Greenply Industries' Q4FY18 results (Outperformer) - Weak performance; to improve only from FY20E onwards…

Q4FY18 Standalone Highlights

• Revenue fell 2.6% yoy to ~Rs4.4bn (1% miss). Plywood was flat yoy, (IDFCe: +6.4% yoy) due to weak realizations. MDF fell sharply by 23.7% yoy (IDFCe: 23.1% yoy fall) due to new capacities of competition coming in. Revenue includes ~Rs170m of GST refunds. (Adj. rev. fell 6.4% yoy and was a miss of 5%).
• Plywood volumes grew at 5.3% yoy, however the growth was more strong on the mid-market segment (7.2%) vs premium (4.5%). As a result, plywood realisation fell 6.1% yoy. MDF volumes fell ~24.3% due to higher competitive intensity in North India and Greenply chose note to cut prices (realisations were up 0.8% yoy).  
• Gross margin fell by 310bp yoy to 44.8% led by lower realisation in plywood and losses in wallpaper. EBITDA fell 22.2% yoy to Rs571mn (8% miss). Adjusting for GST refund/forex loss, EBITDA fell 35.4%. EBITDA margin came in at 13.1% (IDFCe: 14%), adj. margin at 11.3%.
• Plywood EBITDA margins were weak (9.1%; 300 bps yoy decline) due to inferior mix, and higher dealer incentives. MDF EBITDA margin, adjusting for GST refund (~Rs150m) and forex loss (~Rs73m), stood at 28.5% (+60 bps yoy). Reported MDF EBITDA margin stood at 31.8%.
• PAT fell 22.1% yoy to ~Rs326m (5% miss). Decline on PAT was not as sharp due to lower interest expense (37.1% yoy decline).
• MTLM has announced the demerger of its MDF businesses, and Uttarakhand Plywood unit into GreenPanel Industries Ltd. The new entity will be listed separately and shareholders will receive shares on a 1:1 basis. Given that both MTLM and GreenPanel will own Plywood businesses and plywood growth outlook is currently clouded, we remain cautious on this demerger.

Key positives: Lower interest expense.

Key negatives: Plywood margin weakness, fall in MDF volume.

Impact on financials: FY19E/20E EPS cut by 21%/11%.

Valuation & view

High competitive intensity in MDF, weak demand in the Plywood space and slow implementation of eWay Bill remain near-term concerns. However, post the eWay bill implementation settling down, the organized industry in general, and MTLM in particular would be in a strong position to capture market share from unorganized players even though the overall Plywood industry outlook remains muted in the near-term. Its high capex (in MDF) would be concluded by mid FY19E, post which the company would have enough capacities to grow until FY22E. Given long-term visibility in growth, we maintain our Outperformer rating on MTLM with a revised target price of Rs360 (25x FY20E EPS).