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Wood panel companies’ performance in 3QFY23 was muted with median revenue /EBITDA growth of 3%/-15% respectively on account of subdued demand due to festivals and sluggishness in home improvement activity coupled with rising MDF and particle board imports. The plywood segment (volume grew 3-7% YoY) outperformed the MDF segment (volumes declined 2-14% YoY), after a very long time, as rising MDF imports (+40% QoQ) impacted domestic players’ sales volume while unorganised plywood manufacturers struggled with the spike in timber prices. Operating margin of Century/ Greenply contracted 310bps/260bps YoY (down 235- 230bps QoQ) on account of rising raw material cost. Despite weak demand, companies remain optimistic on demand (10-15% volume growth in plywood and 15-25% in MDF in FY23). However, companies have moderated their EBITDA margin guidance. Capacity expansion plans for leading companies are broadly on track. Greenpanel and Century Ply are our preferred picks due to reasonable valuations. We maintain BUY on Greenply and a HOLD on Greenlam on fair valuation.

* Modest volume growth in Ply (Century/ Greenply core plywood volume grew 7%/3% YoY): Century/ Greenply’s Ply segment revenue grew 11%/ 7% YoY (16%/8%, 3-year CAGR) led by volume growth of 7%/3% YoY and realisation growth of 4% YoY respectively. Volume growth was modest on account of festivals in Oct’22 and sluggishness in home improvement activity. Leading organised players continued to gain from unorganised players as challenges pertaining to key raw materials timber continued during the quarter. In laminates, Century’s volume growth was impacted (-3% YoY/- 15% QoQ) whereas Greenlam volume grew 8% YoY mainly led by domestic volume (+19% YoY). Despite weakness in demand, companies expect underlying demand to remain strong in the medium term given the tailwinds in the real estate sector. Greenply and Century have guided for 15% volume growth in the ply segment.

*Challenging quarter for MDF players; rising imports impact volume growth: Greenpanel/Century MDF volume declined by 2%/14% YoY respectively on a high base (+11%/7% 3-year CAGR) in 3QFY23. Century’s volume growth was impacted on account of capacity constraints (97% CU in 3Q); also, commencement of its new capacity (brownfield expansion in Hoshiarpur) was delayed during the quarter (commenced production in Mar’23). MDF imports, which were subdued for the last few quarters, saw sharp rise in demand mainly on account of the decline in global MDF prices coupled with a sharp fall in freight rates (50% decline from the peak). Despite the sharp rise in MDF imports, companies remain optimistic on the growth outlook on the back of a) strong demand from the OEM segment (c.35-40% of industry), b) distribution expansions, and c) increasing applications/ acceptance. The Greenpanel management has guided for 10-12% volume growth in FY23.

*Softening in chemical cost offset by rise in timber cost: Operating margin of Century/ Greenply contracted 310/260bps YoY (contracted 235/230bps QoQ) on account of higher raw material cost. Softening in key chemical prices during   Oct-Nov’22 (constitutes 20%-50% of RM cost for Ply, Laminate and MDF categories) was offset by higher timber prices as availability continues to be challenging (especially in North India). Given elevated timber prices, Century has  moderated its EBITDA margin guidance of c. 13- 15%/25% in plywood/ MDF to 12-14%/20-25% on a sustainable basis. Greenpanel has guided for 25-26% margin in FY23.

* Wood panel channel checks: Our recent channel checks in wood panels suggest that weak demand scenario continues in the sector mainly in the tier 2,3 and 4 cities primarily on account of cost inflation leading to sluggishness in home improvement activity. However, demand momentum in metro and tier 1 cities sustains as consumers continue to spend towards home improvement. On the raw material front, timber scarcity continues in North India. In laminates, prices of key raw materials such as kraft paper, melamine, and phenol, which corrected slightly during Q3FY23, have started to inch up. B-grade kraft paper prices have risen by c.10% during Jan-Feb’23. Industry players expect kraft paper prices to remain elevated due to challenges in procurement.

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