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In-line quarter, valuations attractive

Greenpanel Industries (GREENP) has reported Q2FY23 consolidated operating margin decline of 170bps YoY to 24.7% due to margin decline of 100bps/630bps YoY in MDF/plywood segment on account of RM cost pressure. Consolidated revenue grew in line with estimates by 8.3% YoY to ~Rs4.6bn (3-year CAGR of 33.5%) leading to EBITDA/APAT growth of 1.3%/4.5% YoY. MDF volumes declined 7.9% YoY (on a high base), primarily due to ~40% YoY (flat QoQ) decline in exports (domestic volumes +8% YoY). Management has guided for 12% YoY domestic MDF volume growth in FY23 (with flat YoY growth in exports) and MDF margin at current levels (~29-30%, maintain) for the next 12-18 months as RM cost has stabilised. Management stated it has not yet seen any significant increase in the import of MDF and domestic MDF price/demand remains firm. The brownfield capex of Rs6bn for 231,000CBM MDF plant in Andhra Pradesh is expected to operationalise by Q1FY25 and reach optimum utilisation by FY27 (implying volume CAGR of 12-13% over FY22-27E). We maintain estimates and BUY rating on the stock with a rolled over Sept’23 target price of Rs668 (earlier: Rs662). We believe the stock trades at an attractive valuation of 13.2x PER FY24E and provides a good entry point for long-term investors as MDF industry will continue to have high growth prospects going ahead.

* Volume decline YoY due to high base and pressure on exports: GREENP posted a consolidated revenue growth of 8.3% YoY (3-year CAGR of 33.5%) to ~Rs4.57bn (I-Sec: Rs4.52bn) aided by blended MDF realisation increase of 28% YoY (flat QoQ) whereas MDF volumes declined 7.9% YoY (3-year CAGR of 26.4%) on a high base. MDF volumes growth declined as export volumes declined ~40% YoY due to a high base and also due to increased supply in its key exporting geographies (Middle East countries). Management has guided for a domestic volume growth of 12% YoY and export volume growth to remain flat in FY23. For FY24, it has guided for 97-100% capacity utilisation with current realisation to be maintained. Plywood business saw revenue decline of 16.6% YoY (-13.9% QoQ) with volumes decline of 22.1% YoY (-18.7% QoQ) on a high base and some slowdown in demand. The company expects plywood business to grow ~10% in FY23E. GREENP remains net debt free with a cash surplus of ~Rs590mn. Working capital days increased by 10 days YoY to 24 in Q2, primarily due to decline in payable days.

* Plywood segment drags blended EBITDA margin: GREENP’s blended EBITDA margin (ex-forex gain) in Q2FY23 stood at 24.7% (-170bps YoY / -313bps QoQ) due to decline in MDF/plywood margin of 100bps/630bps YoY. MDF segment margin stood at 30.4% (-100bps YoY/ -290bps QoQ) on raw material cost increase. Plywood margin was severely impacted (-630bps/-420bps YoY/QoQ) as the price hike taken (~2%) in Q2FY23 was not sufficient to cover the RM inflation. Management has guided for MDF margins to sustain at current levels for the next 12-18 months as RM prices seem to have peaked out and expects long-term sustainable margins in this segment at ~27-28%. For plywood segment, it has guided for margin to be in the range of 9.5-10% in FY23. We model MDF margin of 28.3%/26.5% for FY23E/FY24E, respectively.

* Valuations: GREENP’s operational performance has been largely in line with expectations. We continue to like the company for its leadership in MDF segment, which has strong growth prospects led by pick up in housing market and increased acceptance of MDF post the pandemic. Maintain BUY with a rolled over Sep’23 target price of Rs668 (earlier: Rs662), set at an unchanged 23x FY24E P/E.

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