Greenply Industries' Q1FY19 results (Outperformer) - Has the MDF bottom been hit?

Q1FY19 Standalone Highlights

• Plywood: Ply revenue grew 20.7% yoy to ~Rs3.1bn (albeit on a weak base; 11% beat), while segment EBITDA margins came in at 11.3% (vs est. 9.5%; +120 bps yoy). Volume grew 24.1% yoy to 13.8 mn sq. m. while realization fell 3% yoy (due to lower decorative veneer sales).
• MDF: MDF revenue fell 30.1% yoy to ~Rs911m (in-line), although segment EBITDA margin at 22.1% fell ~240 bps yoy (vs est. 26.0%; adjusted for forex loss, EBITDA margin stood at 25%). Volume fell 27.4% yoy to 36,210 cbm (2% miss), while realization fell 4% yoy, due to heavy price competition.
• Overall: Revenue up 1.8% yoy to ~Rs4.0bn (+8% beat), due to better Plywood performance (11% beat; MDF in-line). Gross margin declined ~310bps yoy to 45.8% due to lower contribution of MDF in the mix. This led to EBITDA margin falling ~280bps yoy to 11.3% (IDFCe: 12.2%), while EBITDA declined 18.3% yoy to ~Rs459m (in-line).
• Higher than est. interest expense (~Rs 29m vs est. ~Rs15m) led to PAT declining 22.2% yoy to ~Rs238m (2% miss).
• NWC has increased by 21 days yoy to 79. DSO stayed steady at 63 days, while DIO increased to 59 days (vs 47 yoy) and DPO decreased to 43 days (vs 52 yoy).
• Net debt has increased to ~Rs7.1 bn as of June 2018 (vs ~Rs6.3bn as of March 2018).

Key positives: Plywood performance better than estimates.

Key negatives: Possible loss in MDF market share in North India.

Impact on financials: FY19E/20E EPS cut by 14%/10%.

Valuation & view

Greenply had to give in to the competition and cut MDF prices to bring them on par else it would have risked losing volumes (past two quarters MDF volume decline of 24-30% yoy). As it has operationalized the South MDF plant from July 2018, FY19E earnings would decline yoy because of part ramp up of the plant and interest and D&A expenses hitting the P&L. However, from FY20E onwards we expect a smart recovery driven by our confidence in the management’s ability to ramp up MDF sales form that region. Management commentary on initial signs of unorganised to organised shift being visible with full impact from FY20E is also welcome. Given the heightened competitive activity in the MDF segment and delay in gains from GST/eWay bill implementation, we have cut our target multiple to 20x (vs 25x earlier). However, the current stock price, we believe, factors most of the near-term headwinds (fell by 40% since Q3FY18 results); maintain Outperformer with a revised TP of Rs260.