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Greenply Industries' Q2FY20 results (Neutral) - Gabon to drive FY20E performance…

Q2FY20 Financial Results

• MTLM’s Q2FY20 results are just for the Plywood entity as its MDF business (and Rudrapur Plywood unit) was demerged into Greenpanel Industries Ltd. YoY/QoQ numbers have been restated.
• Cons. revenue came in at ~Rs3.8bn (+5% yoy; 7% beat). Standalone rev. stood at ~Rs3.5bn (+1.5% yoy), while Gabon rev. came in at ~Rs345m (vs ~Rs217m yoy).
• Lower raw material prices (Okume face veneer from Gabon unit/receding timber prices/benign chemical costs) led to gross margins expanding ~370 bps yoy to 42.3% (IDFCe: 42.2%). However, higher employee costs (esp due to Gabon plant expansion) led to EBITDA margins expanding just ~200 bps yoy to 11.8% (IDFCe: 11.9%). Cons. EBITDA grew 26.6% yoy to ~Rs449m (7% beat).
• Cons. PAT grew 50.7% yoy to ~Rs264m (25% beat) due to lower tax.
• Plywood Segment Information: Volume – 15.2 mn sq. m. (+2.2% yoy; 8% beat); Realisation – Rs224/sq. m. (+0.9% yoy).

Key Positives: Volume growth / Gross margin improvement.

Key Negatives: N/A

Impact on Financials: 3% EPS upgrade for FY20E/21E due to lower taxes.

Outlook & Valuation

MTLM’s performance was steady in H1 and they are going into H2 with increasing confidence as the unorganized industry is expected to give way to organized players. Greenply being the largest and most-known brand would be able to wrest market-share away from unorganized industry. However, given the weak consumer sentiment and sluggish trends in the primary real estate market, we believe that these gains would be slow and measured in the near-term. Also over the longer run, we believe that MDF/PB (which are growing faster than Plywood) could also compete with organized plywood players to capture market-share from cheap plywood, which could be a long-term negative for MTLM. As a result, given that near-term growth for MTLM is hinged on Gabon face veneer sales (commodity product/competition could increase here), we believe that current valuations are fair. We would wait for further signs of improvement in plywood performance before upgrading our estimates (we already build in 25% earnings CAGR over FY19-21E). Maintain Neutral on MTLM with TP of Rs152 (15x FY21E EPS).