Greenpanel Industries - Demand revival in MDF to trigger rerating - ICICI Securities

Greenpanel Industries has been trading at benign valuations ever since its listing in Oct'19 (post its demerger from Greenply Industries) largely attributed to demand and pricing headwinds in the MDF category and large capex (Rs7.9bn) committed on its Andhra Pradesh project leading to under-utilisation of its MDF assets and muted profitability. However, with faster-than-expected demand recovery in MDF category (which also seems sustainable) post Covid-19 breakout, GNPL may sweat its capacities much faster than envisaged earlier. Besides, delay in greenfield MDF projects of CPBI and Rushil Décor, coupled with stable MDF pricing and its recently initiated productivity enhancement and cost control measures at its MDF units, may drive significant improvement in its profitability going forward. Upgrade to BUY.

- Increase earnings by 163%/71% for FY21/FY22. Adjusting for the improving demand and earnings visibility in MDF segment, we increase our revenue/earnings estimates by 19%/17% and 163%/71%, respectively, for FY21/FY22. We expect the company to report revenue/PAT CAGR of 15%/138% over FY20-FY22E. With the company available at 8x FY22 earnings or 4.5x EV/EBIDTA, we upgrade the stock to BUY (HOLD earlier) with a revised TP of Rs100 (15x FY22 earnings) vs Rs39 (10xFY22 earnings) earlier.

- Key beneficiary of capacity vacuum likely to be faced by MDF majors amid sharp revival in demand. Despite incremental capacity addition announced by few unorganised players in the recent past, we expect GNPL to be the biggest beneficiary of the burgeoning demand for MDF (post Covid-19) with CPBI likely to run out of their capacities over the next few quarters. Also, a) delayed greenfield projects of Rushil Décor and CPBI; b) likely imposition of anti-dumping duty on thin MDF and CVD on all MDF imports and c) increasing demand for modular furniture (for own consumption and exports) would drive higher utilisation rates and firm MDF pricing for GNPL in near to medium term. We expect GNPL's overall revenues to grow at 14.5% CAGR over FY20-FY22.

- EBITDA margin at an inflection point. Stable category pricing, operating leverage, recently initiated productivity enhancement and cost control measures and improving revenue mix (focus on domestic volumes) would drive strong margin recovery in FY22E for GNPL. We, thus, expect its overall MDF margins to expand to 20% in FY22E vs 16.7% in FY21E (GNPL already demonstrated 19.1% margins in Q4FY20 despite loss of sales in Mar'20 due to sudden lockdown).

- RoCEs may scale up in double digits in FY22E. We expect MDF category RoCEs to inch upwards of 17-18% by FY23 vs 12-13% witnessed in FY19/FY20. This is likely to be driven by higher asset turns for large MDF players and expected improvement in their profitability. GNPL, too, may scale up its RoCEs to double digits (12.7% by FY22E) driven by higher capacity utilisation, expected improvement in profitability, higher FCF generation (with no capex in store over the next two years and stricter working capital management) and subsequent debt reduction. This we believe will drive P/E multiple expansion for GNPL going forward.

Source : Equity Bulls

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