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MDF Industry - Countervailing duty on MDF recommended; imports may get hit structurally - ICICI Securities

Posted On: 2021-05-05 04:54:28 (Time Zone: UTC)


In its final findings w.r.t. case no. 06/2019, the Directorate General of Trade Remedies (DGTR) on 3rd May'21 (Link) recommended countervailing duty (CVD) on imports of MDF into India and originating in or exported from Malaysia, Thailand, Indonesia, Vietnam and Sri Lanka for a period of five years. The same needs to be ratified by the Union finance ministry. The recommended CVD structure (if ratified) is likely to negate the entire pricing differential (domestic vs imports) of 8-10% in thick MDF (70% of MDF market) and prune down the differential to 8-10% (from 20-25% earlier) in thin MDF (30% of market). This we believe would enable south-based MDF manufacturers to replace major MDF imports (on structural basis), which are currently estimated at 25-30% of the overall MDF market in India. Key beneficiaries: Greenpanel Industries, and Rushil Décor.

- CVD on MDF segment recommended for next five years. The DGTR on 3rd May'21 recommended countervailing duty (CVD) on imports of MDF originating in or exported from Malaysia, Thailand, Indonesia, Vietnam and Sri Lanka for a period of five years. The same needs to be ratified by the Union finance ministry. The ratification is expected to take at least 2-3 months. The investigation for CVD was started in Nov'19 and the application was initiated by Greenply Industries, Rushil Décor, and Century Plyboards.

- Quantum of CVD recommended is a positive surprise. The definitive CVD of an amount equivalent to the difference between the quantum of CVD calculated at the rate mentioned and ADD payable, if any, is recommended to be imposed from the date of notification to be issued in this regard by the Union government on all imports of MDF. The quantum of CVD recommended ranges at 8.3%-27.5% for Thailand, 10.5%-18.1% for Malaysia, 12.4%-19.1% for Vietnam, 13.7%-15.8% for Indonesia, and 12.4% for Sri Lanka.

- The CVD would be in addition to ADD levied on all plain MDF from the subject countries, which would make imports further unviable. The DGTR recently recommended ADD on Thin MDF from Malaysia, Indonesia, Thailand and Vietnam on 20th Apr'21 for the next five years (yet to be ratified by Union finance ministry). The DGTR also recommended to extend ADD on Thick MDF (6mm or above) for further five years in Jan'21 from Malaysia, Thailand and Sri Lanka. We believe CVD and ADD together would make imports unviable going forward. It may be noted that the ADD on imports of Thick MDF from Vietnam and Indonesia (vide notification 34/2016 dated Jul'16) would expire in Jul'21 and would come up for a review.

- Robust MDF demand sustains on growing market for modular furniture. Post covid, demand for MDF has seen sharp revival largely driven by: a) increasing preference for modular furniture vs customised carpentry; and b) India gradually becoming a manufacturing hub for modular furniture replacing China. Besides the strong OEM demand, we expect increasing acceptance and awareness of MDF for renovation/refurbishment projects to drive robust demand over the near to medium term.

- MDF margins for south-based MDF manufacturers are likely to remain firm. The recommended CVD structure (if ratified) is likely to negate the entire pricing differential (domestic vs imports) of 8-10%-thick MDF (70% of MDF market) and prune down the differential to 8-10% (from 20-25% earlier) in thin MDF (30% of market) segment. This we believe would enable south-based MDF manufacturers to replace major MDF imports (on structural basis), which are currently estimated at 25-30% of overall MDF market in India. We expect their margins to remain firm driven by operating leverage and firm pricing. Key beneficiaries: Greenpanel Industries, and Rushil Décor.


Source: Equity Bulls

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