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Margin headwinds to persist in near-term

Greenply Industries (MTLM) reported better than expected consolidated revenue growth of 14.4% YoY with standalone India plywood business growing at 14.8% YoY (3-yr CAGR of 7.7%) aided by volume growth of 6.9% YoY (3-yr CAGR of 3.9%) on a high base YoY. Consolidated operating margin declined 161bps YoY (+104bps QoQ on improved product mix) to 9.9% primarily due to higher employee cost (+117bps) resulting in EBIDTA decline of 1.6% YoY. Management was optimistic of demand to improve post the festive period, and targets India plywood volume growth of ~16-17% YoY in FY23 with margins remaining at current levels in near term. Demand from Europe has now been impacted which will affect Gabon operations in H2FY23. MDF capacity expansion is expected to complete by Mar’23 and management has guided for 50-55% utilisation, with PBT breakeven in FY24. We cut our EBIDTA estimates for FY23/FY24E by ~7%/1% due to continued RM pressure in domestic markets and demand disruptions in Gabon on issues in Europe (contributes ~60% of revenue). Maintain BUY rating on the stock due to inexpensive valuations (15.6x PER FY24E) with a rolled over Sept’23 target price of Rs266 (earlier: Rs254), set at 21x (earlier: 22x) one-year forward PER. We continue to prefer Greenpanel Industries and Century Plyboard over MTLM in the sector.

* Revenue growth of 14.4% YoY: MTLM reported Q2FY23 consolidated revenue growth of 14.4% YoY (3-yr CAGR of 9.2%) with standalone India business growth of 14.8% YoY and Gabon revenue growth of 4.9% YoY. India plywood volumes grew 6.9% YoY on a high base (3-year CAGR of 3.9%). Management was optimistic of demand going ahead and expects it to improve post festive period. It has guided for ~16-17% YoY volume growth in FY23. Working capital days improved by 2 days QoQ to 46 days in Q2FY23 and management expects it to improve (further) from ramping up of capacity utilisation at Sandila plant (Uttar Pradesh). The MDF plant is expected to be operational by FY23-end and will start contributing in FY24, enabling revenue CAGR of 24.6% over FY22-24E.

* Operating margin declines YoY: MTLM’s consolidated operating margin declined 161bps YoY to 9.9% (+104bps QoQ) due to higher employee cost resulting in EBIDTA decline of 1.6% YoY. Standalone India business margin declined 255bps YoY as gross margin declined 302bps YoY (+72bps QoQ) due to continued raw material pressure. Management has guided for India margin to remain near current level (of ~9%) in H2FY23 as timber prices continue to remain elevated (despite ~3-4% correction seen over the past few days). Gabon operations had EBITDA margin of 10% (-270bps YoY) in Q2 and the management stated European demand (~60% of Gabon sales) has been under pressure due to power and fuel challenges arising from the current geo-political situation. It expects Gabon margins to be severely impacted in H2FY23.

*Valuations and view: MTLM has near-term margin headwinds due to continued RM pressure in India operations and Gabon having demand issues on account of disruptions in Europe. However, with the commencement of MDF plant by FY23-end, it has strong growth prospects (revenue/EBIDTA CAGR of 24.6%/32.7% over FY22-24E) with reasonable valuations (15.6xPER FY24E). Maintain BUY on inexpensive valuations and sector tailwinds with a rolled over Sept’23 target price of Rs266, set at 21x PER one-year forward (in line with five-year average one-year forward PER).

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