Buy This Small Cap Building Material Sector Stock For Robust 73% Gains, Says ICICI Securities

Greenply Industries reported better than expected consolidated revenue growth of 14.4% YoY with standalone India plywood business growing at 14.8% YoY (3-yr CAGR of 7.7%) aided by volume growth of 6.9% YoY (3-yr CAGR of 3.9%) on a high base YoY. Consolidated operating margin declined 161bps YoY (+104bps QoQ on improved product mix) to 9.9% primarily due to higher employee cost (+117bps) resulting in EBIDTA decline of 1.6% YoY.

ICICI Securities is positive on Greenply Industries Limited, suggesting "buy" for an estimated target price of Rs 477 per share. With the given target price, the brokerage sees a potential upside of up to 73% from its current level. This small-cap building material sector stock has a market capitalisation of Rs 7,794.17 crore.

Stock Outlook & Returns on Investments Over The years

The current market price of the stock is Rs 163.50 per share on NSE, trading 0.18% down compared to its previous close.

In a week, the stock has fallen by 5.6%. The share in the past 1 and 3 months has fallen by 9.67% and 9.77%, respectively. It has given 29.62% in the past 1 year, whereas, in the past 3 years, it surged by 1.36%, giving positive returns. However, in the past 5 years, the stock fell, giving a negative return of 47.6%.

The stock recorded its 52 week high on 9 November 2021 at Rs 249.50 and 52 week low on 24 February 2022 at Rs 161.55, respectively.

Revenue growth of 14.4% YoY

Greenply Industries reported Q2FY23 consolidated revenue growth of 14.4% YoY (3-yr CAGR of 9.2%) with standalone India business growth of 14.8% YoY and Gabon revenue growth of 4.9% YoY. India plywood volumes grew 6.9% YoY on a high base (3-year CAGR of 3.9%). Management was optimistic of demand going ahead and expects it to improve post festive period. It has guided for ~16-17% YoY volume growth in FY23. Working capital days improved by 2 days QoQ to 46 days in Q2FY23 and management expects it to improve (further) from ramping up of capacity utilisation at Sandila plant (Uttar Pradesh). The MDF plant is expected to be operational by FY23-end and will start contributing in FY24, enabling revenue CAGR of 24.6% over FY22-24E.

Operating margin declines YoY

Greenply Industries' consolidated operating margin declined 161bps YoY to 9.9% (+104bps QoQ) due to higher employee cost resulting in EBIDTA decline of 1.6% YoY. Standalone India business margin declined 255bps YoY as gross margin declined 302bps YoY (+72bps QoQ) due to continued raw material pressure. Management has guided for India margin to remain near current level (of ~9%) in H2FY23 as timber prices continue to remain elevated (despite ~3-4% correction seen over the past few days). Gabon operations had EBITDA margin of 10% (-270bps YoY) in Q2 and the management stated European demand (~60% of Gabon sales) has been under pressure due to power and fuel challenges arising from the current geo-political situation. It expects Gabon margins to be severely impacted in H2FY23.

Valuations and view

Greenply Industries has near-term margin headwinds due to continued RM pressure in India operations and Gabon having demand issues on account of disruptions in Europe. However, with the commencement of MDF plant by FY23-end, it has strong growth prospects (revenue/EBIDTA CAGR of 24.6%/32.7% over FY22-24E) with reasonable valuations (15.6xPER FY24E). Maintain BUY on inexpensive valuations and sector tailwinds with a rolled over Sept'23 target price of Rs266, set at 21x PER one-year forward (in line with five-year average one-year forward PER).

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.