Greenply Industries

Stock Opportunities
1

GREENPLY INDUSTRIES

Company began operations in 1984 and has come a long way to become a leading interior infrastructure company.

PRODUCTS:

Includes a range of interior infrastructure products like decorative laminates, decorative veneers, restroom cubicles, ply wood, blockboard, flush boards and medium density boards. (MDF)

PLANT LOCATIONS:

LOCATION

PRODUCT

CAPACITY

TIZIT NAGALAND

PLYWOOD

4.5 MSF

KRIPARAMPUR, WB

PLYWOOD

6 MSF

PANTNAGAR UTTARAKHAND

PLYWOOD AND RECONSTRUCTED VENEERS

10.5 MSF

BAMANBORE GUJARAT

PLYWOOD

7.35 MSF

BEHRORE RAJASTHAN

LAMINATES

5.34 MSF

NALAGARH HP

LAMINATES

4.68 MSF

BEHRORE RAJASTHAN

DECORATIVE VENEERS

4.2 MSF

PANTNAGAR UTTARAKHAND

MDF

0.18 MILL CUBIC METRES

SOME INTERESTING VIEWPOINTS FROM THE LATEST AR:

1.

Scale: Greenply is largest integrated laminates, plywood, decorative veneer and MDF manufacturer.

2.

Presence: it is present in 19 states and accounts for 36% of Indiaâs orgainsed plywood and 26% of countryâs organized laminate market.

3.

Experience: It possesses over two decades experience in the field.

4.

Barrier: Govt has restricted issue of licenses in woodbased industry owing to environmental concerns. Plus companyâs experience and marketing network give it an edge over competitors.

5.

Comprehensive presence: Company has presence in most of interior infrastructure products like plywood, decorative veneers, decorative laminates, MDF etc.

6.

Brand Equity: Companyâs products are available at more than 13000 distributors, dealers, subdealers and retailers across 300 cities supported by over 40 marketing offices.

7.

Relationships: Greenply maintains relationships with architects, interior designers, contractors, carpenters, and retailers.

8. Strategic locations: Greenplyâs facilities are located near large markets, raw material availability locations and port connectivity.

FINANCIALS:

EQUITY 12 CRORES WITH 2.4 CRORES SHARES OF RS 5 EACH.

PROMOTER HOLDING AT 55% NO PLEDGING.

MARKET CAP AT CMP OF AROUND 310 IS 745 CRORES.

DEBT AS ON SEP 12 IS LONG TERM 238 CRORES (267 CR AS ON MARCH 120) AND SHORT TERM 291 CRORES (334 CR AS ON MARCH 12). APPARENTLY DEBT SEEMS TO BE COMING DOWN.

LAST FEW YEARS RESULTS CAN BE VIEWED AT SCREENER.IN AT FOLLOWING LINK

http://www.screener.in/company/?q=526797#pl

COMING TO MORE RECENT NUMBERS,

PERIOD

SALES

OP PROFIT

INT

NP

FY 11

1322

123

42.5

25

FY 12

1643

184

60.78

53

H1 FY 13

947

95

31

67

H1 FY 12

766

52

28

27

TTM

1824

212

66

80

COMPANY IS BETTING ON IMPROVING ASSET UTILISATION, MARGIN IMPROVEMENT DUE TO HIGHER CONTRIBUTION FROM HIGHER MARGIN PRODUCTS LIKE MDF AND SALES GROWTH.

ANY REDUCTION IN INTEREST RATES SHOULD REDUCE THE INTEREST PAYMENT BURDEN AND HELP IN BOTTOMLINE GROWTH.

STOCK PRICE HAS RUN UP AFTER Q2 FY 13 RESULTS FROM 250 LEVELS TO 300 PLUS LEVELS AND IS CONSOLIDATING CURRENTLY.

INVESTMENT THEME:

Greenply is a company which is

1. Sector leader in a sector emerging as a growth sector due to preference for better quality interior products. Whole sector is likely to benefit from shift of customer preference for products from organized players.

2. Has some favorable tailwinds in terms of entry barriers due to govt having stopped giving licenses due to pollution concerns

3. Company is increasing sales steadily and is likely to increase profits at much higher rate due to increased contribution from the higher margin MDF division

4. Capex is almost complete and now with increased asset utilization, margins are likely to increase

5. With improvement in cash flow situation, debt levels are expected to come down.

6. Available at a reasonable valuation of close to 7.5-8 PE based on expected FY 13 EPS of 40 plus.

NEGATIVES:

1. Any move by the govt to tinker with removal of import duty on MDF may cause intense competition.

2. Debt is high in absolute terms.

3. Company will have to go in for further capex after 2-3 years as most of plants are operating at near full capacity.

4. Overall economic slowdown may affect prospects of the sector and the company.

Disc: Invested in the company and intend to add more on declines. I think there are chances of dual benefits in investment here â Chances of PE rerating are here plus earnings growth and positive earnings surprise could occur.

2

Hi Hitesh,

I had looked at this company in the past and thefollowing observations made me shy away and I am sure you have seen these as well, and you might have solid reason to overlook these.

For Greenply the ROE & ROCE, both are below 20… around 14/15.

Plus the debt/equity as you have pointed it out is > 1). operating margin alsohas been coming down from 13.74% in 08 to 9% in 11. But seems like this year it has picked up back to 11%.

Disc: I am a admirer of your intellect.

Thanks

3

Thanks Hitesh, this is an interesting prospect.

Only a week back an enthusiastic young analyst from Delhi had prodded me to have a look. and there you are with the post. Information assymetry is disappearing pretty fast:)

Agree with most of your hypothesis. Would like to add that I like this type of businesses where it is easy to do lot of local scuttlebutt - customers, dealers, architects, projects, and then for different markets…just like you can do for say Astral.

Apart from the company’s numbers which will tell its own story (and granting that visibility looks good at the moment), we should be able to collect pretty fast its standing in the industry, competitive scenario, execution capabilities.

On the other hand, sustainability picture may not be that bright. As you mentioned, there are Risks. Company’s debt servicing capability is poor …with Interest Coverage at just 2x (Mar’12)…this is pretty risky …in the event of some things going wrong in the industry/environment and/or in its execution. Profitability record, Return on Capital is very mediocore, but that can improve quite a bit in 2years, if MDF product mix and consequent jump in margins continues and sustains at a higher level.

So quite a few things to establish here. Our scuttlebutt brigade can get cracking. Not that established a business…but can get stronger and stronger…with favourable/benign environment…Certainly interesting to dig deeper!

I am on vacation from 15th…but will do local scuttlebutt all over East India…metro and Tier 2 & 3 towns…and sporadically file reports:)

4

A key risk that needs to be addressed:

Competition from Chinese/Malaysian Readymade furniture, which a lot of middle class seem to be preferring nowadays.

Do we see people making more homemade furniture (especially the middle class who has no time). Also these imported furniture often cost less.

5

Hi,

Undoubtedly Greenply is leader in Laminate,plywood and mdf board segments. In laminates and plywood segments greenply competes with unorganized players and good national wide players like century ply,Archid ply etc. Hence low Margin, Low Roe. Then management took a wise decision to enter into MDF division which differentiates from others. Greenply is the only company that manufactures Mdf. Mdf business requires huge capex,technology and has high margins. Mdf market with estimated market size of 3500 cr completely depends on imports. This year Greenply recorded just 265 cr on 65 percent capacity utilization.This year they may achieve 90 per capacity and around 375 cr revenues.May be this is the reason this qy they announced good results.This trend may continue too.But i has few apprehensions regarding management aggressiveness.

-This is a capital intensive business and promoters are aggressive regarding capacity enhansions. Almost they did 500cr expansion a year back and with out consolidating and reducing debt they are planning for another greenfield facility for mdf at Vijayawada.I feel they are showing ever increasing thirst.

-Over ownership in shareholding.If we look at shareholding data public holds just 3 per of equity.If there is any disappointment it’s difficult for exit.

-Previously they did rights issue and went for lot of debt.Few moths back debt is more than marketcap.In some interviews at the time of Rights issue they stated that they will be debt free in few years.That does’t happen in coming days also. Unless they consolidate their position and reduce the debt investors don’t benefit much.

Products wise , brand strength wise they are superb.Even in remote places also their brands like Greenply,Greenlam advertisements can be seen.I watched lot of ads on walls , buses etc.Their products are superior and has premium tag compare with others like Archidply, century etc.IN Mdf segemnt we can call it Monopoly.Furniture manufacturers , distributer’s has to buy this from greenly or no other option than Import.Currency adding value to greenply. But one thing we should not forget that China has abundant capacity.Presently it is dumping the products.But Logistics cost is important and that benefits greenply.In a nutshell business wise good but promoters has to prove themselves in commitment in creating shareholder wealth.So We can initiate position and keep monitoring the management for further actions.I would suggest everyone to go through their presentation

http://www.greenply.com/images/pdf/Greenply-Analyst-Meet-Presentation-July-2012.pdf

Rgds

Omprakash

6

Thanks hitesh, this does look like a promising candidate to dig deeper into. I was earlier thinking of century ply as well but omprakash raised some valid differentiating points.

7

Something that I remember reading about someone from Greenply promoters family caught with drugs long time back, so googled for this:

http://articles.timesofindia.indiatimes.com/2011-03-31/delhi/29365610_1_special-cell-cocaine-nigerians

1 Like
8

regarding some concerns raised I think cheaper malaysian and chinese imported furniture, I think there still is a big class of discerning buyers who want furniture exactly to fit their designs. If someone were to buy a house/flat for close to 80 lacs to 1 crores he is not going to go after cheaper furniture. There does exist a market for this cheaper imports but still overall market is very big so that the impact might not be too much.

Plus other sources of demand like offices, hospitality and other such newer/renovated buildings will continue to create demand for these plywood/MDF players.

Plywood and laminates market is a fragmented market with organised and unorganised market slugging it out for market share but in segments like MDF there is an oligopoly like situation. Plus there is always going to be a shift in preference towards products from companies whose products are perceived to be superior and thats where companies like Greenply can gain market share at the cost of unorganised sector.

Regarding poor return ratios and debt , company had gone for capex of close to 500 crores in past 2-3 years and hence high debt. Problem they suffered was that in first year of operations of MDF they had some technical issues and couldnt utilise the capacity fully and due to higher fixed costs and depreciation etc, the company suffered in terms of asset utilisation and profits.

Now since past two three quarters things seem to have changed for the better and results seem to be reflecting those things.

As mentioned before capacity utilisation of MDF has reached close to 90% in q2 fy 13 and it should act as future growth and margin driver.

Expansions of MDF facility might not entail too much capex and hence there might not be too much balooning of debt. In fact I expect debt to come down and returns to improve due to higher asset utilisation and reduced interest payment. (debt has reduced by 60 crores in last six months-- which is close to 10% of total debt. if this trend tends to continue then there could be a strong re rating for the company)

9

As per themanagementthey want to focus on stabilizing operations now and would just tomaintenancecapex of ~50crs p.a. for next two years. They have indicated that a new MDF flat could be set up in Andhra Pradesh (if i recall correctly), but this would be after atleast two years.

Another issue was that the company had taken unhedged Euro loans for the MDF plant and for the last two years incurred sizable fx losses on those loans, however these loans have been fully hedged now and we should not see any further adverse impact due to those. This could also have a positive impact on bottomline.

10

Greenply plans Rs. 350cr expansion

Greenply Industries, in a recent move has decided to set up a new manufacturing plant in Andhra Pradesh involving an investment of Rs. 350cr. In this connection, it is planning to increase the manufacturing capacity of medium density fibreboard (MDF) from 600 to 1200 cubic metres in the manufacturing unit at Pantnagar in Uttarakhand, Chief Financial Officer, Venkatramani said adding that the player has already initiated the work of land acquisition for the 60-100 acre land required for the purpose. Apart from this, it is also negotiating with the German manufacturing firm for supplying machinery for the new plant. In fact the company is keen to manufacture value added products at its existing MDF unit by introducing high density and high gloss MDF laminated boards and floorings so as to improve returns, he claimed.

http://nbmcw.com/news/29580-greenply-plans-rs-350cr-expansion.html Link: http://nbmcw.com/news/29580-greenply-plans-rs-350cr-expansion.html

11

http://www.thehindubusinessline.com/companies/greenply-ind-to-set-up-plant-in-ap/article4077846.ece

12

Hi,

This stock has been on radar since the spectacular Q2 and the big change has been from the MDF segment which was loss making earlier but has now started contributing good profits. If the current performance (margins and sales) are to continue then there is a high chance of re-rating as the co has a very good brand and dominant position in its area. The valuations are also attractive. The laminates area has been a good value addition and this is one area where the co might be getting better margins and brand re-call.

The negative I think about this co is the structure of industry - the industry is highly competitive and has high value of cash transactions. This is perhaps the reason behind the low ROCEs in the past.

Ayush

13

Thanks Om.

There was an announcement in aug 12 on bse with following details

**Greenply Industries Ltd has informed BSE that the Board of Directors of the Company at its meeting held on August 31, 2012, has approved the following:

1). To set-up a new Medium Density Fiberboard (MDF) Unit in Andhra Pradesh and

2). To manufacture new value added products in Company’s existing MDF Unit at Pantnagar, Uttarakhand, by way of expansion of its lamination capacity and introduction of laminated flooring and UV Coated Panels.**

**
**

I guess debt is the thing which needs to be closely monitored here. While expanding the MDF business is a good idea because of huge potential due to import substitution and high margins, how much debt is incurred for this additional capacity always will remain to be seen. Plus how this new facility shapes up in terms of capacity utilisation and any teething problems also needs to be watched.

14

On a lighter note, we are seemingly following a Urban Housing based investment theme. First with pipes (Astral/Supreme) and sanitary ware (Cera), followed by tiles (Kajaria) and now the woodwork (Greenply)

And we have some boarders looking at financing it all (Gruh) :slight_smile:

15

Some stats about the company.

Mar '12

Mar '11

Mar '10

Mar '09

Mar '08

Market cap

CMP

Revenue

1,643.66

1,322.91

942.91

789.91

592.43

EBDIT

172.48

115.60

105.99

84.11

82.83

Depreciation

46.77

40.99

22.02

17.05

13.16

EBIT

125.71

74.61

83.97

67.06

69.67

Operating Margin

7.65

5.64

8.91

8.49

11.76

Fixed Assets

632.80

614.48

556.26

287.59

189.52

Working Capital

239.03

133.07

43.23

102.66

81.08

Total Capital Employed

871.83

747.55

599.49

390.25

270.60

Capital Turnover

1.89

1.77

1.57

2.02

2.19

EBIT/Total Capital Emp

14.42

9.98

14.01

17.18

25.75

RoCE (EBIT/Total Capital)(1-tax_rate)

10.09

6.99

9.80

12.03

18.02

Cost of Capital(WACC)

12.00

12.00

12.00

12.00

12.00

Economic Profit Added (EP)

-16.62

-37.48

-13.16

0.11

16.30

Economic profit Growthh

-55.65

184.80

-11849.82

-99.31

#DIV/0!

Market Value Added(MVA)

Change in OP

51.10

-9.36

16.91

-2.61

69.67

Change in Capital Employed

124.28

148.06

209.24

119.65

270.60

Reutrn on Re-Invested Capital (RoRC)

41.12

-6.32

0.00

-2.18

25.75

Business Quality: Strong Brand Recall, nation wide reach.

Opportunity size: Growing sector.

People have always needed and will need ply boards, laminates.

Moat: ??? (RoCE < 15)

Hitesh,

I am sure there is something about this business as you and other seniors are tracking it. Greenply has been a strong brand for years now with strong nation wide presence. However the corresponding results donât reflect in the financials.

What has really changed..?

is it MDF business, Restricted licensing, or something else..

How do we gauge the effects of above changes given the past record of the company and capital intensive nature of the industry overall..?

I am still not able to see what you/seniors can see here. Appreciate your/seniors help to understand this better.

16

Rudra,

you forgot to mention thecutleryin the urban home (la-opala) :slight_smile:

17

atul,

regarding greenply financials for the past few years as you mentioned there is nothing special.

this was because company was in expansion phase since last two years wherein they pumped in close to 500 crores into expansion. the fruits of this expansion are likely to be seen now onwards as the company has some favorable tailwinds in form of govt restricting permits to wood based industries and proper capacity utilisation in the higher margin MDF business.

With the market looking out for growth stories, the prospects of greenply in view of next two years’s growth seem to be good.

One will have to review the future of this company periodically.

18

Seems to yet another decent pick from Hitesh Bhai . Hdfc sec had also come out with a detailed report recently with a buy reco. Two stalwarts liking the story makes it a blind buy. What % age allocation can eegiveto it is the moot question?

19

Here is a link to the hdfcsec report -

http://www.valuenotes.com/uploads/article_pdf/HDFC%20Securities_Greenply%20Indus_30th%20Nov%202012.pdf

20

Thanks Hitesh for making it little better.

Thanks to this forum, to which I owe all of my learning so far. Based on what I have learnt, Only Businesses, which have good RoCE, give good returns when they put money in to business, Though, not sufficient but a mandatory condition.I understand, that is just tip of the ice-berg and there are many more models to be learnt and criteria which need to be met.

What I am trying to do is frame a mental model in which I(we) can fit Green ply, so that I(we) am/are better equipped to identify these cases in future.I am ok to pass this (as I am not yet convinced) but I am not ok to be blind to these opportunities in future.

Can we say following following?

Companies with recent capex, Strong brand, good opportunity, and Policies support irrespective of RoCE can be good opportunities

Another problem here is this model kind of voids the earlier model…:frowning: