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Near-term demand outlook tepid, medium-term healthy

Woodpanel companies under our coverage reported a tepid Q1FY24 and we expect near-term headwinds to persist due to rising wood cost. We however remain optimistic about demand in the medium term due to continued uptick in the real estate sector and increased acceptance of readymade furniture. MDF imports continue to be elevated with an average monthly run-rate of ~23,290te in Q1FY24 (close to historical highs of FY18). This is expected to continue due to slowdown in the developed markets and thus pose near-term demand and margin headwinds for domestic MDF players (landed MDF price is ~10-20% lower). In plywood segment, timber prices remain on an upward trajectory in Q2FY24 too (up ~5-10% QoQ) and, to negate it, CPBI/MTLM have taken price hikes (~2%). We remain positive on this space due to reasonable valuations and expected demand recovery as the real estate market remains healthy. Our preferred picks in the sector are Greenpanel Industries {(GREENP) MDF industry leader} and Century Plyboards {(CPBI) comprehensive wood panel player with strong brand presence}.

MDF segment impacted due to higher imports

Domestic MDF players continue to face demand and margin headwinds in FY24-TD due to elevated imports and higher RM costs. Domestic volumes declined 10.2% YoY for GREENP and rose 5.9% YoY for CPBI in Q1FY24. MDF imports are close to their historical highs (of FY18), with an average monthly run-rate of ~23,290te in Q1FY24 (vs average run-rate of 24,200te in FY18). MDF imports are likely to remain high in the near term due to tepid demand conditions in the developed markets, which in turn has resulted in dumping in Indian markets. Imported MDF is primarily of industrial grade and its landed cost is cheaper by ~10-20% vs pricing by domestic players. GREENP, the largest MDF player, has launched new SKUs in Q2FY24, which are cheaper by ~7-8%, to compete with imports and will supply to OEMs/dealers who are currently importing. We believe this strategy is prudent and will likely enable the sector to face sporadic imports. As per our interaction with industry participants, MDF demand remains steady but is being catered by cheaper imports. We expect GREENP to witness domestic volume growth of 6.8% YoY (blended 11.2% YoY) and CPBI 20% YoY in FY24E (enabled by new capacity addition and low base). In Q1FY24, GREENP’s operating margin was ~25% (adjusted for higher A&P and one-time repair cost), whereas for CPBI it was 25.4%. We have modelled margins of 24.1-24.4% for GREENP and 22.6-23.0% for CBPI over FY24E- FY26E.

Plywood operational performance to improve in H2FY24

CPBI and Greenply Industries (MTLM) reported subdued demand environment in Q1FY24. Plywood and allied volumes remained flat (4-year CAGR of 8.8%) for CPBI on high base and grew 1.6% YoY (4-year CAGR of 4.7%) for MTLM. However, management of both companies are hopeful of demand pickup in H2FY24 driven by the real estate sector. CPBI has guided for plywood volume growth of 6-7% YoY while MTLM has guided for double-digit YoY volume growth, in FY24. India plywood margin in Q1FY24, for MTLM was impacted by higher A&P expenses and was flat YoY, while for CPBI margin it expanded 280bps YoY due to low base. Managements have indicated 5-10% increase in timber cost in Q2FY24-TD and have taken price hikes (~2%) to negate it. We believe the price hikes, coupled with softening chemical prices and better product mix, should enable margins to sustain going forward. We have modelled margin of 13.5% in plywood for CBPI and 10.0% for MTLM, for FY24E.

MDF imports close to historically high levels

As per GoI data, MDF import volumes in India increased ~121%/6% YoY/QoQ in Q1FY24, while realisation fell ~33%/4% YoY/QoQ. Vietnam (~40%), Thailand (~28%) and Malaysia (~15%) accounted for ~84% of total MDF import volumes in Q1FY24. The average monthly run-rate of imports during the quarter stood at ~23,290 te/month (~4% lower than the historically high level of 24,200te/month in FY18). Import trends in MDF will likely sustain in the near future due to tepid demand in the developed markets with consequent in Indian market. This is expected to pose near-term volume and margin headwinds for domestic players.

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