After restructuring Uniply Industries looks attractive
Uniply was founded in 1996 by a team of professionals from Kitply and Greenply. From its inception to 2014, it increased its reach to north and west India from south India. In 2015, Mr Keshav Kantamneni acquired a stake in Uniply after which Uniply went through two years of business restructuring, asset acquisition, capacity expansion, and mergers.
UNIP has become an end-to-end service provider in the building material space with Vector’s acquisition in 2016 and Artmatrix acquisition in FY18. UNIP is now an architecture, design and interior fit out company, which handles large projects in the commercial and residential space — from designing, to fully furnished spaces, including electrical and plumbing works.
Until FY16, UNIP was a face-veneers and plywood company It had a revenue of Rs 1.2bn and OPM of ~10% and face-veneers (single-digit margins) accounted for ~40% of revenue in FY17. The management gradually discontinued this business. The company scaled up its plywood business (higher margin then face veneers) to 96% in FY17. Over the same period, the management also focused on widening its plywood mix; focused on value-added product extensions (such as antitermite whose share increased to 60% of plywood sales in FY17 from 25% in FY15).
To increase its plywood capacity and presence, UNIP acquired another plywood manufacturing facility (Euro Décor, 38,400 CBM), a plywood unit in Gujarat) in FY16 for Rs 420mn. This acquisition helps UNIP to service the growing markets of west and north India. Additionally, port proximity makes it potentially possible to import and transport timber to this manufacturing facility and would lead to freight savings (UNIP expects to save around 3-5 % on logistics). The acquisition was completed in 4QFY18 and the management expects this plant to deliver attractive throughput from Q1FY19. At full utilization it expects additional revenues of Rs 3.5bn from this plant.
After streamlining its plywood business, the management moved from being a product company to a service company by acquiring Vector Infrastructure Projects. This move helped UNIP to move from a thin-margin competitive-pricing industry (plywood) to one of India’s fastest growing industries, i.e., interior infrastructure fitouts, with higher margins. Now Uniply caters to a larger market of over Rs 3,000bn vs. the Rs 200bn plywood industry. The Vector acquisition not only helps Uniply to cater to a larger market, but also helps increase its footprints pan-India. Vector also helps UNIP to service customised requirements of downstream customers. This move has helped UNIP to increase its product offering and capture larger wallet share of customers.
All of these restructuring moves helped UNIP to increase its plywood capacity to 57,600 CBM from 19,200 CBM/annum in FY15, its presence to pan-India from about 15 cities, and its product profile to a complete fit-out solutions provider from just plywood, and also improved the company’s profitability.
Sold its plywood business to an associate company In FY18, UNIP sold of its plywood business to its associate company, Uniply Décor Ltd (UDL), for an economic value of Rs 3bn, which helped UNIP to reduce its debt, move to an asset-light model, and improve its profitability (the plywood business is now with Uniply Décor). The plywood business is now completely professionally managed, with higher capacity and better product profile, which should lead to better financials and balance sheet.
Vector is a game changer for Uniply:
Vector is a largest turnkey interior infrastructure solution provider in India which provides complete turnkey solutions (design, execution and services), with superior quality and timely execution. More than 90% projects delivered on scheduled time. It has Strong team of ~350 architects, engineers, interior designers, and project managers and has track record of ~2000 completed projects (+10mn sq. ft.), delivered 250,000+ workstations and chairs.
Vector has Diversified and strong client base – IT, banks, financial institutions, corporates, hotels. About 60% of its order book is from IT, 30% from BFSI, and balance from other corporates. 60% revenues are from repeat customers (working for more than 5 years with Vector). Through its acquisition of Vector Projects India Pvt ltd in 2016, UNIP improved its product offering and extended its reach into the downstream business of ‘building and interior solutions’. This allows UNIP to offer plywood solutions, enhance transaction value, and account for a larger customer wallet share.
Vector enhanced its manufacturing facility to 100,000 sq. ft. in FY17 (capex of ~Rs 300 mn) from 45,000 sq. ft., to serve its increased order book. At full utilization this facility can generate revenue of Rs 8.0bn. For faster execution and timely delivery, UNIP is carving out some space from its plywood facility (Gujarat + Chennai) for Vector. With the healthy order pipe line and strong offering (servicers) we expect additionally order inflow of Rs 11bn over 2-3 years.
Artmatrix to boost UNIP profitability:
In January 2018, UNIP announced the merger of Artmatrix. It is expected to contribute fully to earnings from FY20 (we have not yet factored Artmatrix in our estimates). Artmatrix is Incorporated in 2006; based out of Kuala Lumpur, Malaysia. Company Provides one-stop solutions for design, manufacture, and supply of office furniture, primarily to corporate offices and institutions. It has global project presence in 22 countries with visible presence in Malaysia, Singapore, Dubai; in India (showrooms) with Vector. Artmatrix is a zero-debt company; healthy margins (higher double digits) and profitability since inception.
The merger provides strong synergies to gain insight into manufacturing cost structures outside and inside India, this can then be optimized. Artmatrix will also have captive supply of plywood from UDL, leading to cost benefits. It widens UNIP’s market reach and also Captive furniture manufacturing and premium products will increase its overall margins.
Diversified customer & product mix (presence in premium products) gives Artmatrix a strong revenue visibility with healthy margins. Company has state of art manufacturing facility in Malaysia. Management has indicated that Artmatrix has healthy PAT margins of more the 20% and also expect this business to grow at 15-20% over the next 2-3 years.
Healthy order book, strong revenue visibility:
As of now, UNIP’s construction order book spans commercial and residential spaces across Maharashtra, Karnataka, Telengana, Tamil Nadu and Delhi. It is increasing its footprint pan-India and Artmatrix allows it to spread its wings in overseas markets (as Artmatrix has a strong presence in 22 countries). With two years of restructuring, strong product profile (complete solution), and a dynamic management team, UNIP has a strong order book of Rs 15bn in design and turnkey projects, which has led to sizeable expansion in its business (reflected in healthy order book). Orders are likely to be executed over the next 15-18 months.
UNIP margins to improve to 14% in FY20 from 11.7% in FY17, majorly driven by strong operating leverage and product mix. We expect major saving will come from employee cost – currently 9% of sales. Over the next two years, the UNIP business will show very strong growth in revenue, improvement in margins and return ratios, majorly driven by Improvement in execution cycle (Will pick up from FY19), Product mix (all of UNIP’s offerings enjoy higher margins of 10%-15%, excluding Artmatrix), Tight control on the working-capital cycle (PC: 148 days vs. management estimate of 100 days) and Higher asset-turnover (moved to an asset-light model)
At its CMP, UNIP trades at a FY19/20 PE of 34x/15x and EV/EBITDA of 18x/9.5x. Though valuations are not low, huge opportunity in building material solutions, shift of unorganized to organized market, limited number of players keeps UNIP in strong position. Long term investors can buy the stock at current market price.