Published on 20/03/2017 3:13:37 PM | Source: Religare Capital Markets Ltd
Hold Greenply Industries Ltd For Target Rs.265.00 - RCML
Plywood expansion to boost earnings from FY20
* Plywood capacity to be expanded by ~40%:
Greenply Industries’ board has decided to expand the company’s plywood and allied product capacity by 13.5mn sqm to a total of 45.9mn sqm. This expansion is planned at a new facility in Hardoi, Uttar Pradesh, and will be eligible for fiscal benefits under the state’s Infrastructure & Industrial Investment Policy, 2012. The plant is scheduled to become operational from Q3FY19 at a planned capex of ~Rs 1.2bn, to be funded by both debt and internal accruals.
* Timber-rich UP an ideal plant location:
The company has chosen its new plant location based on the abundant availability of timber, its key raw material, in the state. UP is the largest producer of “agro wood” in India and has an abundance of eucalyptus and poplar wood that is used in plywood manufacturing. Easy availability of skilled and unskilled manpower in the state is an added advantage as plywood manufacturing has significant labour requirements.
* Current capacity operating at 107% utilisation:
Greenply prefers to have in-house manufacturing facilities for premium plywood and decided to expand as its capacity utilisation for 9MFY17 stood at ~107% (this can go up to 118-120%). Management expects GST implementation in FY18 to induce a shift from the unorganised to organised markets, leading to higher demand. The set-up of smart cities would also bolster demand for interior infrastructure.
* New facility to contribute meaningfully from FY20:
Upon full utilisation, Greenply estimates the new plant can achieve a turnover of Rs 3.1bn-3.3bn, with operating margins similar to its existing plywood facilities (10-11%). Given that the new facility will be operational in Q3FY19, we expect a meaningful contribution to earnings from FY20 onward. Expansion capex isn’t a concern as Greenply’s balance sheet is healthy (D/E of ~0.4x in FY16) and would remain so despite the incremental capex (D/E of ~0.6x in FY19E).
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