Archidply Industries IPO Review

Investors with a high risk appetite can consider investing in the initial public offer of Archidply Industries. This wood panel and decorative surfacing products manufacturer operates in an industry that is highly unorganised and fraught with regulatory issues. Archidply, however, inspires confidence through its presence in relatively high-end and more customised interior products and its environment-friendly measures to procure sustained sources of raw materials as well as make eco-friendly products that are within the regulator’s permissible ambit.

The offer price band of Rs 70-80 discounts the per share earnings for FY2008 (on the pre-issue equity base) by 7-8 times. While its larger peer Greenply trades at similar valuations, Archidply’s expansion plans through the offer are likely to be earnings accretive over the next two years. The pricing also appears justified given the superior profit margins and return on equity enjoyed by the company.
On the business and offer

Archidply manufactures engineered interior products used in commercial and residential buildings. The company started its manufacturing activities after the merger of a promoter group company — Mysore Chipboard — with itself.

Archidply’s products include a wide range of specialised plywood such as marine and fire retardant plywood, particle boards, decorative laminates and veneers. The company plans to raise about Rs 50 crore for setting up a new manufacturing facility in Karnataka and to set up a medium density fibreboard facility in its existing unit in Uttarakhand.
Sustainable business

The business of plywood has high uncertainties due to the large number of unorganised players; there are also regulatory curbs in production of environmentally less-friendly products and in sourcing of raw materials. Archidply appears well placed to tackle these issues.

For one, the company does not restrict its products to retail customers alone. Its clients include corporates, architects as well as modular furniture makers such as Godrej and Featherlite. Its products are also slightly premium given the sophisticated combination of waterproof, fire resistant as well as low gas emission plywood. We believe that the above products would address a more brand and quality conscious market that is different from the segment that unorganised plywood players cater to.

The company also plans to move to value-add products such as ready-to-assemble furniture components and designer doors. These products appear to be aimed at tapping the huge real estate activity in the commercial space. With tight deadlines for construction and a need to optimally utilise space, these products could well be in demand.

On the raw materials front, the company procures renewable plantation timber grown in coffee estates and farm grown plantation timber, thus preventing any environmental curb on its raw material source.
Safeguarding capacities

While the company’s capacity addition may appear uncalled for, given that it is yet to fully utilise its existing capacities, the move appears to be a safeguard measure.

The Supreme Court has placed restrictions on issue of new licences for manufacture of plywood and other wood-based products.

This appears to be the reason for Archidply’s move to ramp up capacities before its licence expires. The restriction also poses a higher entry barrier for even organised players wanting to expand in new places.

The present scenario is, therefore, likely to ensure less competition for organised players such as Archidply. On the flip side, the company may suffer if the increased capacities do not find demand.
Superior margins

Archidply’s revenue grew at a compounded annual rate of 89 per cent over the last two years to Rs 147 crore in FY 2008. This places the company next to top players such as Greenply Industries and Century Plyboard. The company’s operating and net profit margins at 18.5 per cent and 10.3 per cent respectively, are however far superior to those of peers.

Archidply could be incurring lesser transportation costs compared to its peers as it has an integrated facility in the North and the South (catering to respective markets) as against most other players who have facilities in the North and eastern India.

Further, Archidply appears to have had an early start in the high-potential particleboard market. This product uses plywood by-product and agri fibre as raw material and is more cost effective and environment friendly. Equipped with capacities (for this product) higher than even Greenply’s, the company could have scored higher margins on this front as well.

Archidply’s market share at 8 per cent still remains low, despite being the third largest organised player in terms of revenue. Market penetration clearly poses a challenge. The company is yet to get licence for starting the medium density fibre plant for which a part of the offer proceeds would be utilised. Given that it qualifies under the norms for the same, the risks may not be high.

The small market cap of Rs 155-175 crore (at the offer price) could subject the stock to high volatility under the present market conditions. Investors can consider exiting their holdings if their target return is met shortly after listing. The offer closes on June 17.

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Archidply Industries IPO Analysis

Promoted by Deen Dayal Daga, Shyam D. Daga, Rajiv D. Daga and Assam Timber Products, Archidply Industries was incorporated in 1995. It has modern manufacturing facilities for wood panel products and decorative surfacing products in Rudrapur (Uttarakhand) and Mysore (Karnataka).

The combined production capacity of plywood and block boards (4mm) is 1,28,00,000 square meters (sq mt), plain particleboards (4mm) 1,12,50,000 sq mt, pre-laminated particleboard (4mm), 99,00,000 sq mt, decorative veneers (4mm) 37,50,000 sq. mt, and decorative laminates of 12,00,000 sheets.

The range of comprehensive engineered interior products include plywoods such as marine plywood; fire retardant plywood; shuttering plywood; densified film faced plywood; BWR and MR plywood; lamyply and lamyboard; block boards and flush doors of BWR and MR grade; particle boards such as plain, veneered and pre-laminated both in interior and exterior grades; decorative laminates; and decorative veneers such as teak, natural exotic veneers, reconstituted veneers and dyed veneers.

The brand, Archidply, has been positioned in the premium segment of the wood panel and decorative surfacing products. Brands for the middle segment (Sec B) are Silvi and premium plywood products Pureply.

The marketing network includes 16 marketing offices, 61 distributors and stockiest and 586 authorised dealers.

A new manufacturing facility of plain particle boards, pre laminated board and decorative plywood, to be set up at a cost of Rs 37.67 crore at Chintamani in Karnataka, is to be commissioned by October 2008. A new manufacturing capacity for medium density fibreboard (MDF), to be set up at a cost of Rs 26.18 crore at Rudrapur, will be commissioned by August 2009. The total capital requirement is Rs 83.04 crore inclusive of future operating and working capital requirement. As such, Rs 46.31 crore to Rs 52.92 crore is to be raised in the price band of Rs 70 to Rs 80 per share through an initial public offering (IPO). Term loan will constitute Rs 28 crore.

Strengths

Enjoys various tax benefits. The Rudrapur unit has received approval for thermal energy generation from renewable biomass, making eligible for 24,659 certified emission reductions (CER) annually.

Weaknesses

Faces intense competition from unbranded products from the unorganised sector of the wood-based industry. There are many strong local brands,too. Moreover some organised players are much larger than Archidply.

Yet to receive licence to manufacture MDF at Rudrapur.

Valuation

Archidply has set a price band of Rs 70 to Rs 80 per equity share of Rs 10 face value. At the lower price band, the P/E would be 10.3 times and at the upper price band, the P/E would be 11.8 times the EPS for financial year ended March 2008 (FY 2008) on post-issue equity of Rs 22 crore. In the decorative wood-based/ laminates segment, comparable companies such as Greenply industries, Uniply Industries and Novopan Industries have TTM P/E of around 8, 6.6 and 8.1, respectively.