National Plywood Industries Ltd Management Discussions

Indian economic overview

India emerged as the sixth-largest economy in the world and retained its position as the fastest- growing trillion-dollar economy for a major part of the year under review. However, after growing by 7.2% in 2017-18, the Indian economy grew at 6.8% in 2018-19 as per the provisional second advanced estimate of the Central Statistics Office.

The principal developments during the year under review comprise a sustained increase in per capita income, decline in national inflation, steadying interest rates, and weakened consumer sentiment starting 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.

In 2018, India attracted foreign inflow of ~US$ 38 billion while also making a 23-notch jump to a record 77th position in the World Banks 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 pegged 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 to RS.69.44 against the dollar on 31 March 2019 after having touched a low of RS.74.45 in the year under review. During the fiscal year under review, the Indian Government continued to invest deeper in digitalisation, renewable energy capacity generation and infrastructure building.

Outlook

Indias markets are expected to remain in a state of slowdown through 2019-20 even as the medium-term outlook appears better and the long-term outlook favourable.

Indian plywood sector overview

The size of the Indian plywood sector was pegged at US$ 4.2 billion in 2017 growing at a CAGR of 5% since 2010. The segment is projected to reach US$ 5.3 billion by 2023.

Plywood is made of three or more thin layers of wood bonded together with an adhesive. To reduce shrinkage and boost the strength of the finished piece, each layer of wood, or ply, is oriented with its grain running at right angles to the adjacent layer. Generally, plywood is pressed into large and flat sheets used in building construction.

India has always been a predominantly plywoodconsuming country, as evidenced by the fact that, in the Indian market, the use of plywood and other panels (MDF, particleboards) stands at a ratio of 90:10. This Indian ratio of use is quite the reverse of that in the developed and mature markets, where it is 10:90.

Additionally, Indian plywood industry is fragmented with ~75% of the market share marked by the unorganised sector, while the organized sector accounts for 25%.

Furniture sector

With the Indian furniture markets contribution of around 0.50% of the total GDP the segment was estimated at US$ 32.61 billion in 2018 and projected to grow at a CAGR of 13.38% from 2018-2023 to US$ 61.09 billion by 2023.

The Indian furniture market is broadly divided into the residential and commercial segment. The residential segment accounted for US$ 20.65 billion in 2018 and is projected to grow at a CAGR of 14.16% from 2018-2023. The wooden furniture segment which normally dominates the furniture market, continues to do so and is expected to grow at a CAGR of 11.32% during 2018-2023. The luxury furniture market is expected to reach US$ 27.01 billion by 2020, registering a five-year CAGR of 4.1%.

The Make in India campaign of the Government of India focuses on the objective of achieving qualitative excellence within the country. This has resulted in attracting international capital and technology investments in India. The FDI inflow under this scheme has grown by 60% and resulted in an increased employment of skilled workers. The expectation is that Indias furniture and furnishings industry is expected to employ 11.3 million skilled workers by 2022.

(Source: India Wood, World Bank, National Skill Development Council, National Sample Survey Office, Businesswire, Goldman Sachs)

Office furniture market

The improvement in the economic situation and steady growth in the industrial and service sectors resulted in an increasing demand for more office space. Subsequently, the office furniture sector in India has reached US$ 2.5 billion in size, accounting for ~17% of the total Indian furniture market.

(Source: Business Wire)

Laminates and veneers

Veneer sheets and decorative laminates are popular for being used as furniture surface materials or wall panelling. This helps in enhancing the aesthetic appeal of solid wood used in making furniture, doors, and architectural structures. Decorative laminates have become the most important part of the interior surfacing solutions segment.

The size of the laminates and decorative veneers market in India stood at RS.7,000 crore with the unorganised players accounting for a ~30% share of the market in 2015 compared to 40% in 2013. This reflects a clear and gradual shift towards the organised market due to the emergence of innovative product mixes and lowered input prices, which have resulted in higher margins for laminates and decorative veneer companies. It is reported that ~30% of the countrys laminates are supplied by Gujarat from units based in Ahmedabad and Morbi.

(Source: Business Standard, Economic Times)

Growth drivers

Economic growth: The GDP and economic reform programs of the Central Government indicate recovery. Consumer price inflation is expected to remain subdued; interest rates could be steady and global crude oil prices could remain stable. Besides, factors like bank recapitalisation, rural consumption revival and the Insolvency and Bankruptcy Code reform could strengthen the economy.

Rising income: Indias per capita GDP has increased from Rs.1,11,782 in 2017-18 to an estimated Rs.1,26,406 in 2018-19, with a y-o-y growth rate of 10%. The increased disposable incomes catalysed the consumption.

Urbanisation: India is arguably the fastest urbanising country. In FY2018, 34% of Indias population was living in urban areas (3% increase since the 2011 census) which is anticipated to reach 36% by CY20 compared to 51.3% urban population in China in 2011.

Working population: Indias urban middle-class workforce (over US$ 1 1,000 annual income) stands at 27 million or 2% of its population with a large headroom for growth and potential for accelerated consumption.

Growing middle-class: Indias wealth has grown 9.2% per annum since 2000 after accounting for a 2.2% annual population growth. This rate of wealth accumulation is higher than the global average rate of 6% and indicates strengthened consumption.

Real estate: The growth in the plywood industry is highly correlated with the growth of the real estate market. The housing sector in India contributes around 5-6% to the GDP and the real estate sector is anticipated to reach US$ 1 trillion by 2030. This growth in the real estate sector is mainly reinforced by increased Government support. The Pradhan Mantri Awas Yojana (PMAY) was introduced in June 2015 to provide affordable housing to the urban and rural poor. The mission is to provide Housing for All by 2022. Under this scheme, affordable houses will be built in select cities and towns using ecofriendly methods. In the Credit Linked Subsidy

Scheme, PMAY beneficiaries are eligible for interest subsidy if they avail a loan to purchase or construct a house.

Growth in the replacement market: The growth in the replacement market will also be one of the driving factors for the plywood industry as people would strive for a better standard of living with their per capita income rising. Currently, the replacement cycle for furniture is estimated to be eight to ten years, but this number is likely to come down to five to seven years. This would ensure that the replacement market grows at a steady pace.

Consumer preference: Consumers are much more trend-conscious today. The introduction of new designs and a diverse product range of furniture have therefore helped in creating new demand among the consumers.

Smart Cities: The Government of India launched the Smart Cities Mission in June 2015 to promote sustainable and inclusive cities that would provide core infrastructural facilities and offer clean environment through the application of ‘smart solutions.

Growing e-commerce sales: Over the past years, buying furniture online has become a common trend. Improved logistics, reduction in shipping costs for larger items and the availability of a gamut of choices has caused online furniture buying to surge. On the supply side, they have provided organised platforms to suppliers by bringing them onto a well-managed marketplace or by creating private labels.

(Source: Census of India 2011, MoSPI, Technopak Analysis, The Economic Times Televisory, IMARC, Ply Reporter, Credit Suisse Global Wealth Report)

SWOT analysis of the plywood industry

Strengths	Weaknesses	Opportunities	Threats
• One of the fastest- growing industries in the world • Semi-skilled labour is required, which is abundantly available in this region	• Fluctuation in prices of raw material	• Growing per capita income, growing urban population and increasing number of nuclear families boosting furniture and construction industries	• Restricted access to limited raw material especially for face veneer
			• Tight control on raw materials in neighbouring countries
• Strong customer knowledge and acceptability			• Competition from the unorganised sector and their counterfeiting of branded products
• Massive role in construction industry across economic levels	• Too many players in an industry within which the product is more of a standardized commodity - relative lack of USPs leading to relative lack of brand loyalty	• Possibility of introducing more value-added products to widen the portfolio	• Availability of cheaper substitutes of the products
• No conceptual wastage - apart from 4-8% loss in timber, all raw material finds a use	• Too many unorganized players conducting aggressive deforestation without significant government intervention, leading to a stress on raw material availability	• Development of better technology and superior machinery for higher yields, improved products and even less wastage	• Shift in consumer preferences towards new age, sustainable products

Risk management

Economic risk: The industry could be impacted due to slowdown in the economy.

Mitigation: The Indian economy is expected to remain sluggish following a slowdown in growth to 6.8% in 2018-19, a 40 bps decline in growth over the previous year. Although this sluggishness could test the plywood sector, the medium and long-term outlooks appear more favourable. The key would be to ride this tide of economic slowdown until consumer sentiments are revived.

Industry risk: The off-take could be affected by a slowdown in downstream sectors

Mitigation: The demand for panel products is expected to grow due to two major reasons: one, the growing demand in the real estate sector and two, increasing support for the Central Governments Housing for All by 2022 plan. Furthermore, the demand for office furniture in the country is also expected to rise as a result of increasing office space consumption.

Innovation risk: The lack of introducing new and innovative products by the Company could impact the business in long term.

Mitigation: With excellent quality plywood in India, National Plywood has always gained its respect in the market through the introduction of new and innovative products. The strength of the Company lies in reinforcing outstanding product quality and committing to use only the best raw material. The Company has already introduced new brands of economy range plywood and has been tying up with several companies (TPI Polene, LG Hausys) to add new products to its marketing portfolio.

Cost risk: The Companys profitability could be affected due to fluctuating input material costs.

Mitigation: In order to rationalise operational costs, the Company has been consistently de-bottlenecking its units. Over and above strategic de-bottlenecking, the Company has access to a large quantity of tropical sustainably- grown timber due to its locational advantage with factories in northeast India.

Employee risk: Business growth could be adversely impacted due to high attrition rate and inability to attract skilled employees.

Mitigation: The Company treats its employees as its assets. Most of the employees have been associated with the Company for more than 5 years.

Competition Risk: The Companys profitability might be affected due to growing competition.

Mitigation: The Company has favourably positioned itself to capitalise on impending sectoral upturn through consistent outperformance and strong quality.

Quality risk: Failing to gain market acceptance might be another risk for the Company.

Mitigation: Leveraging cutting-edge technology and high-quality products, the Company sustains strong relationships with key customers. The Company is also planning a significant, targeted advertising campaign in the coming years, especially for promotion of its new sub-brands.

Logistics risk: A loss in sales could be faced due to ineffective distribution and reach.

Mitigation: The Companys products are available across the country, supported by a widespread network of dealers.

Environmental risk: Inefficiency in complying with environmental norms can lead to censure.

Mitigation: The Companys products comply with all relevant sectoral norms and guidelines issued by the Central and State Pollution Boards.

Financial review Sales

Revenues during the year stood at RS.39.82 crore, decreasing by 5.6% as compared to RS.42.16 crore in FY2017-18.

Interest and finance costs

Net interest and finance costs decreased by 23% during the year due to repayment of institutional borrowing.

Profit before tax

The Company registered a profit before tax of H0.94 crore compared to H0.44 crore in the previous year.

Profit after tax

The Company registered a profit after tax of H0.72 crore compared to H0.44 crore in the previous year.

Key financial ratios

Ratio	FY2018-19	FY2017-18
EBITDA/ Turnover (%)	0.39	(2.25)
EBITDA/ Net interest	0.79	(3.64)
Debt Equity Ratio	(6.70)	(2.38)
Return on equity (%)	9.80	1.10
Book value per share (Rs)	(2.98)	(67.91)
Earnings per share (Rs)	0.45	0.74

Human resources

The Company believes that its intrinsic strength lies in its dedicated and motivated employees. As such, the Company provides competitive compensation, an amiable work environment and acknowledges employee performance through a planned reward and recognition programme. The Company aims to create a workplace where every person can achieve his or her true potential. The Company encourages individuals to go beyond the scope of their work and undertake voluntary projects that enable them to learn and devise innovative ideas.

Internal control systems and their adequacy

The internal control and risk management system is structured and applied in accordance with the principles and criteria established in the Corporate Governance Code of the organisation. It is an integral part of the general organisational structure of the Company and involves a range of personnel who act in a co-ordinated manner while executing their respective responsibilities. The Board of Directors offers its guidance and strategic supervision to the Executive Directors.

Cautionary statement

The statements in the ‘Management Discussion and Analysis section describing the Companys objectives, projections, estimates and prediction may be considered as forward looking statements. All statements that address expectations or projections about the future, including but not limited to statements about the Companys strategy for growth, product development, market positioning, expenditures and financial results are based on certain assumptions and expectations of future events. The Company cannot guarantee that these assumptions and expectations are accurate or will be realised. The Company assumes no responsibility to publicly amend, modify or revise any forward-looking statement on the basis of any subsequent developments, information or events.