following completion of open offer formalities. Accordingly BL Bengani, outgoing promoter, has resigned from the post of Chairman and Managing Director effective June 10 and Keshav Kantarnneni, incoming promoter, has been inducted as an additional director of the company. Shares of Uniply Industries surged 4.92 per cent at ₹45.85 on the NSE.