GREENPANEL INDUSTRIES has a Long runway before takeoff. Buy for Target Price of Rs 595 (54% Upside)

Long runway before takeoff

 Increase in MDF imports could pose a threat to domestic price realisation, if not curbed

 MDF export realisation strained but volumes picked up in Oct-Nov’22; guidance at ~30,000cbm for Q3FY23 (+12% QoQ)

 Near-term hindrances but structural drivers intact. Valuations attractive at 15x FY24E EPS; maintain BUY with an unchanged TP of Rs 595

We interacted with GREENP CFO V Venkatramani to gain a perspective on the company’s growth prospects and sector outlook. Key takeaways:

Rise in MDF imports: MDF imports have risen during the last couple of months as (i) Vietnam, Malaysia and Indonesia flooded the global market with plain MDF supplies following a decline in their furniture exports to the US & Europe, and (ii) ocean freight has fallen to US$ 600/cbm vs. US$ 1,450-1,500 during Covid and US$ 850 pre-Covid.

MDF imports into India were in the range of 2,000-3,000cbm per month from April to August, which has swelled to 13,600cbm and 17,800cbm in September and October respectively and could be at similar or higher levels in November. Per management, GREENP is comfortable with imports below 20,000cbm per month and will prefer to maintain pricing, instead taking a hit on volumes if needed.

MDF export volumes picking up: Management expects to post MDF export volumes of ~30,000cbm in Q3FY23 vs. 26,736cbm in Q2FY23 and ~21,000cbm in Q3FY22. Guidance for domestic MDF volume growth is now at 7-8% (earlier 12%) and export volume growth at 8-10% (earlier flat) in FY23, implying a blended increase of 7-8% for the year. EBITDA margin is expected to be similar to Q2 levels of 30% for FY23 (with stability over Dec-Mar’23) and at 27-28% in the long term.

Shutdown of Singapore arm: Due to accumulated losses in the subsidiary (Rs 310mn), onerous documentation and bank charges, GREENP has shut down its Singapore operations, the full impact of which will be visible on the P&L in Q3FY23. Going forward, its Singapore office will be limited to procuring orders from export countries.

Maintain BUY: GREENP is trading at ~15x FY24E EPS which is attractive given GREENP’s strong growth prospects, leadership position in MDF, and an improving balance sheet and return ratios. Management expects Q3 to be a dull quarter given increasing MDF imports and a lull in plywood demand, but is hopeful of demand recovery in Q4. We continue to value GREENP at 23x FY24E EPS (a 34% discount to CPBI) and retain BUY rating with TP of Rs 595.