Rationale

The assigned rating favourably factors in the Greenlam Industries Limited's (GRLM) established position in the laminates industry in both the domestic and exports markets, supported by a strong brand and a wide distribution network. GRLM sells decorative laminates and veneers under the brand name, Greenlam, and Decowood, respectively, which are one of the leading brands in their respective segments. The rating also favourably factors in the healthy capacity utilisation of the laminate division in Q3 FY2021 and Q4 FY2021 at around 102% and 112%, respectively, supported mainly by the recovery in demand in the domestic market, which was adversely impacted in H1 FY2021 (capacity utilisation stood at 67% and in FY2021 the same stood at 87% against the previous year's 88%) due to the Covid-19 pandemic. ICRA notes that despite the region-specific lockdowns, the impact of the second wave of the pandemic is likely to be limited in Q1 FY2022, supported by higher export sales. The rating also favourably factors in the strong financial risk profile of the company, as reflected by Net debt/OPDITA and interest coverage of 0.7 times (previous year: 1.5 times) and 10.2 times (previous year: 8.2 times), respectively in FY2021. GRLM's operating margins were in the range of 13.0-13.6% during FY2017 to FY2020, except in FY2019 when the same stood at 12.5% owing to higher raw material prices. The operating margins improved to 14.4% in FY2021 due to improved operating efficiency, lower marketing and transportation expenses. With the sustenance of the operating margin expected in FY2022, supported by the improvement in volume growth, the recent price hikes undertaken in the laminate segment and no debtfunded capex plans, the debt coverage metrics are expected to remain strong. The company also has capex plans to the tune of Rs. 175 crore (of which Rs. 46 crore has been incurred for land acquisition) in its subsidiary, Greenlam South Limited, for setting up a new laminate manufacturing facility of 1.5 million sheets per annum in Nellore, Andhra Pradesh. This capex is likely to be fully funded by internal accruals and is expected to be commissioned by H2 FY2023. The rating, however, is constrained by the operating losses incurred in the engineering door and flooring segments over the last five years owing to low capacity utilisation. Further, these divisions are expected to incur operating losses in FY2022 as well. The company's operating margins are also exposed to volatility in key raw materials such as papers and chemicals. Melamine and phenol are the primary chemical requirements of GRLM. Phenol prices are highly volatile as it is a crude oil derivative. While the prices of phenol and paper increased significantly during Q3 FY2021-Q4 FY2021, GRLM increased prices to pass on the higher costs in Q4 FY2021 and Q1 FY2022. The rating is also constrained by the high working capital intensity of GRLM due to its high inventory holding period. The company maintains finished goods stock to cater to its 850 designs and 3,000-4,000 stock keeping units (SKUs) and considerable dependence on imported raw materials with a long lead time. However, the company receives a credit period of 90-180 days from its suppliers of various raw materials, which aids the funding of its working capital requirements. The company is also exposed to fluctuations in exchange rates, given a sizeable import of raw materials and export of its products. The risk, however, is mitigated by the prudent hedging policy adopted by the management to keep the unhedged foreign exchange exposure (Rs. 2.40 crore as on March 31, 2021, 1.3% of OPBIDTA) at a comfortable level. GRLM is also exposed to intense competition from large organised and numerous small unorganised players in the decorative laminates market. The Stable outlook on the long-term rating reflects ICRA's opinion that GRLM's credit profile will be supported by its dominant market position in the laminates segment, sustenance of its operating margins and a strong liquidity position.