Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Strong market position: MIL has a strong position among domestic laminate manufacturers. It is one of the largest organised players in India with well diversified customer base. The promoters have been in the business for around five decades and have set up a widespread distribution network comprising around 3,000 dealers. The group has a well-established brand namely, ‘Merino’ for decorative laminates, My Space’ for furniture and panel products and ‘Vegit’ for potato flakes, in the domestic as well as international segments. It generates about 70% revenue from sale in India and 30% from export markets. Close to 80% revenue come from institutional sales. With commencement and stabilization of the on-going capital expenditure (capex) for particle boards and pre-lam particle boards, MIL shall have the largest player in the segment.

Healthy financial risk profile: Strong networth of Rs 1161 crore as on March 31, 2022 is backed by steady accretion to reserve. Gearing and total outside liabilities to total networth ratio (TOL/TNW) ratios were comfortable at 0.25 time and 0.61 times for fiscal 2022. During fiscal 2022 to fiscal 2024, MIL has undertaken capex of around Rs 850 crore, funded by debt-to-equity ratio of around 1:1, for setting up manufacturing capacity of 2,47,500 CBM per annum for particle board and 1,78,000 CBM per annum for pre-lam particle board. Funds of around Rs 595 crore has been infused in fiscal 2023 and the capex is likely to conclude by June’23, keeping the capital structure in control. Debt protection metrics were robust, indicated by interest coverage and net cash accrual to total debt ratios of 15.8 times and 0.6 times, respectively, in fiscal 2022. As reliance on external borrowings have increased, timely stabilization of the on-going capex is critical for prudent debt protection metrices.

Weaknesses:

Exposure to intense competition and changes in demand in the real estate sector: The decorative laminates and panel boards industry is intensely competitive because of several unorganised and organised (Greenlam Industries Ltd and Century Plyboards India Ltd) domestic players as well as some international brands. Competition is expected to intensify with the advent of large foreign brands and veneer players into the laminates segment. Moreover, the large organized, domestic players have also undertaken capex to capture the growing demand and market. Though replacement demand continues to support operations during lean phases, new users and the construction industry remain the key growth drivers.

Susceptibility of profitability to volatility in raw material prices: Raw material cost comprises 55-60% of the cost of sales of MIL. The key raw materials include kraft & design paper and chemicals such as phenol, methanol, melamine, etc. MIL imports 60-70% of its raw material from USA, Europe, Japan, China, and Europe and the remaining is purchased from India. Volatility in prices of the raw material and freight charges have exerted pressure on MIL’s profitability as indicated in operating margins of 12.8% for fiscal 2022 against 15-17.5% during 3 fiscals through fiscal 2021. In fiscal 2023, operating margins are estimated to be around 10.9% as on February 28, 2023. Revision in prices of finished product and sufficient cost passthrough along with stabilization of on-going capex is critical for improvement in profitability over the medium term.

Large working capital requirement: Intense competition necessitates offering of substantial credit to distributors and maintenance of large inventory because of a variety of designs and the need to minimise delays in delivery to customers. Gross current assets stood at 164-174 days over the three fiscals through 2022. Efficient working capital management amid increasing scale will remain a key monitorable over the medium term.