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Steady quarter; RM cost and Gabon to impact profitability

Greenply Industries (Greenply) posted a beat on Revenue (7%/11% above JMFe/ Consensus) and EBITDA (16%/25% above JMFe/ Consensus) largely led by Gabon (easing of supply chain). However, this was offset by higher depreciation and interest expense (refinancing of debt in Gabon in local currency at a higher rate). Plywood volume grew 7% YoY (+6% QoQ/+4% on 3-year CAGR; 2% above JMFe) to 17msm and the management expects a similar run rate for 2HFY23, implying volume growth of 16-17% YoY (on a low base; +4% 3-year CAGR), notwithstanding festivals and slowdown in construction activity in 3Q. EBITDA margin was 8.9% in the plywood segment (-260bps YoY, 80bps above JMFe) and the company indicated that it would try to sustain these margins for FY23/24. The fuel crisis in Europe (60% of Gabon revenue) has led to cancellation of all orders in Gabon and, hence, losses are expected there in the foreseeable future. The MDF plant (Vadodara) is on track to be commissioned by 4QFY23. We cut our FY23/FY24/FY25 estimates by 46%/33%/15% respectively to reflect more issues in Gabon. We maintain BUY rating with a Sept’23 TP of INR 224 (Earlier TP of INR 290). Keys risk to our call – Weaker-than-expected growth in ply volumes.

* 2QFY23 performance: In 2QFY23, Greenply’s consolidated revenue was INR 4.95bn, up 14% YoY (+9% 3-year CAGR) as ply volume/realisation grew by 7%/8% YoY (+4% each on 3 year CAGR). Timber availability and pricing continued to pose a challenge in 2QFY23 (+ 10% since April’22), leading to contraction in gross margin (-30bps YoY; +90bps QoQ on product mix). EBITDA margin contracted 160bps YoY to 9.9% (80bps above JMFe). EBITDA came in at INR 490mn, -1% YoY (+3% on 3-year CAGR; 16% above JMFe) led by significant surprise in Gabon EBITDA (75% above JMFe). However, higher depreciation and interest expense (refinancing of debt in Gabon in local currency at higher rate) led to 26% YoY decline in PAT (8% below JMFe).

* Muted Plywood volume growth (+ 4% 3 year CAGR); maintains volume guidance: Ply volume grew by 7% YoY to 17msm in 2QFY23 ((+4% on 3-year CAGR; 3% above our estimates). Demand during the quarter was challenging on account of festivals and some sluggishness in construction activity. The company guides for c.16-17% volume growth in FY23 (assuming similar quarterly run rate in 3Q-4Q). Plywood EBITDA margin contracted 260bps YoY but expanded 50bps QoQ to 8.9% (in line with JMFe). The company didn’t undertake any price increase during the quarter. The management expects to maintain similar margins in the coming quarters of FY23.

* Gabon business to see headwinds: Gabon business revenue rose 9% YoY in 2QFY23 (+7% QoQ; 20% 3-year CAGR). However, the availability/price of fuel in Europe is a major concern (Europe is 60% of revenue for Gabon) and, hence, Gabon is seeing cancellation of orders. As a result, management did not rule out 50-60% YoY decline in revenue in 2HFY23 accompanied by losses.

* Update on capex programme: Greenply’s premium plywood capacity at Sandila, UP, started commercial production and operated at 15-17% utilisation during Q2FY23 (Sep’22 utilisation was 40-45%) and is estimated to reach 75-80% utilisation by Mar’23. The MDF manufacturing facility in Vadodara (Gujarat; 240,000cbm p.a.) too is on track and is expected to commence operations by 4QFY23 (indicated possibility of a slight 10- 15 days delay in installation of the remaining machinery due to some supply chain challenges). Also, MDF plant cost has seen escalation of 6-7% (from INR 5.5bn to INR 5.8-5.9bn), as indicated in the earlier concalls. Capacity expansion at the manufacturing partner location at Hapur is also seeing a modest 1 month delay and is expected to start production by Q3FY23.

* Revise estimates; maintain BUY: We revise our FY23/FY24/FY25 estimates by 46%/33%/15% respectively to reflect 2QFY23 performance and outlook on Gabon and plywood. We maintain BUY with a Sept’23TP of INR224 basis 22xSept’24EPS (earlier INR 290), given inexpensive valuation (16xFY24EPS) and sector tailwinds.

* Key highlights from 2QFY23 concall:

* Launched Green Platinum plywood, which caters to the premium end plywood segment, with higher fire and water resistance.

* Plywood product mix: Premium segment contributed 60% of ply volume (50% in ply revenue). Value segment plywood continues to witness strong traction.

* MDF unit to achieve break-even at 50-55% utilisation level. Major MDF imports are for interior grade MDFs. Three varieties of MDF – Interior grade, Exterior grade and High density high moisture resistant (HDHMR) boards. As per the management, 40% of the market is interior grade. Exterior and High density grade are the valueadded products.

* Consolidated net debt has increased significantly to INR 4.7bn in Sept’22 (INR 2.2bn in Mar’22) due to ongoing capex programme. The management expects net debt to peak at c.INR 6.5bn (earlier INR6bn guidance) given cost escalation. The company has availed loan facility of INR 4bn for MDF, of which INR 1.9bn has been availed and the remaining INR 2.1bn is expected to be availed by Mar’23.

* Net working capital days was 46 in Sep’22 as compared to 48 in Jun’22 and 29 days in Mar’22. Debtor days increased to 45 (40 in Jun’22/ 42 in Mar’22), inventory days increased to 52 (49 days in Jun’22/ 46 days in Mar’22) and creditor days was 51 (41 in Jun’22/59 in Mar’22).

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