Saturday, January 24, 2015

Greenply Industries: Good quality but overvalued

21 Jan 2015
I have to start this one by saying that Greenply Industries definitely makes beautiful looking annual reports. I know this brand from furniture shopping trips and ads for the last 2 decades but little did I know that it is the largest interior company in india, Largest laminate manufacturer in Asia and the 3rd largest laminate manufacturer globally. The laminates business is in the process of being de-merged and the stock is trading ex-record date.

1. How good is the moat?

Grade: B
  • Brand: Replication cost and timeline are both massive. This is a household name in India and chances are if you are telling your furniture store to use something it will be greenply or greenlam. Plywood manufacturing licenses are also hard to come by.
  • Technology: nothing great. MDF has some edge. Its pretax margins are high.
  • Performance during recessions - this is the opposite of recession proof. The good news is that construction and housing is likely to grow rapidly over the next few years owing to the positive outlook on infrastructure by the government.
  • Pricing power - The industry has low pricing power but when it comes to commercial establishments and housing - most professionals would like a brand. Here branding will play a similar role to branding in the cement industry.
  • Very high market share - 32% in plywood, 28% in laminates and 30% in MDF. In MDF Greenply is 40% of the installed capacity so overcapacity maybe a problem. Overall India's consumption of MDF is low at 0.5 mil m3 versus China at 30 mil m3.
  • The Laminates business has been demerged and today you cannot buy stock of the laminates business as it has not been listed yet - but the stock is trading ex-record date of 27 Nov 2014.
  • Overall being the market leader and good prospects I would say the moat is good.

2. Risks

  • Biggest risk I see is the employees - there are too many of them and thus average compensation is low at 4.2L/employee per year. Also sales/head is not going up which is a matter of huge concern as over time this can lead to lower increments leading to resentment and tough situations for manufacturing companies.
  • Low margin business - Over time if the brand can be made stronger maybe this company can expand margins but for now its a bit dicey.
  • Myanmar is the single largest source of raw materials for the company. Myanmar government is banning timber exports and thus the company is planning to setup a plant in Myanmar.

3. Financials

  • Debtors % of sales is decent at 16% - it is a bit high for my liking but nevertheless decent.
  • ROIC is decent at 14.9% and ROE at 20% or so.
  • Inventory % of sales stands at 19% or so which is a bit high but seems to be the norm in the business
  • Cash flow from operations exceeds Net income which is a good sign
  • Exports are around 15% of the sales and growing rapidly but the imports section is about 1.5 times of the exports. 
  • Dividend % of earnings is low at 7.2% but that can be justified by the massive room to grow.
  • One has to adjust the earnings stated by the amount that the laminates business makes. Now the interesting thing is that in the demerged entity the plyboard and MDF board business has higher returns on capital than the laminates business so it is a better quality company than the financials show but the EPS of the stock you can buy today is lower than what might show up on websites.

4. Soft factors

  • A great advantage is that the company is aggressive and has clear global ambitions. It has the wherewith-all to understand that installing a plant in Myanmar might be an excellent investment as well a secure source of raw materials. I like that.
  • Presentation as I already said is wonderful. This can be a bad thing because a company trying to woo investors could be doing that but the marketing material seems to be good.
  • One the companies reporting late financial results on 5th Feb 2015 for the 31st Dec 2014 quarter. I always feel late reporting companies are not as smart as the ones who report sooner. In fact this is one of the new companies whose December 2014 shareholding patter is also not out yet.
  • Volume - Total trading volume daily is average at 50L but there are days of 1.2L of trading as well. This makes the stock susceptible to larger mis-pricing up or down factors. The are also days of 19Cr+ of trading.
  • Price on BSE and NSE sometime varies as well. I don't understand why.

5. Pricing

  • One has to be careful with the pricing as the stock is trading ex-record date of the demerger. So a buyer today would NOT get the Greenlam demerged entity
  • Stock is trading at around 20 times TTM earnings. Now the real estate sector is in the doldrums and this stock is going to be affected by that kind of activity but going forward I think the next 5 years more housing and commercial establishments are going to be established than the last 10.
  • Unfortunately I think today the margin of safety is absent and the stock is trading around or over what the company is worth.
  • The demerged financials are also a source of concern - While it is probably possible to create the exact financials of the demerged entity in a spreadsheet - I would put this in the too hard bucket as the valuation on the face of it is high.