Airolam - worth a look

Stock Opportunities
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Core hypothesis - Value with growth in good emerging industry with Real estate, house upgradation tailwinds. Disc : Invested and looking forward to hear other views

Stock : Airolam Industries Limited; Listed on NSE SME Platform in Sep’17 at INR 38/share (Pre-Money Mcap at IPO: INR 42cr); Raised INR 15cr new capital; Post money MCap at IPO: INR 57cr; Valuation at IPO: P/E ~22x and P/S of ~0.6x; No exit of promoters/existing shareholders during IPO and no sale of shares by promoters later; No pledge of promoter shares
Current Mcap: INR 59cr

Business : AiroLam manufactures and markets hi pressure decorative laminates primarily in India (International revenue ~15%) . Product includes laminated sheets, pre-laminated boards, and laminated floorings under brands, such as Classico, Airolam, I-Lam, Airolite, Airoline, I-Lite, Premium Airodoor, Airodoor, Airo Flexi, Airo xterior, Airo Digilam, etc.

For reference, we have listed player in the similar business (laminates) like Greenlam (market leader), Stylam, and other small ones are Rushil Decore and Deco-Mica. Apart from that there are sizable unlisted players like Sunmica, Formica, Merino, Durian etc.

Greenlam Stylam Rushil Decor AiroLam Western India plywood
Stock Price (Rs) 1,369 1,188 290 39 64
mCap (Cr) 3,300 2,015 560 59 54
P/E 33 32 41 11 -0.2
P/S 1.14 2.50 1.67 0.44 0.64
P/B 5.6 7.4 2.1 1.2 1.4
D/E 0.6 0.6 1.3 0.8 0.6
Sales (FY 21) (Cr) 1,200 476 335 133 85
EBIDTA (FY 21) (Cr) 173 95 35 12 4
PAT (FY21) (Cr) 75 55 14 5 -1
Sales CAGR (~5 yrs) 7% 2% 8% 12% 0%
PAT CAGR (~5 yrs) 30% 19% 17% 23% 0%
RoE 19 10 12 11 3
RoCE 18 13 6 11 6

Capacity build-up : Airolam has increased operating fixed assets significantly over the time from INR 10.7cr in FY17 to INR 37.5cr in FY21. Almost INR25cr of assets became operational in FY21 (most of that were WIP at end of FY20). High growth in manufacturing capacity during the year (despite being a Covid year) resulted in revenue growth of ~25% in FY21. It is expected that full capacity utilization to flow from FY22 onwards. Assuming conservative revenue growth of 20% and normalized PAT margin of ~4.5% (not assumed benefit of operating margin), FY22E P/E comes in the range of ~7-8x.

Debt Management : Airolam has smartly managed the debt post IPO. The company has consistently reduced cost of debt through restructuring and Euro term loan. The average cost of debt reduced from 11.2% in FY17 to 6.9% in FY21. The total debt of the company only increased from INR 22.5cr in FY17 to INR 34cr in FY21 despite increase in fixed assets from INR 10.6cr to INR 37.5cr in FY21. Most of the new assets funded through capital raised during IPO, accruals from business profits etc. It is worth noting that WC has not improved significantly from IPO period, we assume Covid may be the culprit.

Management : Pravinbhai Patel is a CMD and key person running the company. As per prospectus, he is a Computer Engineer from Gujarat University and has experience in laminate manufacturing industry for more than 10 years. There is no specific info available about Pravinbhai on google or other reports etc. However, we may infer few things about the management integrity through financials/annual reports:
• No reduction in equity holding either in IPO or later;
• No pledge of shares;
• Unsecured interest free loans to company (~INR 5cr);
• Remuneration of MD (Pravinbhai Patel) for FY20 was INR 8.4 lakhs. As per company policy, max remuneration to key MD, Directors is limited to INR 25 lakhs p.a.

Open questions : Despite all positives, stock price is still is at IPO price. Airolam’s revenue almost doubled and PAT almost tripled over the period. Balance sheet has become strong and manufacturing capacity has almost quadrupled. Interest cost of the company has almost halved. We believe major barrier for price movement is listing of stock on SME platform:

• Trading requirement of minimum lot size of 3000 shares. It results in minimum investment of ~INR 1.2 lakhs. Since it is a micro cap and mainly traded by small retail investors, this minimum investment criteria is a big deterrence for small investors
• Investors have apprehension on investing in SME platform of exchange due to lack of liquidity. Investors prefer to invest in Main board of exchange

Going Forward : On 16 June 2021, Airolam has informed NSE that its board has approved the migration of listing and trading of equity shares of Airolam from SME platform to Main board of NSE. In this regard, company has already started the due process of shareholders approval and subsequent application to NSE. Company is already in compliance with and fulfil migration requirements of NSE. Shareholders approval process is completed on 24th July 2021. In our analysis of other stocks which migrated from SME platform to Main board of NSE, migration process takes close to 1 month from the date of shareholders approval. (https://archives.nseindia.com/corporate/AIROLAM_24072021153255_Combined_Voting_Results_Scrutinizers_Report.pdf) The stock has already seen run up of ~25% post this announcement in last one month. We believe once stock is migrated to Main board of NSE, it should attract more investors and enhanced liquidity should drive stock price.

Risk analysis/ Downside : -

  • Competition : Laminates sector is highly fragmented with multiple players (both regional and pan india) including sizable unlisted companies. Airolam will have to face constant competition and need to differentiate in terms of quality, pricing and fluid supply chain

  • Liquidity : Presently the company is listed under NSE SME platform where liquidity and investor acceptance in low compare to listed stocks at NSE Main platform. As discussed above, since company has already started process of migration from SME platform to Main board of NSE, we see it is just a matter of time before it moves to Main board of NSE

  • Innovation : Constant innovation in products and vertical expansion of related products is quintessential for the long term growth of the company

  • Economic recovery : Overall economic recovery post covid is key for the growth of laminate sector and Airolam in particular

  • FX risk : There is Euro loan of ~9 Cr at 5% but there is currency risk associated with it.

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Disc : Invested and looking forward to hear other views

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@nitish Thanks for the write-up, it led me to start my analysis.

Invested

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One more point worth noting - In 2HFY21, there is almost 1.4cr forex loss booked due to big INR depreciation compared to Euro (yearly booking at once it seems). In all fair assessment, it is not expected to repeat. Normalising this, 2h fy21 profitability itself comes to ~4+cr or 8cr+ annualised. Fy21 Annual report will be good to analyse for further details.

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Thanks. This is good news. Hopefully next week onwards - we will see good liquidity here.

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Any tentative date is declared for listing in the main board? Have been tracing the share since it is listed for the first time here but not seeing any momentum in the price. Also, unable to see their June quarter results in the website till date. Is there any cut off date for the publication of June 21 results? Please advise.

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Companies listed in SME platform are required to disclose their financial result on half yearly basis.

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Thanks you for your reply. But even in that case, half year results are not seen in their website yet. May be still there is time to publish?

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Addressing few of the queries above and my take on the recent AR -

**AR commentary **

  1. Despite the pandemic year and lockdown which had impacted domestic sales, company was able to pull yoy growth of 25.3% in FY21 through increase in export revenue. Export revenue grew by 170% yoy (currently at 34% of total revenue in FY21 vs 15% in FY20).

  2. EBITDA of the company increased by 27% yoy to INR 12.4 Cr. As mentioned earlier, the forex loss for the year of INR 1.4 Cr vs INR 0.07 Cr in FY20. The forex loss was due to INR depreciation compared to EUR. However in FY22, Apr’21 till Sep 19, EUR/INR has remained flat. Hence, on pro-forma basis, adjusting that pro-forma EBITDA of FY21 would look even higher.

  3. Total operational fixed assets (capacity) increased to INR 37.2 Cr in FY21 from INR 11cr. There was WIP fixed assets at the end of FY20 was INR 14.7 Cr which became operational in FY21. Adjusting for that, net new purchase of assets was ~INR 14 Cr in FY21.

In contrast, total borrowing of the company (incl current liability payable in particular year) increased by just ~INR 4 Cr to total debt of INR 38 Cr (net debt of INR 33 Cr after adjusting cash at end of FY21).
This indicates better cash management by the company though reduction in working capital.

  1. Net cash from operating improved from INR 5.5 Cr in FY20 to INR 22.3 Cr in FY21.

  2. The stock is currently trading at ~8.7x EV/EBITDA (trailing). In case we adjust forex loss, stock is trading at below 8x.

**Results **

As per current requirement of SME listing, company needs to publish half yearly result, i.e. next result will be published for half year ending Sep’21 sometime in Oct ideally.

**Listing **

As company mentioned in early Sep that in-principle approval received from NSE for listing on main board. I believe it is just a matter of time before it gets listed on NSE. I am not sure if there may be some logistics requirements but in either case it should tentatively be listed on main board by beginning/ mid October.

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Airolam will be listed on Main board from tomorrow - 13th Oct.

Check the notification -

https://www1.nseindia.com/sme/marketinfo/corporates/announcements/announcementsList.jsp?symbol=AIROLAM

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Great news in deed. We need to now wait for half year results.

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Update on the results 1H results -

Airolam reported 58% yoy revenue growth and 16% yoy pat growth. Compare to last half year ending Mar’21, revenue is up 3% while pat declined 5%. It is to be noted that result is for half year and is impacted by covid lockdown in 1Q FY22 (company has not reported both quarter results separately. Since earlier it was listed on SME platform where only half yearly reporting was required. Going forward co to report quarterly since it moved to main board in Oct’21).

Despite lockdown impact in half yearly result, company was able to manage revenue growth (contrary to industry trend). Further, last half year was a festive season which had positive impact on revenue. Also observe that there is an increase in raw material cost (paper) which was expected. And it looks like cost increase has been partially absorbed by the company (in line with industry trends) and resulted in subdued margin and marginally lower pat.

Believe if company would have reported both quarters numbers separately for FY22, the numbers for Sep’21 quarter would be looking much better.

At trailing 12 months pat, stock is trading at ~16x P/E. Continue to believe that lots of things are in favour of airolam, including -

  1. Growth trajectory (over 50% yoy revenue growth)
  2. ~4x capacity in 1.5 years time
  3. Tailwinds from growing real estate sector
  4. Ability to pass on some input cost with increasing demand

Believe that the market reaction post 1H results is temporary and valuation is still attractive for growth.

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I cannot find any new news for Airolam but its stock price has more than doubled in the last 3 months. Any one has any insights as to what has changed in the company’s prospects? I have always believed that tailwinds in the real estate sector will help Airolam’s business but just can’t find any concrete news around it.

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Airo Lam limited (125 Cr.)
Pravinkumar Nathalal Patel (Promoters) BOUGHT 21000 shares, value 1731600 (Rs. 82.46 / share) through Market Purchase on 1687804200000, exchange NSE, intimated on 28-Jun-2023 11:29

Something is cooking up here, Company sounds technically capable by looking at their products.

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