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Our channel checks suggest that volume trajectory for the MDF segment is expected to remain weak in Q2FY24 owing to the subdued demand environment and sustained pressure of MDF imports (monthly run-rate: ~30K CBM). Timber prices in the southern region have further firmed up, with a likely 10% QoQ increase (+2% QoQ in Q1FY24), while having broadly stayed stable in the North. However, declining resin prices and lower marketing spends could provide some respite to margins in Q2FY24E. We continue to like Greenpanel, given its leadership position in the MDF segment, industry-leading margins, lean working capital, and strong balance sheet. However, near-term challenges may pose downside risk to our/ consensus estimates for FY24. We have a BUY rating on the stock, with Jun-24E TP of Rs440/sh, based on 18x P/E.

Volume growth yet to pick up steam

Greenpanel had registered ~7% YoY volume de-growth in the MDF segment during Q1FY24 mainly owing to maintenance shut-down. Given the weak demand in the domestic market and the imports pressure, we estimate Company volumes would grow in a low to mid-single-digit sequentially in Q2FY24E. India’s MDF export shipments have grown 12% YoY in Jul-23. We estimate a similar trend for the company, as we anticipate double-digit YoY export growth in the MDF segment (>30K CBM).

Lower marketing spends likely to negate the impact of higher RM cost in Q2

Timber prices in the South (65-70% of volumes) have further firmed up, further with likely 10% QoQ increase (+2% QoQ in Q1FY24), while it has broadly remained stable in the North region. However, declining resin prices and lower marketing spends could provide some respite to margins. To recap, ad spends in Q1 stood at 3.9% of sales vs annual budget spends of 2-2.5% of sales in FY24.

New segment to propel growth from H2FY24

To combat the challenges of rising imports, Company has recently launched a new category which would cater to OEMs (an import dominated category) and will be priced 7-8% cheaper than industrial grade products. The new OEM segment would generate 8K-10K per month incremental CBM volumes H2FY24 onwards and is likely to contribute 20% to overall volumes over the next two years.

Aggressive capex plans to support long-term growth prospects

MDF is expected to be one of the fastest growing segments in the wood-panel category and is estimated to register at 18-20% CAGR over FY23-28E, led by deepening penetration and increasing preference for readymade furniture. In a bid to capture this opportunity, Greenpanel has outlined capex of Rs6bn, which would enhance its capacity by ~35%, from 660K CBM to 891K CBM by Q2FY25E. 

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