Published on 12/07/2019 10:04:39 AM | Source: ICICI Securities Ltd

Buy Greenply Industries Ltd For The Target Rs.213 - ICICI Securities

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Group demerger finally goes through

The Guwahati bench of NCLT has finally approved the composite scheme of arrangement between Greenply Industries and Greenpanel Industries last week. At current valuations, we believe, the demerger would be value accretive for existing shareholders. While plywood business (new Greenply Industries) is likely to trade at premium valuations aided by its superior RoCE profile, double digit topline growth, improving margins and optionality in its Gabon venture, the MDF business is likely to be valued at a significant discount to its existing group multiple led by high financial leverage, increasing dependence on low margin MDF exports and subdued RoCEs in the near term.

* Arrive at a revised SoTP value of Rs213 (earlier Rs182): We value Greenply Industries at 18x FY21 earnings (15x earlier - Revise multiple to 18x on account of lower earnings volatility post demerger) while valuing Greenpanel Industries at 8x FY21 earnings. We, thus, arrive at a target price of Rs182 per share (earlier Rs151) for Greenply Industries and Rs31 per share for Greenpanell Industries. The SoTP valuation for the combined entity stands at Rs213 per share. Upgrade to BUY.

* Timelines of listing of both the entities: After receiving the nod from Guwahati NCLT for demerging its MDF business (along with the plywood unit at Rudrapur) into a new entity - Greenpanel Industries, the demerger committee has fixed the record date – 15th July - for ascertaining the name of shareholders who will be eligible to receive the equity shares of Greenpanel Industries. While listing of the new plywood entity is likely to happen prior to the record date, the listing of Greenpanel Industries is likely by Sep-end.

* Plywood entity (Greenply Industries) on a strong wicket. The plywood entity is likely to maintain its growth momentum led by a) higher single digit to lower doubledigit growth in its premium and commercial grade plywood segment aided by market share gains; b) growth traction in low-end segments operated under newly-introduced brands Jan Saathi and Bharosa; c) scaling up in decorative veneers segment and d) ramping up of Gabon operations. EBIDTA margins, too, are likely to move up gradually led by operating leverage and traction in decorative veneers and Gabon operations. We expect the plywood entity to exhibit revenue/PAT CAGR of 15.4%/22.4% over FY19-FY21 with RoCEs expected to improve 780bps to 29% by FY21.

* Stress in MDF entity (Greenpanel Industries) likely to continue. We expect MDF volumes to grow at 46% CAGR over FY19-FY21 largely led by ramp-up of production at its recently commissioned AP unit. However, with near-term impetus on exports and domestic pricing expected to remain under pressure (led by excess supply woes in the country), we expect MDF margins to remain at benign levels of 16-17% over the next two years. While the plywood volume is expected to gain traction led by increasing distribution, margins are likely to improve only gradually led by competitive pressures and muted demand. We expect the Greenpanel Industries to exhibit revenue and PAT CAGR of 31.2%/14.9% over FY19-FY21 with RoCEs expected to improve 520bps to 9.1% by FY21. 


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