Aspiration to have a home (real estate) is becoming a top priority among young salaried people. Higher disposable income, easy availability of loans, and spurt in real estate prices has generated interest. This opportunity was exploited not only by real estate companies but also those directly or indirectly related to the real estate sector. One of them is the wood panel sector or traditionally termed as the plywood industry.
The wood panel industry traditionally has been dominated by the unorganised sector due to high tax and regulation. The Supreme Court has restricted issuing fresh licenses to new plywood industries. From the product category, plywood has been contributing maximum share in the sector unlike in overseas countries where around 70% of MDF (medium density fibre board) is consumed. Many companies announced setting up of a MDF plant and foresee it as a major revenue generator and one of them is Archidply Industries (AIL).
Business
Archidply Industries is a Bangalore-based company into the business of wood panel products. The broad category of products the company manufactures includes plywood, block board, particle board, veneers, and decorative laminates. The revenue mix is in equal proportion between the retail and institutional category. Further, the company wants to focus on tier-II and tier-III cities to achieve higher growth.
The company has manufacturing plants in Mysore, Karnataka and Rudrapur, Uttarakhand. According to the prospectus, the total production capacity as on March 2008 is 3.89 crore square metres. Presently, plywood contributes a majority of the company’s sales.
Objects of the issue & financials
AIL intends to put up around Rs 53 crore considering the upper band price. It intends to manufacture particle boards, pre-laminated particle boards, and decorative veneer in the new facility near the new airport in Bangalore, Karnataka. Another facility would be created at Rudrapur, Uttarakhand to manufacture MDF (medium density fibre board). The remaining funds have been allocated for working capital requirement.
The total project cost of both the plants is Rs 83.04 crore, including the term loan of Rs 21.65 crore. Post-commissioning the total production capacity would go up to 6.15 crore square metres. The commercial production of decorative plywood and pre-laminated particle board in the Bangalore facility will start from October 2008. The MDF facility in Rudrapur would start production in August 2009.
The company has recorded financials for only three years and has delivered a robust growth. It has recorded sales of Rs 143.54 crore and a net profit of Rs 14.86 crore respectively in FY 2007-08. The sales and net profit in the FY 2005-06 was Rs 48.22 crore and Rs 2.10 crore respectively. Rapid jump in sales of high margin decorative laminates resulted in a spurt in the operating margin from 11.47% in FY 2005-06 to 19.33% in FY 2007-08.
Decorative laminates production has increased from 0.86 lakh square metres in FY 2006-07 to 4.65 lakh square metres in FY 2007-08. One of the reasons for higher net profit margin in the last fiscal is tax holidays and other concessions awarded to the new plant in Rudrapur, Uttarakhand. The net profit margin in FY 2007-08 is 10.40%. Sustainability of margins in the future would depend on higher sales from value added products.
Valuation & concerns
From the valuation point, FY 2007-08 fully diluted earning per share is Rs 6.75. Considering the lower and higher price band, the price to earning multiple is 10.35 to 11.83 times respectively. If one compares the valuations with the industry-listed peers, at the current market price, the P/E of Greenply Industries is 7.57 (x) and 25.56 (x) of Century Plyboards. The pricing is relatively attractive considering the market conditions.
The company’s revenues are dependent on the real estate boom and higher corporate spending. One of them turning negative could affect the further growth achieved in the last three years. Further, the high interest rate scenario could reduce the sales of flats due to higher cost of borrowing.
One of the promoter group companies, Assam Timber products, based in Assam, is into a similar line of business, which cannot be ignored. Assam Timber has generated sales of around Rs 6 crore in the last financial year. It is selling products of AIL in and around the states of Assam in the name of Archidply. Assam Timber is giving 5% royalty for using this name.
Achieving higher sales in the retail category would depend more on the success of promotional activities. Investors must consider the above factors before investing.