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Strong quarter in tough times; unveils MDF expansion

Greenpanel Industries (Greenpanel) reported another strong quarter with revenue/EBITDA/PBT 3-year CAGR of 32%/69%/228% respectively (10%/18%/32% above JMFe). Demand momentum sustained in MDF as volume grew at a 3-year CAGR of 18% (flat QoQ, 9% above estimates). MDF realisation (+18%, 3-year CAGR) improved both on domestic and export sales, growing 13% and 27% respectively, leading to 580bps improvement in EBITDA margin (27.7%; 200bps above JMFe). The management has guided for lower margin in MDF c. 26-27% on account of the expected rise in RM cost (timber prices up 5% QoQ/20% YoY in the North and higher chemical costs, as it happens with a lag). Greenpanel turned net cash positive in 1QFY23 (net debt reduced by INR770mn on the back of robust cash flow generation; significant reduction in net working capital days). The management announced its capex plan for MDF of adding 231,000cbm for INR6bn (at its AP unit); it is expected to commence production in Q2FY25. It has guided for revenue growth of c. 25-26% in FY23 and c.15% growth in FY24. We cut our FY23/24EPS estimates by 4%/7% to reflect RM cost inflation outlook, and roll forward to Sept’23 TP of INR 630 basis 22x Sept’24E EPS (INR 600 earlier on 22xMar’24E EPS). We maintain BUY. Demand weakness in the domestic market and consequent pricing pressure are key risks to our call.

* 1QFY23 summary: Greenpanel’s revenue grew at a 3-year CAGR of 32% to INR 4.6bn (10% above JMFe) led by the MDF segment (+39% 3-year CAGR; 10% above JMFe), while the plywood segment grew at a 3-year CAGR of 11% (19% above JMFe). Gross margin expanded by 420bps YoY/50bps QoQ to 61.7% on account of increase in realisation (MDF and ply realisations grew 18% and 5%, 3-year CAGR). EBITDA grew at a 3-year CAGR of 69% to INR 1.3bn (18% above JMFe) as EBITDA margin expanded by 580bps YoY to 27.7% on account of superior product mix, higher domestic mix (c.84% of MDF revenue), cost optimisation and operating leverage. Adj. PAT was INR 761mn (+239% 3-year CAGR; 23% above JMFe).

* MDF volume and margin continues to surprise positively (450bps above JMFe): In 1QFY23, Greenpanel’s MDF revenue grew at a 3-year CAGR of 39% (10% above JMFe) as it posted realisation growth of 18% due to price hikes (effected in 3QFY22), superior product mix and domestic mix. Greenpanel’s MDF EBITDA margin continued to surprise positively (33.3%; +1240bps YoY and 450bps above JMFe) due to higher realisation and cost optimisation. Capacity utilisation for MDF plants stood at 81%. Ply segment revenue growth too surprised, growing at a 3-year CAGR of 11% (19% above JMFe) led by volume/realisation growth of 6%/5% (3 years CAGR), Ply EBITDA margin expanded 70bps YoY (200bps above JMFe).

* Unveils MDF capacity expansion in the South: The board approved the expansion of 231,000cbm MDF capacity for an amount of INR 6bn at its existing facility in Andhra Pradesh. Commercial production is expected to start by Q2FY25. The management highlighted that the new capacity could generate revenue c. INR 7.7bn at an optimum utilisation level (considering current realisations and product mix). The new plant will be utilised for manufacturing of thin panel MDF (30-40% of market), which isn’t currently offered by Greenpanel. It will be funded both by internal accruals and debt (will borrow externally from German lender).

* Cut estimates; maintain BUY: We cut our FY23/24EPS estimates by 4%/7% to reflect RM cost inflation outlook, and roll forward to Sept’23 TP of INR 630 basis 22x Sept’24E EPS (INR 630 earlier on 22xMar’24E EPS). We maintain BUY on Greenpanel on the back a) demand tailwinds; (readymade furniture; import substitution), and b) commendable improvement on de-leveraging and working capital fronts. Demand weakness in the domestic market and consequent pricing pressure are key risks to our call.

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