Stylam Industries Ltd

-Strong Exports & Increasing domestic contribution are key triggers

Recommendation : Buy

CMP : Rs 310

Target : NA

% Allocation : 5%

Sector : Consumer Discretionary

Sensex : 27002

Bloomberg code : SYIL. IN

Reuters Code : STYL.BO

AT A GLANCE

52 Week High Low :374.00/249.40

Mkt. Cap (Rs. in Crs) :227

Major Shareholders

Promoters (%) :58.83%

Free Float (%) :41.17%

Exports- Key Focus Area

SIL has maintained its focus in export market which reflects its

superior quality and healthy relationship. The company exports to

over 60 countries with higher dominance in European region. The

company’s ~50% of revenues comes from Europe where UK is the largest contributor with nearly Rs280 mn. Also, Far-East

market also growing very fast especially Singapore and Malaysia

region. Far-East market, which is currently contributing nearly

25% of total export, is expected to increase to 30% by FY18.

Increasing Domestic Revenues – Long term opportunity

SIL has opened nearly 25 own depots since FY15 primarily in

Northern and Western region like Punjab, Haryana, Delhi,

Rajasthan, Gujarat, Maharashtra, Madhya Pradesh and also

have little presence in Southern market which includes Chennai

and Bangalore. Consequently, domestic market also started

marking a significant contribution which is expected to increase

to nearly 30% in FY16 from 20% in FY14. The company is

planning to increase its own presence in at least 40 cities within a

year and expects contribution from domestic business to

increase further to nearly 40% by FY18.

Outlook & Valuation

We Initiate coverage of Stylam Industries Ltd with a BUY rating. Given the

Increasing Capacity ,Increasing Capacity Utilizationt, and an improving product

mix are key positives for the stock. We expect SIL to report an EPS growth of

20% for the next 3 years. At the CMP of INR 310, the stock trades at 18.67x

EPS of FY16. Key Risks to our recommendation include any slow down in the

global economy which will lower capex and any steep increase in raw material

prices will adversely impact the company.

Year(Rs.Cr) Net Sales*

Operating Profit

Pre-tax Profit*

Net Profit*

OPM Margin

PBT Margin

PAT Margin PE (X)

2013 1,658.35 170.52 43.09 26.34 10.28 2.60 1.59 30.00

2014 1,618.91 153.04 21.82 11.6 9.45 1.35 0.72 71.66

2015 2,030.95 192.86 52.86 34.25 9.50 2.60 1.69 25.40

27 June 2016

Stylam Industries Ltd (SIL) 24-06-2016

Multibagger Report

Background: Stylam, one of the top 3 laminate exporters

in India, has a strong presence in both domestic and

international market (contributes 70% in total revenue). The

company is doubling its capacity at a capex of Rs600 mn,

likely to complete by 2016. Total capacity would increase

to over 12 mn sheets post expansion. Total capacity would

increase to over 12 mn sheets post expansion. The company

expects utilization to reach 50% for new plant within a

period of six months due to introduction of new product

(14ftX6ft wider sheet) which has strong demand in export

market and commands a premium of 10%-15% from

regular products. Further, the company is strengthening its

presence in domestic market with direct penetration (gradually phasing out distributors), giving better margin

and higher brand recall.

Investment Arguments

Company Profile: Stylam, one of the top 3 laminate exporters in India, has a strong presence in both domestic and international market (contributes 70% in total revenue). The company is doubling its capacity at a capex of Rs60 Cr, likely to complete by 2016. Total capacity would increase to over 12 mn sheets post expansion. The company expects utilization to reach 50% for new plant within a period of six months due to introduction of new product (14ftX6ft wider sheet) which has strong demand in export market and commands a premium of 10%-15% from regular products. Further, the company is strengthening its presence in domestic market with direct penetration (gradually phasing out distributors), giving better margin and higher brand recall. The company opened 25 branches within a couple of years and likely to expand upto 40 within a year. Further, implementation of GST would change the landscape of entire highly unorganized (65%) industry and could act as a key catalyst for significant re-rating. .Geography wise Contribution

Exports- Key Focus Area Since the beginning, the company maintained its focus in export market which reflects its superior quality and healthy relationship. The company exports to over 60 countries with higher dominance in European region. The company’s ~50% of revenues comes from Europe where UK is the largest contributor with nearly Rs280 mn. Also, Far-East market also growing very fast especially Singapore and Malaysia region. Far-East market, which is currently contributing nearly 25% of total export, is expected to increase to 30% by FY18. Also, Contribution from Middle East is currently about 20% which is likely to decline slightly due to higher growth else-where.

14ft X 6ft product is likely to strengthen its presence in overseas market As the company is implementing Asia’s largest laminate manufacturing unit which would be able to make much wider sheet from current levels. Stylam claims it to first of its kind in India which can produce 14ftX6ft laminate sheet which has lower wastage and wider application. This finds huge demand in foreign including US where the company’s presence is currently negligible. The company expects it to tap the US market with this product which would fetch nearly 15% better pricing from current 8ftX6ft (for an equal size). Out of the total new capacity, almost 30% would be dedicated to this product, which is expected to expand overall margin for the company. Share of new 14ftX6ft product - post expansion

Increasing Domestic Revenues – Long Term opportunity:

The company opened nearly 25 own depots since FY15 primarily in Northern and Western region like Punjab, Haryana, Delhi, Rajasthan, Gujarat, Maharashtra, Madhya Pradesh and also have little presence in Southern market which includes Chennai and Bangalore. Consequently, domestic market also started marking a significant contribution which is expected to increase to nearly 30% in FY16 from 20% in FY14. The company is planning to increase its own presence

in at least 40 cities within a year and expects contribution from domestic business to increase further to nearly 40% by FY18.

Removing Distributor- Key growth driver

Prior to FY15, the company’s entire focus was on export business which was contributing nearly 80% of revenues. Stylam was operating through distributors to reach to the end market. However, since FY15 the company started cutting down distributors and directly opened their own branches which helped in multiple ways. Firstly, it started saving the margins which they were giving to the distributors; Secondly, cash realization also started improving as most of the dealers are taking the cash discount of 4% (if they pay within 2 days); Thirdly, the company raising prices more effectively where they start grabbing market share, which helped in improving margins. Aggressive Brand Building The company is currently spending almost Rs20 mn (just 1% of net sales) on account of business promotional activities. As the company has strengthened its presence in domestic market, the company is required to aggressively market its brand name. In view of that, recently the company has hired a new PR firm ‘Thinkstr’ for creating and marketing its brand name in broadcast media, digital media and print media. The company is planning to invest over Rs50-100 mn for the brand building exercise which would be hardly 2% of the sales as compared to its peer group average of about 3-4%. This is likely to bolster its presence in domestic market and would allow the company to charge some premium over its product.

Aggressive Brand Building

The company is currently spending almost Rs20 mn (just 1% of net sales) on account of business promotional activities. As the company has strengthened its presence in domestic market, the company is required to aggressively market its brand name. In view of that, recently the company has hired a new PR firm ‘Thinkstr’ for creating and marketing its brand name in broadcast media, digital media and print media. The company is planning to invest over Rs50-100 mn for the brand building exercise which would be hardly 2% of the sales as compared to its peer group average of about 3-4%. This is likely to bolster its presence in domestic market and would allow the company to charge some premium over its product. Improving Working Capital Cycle

Stylam’s working capital cycle has improved significantly over the past couple of years due to better inventory management. The company’s working capital cycle has come down to nearly 75 days from over 110 days in FY13 driven by better inventory management. The company has increased its sourcing bandwidth to multiple countries which gives it flexibility to operate at even lower inventory level. Currently, nearly 60% of raw material in FY15 was imported from different countries primarily Europe, which has increased from 27% in FY11. Also, as the new capacity would be operational from Q2FY17, the company expects that working capital cycle would further go down due to much better inventory management. Management expects it to improve further to 60 days from current around 75 days.

IT Park – Consistent Money Spinner

The company is constructing a building at Panchkula IT Park, Haryana with a total built-up area of 2.25 lacs square foot. Out of the total area, the company is planning to occupy nearly 20,000sq ft for its own office purpose and planning to shift all its existing office under one roof, which would take care of entire planning, sourcing and marketing for both domestic and export market. Also, the company is planning to lease out rest of the area for the commercial purposes which would provide them a fixed rental income. The management is expecting average rate of nearly Rs30-35/sq ft, which is expected to generate annual revenue of about Rs70-80 mn on full occupancy. The company expects the building to complete within three months.

Peer Comparison:

The company’s almost 70% of revenue (~Rs1.7 bn) comes from the export market as compared to 30% of Century Ply and 48% of Greenlam Industries. The company has bigger market share in export market compared to domestic market where competition from unorganized market is very heavy. Merino and Greenlam are the major companies in domestic market with almost equal no of market share. Stylam is ranked three in terms of export after Greenlam and Merino.

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Indian Wood Panel Industry The Indian interior infrastructure industry has been growing at a rapid pace over the last few years. One of the major verticals of the interior infrastructure industry is the wood panel market, which comprises of materials used in building furniture: plywood; decorative surface products like laminates and veneers; and engineered wood panels like PB and MDF. The INR270bn Indian wood panel market has been growing at 10-12% CAGR over the last few years. The growth drivers include higher disposable income; rising urbanisation; growth in the real estate sector, particularly in Tier II and III cities; shift to branded from unbranded products and the fast growing replacement market.

Indian Ply Wood Industry The plywood industry is one of the oldest in the country. Its genesis dates back to the time when the British introduced tea cultivation in the northeast and started cultivating tea-chest plywood for use as packing cases. The industry has been expanding its product range ever since. Its product range now includes boiling water-proof preservative treated plywood, phenol formaldehyde (PF) bonded marine grade plywood and urea formaldehyde (UF) bonded commercial grade plywood, concrete shuttering plywood, marine plywood for boat/ shipbuilding/residential projects, fire-retardant plywood, chequered plywood for flooring, flush doors, etc.

The INR180bn Indian plywood industry is growing at 6-8% CAGR in volume terms over the last decade. The industry is dominated by unorganised players located in clusters across the country, which constitute more than 75% of the industry size (INR140bn), with the balance being accounted for by organised players. The fact that the organised industry has been growing at 15-20% CAGR over the last decade clearly suggest that the shift is consistently happening to branded from unbranded plywood. With the unorganised industry still occupying majority share of the industry, there is a

considerable opportunity for organised brands to eye a big pie of the unorganised market going forward over the next five years. Huge Outsourcing Opportunity At present, over 75% of the plywood industry is catered to by various unorganised, pan India clusters. Majority of the units in these clusters are manufacturing commercial grade plywood. Currently, these units are facing growth challenges due to: a) Non-availability of face veneers post the Myanmar timber ban, b) Rising plywood prices, and c) Higher working capital requirements, resulting in increasing idle capacities. This offers a strong opportunity for organised brands, which can enter into a third-party outsourcing arrangement with these units for commercial grade category plywood.

The above map depicts the location of unorganised clusters in India in all four geographic zones. This is unlike the ceramic tiles industry, where the current scaling up of outsourcing is restricted to Morbi, Gujarat, which houses more than 600 ceramic units at one location. It provides a strong opportunity for organised brands to tie up with these players for selling the latter's plywood products in zones in which the vendor is located or is in the near proximity, thereby reducing the freight element and logistic cost to market.

MDF Industry

Of the total wood-based substrate industry in India, the INR13bn MDF market currently accounts for a mere 7% as compared to 80% globally. Albeit on a lower base, the domestic MDF market has been growing at 15-20% CAGR over the last five years. With increasing urbanisation, the demand for ready-made furniture, manufactured with engineered panels like MDF, is rapidly growing as consumers are increasingly finding themselves short on time and inconvenient to get customised furniture fabricated by carpenters. One of the biggest advantages of using MDF is that it is far more affordable than plywood and can be carved and moulded to one's liking.

Laminate Industry With the substrate industry growing at 10% CAGR, the surface industry - laminates and veneers - have also been growing at 10% CAGR over the last five years. The size of Indian laminate industry in FY15 was estimated to be ~8mn sheets per month (~100m sheets per annum), aggregating INR40bn, with an average realisation of INR400 per sheet. Organised players, which constitute ~55% of the industry, have been growing faster than their unorganised counterparts due to their intense focus on 1mm thickness laminates and value-added products like textured, exterior grade and compact laminates. With the shift from unbranded to branded products seen continuing, the industry players expect the laminate industry to continue to grow at the same pace going forward. The 1mm thickness laminate market is estimated to account for 40% of total industry volumes and 60% of the industry size in value terms. The 0.8mm and 0.7mm thickness laminates account for 40% of industry volumes and 30% of the industry size in value terms. The other lower thickness segments - 0.5mm and 0.6mm - are price driven and entirely dominated by the unorganised industry.

GST – Game changer for the Industry The plywood and laminates industry faces huge competition from the unorganized sector, which contributes nearly 70% of the total industry. But laminates manufacturers in the organized sector expect the rollout of the goods and services tax (GST) to boost their sales in a market dominated by the unorganized sector. GST will address complexities and inefficiencies of current indirect tax framework through robust technology platform. Post GST clandestine business will be almost impossible. GST will be a win-win situation for all stake holders i.e. Government, Honest Businessmen and Consumers as it will lower tax incidence, ease business and increase tax buoyancy coupled with tax collection. As per a study carried out GST will have significant positive impact on GDP growth. Under the GST regime, companies with turnover of more than Re1 mn will have to pay the tax against the earlier threshold of Rs.15 mn. Effects on unorganized sector

Price advantage enjoyed by them will actually diminish which makes high quality laminate competitive.

Lowering of excise duty to less than 10 per cent would force the unorganized laminate units to make excise payments regularly.

As inferior-quality laminate would become less competitive. This would also lead to a reduction in the import of low-cost Chinese laminate in the coming years. Pre & Post GST Comparison

Profit & Loss (Standalone)

Balance Sheet(Standalone)

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