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Second Covid wave – likely a blessing in disguise

We expect Greenpanel Industries (GNPL) to continue to post strong earnings growth in near-to-medium term driven by a) increasing demand for modular furniture particularly post Covid; b) possible import substitution with likely imposition of anti-dumping duty on thin MDF and CVD on all MDF imports into India and c) delay in incremental capacity addition by top MDF players. Despite fresh worries of Covid cases increasing in the country, we believe this could be a potential blessing in disguise for GNPL with the likelihood of people incrementally opting for modular furniture over customised home-made furniture. We also expect margin tailwind to persist led by firm pricing, sustained cost rationalisation, improving market mix and operating leverage. Maintain BUY.

* Valuation and outlook: Considering improving volume visibility, we are increasing our revenue and PAT estimates by 3.3%/2.4%/2.1% and 13.6%/4.3%/5.7% for FY21/FY22/FY23, respectively. We now expect GNPL to report revenue and adjusted PAT CAGRs of 19.1% and 93.8%, respectively, over FY20-FY23E. We expect RoCE to improve from 5.6% in FY20 to 24.2% in FY23E. We now value GNPL at 20x vs 18x FY23E earnings and maintain our BUY rating on the stock with a revised target price of Rs300 (earlier: Rs256). Key risks: Sudden slowdown in OEM demand and aggressive capacity addition by industry in near-to-medium term.

* Growth momentum to continue despite fresh worries of second Covid wave: Despite second Covid wave in India and worries of fresh lockdown in the state of Maharashtra, we expect MDF demand to accelerate further with demand for modular furniture likely to gain traction over customised home-made furniture. Also, likely imposition of ADD on imports of thin MDF and CVD on all MDF imports is expected to trigger imports substitution in near-to-medium term. The delay in capacity addition by top MDF manufacturers also provides sustainable growth opportunity for the existing players. Realisation may also remain firm on the back of the recent price hikes and lower share of imports. We expect GNPL to post a revenue CAGR of 19.1% over FY20-FY23E.

* EBITDA margin to improve significantly from 15.7% in FY20 to 24.5% in FY23. We expect EBITDA margin in MDF segment to improve sharply going forward led by the recent price hikes (which will cover a large part of the recent input cost increases), reduction in wastages, operating leverage (expecting both plants to achieve 100% utilisation in FY22 itself), improving mix with higher domestic sales and sustained cost rationalisation. We expect GNPL’s overall EBITDA margin to improve to 24.5% in FY23E from 15.7% in FY20.

* RoCE improvement gains momentum. Strong traction in profitability, minimal capex, stricter working capital discipline and expected debt repayment (to the tune of ~Rs3.2bn) over the next 2 years will drive the company’s RoCE substantially higher to 24.2% in FY23E vs 5.6% in FY20.

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