Uniply Industries Ltd Management Discussions.
INDIAN ECONOMIC OVERVIEW
India retained its position as the sixth-largest economy and the fastest-growing trillion-dollar economy through a major part of the year under review (except in the last quarter of 2018-19). After growing 7.2% in 2017-18, the Indian economy is estimated to have grown 6.8% in 2018-19 as per the Central Statistics Office release, May 2019.
The principal developments during the year under review comprised a sustained increase in per capita income, decline in national inflation, steadying interest rates and weakened consumer sentiment from the second half of the financial year. The weaker sentiment was on account of a large non-banking financial institution announcing its inability to address liabilities. This affected credit expansion, financial markets and consumer sentiment, which in turn resulted in slower GDP growth that declined to 5.8% by the fourth quarter of 2018-19, the slowest growth in a single quarter in years.
In 2018, the country attracted ~US$ 42 billion in FDI inflows as per the World Investment Report, 2019. Driven by strong policy reforms, India witnessed a 23-notch jump to a record 77th position in the World Banks latest report on the Ease of Doing Business that captured the performance of 190 countries.
The commencement of the US-China trade war opened new opportunities for India, particularly in the agro sector. Inflation (including food and energy prices) was estimated at 2.6% on an annual basis, one of the lowest in years and well below the Reserve Bank of Indias medium-term target of 4%. The rupee rebounded after touching a low of Rs.74.45 to a dollar to close the financial year at Rs.69.44. During the fiscal under review, the Indian Government continued to invest deeper in digitisation, renewable energy capacity generation and infrastructure building.
(Source: CSO, Economic Times, PIB, World Bank, Times Now)
The Indian economy appears to be headed for sustained sluggishness in 2019-20. Even as a new government is expected to remain pro-investment and pro-business resulting in a larger spending on infrastructure build-out, an economic revival appears some quarters away. The long-term outlook of the country appears to be positive on account of the various economic reforms, increasing aspirations, sustained consumption momentum and a national under-consumption across a range of products appearing to correct itself.
(Source: CSO, Fitch, Economic Times, Business Standard, IBEF, Business Today, India Today, Money control)
INDIAN BUILDING SOLUTIONS AND INTERIOR FIT-OUTS MARKET OVERVIEW
Spurred on by a gradual growth in demand for commercial real estate, the interior turnkey solutions market has seen substantial growth over the years. Interior turnkey solution is the go-to choice for offices which give the customer an upper hand owing to cost-efficiency and time efficiency. The year 2018 was a landmark for Indian office space absorption standing at an all-time high of 45 million sq. ft., clocking a growth of 5% y-o-y across nine leading cities. This growth in the office space sector has translated into greater demand for turnkey solutions across the country. The modern-day furniture is specially designed to address the needs of todays employees, invoking collaboration, flexibility, and mobility. Nowadays, workspaces are implementing flexible seating, open collaborative spaces, standing workstations, and privacy pods and lounges, among others. The dynamism and growth momentum in the Indian office realty segment provides ample headroom for growth of office interior fit-out segment across the country. Buoyed by this optimism, the office fit-out market in India is expected to reach US$ 2.6 billion by 2020, clocking a CAGR of 10% between 2015 and 2020.
On the other hand, the residential sector has also started adopting the concept of turnkey solutions. The size of the Indian furniture market was pegged at US$ 21 billion in 2018 and is projected to grow to more than US$ 31 billion by 2024, clocking a CAGR of around 7% between 2019-2024, enabled by the growing real estate and hospitality industry. Increasing government investments directed towards infrastructure development coupled with rising demand for premium furniture from certain consumer sections, will also boost the furniture market. Furthermore, rising disposable income is influencing expenditure on a comfortable lifestyle, a part of should provide growth opportunities for furniture market players over the foreseeable future.
The office furniture market in India is fragmented with the unorganised sector dominating the market with a control over more than 75% of the market. The organised sector has to make do with the rest ~25%. However, even the organised sector, which was earlier under the control of Indian companies, of late has seen the entry of many foreign players who are flooding the market with innovative designs, giving a push to the demand for modular offices. The market for furniture, especially office furniture, also depends on the supply and absorption of commercial real estate and vacancy levels of existing spaces. The market for office facilities in India exhibits huge potential drawing in foreign players planning to venture into this industry. Currently, office space occupies ~65% of the Indian facility management services market, the high share reflecting increased commercial activities in the metropolitan areas such as Delhi-NCR, Mumbai, Chennai, and Bengaluru. The home decor market is expected to garner US$ 664 billion by 2020, registering a five-year CAGR of 4.2%.
(Source: Allied Market Research, AB News Wire)
Real estate revival: During 2018-19, the real estate sector of India revived on the back of increasing growth in the residential segment. The biggest impetus for the sector came from the government project of Housing for All by 2022 and the development of 100 Smart Cities which is expected to boost the demand for furniture industry. The rise in demand for residential realty is as substantial as 20% and the home furniture market is expected to witness the fastest growth over the next five years, followed by the office and institutional segments.
Absorption of o_ce spaces: During 2018, India recorded an all-time high office space absorption of 45 million sq. ft., registering a growth of 5% y-o-y across nine leading cities, providing the interior fit-out and furniture market a much needed boost.
Favourable demographics: With a population of 1.35 billion people whose median age was 27 years in 2018, India is expected to become the youngest country by 2020. The demand for interior fit-outs being higher among the young populace, India has huge headroom of growth in this sector.
Tourism boost: An anticipated increase in the tourism and hospitality sector is also expected to catalyse demand for interior fit-outs. Foreign Tourist Arrivals (FTAs) in the country grew 14% to 10.4 million with a consequent growth in Foreign Exchange Earnings at 20.6% to US$ 28.7 billion in 2017-18. However, the sector witnessed a slowdown in 2018-19 and though the FTA in 2018-19 stood at 10.6 million, the growth rate of FTAs declined temporarily to 2.1% in 2018-19.
EMERGING FURNITURE TRENDS
Cost-effective: Space-saving furnishing solutions are extremely cost-effective, using bare minimum, yet essential, raw material to make robust products. This reduces the overall production cost and makes it more affordable for people living in cities.
Practical: Space-saving furniture options often have more practical utility than traditional furniture. For instance, a traditional dining table may have a wooden or a glass top which becomes extremely hard to move and requires higher maintenance costs. However, space-saving options such as a foldable bed or wall dining table create extra utility as they can be used for more than one purpose.
More volume in less space: The whole point of space-saving furniture is to be able to do more in less space. Hostels and hospitals have started opting for bunk-beds which not only saves space but also accommodates more people, generating more revenue. Similarly, educational institutions have started opting for foldable benches, chairs or tables to create space whenever needed.
Mobility: Shifting of traditional furniture while changing houses or offices is challenging. Space-saving furniture is often put together with nuts and bolts that can be assembled or de-assembled, as and when needed. It has the added advantage of saving the furniture from damage and increasing its durability, thus generating a better return on investment in relation to traditional furniture.
INDIAN HOUSING SECTOR REVIEW
The Indian residential market was going through a bearish phase in 2017 owing to the adverse impact of demonetisation, Real Estate (Regulation and Development) Act (RERA) and implementation of the Goods and Service Tax (GST), the combined effect of which translated into a decline in residential sales and launches across the country in 2017. Happily enough, with the impact of these policy initiatives subsiding in 2018, new launches and sales saw a growth of 15% and 13% y-o-y respectively. Though a meltdown in the NBFC sector in the second half of 2018 resulted in a fund crunch for the developer community, the Government of India took some proactive steps to ring-fence the NBFC liquidity crisis coupled with the GST rate cuts on housing units to spur on demand in the housing segment.
In terms of segments, mid-end projects are estimated to garner the major chunk of supply in 2019, followed by the affordable segment (owing to government incentives and increase in end-user demand). Furthermore, an uptick in launches is expected to be witnessed in Bangalore, Mumbai, Hyderabad and Chennai, whereas launches in Kolkata and Pune are expected to be stable.
Increasing population: The population of India is around 1.35 billion people and India is expected to become the most populous country in the world by 2025, catalysing housing demand across the country.
Rising income levels: The per capita income in real terms (at 2011-12 prices) during 2018-19 is estimated to attain a level of Rs.91,921 compared to Rs.86,668 in 2017-18, creating an expectation of driving the countrys consumption. Increasing urbanisation: India is the second largest urban community in the world after China. The estimation is that by 2019-20 35% of Indias population will be living in urban centres contributing 70% to 75% of Indias GDP. The process of urbanisation is expected to continue to bring in half of Indias total population in the urban areas by 2049-50.
Credible players to enter affordable housing: An increasing number of large-scale developers are entering the affordable housing sector owing to government incentives, increased funding availability on account of this sector enjoying the status of infrastructure, and rising demand from buyers. Most of the launches in this segment are expected to be concentrated in the peripheral locations of Tier I, Tier II and Tier III cities, where the sizes of the units are comparatively bigger.
Increasing investment in land: Another reason for expecting a substantial growth in demand in the housing sector in the near future is increasing land transactions by developers in 2018, accounting for 34% of overall investments in 2018 compared to 28% in 2017. The expectation for an increase in demand for housing is buttressed by the fact that more than half of the land deals witnessed in 2018 were for residential projects in cities like Bangalore, Mumbai and Chennai.
Online platforms to enhance sales: Internet penetration in urban India is observed to be more than 60% today and the number of mobile internet users is estimated to touch 627 million by the end of 2019, leading to a rapid increase in channel partners tapping this online platform for sales.
Credit Linked Subsidy Scheme (CLSS): The CLSS for the Middle Income Group (MIG) was announced on December 31, 2016 and has been extended till March 2020 for first time urban home buyers who have an annual income between Rs.6 lakh and H18 lakh. For the MIG I category (consists of individuals with an annual income of Rs.6-12 lakh) an interest subsidy of 4% is provided on a loan of upto Rs.9 lakh. For the MIG II category (consists of individuals with an annual income of H12-18 lakh) an interest subsidy of 3% is given on a loan of upto H12 lakh.
Encouraging policies: The National Urban Housing Fund was kickstarted with an outlay of Rs.60,000 crore. The Indian Governments vision is to provide Housing for All by 2022 is expected to give the housing segment the much needed boost.
AFFORDABLE HOUSING BOOST
The Union Budget 2019 is optimistic for the sector as it contains ample opportunities for the home buyers to invest. Raising the exemption limit for the general category of individual taxpayers, should increase the buying capacity of the potential home buyer making the goal of Housing for All by 2020 a more likely possibility.
Extending the benefits under Sec 80 (I) BA for one more year for all housing projects approved till the end of 2019-20 is expected to further boost demand in real estate industry. Sectors related to and dependent on real estate, such as paints, cement and ceramics, steel among others, will also stand to gain.
People earning up to Rs.5 lakh will get a full tax rebate. However, if one invests in specified government saving schemes, the tax exemption extends to Rs.6.5 lakh. This can have good implications for affordable housing, but not really for the mid-income housing. The Central Government has also extended the benefit of tax exemption for developers by one more year up to 2020, which too is expected to give a push to the affordable housing segment.
The infrastructure and the construction industry received notable sops during the Interim Budget. These benefits should indirectly benefit the real estate sector. Significant boost was also provided for rural development by sanctioning H19,000 crore for 2018-19.
The GST rate payable on affordable homes, with effect from April 2019, came down from 8% to 1%, and all other residential properties outside the affordable segment attracted 5% GST instead of the 12%, earlier levied.
1.53 crore houses were constructed under Pradhan Mantri Awas Yojana (PMAY) in the last five years. The Central Government is focused on boosting ease of living. It aims to build next-gen physical as well as social infrastructure for US$ 10 trillion economy. This is expected to boost quality of living in Indian cities and towns. The Interim Budget has continued the thrust on improving and enhancing infrastructure, which is the backbone of any developing country. This includes outlays for railways and roads among others, to boost connectivity across the country, especially that between the Tier II and Tier III cities, and the big cities.
In February 2019, the government relaxed the upper limit for the area of affordable housing. Following the revision, affordable housing could include units upto 60 sq. m. in metropolitan cities with a value up to Rs.4.5 million. For non-metropolitan cities, this was revised to 90 sq. m. per unit with value up to Rs.4.5 million under the affordable housing category.
(Source: The Hindu, Provident Housing, Fortune, LiasesForas, DNA, CBRE)
Slowdown in the downstream sector could impact offtake of the Company. Mitigation: On the back of a recovering real estate sector, the demand for panel products is expected to grow. Housing for All is also receiving traction and is expected to drive demand for panel products. Further, increasing office space consumption is expected to drive demand for office furniture in the country.
Growing competition could have an adverse bearing on the Companys profitability.
Mitigation: Headquartered in Mumbai with core markets in Delhi, Pune, Bangalore, Chennai, Hyderabad and Kolkata, the Company has robust presence spread across the entire country. On the back of strong quality coupled with consistent performance, the Company has fortified its position in the market. With Markab acquiring a majority stake in the Company, Uniply is expected to foray into the global market as well.
The Company may not be able to fund its capex requirements in a cost-effective manner.
Mitigation: The Company significantly de-leveraged its debt-equity ratio to 0.48 during 2018-19 from 0.77 during 2017-18, while the Companys interest cover stood at a robust 2.51x as on 31st March 2019.
An inability to stay abreast of the latest styles can result in lowered sales. Mitigation: The Company has a design and build team in play that is constantly observing market trends and developing products as per ever-changing market trends. This also gives the Company an upper hand over sectoral peers.
ABOUT THE COMPANY
In 2016, Uniply is headquartered in Mumbai with a presence across India in major cities such as Delhi, Pune, Bangalore, Chennai, Hyderabad and Kolkata. The Company comprises two business interior wood products and construction.
The interior wood products business enjoys an international presence with offices in Dubai and Kuala Lumpur with extensive certifications (ISO 9001:2008, ISO 14001 and OHSAS 18001). The Company is driven by a vision of creating innovative interiors and robust construction. The interior wood products business comprises 470 architects and interior designers and a strong in-house engineering team.
Uniply reported project wins worth Rs.638 crore in the affordable housing segment. The Companys construction business is executing two turnkey projects each in Telangana and Karnataka (design-to-build). As these projects are still in a nascent stage, revenues for the year ended 31st March 2019 stood at Rs.228.65 crore but are expected to grow in the current financial year.
FINANCIAL REVIEW, 2018-19
Consolidated income for the year increased to Rs.504.80 crore compared to Rs.404.03 crore in the previous fiscal.
Consolidated profit before tax for the year was Rs.59.20 crore compared to Rs.54.41 crore in the previous fiscal.
Consolidated profit after tax for the year was Rs.39.43 crore compared to Rs.32.80 crore in the previous fiscal.
INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY
The Company has implemented proper and adequate system of internal control commensurate with the size and nature of its operations to provide reasonable assurance that all assets are safeguarded, transactions are authorised, recorded and reported properly, applicable statutes and corporate policies are duly complied with.
The Company recognises people as the primary source of its competitiveness and continues to focus on people- development by leveraging technology and promoting a continuously learning human resource base to unleash their potential and fulfill their aspirations. The Company recruits judiciously through industry contacts, newspaper advertisements and consultancies.
QUALITY MANAGEMENT SYSTEM
The Company continues to lay a keen emphasis on qualitative excellence to ensure total customer satisfaction. The Companys mission is to provide customers with products that match international standards and surpass their expectations.
The above statements are as perceived by the Directors based on the current scenario and the input available. Any extraneous developments and force majeure conditions may have an impact on the above perceptions.
The Directors place on record their deep appreciation to employees at all levels for their hard work, dedication and commitment. The enthusiasm and unstinting efforts of the employees have enabled the Company to emerge as a leading sectoral player. The Board places on record its appreciation for the support and co-operation your Company has been receiving from its suppliers, redistribution stockists, retailers, business partners and others associated with the Company as its trading partners. The Company looks upon them as partners in its progress and has shared with them the rewards of growth. It will be the Companys endeavour to build and nurture strong links with other associates in the trade based on mutuality of benefits, respect for and co-operation with each other, keeping in mind that it is ultimately consistent with consumer interests. The Directors also take this opportunity to thank all investors, clients, vendors, banks, governmental agencies and regulatory authorities and stock exchanges for their continued support.
|For and on behalf of the Board of Directors|
|Place: Chennai||Keshav Narayan Kantamneni|
|Date: August 14, 2019||