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Greenply Industries' Q3FY20 results (Neutral) - Gabon weakness led miss in Q3

Q3FY20 Financial Results

• MTLM’s Q3FY20 results are just for the Plywood entity as its MDF business (and Rudrapur Plywood unit) was demerged into Greenpanel Industries Ltd since July 2019. YoY/QoQ numbers have been restated.
• Cons. revenue came in at ~Rs3.5bn (-1% yoy; 5% miss). Standalone rev. stood at ~Rs3.2bn (+2.4% yoy), while Gabon rev. came in at ~Rs265m (vs ~Rs375m yoy).
• Gross margins were stable at ~41.1%, while EBITDA margins were steady at ~11.5% (IDFCe: 11.9%). The weak top-line performance, especially in Gabon, led to flattish EBITDA at ~Rs398m (8% miss).
• Cons. PAT grew ~2% yoy to ~Rs213m (11% miss). Tax rate stood at 25.5% in Q3 (vs 28.3% yoy).
• Plywood Performance: Volume – 14.3 mn sq. m. (+5.2% yoy; 2% miss); Realisation – Rs219/sq. m. (-2.7% yoy). Plywood revenue stood at ~Rs3.2bn (+2.4% yoy) while EBITDA margins stood at 11.0% (vs 10.3% yoy). Growth was hampered due to focus on credit cycle.
• Gabon Performance: Revenue down ~29% yoy to ~Rs265m, while EBITDA fell ~42% yoy to ~Rs48m (18.1% EBITDA margin vs 22.1% yoy). Business was weak due to lower volumes in India as Gurjan prices fell during the quarter (preference high for Gurjan vs Okume in India).

Key Positives: Margins maintained in Plywood; Gabon margin in-line.

Key Negatives: Gabon revenue decline.

Impact on Financials: 5% cut in FY20E EPS. Introduce FY22E.

Outlook & Valuation

Plywood was muted, but this has come in an overall weak market sentiment and MTLM’s rising focus stricter credit. Improving tax compliance in the unorganized industry (albeit still slow) is directionally positive and Greenply being the largest brand should be able to gain market-share away from such players, especially with the latter’s credit cycles being stretched. However, we would wait to see how unorganized players react in the medium-term before taking a stronger call on the market-share gains thesis. In the long run, we believe that MDF/PB could cannibalize Plywood market and MTLM being a pure Plywood player could be hit if the market-share thesis does not play out. Near-term growth would continue to remain hinged on Gabon face veneer sales (commoditized product which could see competitive pressures given high margins). Given these reasons, we believe that current valuations are fair. Maintain Neutral with TP of Rs153 (15x FY21E EPS).​