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Event update: Greenply Industries (Outperformer) - Near-term challenging, MDF industry improvement key..

Greenply Industries Ltd. (MTLM) hosted an analyst meet in Mumbai. Following are the key takeaways from our interaction:

MDF Highlights:

• Existing MDF demand is around 0.8m cbm p.a. versus capacity of 1.3m cbm and another 0.25m cbm is imported in India, as per the management. Thus India’s capacity utilization is around `45%. Management believes that the overcapacity situation is expected to ease from FY20E end as the industry is expected to post a CAGR of 18% over FY18-22E.
• MDF prices have fallen by 15% due to overcapacity; however, management believes that pricing should stabilize going forward as unlisted competition will not earn much margin below current prices.

Plywood Highlights:

• Plywood segment revenue to grow 12-14% CAGR over FY18-20E to ~Rs15-16bn with EBITDA margins of 11-11.5%. Growth would be supported through (1) unorganized industry losing market-share, (2) increased capacities in Plywood coming online and optimal utilization of existing capacities, and (3) higher outsourcing of mid-market plywood (30% target versus current 24% of Plywood revenue).
• Gabon face veneer plant expansion (to 96,000 cbm) would conclude by H1FY20E (total investment of US$8m). MTLM would use 10% of Gabon output and sell the balance to third-party clients.
• Greenpanel, the demerged MDF entity, will also house the Rudrapur plywood unit and has no plans to increase plywood capacity.
• Under-invoicing is reducing amongst unorganized players in the post GST environment (40-50% of sales invoiced as on date as per MTLM).

Outlook & Valuation:

MTLM’s continued weakness in the MDF segment remains a key concern given that it has clearly lost market-share (despite being a 10+ year incumbent). Given the massive overcapacity situation in India (industry utilisation at ~45-50%), further price cuts are not ruled out even as MTLM looks to export markets in the interim (which have lower realizations, and thus margins, versus domestic markets), profitability of the MDF business would continue to remain subpar in the near-term but improve dramatically in 6-8 qtrs.

Plywood business on the other hand is showing a decent recovery, and we are particularly encouraged that the company is gearing itself to capture market-share in the mid-market segment from unorganized players. We have revised our revenue/PAT estimates lower by 3%/5% and 9%/18% for FY19E/20E respectively to account for continued weakness in MDF segment. However, the recent price correction provides a decent entry point (as currently both earnings and valuation multiples are at trough levels). Maintain Outperformer with a revised target price of Rs158 (18x FY20E EPS).