Stylam Industries Ltd Management Discussions.

Economy - India

Indias economic growth in 2016-17 didnt seem as wasnt encouraging. The Central Statistical Organization of the Government of India has estimated Indias real GDP growth for FY2017 at 7.1%. While it is better than all developed countries and most emerging markets including China. However, it is not as good as the 7.9% GDP growth achieved in FY2016. Qualitatively, the results were similar when measured in terms of gross value added (GVA) at constant prices. Real GVA growth for FY2017 is estimated at 6.7% versus 7.8% in FY2016. There are three main reasons for this deceleration of growth.

The first is insufficient investments which translate to additional income and employment. Gross fixed capital formation (GFCF) for FY2017 as a share of GDP has steadily fallen: from 31.7% in FY2015 to 31.1% in FY2016 to a low of 29.2% for FY2017.

The second has to do with the substantial overhang of non-performing loans across the banking system, especially the public sector banks. This has significantly reduced the banks appetite for making large term loans, without which there can be no investment-led growth.

The third reason is related to the temporary effects of demonetising of Rs.500 and Rs. 1,000 notes, which came into effect on 8 November 2016. Although the third quarter estimates (for October- December 2016) show no appreciable dip in either real GDP or GVA, there is no doubt that removing over 86% of the value of currency in circulation and substituting it with a slower injection of new notes created demand and cash constraints throughout the economy. It remains to be seen what the overall effect of this will be on growth for the second half of FY2017.

For FY 2017-18, growth is estimated to pick up to 7.4% levels. There is an expectation of stable to slightly positive inflationary pressures due to pick-up in economy as well as impact of seventh pay commission. It is widely expected that GST implementation in FY 2017-18 would auger well for economic growth. Economists estimate potential long term GDP growth impact at 2-4 percentage points attributable to GST.

There is a gradual revival being seen in the construction sector. While investments are still subdued due to excess capacity across sectors, it is expected that a prolonged period of controlled inflation, a stable government policy and steadily improving per-capita income would improve consumption and lead to a more sustained growth in the range of 7.0-8.5%.

Economy- Global

The International Monetary Fund projects the World growth to rise from 3.1% in 2016 to 3.5% in 2017 and further to 3.6% in 2018 as the long awaited cyclical recovery in manufacturing and trade is currently underway with support from buoyant financial markets worldwide. It expects growth to be broad based across the globe with developed economies expected to grow at 2.0% in 2017 (1.7% in 2016) and emerging & developing economies at 4.5% in 2017 (4.1% in 2016).

Among developed economies, United States of America is expected to grow at 2.3% in 2017 (1.6% in 2016), Euro zone is expected to retain 1.7% growth (same as 2016) and Japan at 1.2% in 2017 (1.0% in 2016). Amongst developing and emerging economies, China is expected to grow at 6.6% in 2017 and 6.2% in 2018 (6.7% in 2016), while Middle East (including North Africa and others) and sub-saharan Africa are expected to see a slower growth at 2.6% in 2017 (3.9% in 2016).

While the growth is expected to be broad-based, factors differ. For the US it is assumed expected to be an expansionary fiscal policy and real demand picking up, for Europe it is the largely improving domestic demand and cyclical recovery post downturn; for Japan it is stronger exports and for oil exporters of Middle East the factors are mainly growth in non-oil sectors which are not able to fully compensate for fall in growth due to oil exports. Brazil and Russia both are also expected to come out of recession.

Amidst this picture, it would be prudent to watch out for headwinds like increasingly inward looking policies across various economies, rate hikes in US and other economies and geopolitical risks. Nonetheless at the current juncture, the economic environment is largely pro-growth.

Laminate Industry

The market is mainly driven by increasing demand from housing market. The demand has increased due to growing significance of new construction industry. Plywood and laminates have become an indispensable part of big and evolving markets like real-estate market, furniture market, modular kitchen market as well as the flooring market. The increased demand in these markets triggers the demand in the plywood and laminates market. Apart from this, increasing urban population, rising per capita income and a gradual shift towards organized sector is also expected to provide a boost to laminate usage.

Risk Factors

Risk Nature of Risk Risk Mitigation Strategies
Industry Risk More than 70% of revenues are derived from the Exports, majority being Europe. Hence, any economic crisis that hits the developed economies is sure to have a significant impact on the Companys bottom line. Diverse market presence, which helps the Company to focus on different customers and geographies.
Positive growth drivers
Expert forecast on High demand from domestic market after governments focus on low cost housing and shift in consumer preference from un-organized to organized sector
Input Price volatility Risk There is a major threat with regards to the volatility in the price of raw material costs particularly chemicals The Company constantly strived to keep its production costs under control, by enhancing its productivity.
The Company has not entered into long term contracts with customer and if the increase is for the Laminate industry, the effect of the increase can be passed on to the customer
Currency Risk With significant exports and foreign currency liabilities, the Company is always exposed to global currency fluctuations. Company has followed a consistent policy of taking simple forwards on a rolling basis to protect its export realization. At any given point of time, exports are higher than its foreign currency borrowings, thereby giving it a natural hedge.
Interest Rate Risk The Company uses borrowings to fund its expansion and hence, has an incremental exposure to interest rate risk. Companys efficient financial planning, includes increasing equity with growing debt- levels, has ensured a healthy debt-equity ratio.
The expansion projects are funded by mix of loan portfolio and internal cash accruals.
Companys focuses on working capital management to reduce interest cost.