Uniply Industries on the cusp of a spectacular era!

Even though it has had a precipitous run-up (rising by c. 32 times, with market
capitalisation going up from Rs. 22 Cr in Jan 2014 to Rs.700 Cr currently), Uniply
Industries, is one heck of an investment idea. The company which has its origins
in Plywood sector, is looking at a mammoth opportunity stoked by a confluence
of several ensuing developments on both the macro and on company-specific
fronts.

On the macro side, the herald of the new Goods and Services Tax regime is a
game-changer for the organised plywood players in the highly-fragmented
c.25,000 Cr industry. This would create a level playing field vis--vis the
unorganised players, who have had it easy until now, owing to a zero-tax regime.
The size of the addressable market hugely would shift in favour of organised
players, Uniply being one of them. In addition, the industry is also looking at a
very favourable tailwind from the Government dispensation and its thrust on
housing for all, programs for development of smart cities and a massive
infrastructure push. Whats more, with rising per-capita incomes and evolving
consumer preferences, Plywood as a choice of product would be very fanciful in
times ahead.

But these factors as stated above are industry-encompassing and there are
bigger players who adorn the list, of the likes of Greenply and Century laminates.
The question is why the fascination for this little-known player, and especially
given that it has already run its course. Well the answer to that lies in the
narrative being woven around the company by its newly incumbent management
team. This is evident in the spectacular repositioning that the business model of
the company is witnessing under its aegis, espousing great hope and optimism.
To understand the context, it would be helpful to delve in its history a bit.

Uniply Industries was formed by technocrats with avid experience in the sector, a
fact clearly reflected in its superior product quality. This strength was however
not capitalised et al by its original founders. The poor business acumen resulted
in low capacity utilisation, poor brand recall, labour trouble, working capital
issues and debt trap ultimately forcing the company to the gates of BIFR. The
founders approached an investment bank M/s Globality Partners, led by a 30-
something ex-Kelloggs School of Management pedigreed, Keshav Kantamneni
for sell-off. Ironically, what appeared to its founders to be a burden, seemed a
goldmine to Keshav, who decided to but a majority stake in the distressed
plywood maker, for a measly Rs. 22 Cr market cap (EV of Rs. 140 Cr, courtesy Rs.
115 Cr debt).

From the word go, Keshav and his team unleashed a spate of steps in
consonance with the vision, that he dreamt of while acquiring the stake. He was
quick to capitalise on the low-hanging fruits at the outset. The flawed product-
mix with a skew towards low-margin veneer, was completely revamped by an
immediate positioning to high-margin value added segments. This overnight led
to an EBIT margin improvement of c. 900 bps. The mainstay of plywood business,
dealer network (who swore by Uniplys product quality, even in distressed times)
was energized by renegotiated attractive terms with them. To stem the rot on
labour front, c.20% of total strength was laid-off amicably. From a 100% import-
dependence for raw material, the level was brought down to c.60%, with the
target to bring it down to almost zero level in two years. The managers are
assiduously upstaging the capacity utilisation levels, which told stories of utter
neglect and despondency.

The ultimate manifestation of this carcass, financial picture laden with huge debt
and pathetic working capital was handled with a pang. Working capital
requirement were brought down to Rs. 42 Cr (on revenues of Rs. 136 Cr in FY15-
16) from a staggering Rs. 156 Cr (revenues of Rs. 107 Cr in FY 14-15). Debt costs
were lowered by c. 430 bps in FY 15-16, translating into a saving of Rs. 37 Lacs
per month in interest outgo.

After arresting the rot, Keshav and his team have their eyes set on completely
transforming the DNA of Uniply from a low-margin product company into a
product-cum-solutions company. The idea is to capture the value of a log of wood
to the maximum possible extent in the value-chain, which would ensure the
maximum bang for the buck. To achieve this transformation and metamorphosis,
a string of acquisitions are being made. The latest and most noticeable among
them being acquisition of Vector Projects, an interior contracting solutions
provider, with the reputation of having delivered 1500 projects, across 10 million
square feet.

The latest year end FY 16 numbers foretell signs of times ahead. The Company
has recorded highest EBIT margin and PAT of 11% and Rs. 6 Cr, respectively,
since FY 2007.
On the valuation front, the stock appears to be expensive, given that at the
current stock price of Rs. 320, the Trailing PE is a staggering 120 times, P/B at 17
times. But the following facts would help assuage the doubts. The Company has
an installed capacity of Rs.300 Cr, leaving a lot of scope, even on organic front.
Given a fuller utilisation and factoring-in inorganic moves being made by the
management, a sales number of Rs. 400 Cr, by FY 18, does not look far-fetched.
Assuming the improvement in product-mix and other factors to give a further
fillip to PAT margin, thereby taking it to c. 8% (of the likes of other big players), a
PAT of Rs. 32 Cr is plausible. Given the equity base of c. 2.4 Cr equity shares (on
expanded equity base), the FY 19 EPS can be easily Rs. 16. This is discounting
current price by 20 times forward (conservative yardstick). While making this
analysis, one is not considering a lot of value-chain related improvement, and PE
rerating story, which is yet to unfold (owing to paucity of published data).

To aid the pied-piper in his caravan of dreams, Keshav has received tutelage from
the likes of eminent investors Mr. Vallabh Bhansali, Mr. Radha Krishna Damani,
Mr. Nikhil Vora and others, who have invested in preferential allotments at
various stages over the course of the past 2 years. The stock market too has
applauded the Companys stock by making its market cap. going up by an
outlandish c. 32 times (read times) from Rs. 22 Cr. odd pre-announcement of
buyout to Rs. 700 Cr. as at the last count. But from the looks of it.. this seems to
be just the beginning and as they say picture abhi baki hai. One should
decisively be a passenger in this ride and not a mere onlooker..