Greenply Industries' Q1FY20 results (Downgrade to Neutral) - Concentrated presence in Ply segment a long-term worry…

Q1FY20 Financial Results

• MTLM’s Q1FY20 results are just for the Plywood entity as its MDF business (and Rudrapur Plywood unit) was demerged into Greenpanel Industries Ltd. (to be listed separately towards end August). YoY/QoQ numbers have been restated.
• Cons. revenue came in at ~Rs3.5bn (+13.1% yoy). Standalone rev. stood at ~Rs3.1bn (+6.2% yoy; in-line), while Gabon rev. came in at ~Rs440m.
• Standalone EBITDA jumped ~50.2% yoy to ~Rs327m (in-line) due to better realizations and healthy volume growth while margins improved ~310 bps yoy to 10.7% (IDFCe: 10.5%). Cons. EBITDA stood at ~Rs412m (~2x yoy; margin at 11.8% vs 6.7% yoy).
• Standalone PAT grew ~61.5% yoy to ~Rs157m (10% miss – due to higher than expected tax rate of ~35% vs est. 28%). Cons. PAT grew ~81.7% yoy to ~Rs210m.
• Plywood Segment Information: Volume grew 4.1% yoy to ~13mn. sq. m. Realisation grew 3.3% yoy to ~Rs222/sq. m.

Key Positives: Margin improvement yoy.

Key Negatives: Higher than est. tax rate.

Impact on Financials: Introduce FY20E/21E financials ex. Greenpanel.

Outlook & Valuation

MTLM is now a pure plywood company and would be exposed to the relatively vast but slow growing plywood industry. While we agree with the thesis that MTLM, on the back of its brand strength and distribution prowess, is well placed to capture market-share from unorganized players (and grow faster than the industry), we believe that in the near-term weak consumer sentiment could place a cap on growth. Over the longer run, we believe that MDF/PB (which are growing far faster than Plywood) could also snatch market-share away from Plywood, which would be a long-term negative for MTLM. Given these concerns, and that near-term growth would be powered by Gabon face veneer sales (commodity product and competition increasing here), we believe that MTLM’s fair target multiple should be 15x. While our numbers build in ~25% earnings CAGR over FY19-21E, we believe the current stock price leaves little room for upside. Hence, we downgrade MTLM to Neutral. Key upside risk would be faster than expected Plywood growth (est. ~8% CAGR over FY19-21E).