Greenply Industries' Q3FY19 results (Outperformer) - Plywood strong; MDF possibly bottoming out!

Q3FY19 Standalone Highlights

• Plywood: Ply rev. grew 18.4% yoy to ~Rs3.3bn (5% beat), while segment EBITDA margins came in at 10.2% (vs est. 11.3%; +50 bps yoy). Volume grew 17.7% yoy to 14.6 MSM while realization rose 2.7% yoy due to better product mix (decorative veneers plant started).
• MDF: MDF revenue grew 7.7% yoy and 41% qoq to ~Rs1.2bn (in-line) and segment EBITDA margin came in at 20.4% (vs 33.9% yoy; est. 15.0%). Adjusting for forex gain, EBITDA margin stood at 13.1%. Volume grew 33.9% yoy (AP MDF production was not in the base) while blended realization fell 19.8% yoy due to higher exports share and sharp correction in pricing due to excessive overcapacity.
• Overall: Rev. grew 15.9% yoy to ~Rs4.6bn (5% beat) due to better than exp. Plywood performance. Gross margin declined ~140 bps yoy to 45.3% due to lower MDF realizations/higher exports. Adjusting for forex fluctuations, EBITDA fell 9.8% yoy to ~Rs493m (7% miss) while margin fell ~300bps yoy to 10.7% (IDFCe: 12.0%). EBITDA was under pressure due to lower GM and low utilisation (of 29%) in AP plant.
• Q3 has ~Rs215m of forex gains (booked in other expenses/finance costs). Adjusting for the same, PAT fell 49.5% yoy to ~Rs142m (3% beat). PAT however came in better than expected due to lower tax rate (14.2% vs est. 28%).
• NWC increased by 11 days yoy to 79, mainly due to rise in inventory (+26 days yoy). DSO was steady (-4 days yoy), while DPO up improved by 11 days yoy.

Key positives: Plywood performance better than estimates.

Key negatives: Lower AP MDF utilization led higher total expenses.

Impact on financials: Raise FY19E EPS by 10.3% (as we lower tax rate).

Valuation & view

MDF rev. grew 41% qoq and we believe that industry capacity utilisation will continue to improve qoq; profitability may have also bottomed out as pricing may fall but higher utilization would mean that margins may not fall further. The excessive MDF capacity in the system and high capex/low asset-turn might deter unorganised players to enter the market giving some hope of profitability improvement once this capacity is absorbed in the next 18-24 months. MTLM’s brand power on the Plywood side has been visible during 9MFY19 as gained market-share at the cost of unorganized/second-tier players despite the fact that tailwinds from the complete implementation of eWay Bill and increasing tax compliance are yet to fully materialize for organized players. The CMP offers a compelling entry point (trading at 15x FY20E EPS) in our opinion, even though upside will be gradual with increasing utilisation on the MDF front. Maintain OP with a TP of Rs158 (18x FY20E EPS).