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Event update: Greenply Industries (Outperformer) - Commentary turning bullish!

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

Plywood volume growth to revive to 12-15% yoy: The plywood industry as a whole is expected to remain sluggish over the next two years. However, organized players will register volume growth as they capture market share from unorganized players (post GST being reduced to 18%). MTLM expects 12-15% CAGR in plywood volumes over the next two years as a result. Once the real estate industry revives, plywood volumes CAGR could touch 18%. Plywood margin could range between 11-12% (FY17 – 11.2%) as volumes improve.

Andhra Pradesh (AP) MDF plant on schedule; MDF margins to be hit near-term: MTLM’s AP plant is expected to start by Sep 2018. The company is trying to start operations by July 2018. Utilization level is expected to touch 60% for July-March 2019 (~45% for FY19E). However, the margin at its existing Pantnagar MDF plant is expected to fall to 27% (30-31% currently) as the company expects higher competition at its key market in North India. MTLM expects margin at its new MDF plant at 13-14% in FY19E due to lower utilization. Overall, MDF revenue is expected to grow 25% CAGR over the next 4-5 years.

Gabon, Myanmar to assure RM security: MTLM’s Gabon face veneer unit has commenced operations in July 2017 (50% of the capacity onstream, rest expected by Dec 2017). While some of the face veneer is being received from its Myanmar plant (export of raw timber is banned in Myanmar) and the rest is being met through its Gabon unit; MTLM doesn’t expect any disruption for now. Core veneer (90% of wood requirement) is procured from plantations in India.

Working capital (WC) position to improve with increase in MDF revenue: MTLM expects working capital to remain stable at ~50 days in the near-term. Rising contribution of MDF could ease the company’s WC situation as it is less WC intensive compared to plywood (MTLM’s receivable/inventory/payable days at 90/40/60 days vs MDF’s 25/40/30 days, respectively).

Valuation and View

The recent GST boost (rate lowered to 18%) should accelerate shift of market share towards organised players and any revival in real estate would aid growth. We expect MTLM’s earnings to double over FY17-20E (mostly back-ended) on timely capacity addition. We maintain Outperformer; MTLM is one of our top picks.