Buy Greenlam Industries, target price Rs 1,031: Yes Securities

Yes Securities has given a buy rating to Greenlam Industries with a target price of Rs 1,031. The share price moved down by -2.89 per cent from its previous close of Rs 767.30. The stock’s last traded price is Rs 745.10.

Topline for the fourth quarter of FY20 stood at Rs 3.24 billion, which was down by 10 per cent year on year due to Coronavirus inflicted lockdown measures in the latter half of March’20 which hampered overall domestic business of the company. However, laminate exports were the silver lining during the quarter – volume and value growth of ~11.7 per cent year on year.

Although gross margins of Greenlam improved by 650 bps year on year to 50.2 per cent, led by favorable product mix and benign raw material cost, negative operating leverage due to significant hit in volumes across different product categories weighed on the operating margin. Accordingly, EBITDA margins increased by 162 bps year on year to 14 per cent while absolute EBITDA came in at Rs 452 million, growth of 1.7 per cent year on year.

Investment Rationale

Based on channel check, assessment and management commentary, the brokerage remains convinced that a market leader like Greenlams will emerge stronger from the Covid scenario on the back of a strong balance sheet and superior working capital & supply chain management. Going ahead, the brokerage estimates revenue/EBITDA decline of 20.6 per cent/43.3 per cent year on year in FY21 and growth of 38.5 per cent/105.5 per cent year on year in FY22 respectively.

Further, despite the sharp decline in FY21E earnings and capex of Rs 1.5 billion over FY20-FY22 towards capacity expansion in Andhra, the balance sheet is expected to grow stronger and net debt/equity should decline from 0.53 times currently to 0.3 times by FY22E.

Currently Greenlam is trading at P/E of 18.4 times on FY22E. The brokerage maintains buy rating with target price of Rs 1,031/share – discounted cash flow derived value with implied P/E multiple of 24.7 times on FY22E.



Risk to the call : In case of a second wave of Covid spread, volume de- growth in FY21E would be much sharper than expected, resulting in a significant negative operating leverage.

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 324.02 crore, down -9.50 per cent from last quarter sales of Rs 358.03 crore and down -10.05 per cent from last year's same quarter sales of Rs 360.22 crore. The company reported net profit after tax of Rs 21.71 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 54.89 per cent stake in the company as of March 31, 2020, while FIIs held 2.56 per cent, DIIs 15.59 per cent and public and others 26.96 per cent.