15.9/34.7% cut in FY20/21 EPS due to COVID-19; TP down to Rs 754; upgraded to ‘Buy’ given sharp correction
The sharp correction in the stock of Greenlam Industries (GRLM) should be used as an ideal opportunity to invest for medium to long term, in our view. Despite the ongoing COVID-19 crisis and the expected muted demand environment (for its product basket) in the near term, we believe the positives (decent traction in laminate exports and considerable decline in resin costs in its laminate segment which seems unlikely to be fully passed on) are likely to outweigh the negatives (sustained decline in domestic laminate volumes and expected fall in volumes and margins of decorative veneer segment), which suggests the earnings pullback could be faster than anticipated once the situation normalises. Upgrade to Buy.
Earnings cut by 15.9/34.7% for FY20/FY21: The countrywide lockdown and expected deferment in renovation demand is likely to adversely impact demand for laminates in India in the near term. Factoring in the same, we cut our revenue/earnings estimates by 5%/13% and 15.9%/34.7%, respectively, for FY20/FY21. Rolling over our numbers and valuations to FY22 and considering the steep correction in the stock price, we upgrade the stock to Buy from ADD with a revised TP of Rs 754 (20x FY22 earnings) vs Rs 1,024 (22.5x FY21e earnings) earlier.
Expected traction in laminate exports and decline in input costs key ammunition in fight against COVID-19: Recent commissioning (Sep’19) of 1.6m laminate sheets per annum at Nalagarh, Himachal Pradesh, is expected to drive traction in overall exports. Despite the likely growth pressure in domestic volumes, we expect laminate margins to remain firm led by likely decline in input cost.
Veneer and allied products performance to get materially impacted in the near term: We expect decorative veneer volume growth to decline in double-digits in FY21. The scaling up of niche business segments, too, would be slower than anticipated.
Strict balance sheet discipline holds GRLM in good stead: GRLM’s balance sheet discipline amid stricter working capital management and sound capital allocation would enable it to keep its debt under check despite its planned greenfield project (capex at Rs 1.75 bn) in South India. We expect overall debt to merely rise to Rs 3.02 bn (net D/E at 0.4x) in FY22 vs Rs 2.7 bn in FY19 (net D/E at 0.6x).