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Wood panel companies under our coverage reported healthy revenue growth in Q1FY23 aided by continued uptick in the housing market, shift of market from unorganised to organised sector, and wider acceptance of readymade furniture, which has driven demand for the MDF segment. Plywood companies (CPBI, MTLM) reported revenue growth of 113%/85% YoY (3-year CAGR of 14.6%/8.9%) and volume growth of 105.9%/79.4% YoY (3- year CAGR of 12%/5.7%) aided by a tepid base. MDF players (GREENP, CPBI) reported revenue growth of 54.1%/70.9% YoY (3-year CAGR of 38.7%/19.2%) and volume growth of 10.9%/42.3% YoY (3-year CAGR of 17.7%/3.2%). Margins for plywood companies remained under pressure with CPBI/MTLM margins contracting 442bps/126bps QoQ due to higher raw material costs and other expenses. However, MDF companies, GREENP and CPBI continued to report strong operating margins, which expanded by 800bps and 686bps YoY for the respective companies. Managements across the wood panel segment guided for healthy revenue growth going ahead. Plywood players have guided for margin expansion, whereas MDF players have pointed at some moderation from peak. We remain positive on the wood panel sector with our top pick being GREENP (major beneficiary of the pick-up in demand for MDF) and CPBI (comprehensive wood panel player with presence across both plywood and MDF segments).

* MDF growth and margins remain strong: MDF players in our coverage universe witnessed revenue growth of 54-70.9%, with realisations improving 20-39%, YoY. GREENP witnessed revenue growth of 54.1% YoY (3-year CAGR of 38.7%) and volume growth of 10.9% YoY (3- year CAGR of 17.7%). On the other hand, CPBI revenues surged 70.9% YoY (3-year CAGR of 19.2%) and volumes grew 42.3% YoY (3-year CAGR of 3.2%). Operating margins expanded by 800bps/686bps YoY to 33.3%/34.9% for GREENP/CPBI in Q1FY23 due to better product mix, increased realisations and operating leverage. Managements guided for the near-peak margins to descend going ahead due to raw material price inflation, which may not be passed on soon. GREENP management has cautiously guided for 10-12% volume growth for its MDF segment in FY23 (earlier: 15-18% growth) due to possible macro headwinds like higher interest rates, global slowdown, etc., which may affect near-term demand. CPBI has maintained its guidance for >20% volume growth in FY23 aided by commissioning of its brownfield capacity in Oct’22. GREENP management has conservatively guided for 26-27% MDF margins for the remaining 9MFY23 whereas CBPI indicated it at >25%.

* Plywood revenue growth healthy; margins lower: Plywood companies under our coverage saw revenue growth of 85-113% YoY with volume growth in the range of 79-106% YoY on a low covid-impacted base. CPBI witnessed revenue growth of 113.3% (3-year CAGR of 14.6%) and volume growth of 105.9% YoY (3-year CAGR of 12%). MTLM saw revenue growth of 85% YoY (3-year CAGR of 8.9%) and volume growth of 79.4% YoY (3-year CAGR of 5.7%). While EBITDA margin for CPBI/MTLM increased 289bps/409bps YoY, it contracted 442bps/126bps QoQ due to increased RM inflation, adverse product mix and lag in price hikes. As per the managements, demand is likely to remain healthy with growth driven by tiers-2&3 cities. Both companies also took price hikes in Q1FY23, the full impact of which is likely to be realised in Q2FY23. Managements expect RM inflation to ease from Q2FY23 onwards which, coupled with the impact of price hikes, will enable the companies to improve margins going ahead. MTLM management has maintained its plywood revenue guidance of 15% YoY and CPBI at 20% YoY for FY23.

* Working capital improves further: Working capital continued to improve for all the covered companies. CPBI reported net working capital days of 58 (-50 days YoY), MTLM 48 days (-14 YoY) whereas GREENP reported 16 days (-18 YoY). As per the respective managements, working capital discipline would largely be maintained going ahead too.

* Prefer GREENP and CPBI: We remain positive on the wood panel segment and have a BUY rating on all the stocks under coverage. Our positive outlook is based on the improving growth prospects as demand in the residential housing market remains healthy. We continue to prefer GREENP and CPBI in the wood panel industry due to their significant presence in MDF, the fastest-growing segment in the wood panel market.

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