Capacity addition, new product launches to drive Greenlam's growth

The de-merged decorative business of Greenply is likely to witness improved growth, margins and lower debt over the next 18-20 months

Greenlam Industries (Greenlam) is into decorative business (laminates, veneers, engineered wood flooring, engineered door solutions) and was demerged in November 2014 from Greenply Industries (Greenply). Greenlam was listed on both BSE and NSE on 2nd March, 2015 and has witnessed a strong run in the past two trading sessions. The stock opened on BSE at Rs 450.75 on Monday and has gained 15.7% since then versus a flattish movement by S&P BSE Sensex. The stock has hit upper circuit of 5% on each of the three trading sessions.

At Wednesday's closing price, Greenlam trades at 30.3 times FY16 estimated earnings which is at a 13% discount to its listed peer - Century Plywood which though is larger in absolute revenue terms, but its laminate revenues are about one-third of Greenlam's laminate revenues. Going forward this valuation discount could reduce further given Greenlam's aggressive capex plans.

Besides expanding its existing capacity in laminates by 20% to 12.02 million sheets by December 2015, Greenlam has also entered engineered wood flooring segment in September 2014 with an installed capacity of 1 million square metre. It also plans to enter the engineered wood doors segment in the first quarter of FY16 with a capacity of 0.12 million doors per year. Large part of its capital expenditure is implemented and the company will not incur significant capital expenditure over the next 3-5 years. This will benefit Greenlam in multiple ways. One, its debt will not witness any increase and two commissioning of incremental capacity will boost Greenlam's revenue growth.

Saurabh Mittal, Joint MD and CEO, Greenlam Industries, says,"We are looking at a 10-12% revenue growth in FY15 which should increase to 15-18% from FY16 onwards on increased capacities and improving macro."

For the nine months ending 31st December, 2014, Greenlam posted revenues of Rs 613 crore with 89% contributed by its laminates business and the rest coming in from the decorative veneers segment (includes engineered wood flooring). Company has incurred capex of Rs 125 crore in the engineered wood flooring business and is targetting revenues of about Rs 300-350 crore from this segment in the next four years.

Greenlam's EBITDA margin contracted 149 basis points to 10.7% in the December 2014 quarter thanks to the losses borne by its engineered wood flooring business. This trend is likely to continue for another 2-3 quarters as the company sets up network for this business. Management expects EBITDA margin to improve from second half of FY16. Analysts too second this view.

"With lower receivables and inventory days, engineered wood flooring business has a lower working capital cycle compared to the laminate business. We expect Greenlam to report revenue and PAT CAGR of 16.6% and 36.1% over FY15-FY17, respectively, on the back of ramp-up in engineered wood flooring division, brownfield capex and a lower working capital cycle", says Jignesh Kamani of Nirmal Bang Capital. He expects the company's EBITDA margin to improve from 11.2% in FY14 to 12.4% in FY17.

Company is market leader in both Laminates and Veneer businesses. Going forward, it aims to invest in brand building and advertising of its engineered wood flooring brand - Mikasa. This business could break even when it achieves 20% capacity utilisation. Marino Laminates is the second player in organised laminates market and any aggression by Marino could put pressure on Greenlam to protect its market share, which in turn could impact profitability and could be a risk in the longer run.