Summary
· Company expected to benefit from tailwinds in the economy such as increasing disposable income, rapid urbanization, seventh pay commission etc.
· Implementation of the GST should lead to increased market share.
· Growth in the housing/ real estate sector due to “housing for all” by 2020 scheme and development of smart cities.
· Company setting up a new MDF plant in Andhra Pradesh to increase geographical reach, substitute imports and boost margins.
· Company undervalued. Target of 302-339 over the next few quarters.
Company Overview:
Greenply Industries Limited is India's largest interior infrastructure company with a turnover of Rs. 1655 crore. The company is a market leader in the production and distribution of plywood and MDF boards accounting 26% of the organized plywood market in India and 30% market share in domestic MDF market.
Plywood & Allied Products account for 71% of the total revenues (in 1QFY17), while MDF accounts for the balance 29%.
The company has a comprehensive portfolio of residential and commercial flooring products: plywood & block boards, MDF and Wood floors under the reputed brand names of Greenply Plywood, Green Club Ply, Ecotec, Green Panelmax, and Green Floormax, to name a few.
Currently GIL has five state of the art manufacturing facilities, across the country, manufacturing products of global standards; 4 state of art manufacturing facilities for Plywood at Tizit (Nagaland), Kriparampur (West Bengal), Pantnagar (Uttarakhand) & Bamanbore (Gujarat) and one for Medium Density Fibreboards (MDF) at Pantnagar (Uttarakhand). GIL’s MDF facility is the largest in country.
Industry Overview:
The Indian wood panel market
is valued at Rs. 285 billion. The market has been growing at 10- 12% CAGR over the last few years.
Plywood industry size–Rs.180billion
MDF industry size – Rs.16 billion
The plywood industry is one of India’s oldest industries. The industry has been growing at 6-8% CAGR in terms of volume over the last decade. Unorganized players, located in clusters across the country, primarily dominate the industry. It constitutes over 75% of the industry size (`140 billion), with the balance being accounted for by organized players. The organized industry has been growing at 15-20% CAGR over the last decade owing to the consistent shift happening from unbranded to branded plywood.
The 16 billion MDF market has been growing at a CAGR of 15-20% over the last 5 years. With increasing urbanization, there is a rising demand for readymade furniture, manufactured with engineered panels like MDF.
Tailwinds in the industry include higher disposable income, rising urbanization, real estate sector’s growth in tier II and tier III cities, fast-growing replacement market and a reduced home renovation cycle from 15 years a decade ago to five years. FDI in the Indian real estate sector and the government’s Housing-for-All by 2022 initiative and development of 100 Smart Cities are some growth drivers for the revival of the real estate and construction sectors.
Investment Trends:
1. GST Implementation to Result in Higher Market Share
GST is expected to be favorable for the branded Plywood manufacturers primarily because of change in the taxation structure.
At present, on purchases of Plywood from GIL, the dealer pays Central Excise Duty and a Value Added Tax. The Excise Duty is a cost for the dealer as he does not get an input credit for that but gets an input credit for the VAT paid. Now when GST is implemented both the Central GST, which will replace Excise Duty as well as the State GST, which will replace Value Added Tax will be cenvatable for the dealers. As a result dealers cost of purchasing from organized branded players will come down by about 10%.
Furthermore, currently unorganized players do not pay Excise Duty by maintaining their annual turnover below Rs. 1.5 crore which is exemption sealing for payment of Excise Duty. When GST is implemented this exemption limit will be 10 lakh per annum, so it will be very difficult for a manufacturer to maintain its annual turnover below that. Consequently, most of them would fall into the tax net although they might still not be paying probably more than 25-30% of their actual taxation, but nonetheless their cost will increase. This will help reduce the price gap between branded and unbranded. The company estimates price gap to come down to somewhere between 6-8%, which is 15-20% at the moment, once GST is implemented.
Therefore, the rollout of GST is expected to facilitate a faster shift from unorganized to branded products in the plywood space.
2. Tailwinds in the Macro Economy
Urbanization: Over the last decade, India’s urban population has grown by 2.47% annually, making it the fastest urbanizing country. This trend is consistently strengthening the prospects of India’s plywood industry. The rural segment also contributes to 8-10% of the country’s plywood demand; and thus, there exists a latent opportunity from rural India.
Disposable Income: The average age of the Indian population is a mere 24 years. Add to this the fact that these individuals are armed with progressively larger wallets (from H80,388 in FY14 to H88,533 in FY15) means that disposable incomes are on the rise. Disposable income is expected to keep increasing. Furthermore, nuclear families are the new normal in India, further catalyzing the need for quality housing and interiors.
Seventh Pay commission: Currently, the Seventh Pay Commission has recommended an overall hike of 23.6%. This would benefit ~1.4 crore government employees, subsequently leading to higher disposable income. This could spurt building material segment’s demand, including plywood
Rising per capital income: The middle-class segment is expected to grow to 110 million by 2020 from 58 million households in 2010. With the increase in per capita income, it is likely that people will have more money and subsequently the spending on home decoration front will also rise, leading to a huge possibility for the plywood industry.
3. Tailwinds in Housing and Real Estate
India’s real estate market is expected to grow at 30% over the next decade. This will be driven by the government’s increased focus on affordable housing and easy financing.
Housing for all: Indian investment is being driven into housing sector after the Government of India announced the ‘housing for all’ initiative. Under the initiative, India is expected to develop about 11 crore housing unit s and imvestments of more
than USD 2 trillion are expected until 2022.
Smart Cities: The Indian government has targeted the creation of 100 smart cities by 2017, allocating B70 bn in the 2016 Budget. This represents one of the most exciting drivers of real estate development and related offtake of interior infrastructure products.
Commercial Property Growth: Absorption of commercial office space in India is expected to grow at 10%. Increasing demand for office space will drive the demand for the interior infrastructure industry
4. Implementation of Anti-Dumping Duty to Increase Realizations
Till now Anti-Dumping Duty did not have any significant impact on MDF’s volumes since Indonesia and Vietnam were not covered. Therefore, imports basically changed from China, Malaysia, Thailand and Sri Lanka to Indonesia and Vietnam. So there was shifting of imports from countries, which were impacted by the Anti- Dumping Duty to countries, which the Anti-Dumping Duty did not cove, and there was no real impact on sales of domestic manufacturers. Recently, the government included all six countries, which will boost volumes in the MDF segment since imports will be substituted with domestic products.
These trends favorably impact all the companies in the industry. However, Greenply is a better pick due to its new expansion plans, solid track record, strategic approach and strong brand name.
1. New facility in Andra Pradesh
The company is planning to open a new Greenfield MDF plant at Chittoor, Andhra Pradesh, with an installed capacity to produce 1,200 cubic meters
of MDF per day. This project’s expected capital outlay is around Rs. 700 crore.
With the new MDF plant, the company would be able to cater to domestic demand since the company expects the MDF market to grow at 10-15% over the next 3-4 years. The company will also be able to compete in the southern market, which is currently catered to mainly by Rushil Décor apart from imported MDF. Currently, GIL caters to southern India from its Jharkhand plant which leads to a compromise on the margins as freight cost is significant. With the new plant, Freight cost will come down from about 12-13% to about 4-5%, which will enable the company to compete effectively with imports. The possibility of exports would also increase substantially due
to proximity to port (within
100 kms), enabling savings
of inland freight cost. The company will also have an advantage in exports because of the product quality. Major markets for exports would likely be the Middle East, Pakistan, Iran, Sri Lanka, Nepal and Bangladesh
As of today land development work has been commenced and management anticipates it to complete by H1FY19. The project will boost topline and bottom line in medium term, as MDF is a higher margin business (in Q1FY17, EBITDA margin for MDF was 30.2% and for plywood it was 9.8%).
The company has consistently been growing. This quarter, due to a slowdown in demand, Q-O-Q revenue has declined. However, on a YOY basis, Net sales are up 9.3% (of which plywood revenues are up 7.7% and MDF revenues are up 11.4%). PAT has also grown by 26.4% on a YOY basis.
Looking at a longer horizon, from FY12-16, net Sales, EBIDTA and PBT have increased at a CAGR of 11.6%, 20.8% and 42.3% respectively.
This growth momentum is expected to continue.
3. Moving Towards an Asset Light Model - Future Growth Through the Outsourcing Route
Currently, capacity utilization for plywood is 111% and for MDF is 106%. So there is only 5%-10% upside remaining to reach its peak utilization. GIL has therefore cautiously taken the decision to increase its outsourcing for plywood from currently 22% (value terms) to the 30% in next 2-3 years. As the plywood industry is only growing at 6-8% CAGR in last decade, greenfield or brownfield expansion doesn’t make sense for smaller incremental volumes which will take substantial time to reach breakeven. Introduction of GST to reduce the benefit enjoyed by unorganized players, and GIL can therefore, tie up with them in future to outsource some part of their sales. This focus on asset light model will help GIL to improve return ratios going forward. Furthermore, mid-segment variants to be outsourced will free existing
capacities for premium variants. However, outsourcing could lead to quality deterioration. To keep that in check the company has set up a team on the vendor’s site to monitor quality of inputs and ensure consistent quality of finished product.
4. Strong brand Name
Greenply has emerged as India’s largest interior infrastructure company. The company has a strong brand name in the country and has been spending a decent amount on advertising and marketing. Ad expenditure to sales was at 3.3% in Q1FY17 compared to 2.7% last year. The company expects to continue spending ~3% of revenue on advertising.
The current trend of consumers shifting from unorganized players to branded names should favorable impact Greenply.
Peer Analysis:
Greenply faces high competition from Centuryply. However, Greenply is a better stock pick because of its consistently increasing EPS and profitability margins.
In the most recent quarter Centuryply’s Plywood margins declined 210 bps YoY, which dragged the overall company’s operating margins lower by 140bps to 16.8%. However, Greenply’s plywood margins have been up 140bps, lifting the overall margins by 80bps to 15.5%. PAT growth is also stronger for Greenply at 26.4% YOY compared to 7% YOY growth for centuryply.
With regard to expansion plans, Centuryply is also in the process of expansion and is putting up an MDF plant in Punjab. However, this isn’t a very strategic move since the new plant is in the north and if the company wants to sell its products in the south, it will have to incur higher freight costs.
Now one might wonder if all these expansion plans could lead to an oversupply of MDF and drive down the price and realizations. Greenply has answered this concern in the earnings call by mentioning that they would be exporting 30-40% of the production from the new facility. The company has already started exporting nearly 12-15% of total production from Uttarakhand at lower realization just to create a market for its upcoming Chittoor plant.
Furthermore, Greenply is a better pick because it is currently trading at a discount to its peers and has a higher ROCE.
Risks:
1. Greenply has a JV with a company in Myanmar, from which it procures raw materials. There have been reports that Myanmar might either reduce felling of timber or may impose a ban on felling on timber. This could prove to be a tailwind for the company. The company is reacting to this by setting up a face veneer unit in Gabon, West Africa.
2. Emergence of substitutes and changing consumer preference: Currently, in the furniture industry, wood-based products like plywood, MDF, particle board, blockboard etc. are being widely used. However, going ahead, with a change in consumer preference, substitutes like cement, plastic or steel could pose a challenge to the wooden industry.
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