India Wood Panels

Steady Quarter guidance intact

• The performance of wood panel companies was steady in 2QFY23 with a median
Revenue/EBITDA growth of 14%/12% YoY (21%/25%, 3-year CAGR) respectively on the back
of sustained demand momentum for home improvement, and continued market share gains
from unorganised players who continue to struggle with cost inflation and procurement of
key raw materials (timber prices have increased c. 10% since Apr’22). Within wood panels,
the MDF segment continued to outperform the Plywood segment (c.18- 28% YoY growth in
MDF revenue vs. 10-15% YoY in plywood) led by OEM segment demand. MDF imports saw
increase in volume during Q2FY23 (14%/57% QoQ/ YoY) and our channel check suggests that
recently Rushil cut plain MDF prices (by 3-5%) in South and West markets. Operating margin
of Century/ Greenply contracted 160bps/270bps YoY (up 50- 100bps QoQ) on account of
rising raw material cost. Despite weak demand during Oct’22, companies remain optimistic
on demand (10-15% volume growth in Plywood and 15-25% in MDF in FY23) and operating
margins. Century Ply announced the setting up of a greenfield particle board unit by FY25.
Greenpanel and Century Ply are our top picks given strong tailwinds and reasonable
valuations. We maintain BUY on Greenply and a HOLD on Greenlam on fair valuation.
• Demand momentum sees slight moderation in Ply (Century/ Greenply volume grew 3%/7%
YoY and 13%/4% on 3-year CAGR): Century/ Greenply’s Ply segment revenue grew 10%/ 15%
YoY (16%/8%, 3-year CAGR) mainly on the back of moderation in demand momentum
(slowdown in construction activity). However, leading companies continued to gain market
share from the unorganised sector. Century’s ply volume growth (3% YoY, 13% 3-year CAGR)
optically appears muted due to the high base. Greenlam / Century’s laminates segment
delivered muted volume growth (-10% /0% YoY, 3%/4% QoQ) as domestic volumes declined
on account of demand slowdown (Greenlam domestic volume fell 8% YoY). Despite
weakness in demand, companies expect underlying demand to remain strong in the medium
term given the tailwinds in the real estate sector. Greenply/ Century maintain their guidance
for 10%/15% volume growth in the ply segment.
• MDF segment continues to outperform Ply/laminate on a 3-year CAGR basis (volume grew
11-26%); increasing MDF imports leading to price cuts in 3QFY23: Greenpanel/Century MDF
volume grew by 26%/11% (3-year CAGR) respectively (- 8%/7% YoY respectively on a high
base) in 2QFY23 on the back of a) strong demand from the OEM segment (c.35-40% of
industry), b) distribution expansions, and c) increasing applications/ acceptance. MDF
imports, which were subdued for the last few quarters, saw a sharp increase in volumes
(14%/57% QoQ/ YoY, -29% 3-year CAGR) during Q2FY23 mainly on account of the decline in
global MDF prices coupled with a sharp fall in freight rates (50% decline from the peak).
Greenpanel/ Century managements have guided for 12%/20% volume growth in FY23. As
per our channel checks, the sharp rise in imports during the Oct-Nov has led leading MDF
players such as Rushil to cut prices by 3-5% in the South and West markets. We note that
this correction is mainly in the plain MDF segment and other peers have not responded to
these cuts.
• Key RM costs remained high, operating margins performance sees contraction YoY:
Operating performance of Century/ Greenply contracted 160/270bps YoY (improved
50/100bps QoQ) on account of cost inflation in key raw materials (timber and chemical cost)
as it didn’t hike prices during Q2FY23 (c. 2-2.5% in 1QFY23, 8% in FY22). The managements
highlighted that timber prices remain high as availability challenges continue (especially in
north India). However, chemical prices started softening in OctNov (constitutes 20%-50% of
RM cost for Ply, Laminate and MDF categories). Century has guided for c. 13-15%/25%
EBITDA margin in plywood/ MDF as a sustainable margin in the near term. Greenpanel has
guided for similar margin of Q2 (c. 30%) to be sustainable in 2H