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Margins disappoint…

About the stock: Greenply Industries (GIL) is one the leading players in the plywood business in India. It has a distribution network of 2,350+dealers/authorised stockists pan-India.

* It is foraying into the MDF boards business with greenfield manufacturing at Vadodara, Gujarat of 800 CBM/day (capex of ~| 555 crore) with revenue potential of ~| 600-650 crore per annum, to be commissioned by Q4FY23

Q2FY23 Results: GIL reported a soft performance on margins front.

* The topline at | 494.7 crore, was up 14.4% YoY with 14.8% growth in plywood revenues at | 431.8 crore (three-year average of ~7.7%) with volumes up ~7.2% YoY at 17 MSM and ~6.4% realisation growth

* EBITDA margins were at 9.9%, down 161 bps YoY, due to higher input cost

* PAT came in at | 23.6 crore, down 26.1% YoY

What should investors do? GIL’s share price has declined by 45% over the past five years given the lagging growth trajectory vis-à-vis peers.

* We maintain our HOLD rating on the company. GIL’s relative market share in plywood and traction thereafter will be one of the factors to be monitored. We would also monitor input prices for interim margins impact. Furthermore, while foray into MDF is positive, one has to be cautious at the possibility of increased capacities impacting the economics

Target Price and Valuation: We value GIL at | 195/share (at 20x FY24E P/E).

Key triggers for future price performance:

* Planned capex in plywood and MDF business to provide additional revenue in the medium to long term

* Recovery in plywood growth momentum, which has lagged peers

* Strong brand presence, well established distribution network and product portfolio offering at varied price points; improving dealer’s network and healthy momentum in real estate to support sales growth

Alternate Stock Idea: Besides Greenply, we like Century Ply in woodpanel segment

* A play on superior growth among peers

* BUY with a target price of | 675

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