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Strong growth momentum sustains

We remain positively surprised with management assertion of sustainability / improvement over an impressive Q4FY21 volume/margin delivery into FY22, which paves the way for an impressive execution opportunity (excluding probable near-term covid impact) over the next couple of years. As far as Q4FY21 was concerned, Greenpanel Industries (GNPL) sustained its overall growth momentum across all parameters – volumes, realisations, margins and cashflow generation with: a) 12.7% / 21.7% QoQ rise in its MDF volumes / revenues; b) 21.3% / 35.8% QoQ growth in plywood volumes / revenues; c) 330bps QoQ expansion in overall EBITDA margin; and d) net debt reduction of Rs0.75bn QoQ. Despite ongoing brownfield capacity expansion (due to be commissioned by Sep/Oct’21), the management has also guided for substantial net debt reduction of Rs2.25bn over FY22E-FY23E, which is likely to leapfrog its RoCEs to ~25% by FY23E. This we believe would offer further scope for rerating the stock going forward. Maintain BUY.

* Valuation and outlook: We conservatively maintain our earnings estimates despite the sharp Q4FY21 outperformance considering the near-term covid challenges. We expect GNPL to report revenue and adjusted PAT CAGRs of 22.8% and 68.4% respectively, over FY21-FY23E. We expect RoCE to substantially improve to 24.4% in FY23E from 11.5% in FY21. We thus maintain our BUY rating on the stock with an unchanged target price of Rs350. Key risks: sudden slowdown in OEM demand, and aggressive capacity addition in the industry in near to medium term.

* Strong MDF/Plywood segment growth aids outperformance: GNPL reported strong sequential improvement in MDF/Plywood revenue growth by 21.7%/35.8%. Growth in MDF was driven by market share gains from the cheap plywood segment, strong demand for modular furniture (post-covid), and widening of the company’s distribution reach. Plywood segment growth was driven by strong recovery in secondary real estate market and overall economy growth. Realisation too increased sharply by 7.9% and 11.9% in MDF and plywood respectively, led by price hikes and better mix. With likely delay in new MDF capacities of large players, we expect GNPL to post an impressive revenue CAGR of 22.8% over FY21-FY23E.

* EBITDA margin at 24.9%, up 330bps QoQ. Company reported an EBITDA margin of 24.9% (I-Sec: 23.7%) driven by sharp jump in its South plant margins (which is likely to further improve) led by better mix, operating leverage, higher MDF VAP sales, price hikes in MDF segment, and reduction in wastage. While MDF EBITDA margin was at 28.6% (up 410bps QoQ), plywood margin was at 15.5% (up 80bps QoQ). With recent price hikes in MDF covering large part of the rise in input costs, we expect GNPL’s overall EBITDA margin to improve to 24.5% in FY23E from 19.9% in FY21.

* RoCE improvement gains momentum. Strong traction in profitability, minimal capex, stricter working capital discipline and expected debt repayment (of ~Rs2.25bn) over the next two years would drive the company’s RoCE higher to 24.4% in FY23E vs 11.5% in FY21. This we believe would offer further scope for rerating of the stock going forward.

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