GREENPANEL INDUSTRIES has leadership position in the MDF market, improving balance sheet: BobCaps

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

Key takeaways:

Brownfield expansion planned at AP plant: GREENP plans to expand MDF (medium-density fibreboard) capacity at its Andhra Pradesh plant by 231,000cbm at a capex of Rs 6bn, comprising ~Rs 2.3bn of low-cost foreign debt and internal accruals. The plant will manufacture thin MDF (30-40% of the market), and commercial production is scheduled to start by Q2FY25. Management expects the new capacity to generate revenue of Rs 7.7bn-8bn at optimal utilisation, targeted in FY27. MDF capacity will rise to 891,000cbm post expansion.

“Over cautious” on raw-material price movement: Management has guided for 26-27% EBITDA margins in 9MFY23 for MDF (33.3% in Q1) as it anticipates higher chemical prices (crude derivative) to put 300bps of gross margin pressure. Per management, chemical prices have not increased since the start of CY22, and the ability to take price hikes will depend on demand. In the plywood business, timber prices have risen by 6-8% in Q2FY23, putting pressure on segment EBITDA margins (11.5% in Q1). Nevertheless, management expects plywood margins to hold in the 11-11.5% range for FY23.

MDF export realisation down 5-6% vs. Q1: Due to lower demand from the Middle East amid festivals, geopolitical tensions which delayed shipments and the global economic slowdown, management expects MDF export volumes to remain flattish or grow in low single digits in FY23 compared to FY22 (122,512cbm). Export realisation has also fallen by 5-6% compared to Q1 (Rs 23,941/cbm).

Maintain BUY: Despite a strong Q1FY23, stock performance has remained lacklustre owing to management’s “over-cautious” guidance. GREENP is trading at 17x FY24E EPS. We continue to value the stock at 23x FY24E EPS, a 34% discount to peer CPBI, and retain our TP of Rs 595 with a BUY rating. We like the company for its a leadership position in the MDF market, improving balance sheet and commendable improvement in working capital discipline and return ratios.