Greenply Industries (GIL) has announced a total capex of Rs3.7 billion for the set up of MDF and laminate manufacturing facilities with capacities of 0.18mn cubic metres and 3.3mn sheets respectively.
The MDF plant will be commissioned by Q4FY10 while the laminate facility will become operational in Q3FY10. GIL has already expanded its veneer capacity from 2.1mn sqm to 4.1mn sqm, which has been operational since Q1FY09.
The company posted strong sales for Q4FY08 but profits were subdued owing to higher depreciation and interest expenses.
In the medium term, revenue growth will moderate as all its segments are currently operating at optimum levels and revenues from the MDF and laminate facilities will be available only from FY10 or FY11 onwards.
Ongoing expansion is expected to put a strain on cash flows, while input cost pressures will compress EBITDA margins, dampening profitability.
We are downgrading our target price to Rs252 from Rs335 due to a revision in earning estimates and changes in assumptions relating to risk free rate for our DCF valuation.
Over the past few months, the stock has corrected from a high of Rs420 to Rs161; considering the robust upside potential, we upgrade our recommendation from Hold to BUY.