Midcap mania: Stylam Industries Q1 profit up 46%, beats expectations

Well, before I tell you about Stylam Industries Limited,  just wanted to mention that at a recent conference held in Mumbai investors had flocked to meet the company's management which made me curious.

Stylam Industries manufacturers high-pressure decorative laminates used in home and industry segments and has a manufacturing capacity of 11 million sheets which is  smaller than market leaders  Merino and Greenlam but larger than Century Ply.

Brands under Stylam includes Cuboid (cubicles and Lockers), Viotouch (decorative ), Granex (solid surfaces) and Fascia (exterior cladding).

Dynamics of the Indian laminates market has been looking up post the implementation of goods and services tax (GST) as the country has a large market with nearly 35 percent of them are being unorganised.

The reason the stock came on our radar because of a strong showing in Q1FY19. The company has been a good performer in the past five years with sales compound annual growth rate (CAGR) of 20 percent and also since it could be a potential beneficiary of the rupee depreciation.

In Q1FY19, its net profit jumped by 46 percent at Rs 7 crore and exports account for 65 percent of sales.

In the past two years after doubling the capacity, the company has started deleveraging balance sheet as its net debt came down to Rs 117 crore from Rs 184 crore in FY17 and its debt-equity ratio has dropped to 0.8 percent against 2.4 percent a year ago.

The company managed to achieve this through a Rs 51 crore preferential share issue from Sachin Bhartiya led Lighthouse Funds in May 2017. The company has also been trying to sell its non-core asset which consists of a building in Panchkula Technology Park.

Now assuming the company delivers a net profit of approximately Rs 40 crore to Rs 50 crore in the coming year we arrive at a market capitalisation of Rs 800 crore to Rs 1,000 crore (assuming a 20x price-to-earnings ratio). That is a little higher than the current market capitalisation of Rs 645 crore.

Though things appear pretty hunky-dory there are various questions that can be raised.

(a) Promoter shares pledged.

Promoter group holds 52.7 percent in the company but 41.12 percent of this holding is pledged.

(b) The company's profit in the past five years has grown at a 38 percent CAGR but still, no dividend has been paid since 2010.

(c) Employee costs down by 7 percent.

Also in these competitive times, the company has delivered a 40 percent growth on the topline but its employee costs are down 7 percent year-on-year which is quite eye-catching.