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Demand scenario steady; RM inflation weighs on margins

Wood Panel companies’ 2QFY22 performance (35-80% QoQ growth in revenue) delivered sharp improvement on QoQ and 2yr CAGR basis on the back of strong improvement in volumes led by a) opening up of all markets, b) increase in home improvement activity and c) pent up demand. MDF segment (c.25-64% 2yr CAGR in revenues) continued to outperform ply/laminate segment (4-20% on 2yr CAGR) on the back of a) strong demand from OEM segemnt (c.35-40% of industry), b) distribution expansions, c) increasing applications/ acceptance and d) lower imports. While gross margins are imapacted by rising raw material cost and delay in price hikes, operating margins posred improvement (except Greenlam) on the back of operating leverage. Companies expect healthy performance to continue as they are experiencing healthy traction from home improvement activity. Greenpanel is our top pick given strong tailwinds and attractive valuations.

* Demand in ply/laminate segment bounces back in 2QFY22: Demand momentum in Ply/laminate segment has bounced back in 2QFY22 (revenues grew in range of 4-20% on 2yr CAGR basis in 2QFY22; 34-99% QoQ growth due to low base) mainly on the back of all markets being fully operational and healthy improvement in home improvement activity. Century’s ply performance (+19% volumes 2yr CAGR in 2QFY22) was significantly better than Greenply (+2% volumes 2yr CAGR in 2QFY22) on the back of a) market share gains due to VIROKILL technology in all its premium products, and b) Greenply’s focus on credit control. Companies expect margins to remain at healthy levels going forward owing to a) price hikes, b) improvement in efficiency and c) operating leverage.

* Performance in MDF segment continues to be better than Ply/laminate: Greenpanel/Century MDF volumes grew by 48%/12% 2yr CAGR respectively (+22%/+32% QoQ respectively) in 2QFY22 due to strong demand scenario. MDF segment performance was better than ply/laminate segment (c.4-20% growth on 2yr CAGR) on the back of a) strong demand from OEM segment (c.35-40% of industry), b) distribution expansions, c) increasing applications/ acceptance and d) lower imports.. Underlying demand scenario for MDF continues to be strong due to a) high demand from OEMs given healthy demand for ready made furniture, b) negligible MDF imports due to high freight cost and container shortages. Greenpanel and Century Ply have taken required price hikes in MDF segment in order to negate the raw material cost inflation. Companies expect healthy demand momentum to continue over the medium term on the back of domestic demand growth and minimal MDF imports which should be able to absorb the capacity expansions.

* EBITDA margins improve due to operating leverage; RM inflation weighs: EBITDA margins for our coverage companies have improved sharply (Century/Greenply/Greenpanel expanded by 620bps/640bps/310bps QoQ respectively while Greenlam margins declined by 130bps QoQ) due to operating leverage (significant volume improvement QoQ) while raw material cost inflation weighed on margins (companies took price hikes with a lag). Companies have broadly maintained their margin guidance as they have taken the required price hikes.

* Possible government measures to make it more attractive: Indian Government is actively considering imposing tighter restrictions on imports of several items, including furniture (India imports readymade furniture worth c.INR 28bn annually, of which 40-50% comes from China) and possible Counter Veiling Duty (CVD) on MDF (15-23% of India consumption). While the Ministry of Commerce has already approved CVD measures on MDF imports, it is pending for approval by the Ministry of Finance. Additionally, it has identified readymade furniture as one of the 20 sectors to make India a hub for global exports. We believe this augurs well for MDF manufacturers in India as it improves volume visibility along with potential for price hikes.

* Recommendation: We continue to maintain our positive bias in the wood panel sector on account of strong underlying demand, improvement in home improvement activity coupled with stronger balance sheets. Our top picks are Greenpanel Industries (biggest beneficiary of MDF industry tailwinds) and Greenply Ply (attractive valuation).

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