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Steady quarter; capex on track

Greenply 3QFY22 was a mixed bag with Plywood volume growth of 11% YoY (3% above JMFe; +4% 2yr CAGR vs +15% CAGR for Century Ply) while EBITDA margins print was 10.2% for plywood segment (-210bps YoY.-130bps QoQ) due to delay in pass through of RM cost inflation and mix (higher share of outsourced volume). Consolidated EBITDA at INR 428mn, +3% YoY/-14% QoQ and was 10% below JMFe. Consolidated PBT at INR 298mn, +8% YoY/-13% QoQ and was 7% below JMFe/5% below Consensus. However, share of profit from associate (INR25mn, of which INR15mn pertains to one-off income) supported PAT which came in INR 298mn, +19% YoY/-7% QoQ and 1% below JMFe/Consensus. Consolidated working capital days slightly deteriorated QoQ from 39 to 42 days in 3QFY22. Management guides for low double digit volume growth in ply segment in coming quarters (500-700bps higher than industry growth rate in medium term) on healthy real estate absorption, strong demand from smaller cities and market share gains from unorganised players. It also retained its earlier guidance of EBITDA margins improvement to 13-14% over next 2-3 years led by pricing improvement, efficiency and operating leverage. Company’s MDF and Ply expansion plans are on-track with ply plant (Lucknow) to achieve CoD in 1QFY23 and MDF plant (Vadodara) is expected to start commission in 4QFY23. We roll forward to Mar’23 TP of INR 260 (22x FY24EPS) and maintain BUY rating given reasonable valuation. Keys risk to our call- Weaker than expected growth in ply volumes.

* 3QFY22 Performance:

In 3QFY22, Greenply’s consolidated revenue came at INR 4.2bn (+24% YoY; +10% 2yr CAGR) as ply volume/realisation grew by 11%/8% respectively (+4%/+4% 2yr CAGR respectively) while EBITDA/adj.PAT came at INR 428mn/INR298mn respectively (+4%/+18% 2yr CAGR respectively). Gross margins contracted 330bps YoY at 39.8% (60bps below JMFe) while EBITDA margins contracted by 210bps YoY to 10.2% (130bps below JMFe) due to RM cost inflation and and product mix. Consol. PAT came at INR 298mn (+19% YoY; +18% 2yr CAGR; 1% below JMFe). In 9MFY22, revenue/EBITDA/PAT was up 45%/48%/104% on 2yr CAGR basis.

* Ply volumes steady; demand scenario improving:

Ply volume grew by 11% YoY to 15.6msm (+4% 2yr CAGR) on account of healthy demand from housing segment. Management is optimistic about achieving low double digit volume growth in ply segment in upcoming quarters on the back of healthy real estate absorption, strong demand from smaller cities and market share gains from unorganised players. The company also indicated market share gains from unorganised players as it aims to grow volume 5-7% over industry growth. Plywood EBITDA margins came in at 10.2% (- 210bps YoY; 130bps below JMFe) however adjusted EBITDA margins (adjusted for noncash ESOP charge of INR30mn) came at 10.9%. Contraction in margins was due to 1) increase in raw material prices and 2) higher mix of manufacturing and trading partners’ volume (48% vs. 40% in 3QFY21). Gabon business (revenue up 58% YoY,-14% QoQ; +35% 2yr CAGR) continues to be impacted by container availability issues and high ocean freights.

* Own manufacturing mix to improve as Plywood and MDF capacity commences in 1QFY23 and 4QFY23, respectively:

Greenply’s Plywood capacity at Sandila, UP is expected to start its operation in 1QFY23 (trial run is expected in 4QFY22). MDF manufacturing facility in Vadodara, Gujarat with a capacity of 240,000cbm p.a. is expected to commence operations by 4QFY23. Sandila, UP plant will be utilized to manufacture premium plywood and hence will boost margins. However, this will be partially offset by ESOP costs (100bps each year for FY23/24). Construction activities at the MDF plant location have begun and major plant and machinery has been ordered.

* Revise estimates; maintain BUY:

We cut our FY22/23/24 EPS by 11%/9%/8% respectively to reflect 3QFY22 performance and lower margins. We continue to like Greenply on the back of a) demand tailwinds (given improving real estate absorption), b) improvement in return profile (post tax return ratios more than 20%), c) aggressive capital allocation towards MDF business (highest growth segment in wood-panels), d) commendable improvement in balance sheet and e) reasonable valuations. We maintain BUY with a roll forward Mar’23TP of INR260 basis 22xFY24EPS (earlier INR 270 basis 22x Sept’23 EPS).

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