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Greenpanel Industries – MDF King

Updated: Sep 21, 2023


Company Name – Greenpanel Industries Limited (Greenpanel)


Current Share Price – INR 280 (April 6, 2023)


Market Cap – INR 3,437 cr


 

1. What is interesting about the stock?


Indians are loving shopping for furniture in Ikea – there is a big queue whenever a new store opens and the euphoria is continuing. Ikea stores in Hyderabad, Mumbai, and Bengaluru were an instant hit. Did you know that most of the furniture in Ikea is made with MDF (medium-density fiberboard) and not plywood as has been preferred by Indians?


Globally, the ratio of plywood to MDF in the furniture market is 30:70 whereas in India it is 80:20. There are several reasons why plywood has a higher market share than MDF in India. Some of the key reasons include:

  • Availability and Accessibility: Plywood has been used in India for many decades and is widely available nationwide. In contrast, MDF is a relatively newer product in the Indian market, and its availability and accessibility are limited to certain regions (South) and markets.

  • Perceived Durability: Plywood is perceived as a more durable and strong material compared to MDF. This is because plywood is made by layering sheets of wood veneer together, which makes it more resistant to impact and stress. On the other hand, MDF is made by breaking down wood fibers and compressing them with resin, making it less sturdy than plywood.

  • Cost: Plywood is generally less expensive than MDF, which makes it a more affordable option for consumers. This is especially true for lower-grade plywood, which is commonly used in construction and furniture manufacturing.

  • Cultural Preferences: In India, there is a cultural preference for natural materials like wood, and plywood is perceived as a more "natural" material compared to MDF. This preference for natural materials has contributed to plywood's popularity in the Indian market.

However, furniture at Ikea is mostly based on MDF (medium-density fiberboard). Ikea is known for producing affordable and stylish furniture, and MDF is ideal for achieving these goals. MDF is a versatile material that can be easily shaped, cut, and laminated, allowing Ikea to create furniture with intricate designs and patterns.


Moreover, MDF is a cost-effective material compared to natural wood and good quality plywood, which allows Ikea to keep its prices low while maintaining a high level of quality.


Greenpanel Industries is the largest manufacturer of MDF boards in India, 3rd largest in Asia, and 5th largest manufacturer of MDF boards in the world. Company has an installed capacity of 6.6 lakh cubic meters (CBM) per annum vs Action Tesa at 4 lakh, Rushil Décor at 3.3 lakh, and Century Plywood at 2 lakh.


The production capacity of MDF in India has grown by more than 15x from 0.15 million CBM in 2010 to 2.30 million CBM in 2022. Further, it is expected to witness a CAGR of 20-25% in the period 2021-2026. Regional demand for MDF in India is:

  • South – 45%

  • North – 30%

  • West – 15%

  • Others – 10%

A bit more background on Greenpanel - Company is a leading manufacturer of wood-based panel products in India. Greenpanel produces a wide range of products, including plain and pre-laminated particle boards, medium-density fiberboards (MDF), and decorative veneers.


The Company was de-merged from Greenply Industries on April 1, 2018, into an independent company that focuses largely on the manufacture, distribution, and marketing of MDF. Demerger was part of a family settlement.


The Company's manufacturing facilities are located in various parts of India, including Uttarakhand, Andhra Pradesh, and Gujarat.


MDF contributes ~85% of the Company’s revenue and ~95% of EBITDA in FY22 with the remaining coming from plywood.


Prices of MDF in the domestic market get impacted by imports from Vietnam and Indonesia. These countries are big manufacturing hubs for Europe and the US. However, due to the slowdown in those countries, there is a surplus capacity in Vietnam and Indonesia leading to dumping in India (especially South India) at low prices. This has led to falling domestic sales for players like Greenpanel. Also, the Company is forced to export in the scenario where the export prices are lower than domestic prices.



Greenpanel has announced a capex of INR 600 crore towards MDF brownfield capacity expansion of 2,31,000 CBM with expected production commencement from Q1FY25.


Why invest in Greenpanel?

  • MDF expected to gain share vs Plywood as Indian change their preference (shown by their liking of Ikea furniture). Greenpanel is market leader in MDF

  • Extensive experience with promoters in the wood-based interior infrastructure segment – they have been involved for more than 2 decades

  • Robust balance sheet – zero net debt; high ROCE and ROE (~30%)

2. Key Historical Financials

  • Company revenue had shown strong growth in FY22 with EBITDA margin expansion (operating leverage) and net profit margin (operating leverage, and deleveraging)

  • However, the business struggled in Q3FY23 due to the global slowdown and currency losses. It could continue for the next few quarters

  • Management has guided towards 10-12% volume growth and 23-25% EBITDA margin for FY24

  • Cash flow conversion (CFO/EBITDA) was 85% in FY25 which is quite good

3. What is my view on company valuation?


Share price has jumped ~9x over the last 3 years which has been duly supported by an increase in net profit.


Company trades at EV/EBITDA (TTM) at 7x vs Century Ply at 17.5x, Greenply at 13.2x, Greenlam at 19.2x, and Rushil Décor at 6.4x. In terms of P/E (TTM) ratio, Greenpanel trades at 13.0x vs Century Ply at 29.1x, Greenply at 17.5x, Greenlam at 36.3x, and Rushil Décor at 7.1x. So, the valuation looks reasonable as compared to the peers.


But, the multiples do not account for the global slowdown impact in the last quarter. Using the annualized Q3FY23 profit, the P/E multiple comes to ~23x. Share price could be under pressure in the next quarter as the global slowdown accelerates and long-term investors could evaluate investing at lower levels.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • Increasing competition and the threat of imports could lead to further pricing pressure – return ratios are quite high and could trend down in the next few years

  • Exposure to forex risk – foreign currency loan and import of raw material

  • Sustained slowdown in the real estate market

 

About the Author


I have over 17 years of experience in venture capital, private equity, and investment banking across various sectors in India and the Middle East. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.


I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).


I am an Insignificant Investor in the public market and co-founder of SocInvest.


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

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