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Growth returns, at an inflection point

After several quarters of muted/decline in volumes, Greenply Industries (MTLM) has finally returned to growth (with a bang: high double-digit growth) – that is the insight from our conversations with multiple plywood dealers (pan-India). With the (recent) sharp improvement in working capital management (leading to strong balance sheet strengthening) and sudden recovery in secondary real estate market post Covid, we expect growth momentum to sustain in near-to-medium term. With sharp recovery in growth, we estimate plywood EBITDA margin to improve to 13.6% by FY23 (vs management guidance of 14.6%). At 13.8x FY23E earnings, we believe, rerating is inevitable considering robust growth and margin outlook amid expected sharp improvement in RoCEs (30%+) by FY23E. Maintain BUY. Downside risks: Sudden decline in secondary real estate sales and sustained weakness in Gabon operations.

* Industry tailwind likely to sustain in near term: We believe wood panel sector (comprising plywood, MDF, particle board and laminates/decorative veneer segments) is the biggest beneficiary in terms of the recent opening up of the inherent demand. This is largely attributed to the (recent) strong traction witnessed in the secondary real-estate market post Covid. This, coupled with sustained demand from tier 2/3/4 markets and likely pent-up in renovation demand post Covid, is expected to boost volume growth of top plywood players in the near term.

* Expect 20%+ volume CAGR in plywood volumes over FY21-FY23. As per our channel checks, plywood demand has picked up strongly post Q2FY21 and is likely to remain strong in the near term with improving demand visibility. With the company sharply improving its working capital management and the base being significantly lower, we expect its plywood volumes to exhibit a 20%+ volume CAGR over the next 2 years. While Gabon operation is likely to achieve normalcy once the pandemic situation eases, we are building in a conservative 17% revenue CAGR for its Gabon business over the next 2 years. We, thus, expect MTLM’s overall revenues to exhibit 21.4% CAGR over FY21-FY23E.

* Consolidated EBITDA margin to improve by 290bps over FY21-FY23. MTLM reported its consolidated EBITDA margin at 12.3% in Q3FY21 led by operating leverage and sustained cost rationalisation. Going forward, we expect MTLM’s consolidated EBITDA margin to improve by 290bps from 10.7% in FY21 to 13.6% (management guidance at 14.6%) in FY23 led by the recent price hike, product mix improvement, cost optimisation and operating leverage.

* RoCE to improve sharply to 30.2% by FY23E: Expected improvement in profitability, stricter working capital management and fast improving FCF from operations may drive sharp debt reduction over the next 2 years, which in turn will drive RoCE higher by 1,300bps to 30.2% in FY23E.

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