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On the path to recovery

Wood Panel companies’ 1QFY22 performance (19-39% QoQ decline in revenue) was impacted due to lockdowns led by Covid-19 second wave. Demand scenario has been improving since mid-June’21 and July’21 performance has been encouraging (revenues are almost back to normal levels). MDF segment continues to outperform ply/laminate segment (c.15-45% QoQ decline in revenues) as OEM segment (c.35-40% of revenue) were permitted to operate through the locakdown.

Operating margins were impacted (-280 to 640bps QoQ) mainly due to adverse operating leverage and raw material cost inflation. Companies too suggest that underlying demand continues to improve MoM and expects to achieve healthy performance in 2QFY22 as major markets open up. Greenpanel is our top pick given strong tailwinds and attractive valuations.

* Demand in ply/laminate segment impacted due to lockdowns; healthy recovery in July’21: Demand momentum in Ply/laminate segment was impacted in 1QFY22 (revenues declined in range of 9-16% on 2yr CAGR basis in 1QFY22; 15-45% decline QoQ) mainly on the back of Covid-19 second wave led lockdowns, while demand scenario has been improving since mid-June’21 and July’21 performance has been encouraging (revenues are almost back to normal levels).

Century’s ply performance (- 16% volumes 2yr CAGR in 1QFY22) was modestly better than Greenply (-19% volumes 2yr CAGR in 1QFY22) on the back of a) market share gains due to VIROKILL technology in all its premium products, and b) Greenply’s focus on credit control. Companies have taken price hikes in the range of 2-3% in ply/laminate segment in order to negate the raw material cost inflation (indicated further price hikes in 2QFY22 as costs continue to rise). Underlying demand scenario continues to improve as major markets open up.

* Performance in MDF segment continues to be better than Ply/laminate: Greenpanel/Century MDF volumes declined by 19%/31% QoQ respectively (+21%/-12% 2yr CAGR respectively) in 1QFY22 due to lockdowns caused by Covid-19 second wave. MDF segment performance was better than ply/laminate segment (c.15-45% decline in revenues QoQ) as c.35-40% revenues come from OEM segment which continued its operations. Underlying demand scenario for MDF continues to be strong due to a) high demand from OEMs given healthy demand for ready made furniture, b) negligible MDF imports due to high freight cost and container shortages.

MDF export realisations are expected to increase by 20% QoQ in 2QFY22 as international MDF prices have risen sharply owing to higher raw material costs, ocean freight and strong demand. Greenpanel and Century Ply have taken price hikes in the range of 4-6% QoQ in MDF segment in order to negate the raw material cost inflation. Companies expect healthy demand momentum to continue over the medium term on the back of domestic demand growth and minimal MDF imports which should be able to absorb the capacity expansions.

* EBITDA margins contract due to adverse operating leverage: EBITDA margins for our coverage companies have contracted sharply (Century/Greenply/Greenpanel/Greenlam contracted by 340bps/640bps/280bps/480bps QoQ respectively) as it was mainly impacted by adverse operating leverage (significant volume decline QoQ) and raw material cost inflation. Companies have broadly maintained their margin guidance as they are optimistic on the recovery of lost volumes and they have also taken the required price hikes.

* Anti-dumping proposal rejected; optimistic on CVD proposal: Ministry of Finance rejected DGTR’s Anti Dumping proposal, however, this is not a dampener, as a) global MDF prices are rising thanks to improved demand and high ocean freight costs, and b) competing countries like Vietnam are focusing on more on lucrative markets than India given better pricing and value added opportunities (benefitting from china substitution playing out globally). However, the companies and industry is hopeful about CVD proposal for which investigations are underway.

* Possible government measures to make it more attractive: Indian Government is actively considering imposing tighter restrictions on imports of several items, including furniture (India imports readymade furniture worth c.INR 28bn annually, of which 40-50% comes from China) and possible Counter Veiling Duty (CVD) on MDF (15-23% of India consumption). While the Ministry of Commerce has already approved CVD measures on MDF imports, it is pending for approval by the Ministry of Finance. Additionally, it has identified readymade furniture as one of the 20 sectors to make India a hub for global exports. We believe this augurs well for MDF manufacturers in India as it improves volume visibility along with potential for price hikes.

* Recommendation: We continue to maintain our positive bias in the wood panel sector on account of strong underlying demand coupled with stronger balance sheets. Our top picks are Greenpanel Industries (biggest beneficiary of MDF industry tailwinds) and Greenply Ply (attractive valuation).

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