India Ratings and Research (Ind-Ra) has assigned Greenply Industries (Greenply) a long-term issuer rating of 'IND AA-'. The outlook is stable. The agency has also assigned the company's Rs 300 million commercial paper programme (within working capital limits) a short-term 'IND A1+' rating.
The ratings reflect Greenply's leading position in the plywood and medium density fibre boards (MDF) market with around 30% share of organised market and established brand with pan India presence. Greenply's credit metrics are comfortable with interest cover of 5.42x in FY15 (FY14: 4.27x, FY13: 4.08x) and net leverage of 1.59x (2.57x, 2.43x). The company was able to maintain its margins at around 13% in FY15 despite the de-merger of laminate business in November 2014. The revenue from the plywood and MDF segments grew 12.27% in FY15 to Rs 15,605.8 million. During 1QFY16, revenue increased to Rs 3,808.5 million (1QFY15: Rs 3,310.8 million) and margins improved to 14.66% (13.6%) due to higher margins from the MDF segment.
Greenply has been running its plywood division at above 100% utilisation and excess demand is met through its asset-light model of outsourcing plywood manufacturing and rebranding under its own brand. This allows the company to increase its revenue without leveraging. The outsourcing business accounts for around 20% of plywood sales which is likely to increase to 30% over the next three years. The plywood outsourcing is for mid-segment variants, thereby freeing capacity for premium variants which require higher quality control and have better margins. Also, the MDF division was running at 90% in FY15 (FY14: 76%; FY13: 88%); the decline in use during FY14 was due to a slowdown in demand from the commercial sector.
The ratings factor in the company’s announcement of large, debt-led capex of Rs 6,000 million-Rs 6,500 million for setting up new a MDF manufacturing unit in Andhra Pradesh to be operational in FY19. Ind-Ra expects the leverage to peak in FY18 but remain below 2x and deleverage after that. The equity for the project is to be funded by internal accruals.
