Stylam Industries: An Emerging Player in the Wood Panel Industry

Stylam Industries Ltd is a manufacturer of laminates, solid surface panels and other allied products. It is one of the largest exporters of laminates from India and is also trying to increase its presence in the domestic market which is dominated by Greenlam currently. Further, Stylam has also announced its foray into Plywood manufacturing and is investing 60 crores to set up the necessary infrastructure.

What are laminates?

Laminates are composite sheeting material made of thin layers of different types of paper and plastic resins. These are not be confused with plywood or Medium Density Fiberboard (MDF) as laminates are only the finishing layer of items made of plywood, MDF or other wood-based products. They are commonly used to furnish furniture pieces such as beds, sofa, stools, tables, wall shelves in bathrooms, kitchen, bookshelves, modular cabinets etc.

Laminates manufacturers have kept up with time which has led to a wide variety of offerings in the market today, serving the need of simple to highly sophisticated customers. Scratch proof bright colors, glossy, mirror or metallic finishes, interesting textures, germ and bug eliminators, anti-fingerprint laminates are just some of the offerings present in the market today.

How are laminates made?

Laminates are made up of papers that are treated with chemical resins to impart them strength and stiffness. The main raw materials used in manufacturing laminates include:

Brown/Kraft paper such as the one used for brown paper bags.

Phenolic resin which is made from phenol and is the basic material used for making plastic.

Decorative/Décor Printed Paper which becomes the face of the mica sheet with printed decorative design.

Melamine resin which is a clear transparent resin for treating the decorative paper.

Clear translucent paper which forms the topmost overlay of the decorative laminated sheet.

The manufacturing process starts with soaking kraft paper with phenolic resin and decorative printed paper and the translucent paper with the melamine resin. The resin helps to make these surfaces harder, stiffer and better at resisting scratches and wear and tear. The papers are then left to dry.

The dried papers or sheets are then stacked upon each other. The brown paper forms the bottom sheet followed by the decorative sheet, and the topmost layer is of the clear translucent paper. These stacked sheets are pressed under high pressure and temperature and any texture or pattern to be applied is done in this process. Finally, the bottom part of the laminate is sanded to finish the manufacturing process. This sanded surface is the one on which carpenters apply adhesive while gluing these laminate sheets over plywood or other base substrate materials.

Two important inputs evident from the manufacturing process are, different types of paper and, phenol. Paper prices are largely driven by prices of wood pulp and phenol is a derivative of crude oil.

The Furniture and Wood Panel Industry

The global furniture market was estimated to be worth $510 billion in 2020 and is forecast to reach ~$650.7 billion by 2027 growing at a CAGR of 3.5%. Over the past few years, China has shown impeccable growth and accounted for 33% of global furniture production in 2019. Major end markets for furniture include USA, Europe, Japan, Canada etc.

The Indian furniture market was estimated at $20 billion and has grown at a CAGR of 15% over the last 5 years. It accounts for less than 5% of global furniture market and has tremendous scope to increase its share.

Online furniture sales are growing rapidly globally and the pandemic has proven to be the shot in the arm for further boosting online furniture sales. Online furniture sales account for a 4% share of overall furniture market in India, compared to 38% in US and 44% in China. The low online sales of furniture in India is also due to wide prevalence of handmade furniture in India unlike the dominance of readymade furniture globally. This translates into lower penetration of engineered wood like MDF in India.

The wood panel industry, a part of the furniture industry, includes plywood, MDF, Particle Board and Laminates. The industry is seeing the growing prominence of MDF domestically, replacing the low-end plywood.

The global laminates industry is estimated at $7 billion witnessing a stable growth of 4-5%. Asia is the largest market for laminates while US and Europe are the next big markets. The Indian laminates industry market size is around $1 billion with exports accounting for 1/4^th of the total market. Greenlam Industries from India is among the top 3 manufacturers of laminates globally.

A rising population with growing middle class and increasing per capita income, subdued mortgage rates, pick up in real estate investments, higher infrastructural spends are some of the factors which will drive the growth of the Indian laminates industry.

Stylam Industries has a Diversified Product Portfolio

Stylam has a diversified product portfolio of laminates with 1200+ designs and 120 textures and finishes. The company is a pioneer in India for introducing the PU+ Lacquer Coating process thereby producing high quality, high value-added laminate finishes.

Decorative Laminates - Designed using sheets of classy brown kraft papers and decorative printed papers, Decorative laminates are used in Wooden claddings/linings of walls and columns, Lift linings, Doors, shelves and storage units, Vanity units tabletops, work tops, desks and counters, Office partitions, Cubicles Store fittings among other application.

Compact Laminates - Compact laminates are hard and resistant to a wide range of chemicals and atmospheric agents. They provide flexibility of choice to the end-user, as their high flexural and tensile strength make them suitable for saw cutting, drilling, machining and punching as per requirement. Stylam offers various types of compact laminates such as Chemical-resistant laminates, laminates resistant to weather changes, Fire-retardant grade laminates, multi-purpose industrial laminates etc.

PU+ lacquer coating – Hot coating of PU (polyurethane)+ lacquer allows the company to produce laminates with durable surface finish. Anti-fingerprint laminates, high gloss laminates and other value-added laminates are produced by the company using this process.

Specialty Surfaces - Specialty surfaces are the premium range of value-added decorative surfaces that give an edge to interiors. Product offering under this category includes Mirror laminates, Magnetic laminates, Electrostatic Dissipative (ESD) laminates, Unicore laminates, Digital laminates, Metallic laminates, Synchro laminates among others.

Export Dominating Revenue Mix but Focus on Domestic Market has Increased

Stylam derives the major portion of its revenues from exports. It has a diversified presence globally with exports to 65+ countries across four continents with constant emphasis on penetrating newer markets. The contribution of major regions in total export sales in FY21 stood at 41%/14%/13%/11%/9% for Europe/Far East/Israel/Middle East/UK respectively. The company has several global certifications which help it in faster processing and clearance of cargo, deferred payment of duty, along with direct port delivery and entry. It has recently been upgraded to Three Star Export House, as per the Foreign Trade Policy and also received T-2 recognition from the Authorized Economic Operator (AEO) program. These certifications help in easing the entry into new markets and vindicate presence in markets in which it is already present.

The domestic laminates market is dominated by Greenlam with an unmatched distribution reach. Stylam has also started to increase its distribution reach with enhanced focus on increasing its share in domestic markets. During H1FY22, the company has already increased its domestic distributors count by almost 40% and is looking to end FY22 with further additions to the number. It is constantly interacting with its dealers, distributors and business partners to create a strengthened relationship. The company is in touch with architects and on-ground designers to understand their requirements and onboard them to increase presence across the country.

The focus on branding has also increased domestically with advertising campaigns launched around the IPL grabbing consumer mindshare. The spend on marketing has inched up from 0.7% of sales in FY18 to 1.4% of sales in FY21.

Manufacturing Capacity

The company has present installed capacity to manufacture 14.3 million sheets per annum. It has manufacturing facilities located across two locations in Haryana – Panchkula (4.5 mn sheets capacity) and Manak Tabra (9.8 mn sheets capacity).

Over the years, the company has significantly scaled up its capacity. Stylam’s manufacturing capacity stood at 4.8 million sheets p.a. in FY12 which increased to 6.4 million in FY14, 11 million sheets in FY18 and then to the current capacity of 14.3 million sheets p.a. in FY20.

Looking Beyond Laminates, Creating a Market for Solid Surfaces

Stylam entered into the manufacturing of acrylic solid surface panels through the amalgamation of Golden Chemtech Limited (Associate Company) with the company in FY18 (more on this amalgamation later). The global acrylic solid surface market was estimated at $2 billion and is growing at 5-6%.

Solid surface is made of acrylic resin, polyester resin or a combination of the two that is then combined with filler, color pigments and acrylic chips. It is most commonly known as “Corian” which is, in fact, the brand name of the solid surface product manufactured by DuPont. These surfaces can be readily cut, routed and sanded like wood and formed into countertops, shower walls, external cladding for buildings, signage and furniture where non-porosity and infrequent maintenance are highly valued.

In addition to being workable like hard wood, it can be heated and thermoformed into curved and molded shapes. It can also be printed on using dye-sublimation techniques that deposit the ink just below the surface so the image becomes permanent. Solid surface find application in kitchen and bath countertops, commercial food preparation areas, tables and desktops, reception desks, workstations, window sills, laboratory bench tops, bar tops, and flooring.

Stylam offers solid surfaces under two brands, Granex and Marvella. It is an import substitution play which will benefit from growing demand for aesthetically designed homes and offices and growth of real estate industry in India.

Granex – It is best used in commercial space like healthcare, food service, hospitality, office buildings and schools along with designed home spaces.

Marvella – It is created especially for application as kitchen tops and cladding, bathroom vanity counter, wash counter, bathroom cladding, tabletops, windowsills and frames, decorative cladding and false ceiling usage.

Correcting a Past Capital Allocation Folly

During FY11, even when the laminates business was still sub 100 crores in terms of revenues, the company decided that it should foray into IT/BPO sector. The plan was to buy land, construct a building, lease out the building for IT/BPO operations while keeping some part of it with the company for marketing and other corporate purposes. All this while the company was continuously adding capacities under laminates division.

So, the company purchased land of 5520 sq. mtr in Panchkula Technology Park in Haryana in FY13 and started construction of the building and in FY17, an eight-storey building with two basements was ready for service. However, by that time, the fortunes of the Indian BPO services had turned and there were few takers for the project. The industry was witnessing slowdown and Stylam had to brush aside the idea of leasing out the premises as the demand just wasn’t there.

The intention then turned towards selling off the building but even a buyer was hard to come by and the building sat there in the books as an “Investment Property” until FY19. The company was finally able to find a buyer for the building during FY20 and the building was sold for 33.7 crores. It had to book a loss of 15.2 crores on the sale in FY20 (under exceptional items).

Analyzing the Amalgamation of Golden Chem-Tech Ltd

The company filed a scheme of amalgamation for amalgamation of Golden Chem-Tech Ltd (GCL) with Stylam Industries in 2017. GCL was a promoter group entity (promoted by Jagdish Gupta, MD of Stylam) engaged in the manufacturing of adhesives and Paint Binder. In 2016, the company diversified into manufacturing of Solid Acrylic Surfaces. The adhesives business vertical was very competitive and the product was also a low margin one. So, the company closed down its Adhesives operations and started focusing on manufacturing of Solid Acrylic Panels.

The objective of the amalgamation was to consolidate the company’s presence in building material industry under one roof. The scheme was approved by the company on August 28, 2017. As per the scheme, Stylam issued ~3 lakh shares to the shareholders of GCL, all of whom were also the promoters of Stylam. Based on the closing price of Stylam’s shares on Aug 28, 2017, the amalgamation implied a transaction value of ~12 crores.

The sales of GCL were continuously deteriorating. If we annualize the PAT of GCL for H1FY18, it results in a bottomline of 0.48 crores for FY18 which implies a PE of 25x while the book value of 7.3 crores as of H1FY18 implies a P/B of 1.6x for the transaction. Not cheap, but necessarily exorbitant either. One can, however, question the decision of starting the manufacturing of acrylic surfaces through GCL rather than Stylam for which acrylic panels were actually an adjacent market to laminates.

Do Recent Exits Spell Trouble?

Stylam has seen a fair number of resignations at the CS and CFO levels in past 1.5 years to warrant attention.

Shrishty Chaudhary was appointed as the CS and Compliance Officer of the company in Jan 2020. She resigned from her position in March 2021. After that Karan Mehra was appointed in her position in May 2021 but resigned in Sept 2021. In Jan 2022, Sanjeev Kumar Sehgal has been appointed as CS and Compliance Officer. In Oct 2021, the CFO of the company, Sanjeev Vaid resigned from his position and the company appointed Kishan Nagpal as the CFO in Nov 2021. The management has cited relocation problems after end the end of work from home as the reason for recent exits.

Similarly, the company has seen some resignations of Independent Directors in 2021. Sonia Goyal and Purva Kansal resigned from the Board as the Independent Directors in Jan 2021 and March 20221 respectively, citing preoccupation elsewhere as the reason.

Further exits would warrant serious questions regarding the ability of the company to retain talents at the top level.

Financials

Sales have grown from 83 crores in FY11 to 476 crores in FY21 at CAGR of 19% while the last 5 years sales CAGR has been 12%. Stylam has shown YoY growth in topline in each of the last 10 years. The company is now aiming to double the sales by increasing capacity utilization by FY25.

EBITDA has grown at a CAGR of 37% over the last 10 years and 26% over the last 5 years. EBITDA margin tripled from 5% in FY11 to 15% in FY17 and further improved to 20% in FY21.

PAT has clocked a CAGR of 34%/35% respectively for last 10/5 years. Cash conversion has been healthy with last 10 years cumulative CFO/PAT at 141% while the median CFO/PAT being 114% over the last 10 years.

The fixed asset turnover has deteriorated over the years from a high of 4.6x in FY16 to 2.5x in FY21. This is due to significant investments in building capacities over the years which has led to faster growth in the denominator. Free cash flow has also been elusive due to the same reason. Inventory turnover has improved over the years from 4.2x in FY12 to 6.6x in FY21. Receivable days has deteriorated from around 55 days between FY12-17 to ~70 days beyond FY18.

Debt was a major concern for Stylam, even just a couple of years back. The company was highly leveraged with ~45% of total operating earnings (EBIT) between FY12-14 going to fund the interest expense and 25% till FY17. Debt/Equity was >2x till FY17 which was brought under control after that through raising of funds by preferential issue of shares to Lighthouse funds and then through the sale of the building in Panchkula in FY20. Currently the D/E has fallen to 0.2x and the company is aiming to become net debt free by the end of FY22. Going forward, the reliance on debt should reduce and Stylam expects to fund future capex through internal accruals.

ROE/ROCE have shown improvement over the years with FY21 ROE/ROCE at 21%/23% respectively.

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