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Management Speak: Greenply Industries (Neutral) - Gabon to power growth in the near-term…

Key Takeaways

• Gabon to take-over growth in the near-term: MTLM’s expanded Gabon capacity is expected to post revenue of ~Rs2bn in FY20E and peak at ~Rs3.5bn by FY23E. Weak plywood trends in India would mean that Gabon would power MTLM’s 10-12% revenue growth in FY20E. 60%+ output from this facility would be for non-India markets.
• Plywood story to play-out in the medium term: MTLM is seeing signs of higher stress on unorganized players due to stricter GST/eWay bill implementation. Shrinking price differentials should lead to market-share grabs by organized players like MTLM, which should eventually drive Plywood growth for the company in the long run (12-14%).
• Plywood mix to weaken; Gabon to compensate for margins: Rising share of Ply revenue through outsourcing/JVs would mean that value-mix would weaken over the medium term, thus hurting margins (from the current ~11% average). This should be compensated to some extent by higher Gabon face veneer revenue as its margins are 18%+.
• NWC tightening in India expected: MTLM’s India plywood business has seen its NWC deteriorate by 18 days yoy to 68 due to sharp rise in DSO and fall in DPO. It intends to cut back NWC by 5 days over H2, but this could lead to weaker revenue performance in India plywood.
• FCF generation for debt repayments: Lower capital intensity in the near-to-mid term (JVs/outsourcing) and shifting to the 25.2% tax rate would mean that MTLM’s FCF generation would rise. The company intends to use this purely to repay debt (LT debt of ~Rs1.3bn to be repaid over the next 4 years; yearly ST debt reduction of Rs50-100mn.

Outlook & Valuation

We remain cognizant to the fact that brand ‘Greenply’ is strong enough to wrest market-share away from unorganized players over the long-run. However, given weak consumer sentiments/sluggish real estate and with focus increasing on tightening receivables, we believe that these gains would be slow in the near-term. Growth could also be constrained given rising MDF/PB adoption (due to preference for readymade furniture). These concerns, and the fact that near-term growth is hinged on Gabon face veneer, suggest that current valuations are fair. Hence, we maintain NEUTRAL (15x FY21E EPS / TP Rs152).