Greenply Industries Ltd is expanding its plywood and allied products capacity by about 40%. Last week its board approved setting up of a new unit in Hardoi, Uttar Pradesh, to further those ambitions.
The company will add plywood and allied product capacity at the planned facility in Hardoi by 13.5 million sq. m., taking its total capacity to 45.9 million sq. m. This expansion will entail an investment of Rs120 crore, out of which Rs80 crore will be funded by debt and the rest through internal accruals, said V. Venkatramani, chief financial officer at Greenply Industries.
The plan is easy on the balance sheet. Expansion capex (capital expenditure) isn’t a concern as Greenply’s balance sheet is healthy (debt/equity of ~0.4 times in fiscal year 2016) and would remain so despite the incremental capex (debt/equity of ~0.6 times in FY19), pointed out Arun Baid, an analyst at Religare Institutional Research. However, the benefits from this plan will not be visible immediately. “Given that the new facility will be operational in Q3FY19, we expect a meaningful contribution to earnings from FY20 onward,” says Religare in a report on 17 March.
In a way, the company is getting ready to meet the expected higher demand as a result of implementation of the goods and services tax (GST), which is likely to encourage a shift from the unorganized to organized markets. In fact, this anticipated shift to organized markets is also a reason for the optimism in the Greenply Industries stock, which has risen as much as 57% so far this fiscal year. Currently, one share trades at nearly 22.5 times estimated earnings for FY18; suggesting investors are capturing a good portion of the brighter picture.
Unfortunately, the financials don’t offer that much comfort. For the nine-month period ended December (9MFY17), operating revenue adjusting for excise duty increased merely 1% year-on-year. Operating profit had declined marginally. The adverse impact of demonetization during the December quarter weighed on overall numbers for 9MFY17. In any case, demand was slow prior to demonetization thanks to the lack of revival in the real estate sector.
“While we are recovering in the current quarter after demonetization, growth is likely to be challenging for the next financial year as well,” said Venkatramani, who expects revenue growth of 5-7% in FY18.
That’s not exciting enough to further improve sentiments for the stock at least in the near future considering the sharp run in the share price already.
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.