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Incremental tailwinds on offer

We expect Greenpanel Industries (GNPL) to continue to post strong earnings growth in near-to-medium term on the back of incremental tailwinds arising from the recent developments: 1) Recommendation of anti-dumping duty (ADD) on thin MDF from Thailand, Indonesia, Vietnam and Malaysia and 2) delay in commissioning of Rushil Décor’s greenfield MDF plant in South India due to the recent call back of professional manpower by its machinery supplier (from Germany) considering the ongoing covid second wave in the country.

Other tailwinds that continue to exist: 1) Growing consumer preference towards modular furniture over customised furniture making in such pandemic times, and 2) sustained impact on MDF imports into India due to higher sea freight and container unavailability. This, we believe will result in accelerated volume growth for GNPL’s South India plant which in turn will drive higher capacity utilisation, firm margins and sharp improvement in its overall profitability. Maintain BUY.

* Valuation and outlook: Considering the improving volume and margin visibility, we increase our revenue and PAT estimates by 4.3%/4.1% and 6.7%/5.8% for FY22/FY23, respectively. We now expect GNPL to report revenue and adjusted PAT CAGRs of 20.7% and 97.5%, respectively, over FY20-FY23E. We expect RoCEs to improve sharply to 25.1% in FY23E from 5.6% in FY20. With incremental tailwinds on offer, we now value GNPL at 22x vs 20x FY23E earnings earlier and maintain our BUY rating on the stock with a revised target price of Rs350 (earlier: Rs300). Key risks: Sudden slowdown in OEM demand and aggressive capacity addition.

* Incremental tailwinds to boost GNPL’s volume growth: The recent recommendation of ADD on thin MDF from Thailand, Indonesia, Vietnam and Malaysia, and 2) delay in commissioning of Rushil Décor’s MDF plant in South India will incrementally boost GNPL’s South India plant volumes. The industry expects the recommendation to be ratified by the finance ministry over the next 2-3 months. Besides ADD, the industry also expects CVD on all MDF imports to be announced soon. The likely import substitution opportunity in the region will immensely benefit GNPL considering its largest set up of MDF plant (under-utilised) in South India.

* EBITDA margin to improve significantly 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.

* RoCEs to surge to 25% by FY23. Muted capex, strict working capital discipline and sharp jump in profitability is expected to drive its RoCEs higher to 25%+ by FY23 (from 10.2% in FY21). This is likely to drive the rerating in the stock going forward

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