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India Wood Panels

Momentum sustains; guidance intact

Wood panel companies delivered 2-24% growth in volume (3-year CAGR basis) on the back of robust underlying demand from the real estate sector and home improvement activity. The MDF segment (c.11-24% 3-year CAGR in revenue) continued to outperform the ply/laminate segment (3-14% 3-year CAGR) led by a) steady demand from the OEM segment (c.35-40% of industry), b) distribution expansions, c) increasing applications/ acceptance, and d) subdued imports. Operating margins, however, were impacted by rising raw material cost and delay in price hikes. Ply companies effected 2-2.5% price hike in May’22, while MDF prices are steady (last price hike was undertaken in 3QFY22). Wood panel companies’ managements are optimistic on future demand given the sector tailwinds and have guided for c. 10-15% volume growth in Plywood and 15-25% volume growth in MDF in FY23. Price inflation in chemicals is emerging as a key monitorable (constitutes 20%-50% of RM cost for Ply, Laminate and MDF categories) given the sharp rally in Brent crude prices (+63% CYTD; +20% since Apr’22). Greenpanel and Century Ply are our top picks given strong tailwinds and attractive valuations, followed by Greenply. We maintain HOLD on Greenlam on fair valuation. Our estimates/TP remains unchanged.

* Demand momentum in ply segment continued (+3-15% 3-year CAGR) while laminates saw muted growth (+2-7% 3 year CAGR): Ply segment continued to witness steady demand in 4QFY22 (ply revenue grew ~7-19% on 3-year CAGR basis in 4QFY22) mainly on the back of a pick-up in the real estate cycle and healthy demand from home improvement activity. On the other hand, laminates saw muted volume growth (+2-7% 3-year CAGR, revenue grew by ~6-13%) on account of higher base of 4QFY21 and some demand disruption during January due to the 3 rd Covid wave. Century’s ply performance (+14% volume 3-year CAGR in 4QFY22) was significantly better than that of Greenply (+3% volume 3-year CAGR in 4QFY22). Companies expect underlying demand to remain strong in the medium term given the tailwinds in the real estate sector. Greenply/ Century have guided for 10%/15% volume growth in the ply segment.

* Performance in MDF segment continues to be better than Ply/laminate on a 3-year CAGR basis: Greenpanel/Century MDF volume grew by 24%/11% 3-year CAGR respectively (3%/-14% QoQ respectively) in 4QFY22 on the back of a) strong demand from the OEM segment (c.35-40% of industry), b) distribution expansions, c) increasing applications/ acceptance, and d) subdued imports. Given the sector tailwinds - a) high demand from OEMs for readymade furniture, and b) decline in MDF imports due to high freight cost and container shortages, Greenpanel/Century managements have guided for healthy 15-18%/25% volume growth in FY23. Greenpanel and Century Ply increased prices by c.17-18% in the MDF segment in FY22 in order to negate raw material cost inflation

* Mixed operating performance for our coverage companies: EBITDA margin surprised positively for Century (+90bps YoY) and Greenpanel (+420bps YoY) as they undertook adequate price hikes. Century hiked prices by c. 3-4% in 4Q22 and c. 8% in FY22 in Plywood (both Greenpanel and Century hiked prices by c. 17-18% in MDF in FY22). On the other hand, Greenply and Greenlam’s margins contracted due to delay in passing on RM cost inflation, and higher other expenses owing to increase in ad spends in case of Greenply. Companies indicated that further price hikes are likely given the rise in input commodity prices. Ply companies hiked prices by 2-2.5% in May’22. Price inflation in chemicals is emerging as a key monitorable (constitutes 20%-50% of RM cost for Ply, Laminate and MDF categories) given the sharp rally in Brent crude prices (+63% CYTD; +20% since Apr’22). Century has guided for c. 13-15%/25% EBITDA margin in plywood/ MDF as sustainable margin in the near term.

* FY22 performance summary: Wood panel companies’ revenue grew by 45% YoY (13% 3 years CAGR) led by robust underlying demand. Healthy demand environment enabled these companies to effectively pass on rising input costs, which led to EBITDA margin expansion of 90bps YoY. EBITDA grew 54% YoY, 23% on a 3-year CAGR basis. Working capital cycle (median) was flat YoY to 71 days, however, debtor days (median) improved significantly by 9 days to 42.

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

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