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Domestic demand remains healthy

Our positive stance on Greenpanel Industries (GREENP) stands bolstered post our interactions with dealers and industry participants indicating MDF demand remains healthy and continues to grow in double digits YoY (in the ongoing quarter too) despite a YoY strong base. The growth in MDF continues to be driven by increase in demand for readymade furniture even post-pandemic. Also, the pick-up in housing market seen after the pandemic has further aided demand growth. As per industry participants, imports of MDF have not yet gathered pace and this is likely to remain so in the near term too because MDF prices in the international markets remain high. MDF players have not taken any price hike in Q2FY23-TD despite raw material price inflation, hence margins will likely contract QoQ/YoY (in line with management guidance). We have factored-in margins of 26.2% for 9MFY23E for the MDF segment (vs 33.3% in Q1FY23) and do believe it has upside risk if raw material prices soften. GREENP is expected to witness revenue/PAT CAGRs of 15.6%/21.3% over FY22-FY24E driven by MDF volume CAGR of 14%. Maintain BUY with an unchanged Mar’23E target price of Rs662, set at a P/E of 23x FY24E.

* Domestic MDF demand remains healthy: From our interaction with dealers and industry participants, we learn that domestic demand for MDF continues to grow in double-digits during the current quarter despite a high base YoY. The increased acceptance of readymade furniture and pick-up in housing and office market continue to drive demand for the industry. We model GREENP to witness a MDF volume CAGR of 14% (domestic volume CAGR of 18% vs 34% during FY19-FY22) during FY22-FY24E. We have factored-in flat export volumes over FY22-FY24E (vs 41.8% CAGR in FY19- FY22) due to slowdown in international markets. Exports accounted for 24.7% of MDF volumes and 17.5% of MDF revenues for GREENP in FY22. We expect the company to witness a revenue CAGR of 15.6% during FY22-FY24E with MDF domestic realisation of Rs30,217/SCM in FY24E (vs Rs33,346/SCM in Q1FY23).

* MDF margins to shrink YoY/QoQ due to higher raw material costs: GREENP’s MDF operating margins are expected to shrink ~245bps YoY to 27.9% in FY23E due to higher raw material costs. As per dealers, there has been no MDF price hikes taken by any large player in the ongoing quarter. We believe companies in this segment will not take any price hike in the near future too as their margins are still high compared to historical perspective (~25-27%) despite higher raw material costs. This no-price-hike strategy shields the company from adverse volume impact due to the inflationary environment. We believe our MDF margin estimates of 27.9%/26.7% for FY23E/FY24E (vs 30.3% in FY22) have upside risks as raw material prices may soften going forward.

* Attractive valuations: GREENP trades at a P/E of 14.9x FY24E, which is attractive given the strong growth prospects, high return ratios, robust balance sheet and industry leadership position. Maintain BUY with an unchanged Mar’23E target price of Rs662.

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