Equity Research: Greenpanel Industries

Greenpanel Industries is anticipated to record increasing revenue along with strong surge in demand and growing customer base, with EBITDA, and PAT CAGRs of 17%/15%/23%. It is currently trading at 18x/15x FY23E/24E EPS.

Greenpanel Industries was incorporated in December 2017. On April 1, 2018, the erstwhile MDF division of Greenply Industries was demerged and divested into Greenpanel Industries. The spun- off Greenpanel was listed independently on the stock exchanges on October 23, 2019. Greenpanel has MDF manufacturing operations at Pantnagar in Uttarakhand and Chittoor in Andhra Pradesh with combined installed capacity of 660,000 CBM. The company also has a plywood manufacturing facility with installed capacity of 10.5 million square meters at Patnagar. The product offerings of the company include decorative veneer, flooring and door. Even though the company demerged in 2018, the company will be bringing its old distribution network under its new de-merged company. As of FY22, the company has 2,535 dealers PAN India and 12,500+ retailers PAN India.

Business Model:

Greenply is into branded plywood business for more than three decades. Plywood is used for a wide range of applications, spanning from wardrobes and tables to shelves and cabins. The MDF business of Greenply Industries Ltd has been in existence only since 2010 and was earlier sold as in the brand name 'GreenPanelMax' .The idea behind the creation of a separate entity was to house the MDF(Medium Density Fiberboard) business of Greenply and focus on growing the new business. Another reason I think was the separation of businesses between families. The management of Greenpanel are assured that the future of wooden furniture is the use of MDF as the raw material for factory made furniture. Greenpanel derives about 75% of revenue from MDF and 25% from plywood. Globally, the market share dynamics is reverse of India where MDF consumption is 80% of the market whereas Plywood captures a mere 20% whereas in India Plywood has a market share of 80%. Today in India MDF is the fastest growing sub-segment pushing to all companies in the space expand or create new capacities.

Industry Research:

Indian furniture market traditionally has been dependent on carpenter who would make the furniture at customer's home. But there has been a gradual shift happening towards ready made furniture much before COVID due to lack of time and oversight. But COVID accelerated the trend as now people are wary of bringing people into their home and opting for ready made furniture. Earlier furniture were thought of a one time investment but with the introduction of cheaper wood varieties with modern design, there is a gradual shift happening to cheaper, factory made furniture. Furniture can made from various kind of wood. While Solid wood is the most durable but is also most expensive. There are alternate forms of wood which can also be used to make furniture at a much lower cost such as particle board(uses waste wood), MDF etc. Example of Solid wood be seesham wood, mango wood etc where engineered wood would be Plywood, particle board, MDF etc. In terms of most common engineered material used to make furniture, its particle board, it is also the cheapest being made of waste wood/wood chips. It is followed by MDF which is being used for a bit higher end furniture. Since the use of ready made furniture and application of MDF is at an very nascent stage, it offers immense room for growth.

MDF a multipurpose, cutting-edge wood panel:

There are several distinguishing qualities about MDF that set it apart from the other types of engineered wood, giving customers extra reasons to choose it. MDF has appealing aesthetics, is simple to paint, significantly stronger than particleboard, outperforms inexpensive plywood in price, can be applied to a variety of applications, and is environmentally benign.

Consumer Preference Increasing:

Raising consumer knowledge of the various applications, low cost, environmental friendliness, and long shelf life of MDF. Increased aspirations for branded MDF items with attributes such as high density, water resistance, dimensional stability, etc. Due to the new work-from-home model, customers are striving for better homes with branded furniture, which is driving demand for the industry.

Affordable and Robust:

MDF is replacing cheap plywood since it isn't much more expensive but has far greater durability and looks. Greenpanel MDF has a lifespan of 10-15 years, which is significantly longer than that of inexpensive plywood. The medium/cheap, local/unorganized plywood segment, which makes up roughly 80% of the entire plywood business, is now being replaced by MDF. The business anticipates that between 50% and 60% of the mid-segment plywood market will transition to MDF during the next 5-7 years.

Boom in Furniture Demand:

After the pandemic, the idea of working from home has resulted in a huge demand for modular furniture and pieces with better aesthetics. As e-commerce grew, more ready-made furniture was purchased online, which increased the demand for MDF. This trend, in our opinion, will continue in the future. South India accounts for a large portion of MDF sales, but the trend has gained traction in North India due to a higher acceptance of the product. Organized players are playing a significant role in raising the product's awareness through actions like leveraging the digital platform, retail branding, events for architects, advertisements, and expanding the distribution network.

Investment Rationale:

MDF: An Underpentrated product for Indian Market

Presently, the ratio of MDF to plywood is roughly 70:30 worldwide, however it is roughly 20:80 in India. The ratio of MDF and plywood in India is anticipated to be 50:50, according to industry analysts, reflecting the industry's under penetration and significant growth potential. Particularly after Covid-19, MDF is getting more and more well-liked and accepted in Indian marketplaces.

Fastest Growing Category for Furniture

MDF's market size in India was predicted to be INR 3,200 crores in FY22 and INR 6,000 crores in FY26, representing a CAGR of 15-20%. MDF is thought to be the category with the quickest growth within the home décor market. Some of the causes that are likely to fuel growth include the recovery of the real estate industry, a rise in the popularity of ready-made furniture among consumers, and a shorter furniture cycle time.

Highly Organised in Nature

The organised sector accounts for nearly 70% of the MDF market size in India, and the threat of the unorganised sector is not a concern in this segment because it is capital intensive and the quality of the product produced by unorganised players is lower than that of the organised players because they primarily use used machinery, which represents high entry barriers especially for the unorganised sector.

Largest and Renowned Player in Market

With a revenue market share of 28% as of FY22, Greenpanel is the leading producer of MDF in the nation. In addition, it also produces related goods like plywood, wood flooring, and veneers. As the scale of the industry expands, we anticipate it will sustain or increase. At 6,60,000 CBM as of FY22, it is currently the biggest participant in terms of capacity.

Capex will be the major growth driver

With a cost of INR 600 crores and a potential revenue of INR 770 crores at the current realisation levels, the business announced in Q1FY23 a brownfield expansion at the Andhra Pradesh facility for the MDF segment to increase its capacity by 2,31,000 CBM. Commercial production will begin in H1FY25, and by FY27, it hopes to be fully used. The capital expenditures will boost volume growth by 35%. By FY25, the company's capacity will be 8,91,000 CBM, or 34% of the organised players' combined capacity in MDF. In order to spur future expansion, we think the company would try to expand its plywood production capacity and broaden its product line.

Improved Operating Margin

Operating margins increased from 13% to 27% over the course of FY19–22 as a result of strong demand, lower imports, better capacity utilisation, and operating leverage. All MDF companies are currently experiencing historically strong margins, and we anticipate that this trend will continue for at least another 12 months. Due to capacity coming online from multiple participants in FY24, there may be a demand-supply mismatch, which might lead to a decline in realisations and have an impact on the operating margins. According to management's forecast, the MDF segment's margins will range from 28 to 30% (FY22 - 30%). The return ratios have showed a substantial improvement in the recent 2 years.

Net Debt Free with strong Cash Flow:

As instructed before by the management before announcing the development plan, the company achieved net debt freedom in Q1FY23. In FY22, the company decreased its net debt by INR 304 crores. The INR 600 crore expenditure will be financed mostly by internal accruals, with the addition of an INR 220-230 crore foreign debt. Over the next three years, the debt will be paid off. Due to their focus on superior capital allocation, the company has seen a substantial improvement in their working capital cycle, which went from 60 days in FY19 to 16 days in FY22. Improved working capital has made it possible to produce strong free cashflows of INR 390 crores from FY20 to FY22.

Key Manegerial Personnel:

1.) Mr. Shiv Prakash Mittal (Executive Chairman)

He holds a Bachelor’s degree in Science from the University of Calcutta. He was one of the founders of Greenply Industries Limited. He w as associated with Kitply Industries Limited for 21 years. He has over 30 years of experience in the fields of production and marketing in plywood, laminates, MDF and allied products.

2.) Mr. Shobhan Mittal (MD & CEO)

He is a Bachelor of Business Administration, and was Joint Managing Director & CEO of Greenply Industries Ltd. With over ten years of experience in Business Administration and Marketing Strategy, he was instrumental in setting up the MDF units at Pant nagar and Chittoor. After successfully streamlining the Pant nagar unit, he has been involved in streamlining operations at the Chittoor unit.

3.) Mr. Salil Kumar Bhandari (Independent Director)

He is FCA qualified and graduated from Shri Ram College of Commerce, Delhi University, and has a Diploma in Business Administration from the All India Council for Management Studies, Chennai. He is Founder and Managing Partner of BGJC & Associates LLP, an audit and management consulting firm in New Delhi. He was a Managing Committee member at ASSOCHAM. He was a Member of Advisory Committee, Dept. of Company Affairs, Government of India.

4.) Mr. Mahesh Kumar Jiw Rajka (Independent Director)

He is an Indian Forest Service officer, Maharashtra cadre (March Mr. Mahesh Kumar Independent 1, 1977 to March 31, 2009) and opted for voluntary retirement Jiwrajka Director from 31 March, 2009. His prior assignments include Inspector General of Forests & Head North- East Cell, Ministry of Environment & Forests, and Government of India.

5.) Ms. Sushmita Singh (Independent Director)

She is a postgraduate in English from the Patna University, has done a Diploma in Urban Town Planning from the Human Settlement Management Institute, New Delhi, as well as a certification course in Enhancement of Managerial Capability from the Indian Institute of Management, Lucknow. Besides, holding Directorships in several companies and their committees, Ms. Singha has been actively involved in several social organisations and government initiatives.

6.) Mr. Arun Kumar Saraf (Independent Director)

He is a Chartered Accountant by qualification, has been Independent practicing as a Tax Consultant for over 33 years. He had been Mr. Arun Kumar Saraf Director managing income tax-related matters for over 250 companies across Kolkata, Bangalore and Mumbai. Besides, he has been appointed as a Director at Loyalie IT-Solutions Private Limited.

7.) Ms. Shiv Priya Nanda (Independent Director)

She is a Lawyer by profession, aged about 59 years, and has over 30 years of extensive experience in mergers and acquisitions, corporate restructuring, strategic joint ventures, and corporate advisory. She is a member of Bar Council of Delhi, lnternational Bar Association, lnterpacific Bar Association and American Bar Association. She has also written and published various articles related to legal, regulatory and contractual issues. She has been appointed with effect from July 6, 2022.

8.) Mr. Vishwanathan Venkatramani (CFO)

He is a Chartered Accountant with over three decades of experience in Finance, Accounting and Taxation functions. He is CFO the CFO of Greenpanel and heads the corporate functions of Finance, Accounts, Secretarial and Taxation. He was the Finance Controller of MKJ Enterprises Limited.

Key Investment Risks:

Overwhelming rivalry in MDF: Numerous players, including majors Action Tesa, Century Plyboards, and Greenply Industries, are striving to increase capacity. Following such significant capacity expansions, the industry may experience some pricing pressure as the market absorbs the additional supply, which brings back memories of the circumstances in FY18 and FY19.

Slowdown in Reality Sector: Real estate activity has been steadily declining for the past three to four years, which has had a significant negative impact on the growth of the home décor industry. Given the recent uptick in real estate activity, demand has been increasing. But, any delay might have a negative impact on earnings projections for all corporations.

Foreign exchange fluctuation risk: Given its substantial exports, dependency on import of raw materials (design paper for pre- laminated MDF) and high reliance on foreign currency borrowings, Greenpanel is exposed to FX risk. However, such risk is largely covered either through natural hedging or through currency hedging undertaken by the company. Furthermore, the company has prepaid EUR8.90mn along with a regular instalment of EUR2.23mn in October (aggregating to EUR11.1mn), thereby reducing the forex risk on our foreign currency borrowings.

INR appreciation: MDF imports used to make up ~30% of domestic consumption prior to covid-19. Due to container availability issues and higher freight rates, MDF imports for the industry have dipped below 10%. However, significant INR appreciation could make imports competitive and delay absorption of capacity additions in the domestic market.

Financials:

Valuations & Analysis:

The operating margins of Indian MDF players have significantly increased over the past few years as a result of higher realisations brought on by better pricing power, which was in turn a result of factors like increased domestic demand, decreased imports, higher utilisation rates, and an increase in the share of value-added products. We think the operating margins in the MDF category (which were 34% in the first quarter) have peaked and will begin to normalise from next year due to significant capacity coming online (about 1.34 million CBM) from organised players. While imports accounted for 30% of total demand during the period when capacity increase occurred and lower levels of utilisation resulted, the decline in operating margins won't be as severe as it was in FY19. This time, things will be different since there will be a lot more demand and imports because the main exporters from Vietnam and Indonesia have switched their MDF production to the United States for furniture production. According to management comments from several MDF players, the EBITDA margin should be between 25 and 30 percent over the medium term.

We anticipate that Greenpanel Industries, which has the highest revenue market share (28%) and is the biggest exporter of MDF from India, will profit from the structural change occurring in that country from low-cost/mid-cost plywood to MDF. Even in terms of capacity, it makes about 41% of the organised sector's capacity as of FY22. MDF is expected to develop the fastest in the upcoming years, with the real estate sector serving as the primary growth driver for the whole wood panel market. The company is in a good position to take advantage of the opportunity that is emerging because to the strength of its product, which is driven by import substitution, rising domestic demand, and export opportunities for both MDF and ready-made furniture.

The company anticipates that MDF will eventually replace medium/low plywood (80%), which currently accounts for the majority of the $22,000 billion global plywood market. 60% of the medium/low plywood market, or 10,500 crores, or around three times the size of the current market, is the potential market size for MDF. For the period of FY22–24E, Greenpanel Industries is anticipated to record revenue, EBITDA, and PAT CAGRs of 17%/15%/23%. It is currently trading at 18x/15x FY23E/24E EPS.

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