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Demand steady; Cost inflation to weigh on profitability

Our recent channel checks across India suggest that a) demand recovery for non-south region started from mid-June’21 while in south region it started from mid-July’21, b) MDF demand remains robust due to strong demand from OEMs, c) quick demand pick up was seen in ply/laminate segment as it has already reached c.80-90% of normal levels due to pick-up in renovations, d) further price hikes have been taken by unorganised players in Aug’21 due to rising raw material and logistics costs and organised payers are mulling to take price hikes in coming weeks.

Smaller and unorganised players are facing severe pressure on several fronts including raw material cost inflation, rising logistics cost, demand volatility and working capital issues, which should aid market share gains for larger players in near term, in our view. We are positive on wood panel pack with Greenpanel Industries and Century Plyboards as top picks.

* Quality plywood demand on rise: After almost a decade, market participants have highlighted that they are experiencing strong demand for good quality plywood. In a recent survey by Ply Reporter, there is a clear spurt noted in demand for composed core plywood, calibrated plywood and genuine water proof plywood by the retailers in developing markets. Dealers incrementally prefer to work with manufacturers who have ‘Mat Pressing’ process with core composers and a good brand name. As per ply reporter survey, market share for composed core and calibrated plywood category has gone up from 3% in 2015 to 11% in 2021.

* Laminate brands eyeing to enter into plywood manufacturing: With a spike in demand for wood panel products due to healthy real estate absorption, various emerging wood panel brands are looking for expansion in their core business categories. Plywood producers are entering into MDF, particleboards and laminates manufacturing, whereas laminates producers are diversifying to plywood and particleboards manufacturing. This is being experienced since past 5 years as these products are being sold through similar distribution channels, which is one of the core driver of these product categories. It is noted that laminate brands have more market reach with similar retail networks, thus, they can get the advantage of good brand recall among retailers and might take up share in high end plywood market.

* Morbi to add yearly 15mn sheets laminate capacity by end 2021: Morbi, Gujarat has been growing as a hub for Decorative Laminates with c.30 manufacturing establishments of laminates currently. Reports indicate that expansion plans are under execution by these manufacturing units adding a dozen of new hot presses, more daylights and new establishments which may increase the capacity by c. 15mn sheets by end 2021. Morbi based players mainly focus on west and south based markets because of their good service and distribution network.

* Prices rise further in High Pressure Laminates (HPL) and Particle Boards (PB): Due to steep rise in prices of raw materials such as Melamine, Phenol, Formaldehyde, Kraft Paper and Base Paper, the decorative laminates manufacturing companies have announced price increases by c.3-5% in entire thickness in HPL category from mid-August’21. Separately, All India Particle Board Manufacturers association at a meeting on 23rd Aug’21, decided to increase the prices of wood and bagasse particleboards by INR 3.5/sqft (plain and prelam) with immediate effect, as they were facing severe challenges on profitability front post second wave of Covid-19.

* PVC based industry hit hard by cost escalation: PVC resin prices have been rising rapidly in the last month as it increased by c.INR 13/kg to INR 130/kg, which has impacted the wood panel products which use PVC resin as raw material. The compound based on PVC resin is extensively used by wood plastic composite boards, door frames, PVC edge band tapes, PVC laminates, charcoal panel and decorative PVC sheets. The rapid increase in PVC prices is causing lot of pain to smaller players who are already under pressure with liquidity and working capital issues. If the PVC prices do not come at sustainable levels with respect to finished product affordability, the smaller PVC based material manufacturer will witness drop in profitability, working capital issues and issues in raw material availability.

* Aluminium Composite Panels prices increased by 10%: The price increase is coming in ACP segment in India following increasing raw material cost. The ACP manufacturer Association has announced to increase the prices by 7-10% on different variants of composite panels which is produced with combination of metal and plastic composites. Majority of players have announced the price hike from 1st Sept’21.

* No to ADD on imported Thin MDF: The Indian Finance Ministry has decided to not impose ADD on several types of MDF boards having thickness below 6mm importer from Vietnam, Malaysia, Thailand and Indonesia. After investigation since Apr’20, DGTR had recommended the imposition of ADD in Apr’21 but it was further queried by Ministry of Finance after objections of importers and users industry. The domestic MDF industry has adequate production capacity to meet the domestic needs of thin MDF and to add further, existing companies are also increasing their capacities.

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