Greenply Industries Ltd Q4 FY2022 Concall Summary

Key Takeaways

• Volume-led revenue growth, margin squeezed: Standalone revenue grew ~15% YoY on 8% volume and 7% realization, but gross margin faced ~120 bps pressure from persistent raw material inflation and a one-off marketing spend spike.
• Two large projects on track, one about to deliver: The Sandila plywood plant begins trial runs imminently, while the Vadodara MDF plant remains on schedule for first commercial board by Q4 FY23, together representing the company's largest-ever capacity expansion.
• FY23 margin recovery is the central bet: Management expects to claw back 100 bps of standalone EBITDA margin in FY23, taking it to 11-11.3%, despite continued investment spending.
• MDF is the medium-term story, freight advantage is the edge: With no other MDF manufacturer in western India, Greenply expects to capture 50-60% of the western market initially by passing on the freight cost advantage, targeting ₹350-400 cr revenue in the first full year.
• What to watch next quarter: Whether the Sandila trial run translates smoothly into commercial production, the pace of MDF distribution network build-out once the sales head joins, and any sign that raw material inflation is finally peaking.

Volume Growth & Capacity Expansion

• Q4 volume driver: 8% volume growth in Q4 was partly supported by outsourced manufacturing tie-ups because existing in-house capacity was running almost at full utilization.
• FY23 volume guidance: Management expects 10-11% volume growth for FY23, calling it realistic rather than conservative given current capacity constraints; the new Sandila plant will help meet this target.
• Sandila plywood plant: Financial closure is done, construction is complete, and commercial operations are expected to start very soon with trial runs beginning in the next one week.
• Asset-light capacity adds: Two manufacturing partner units were added in Bareilly, UP for plywood and allied products, with the first unit fully utilized and the second partially producing since Q3 FY22; another associate partner facility in Hapur, UP is expected to be operational by Q4 FY23.
• Outsourced volume trajectory: Outsourced volume may initially dip slightly when Sandila commissions, then catch up again as both in-house and outsourced need to move in tandem to deliver the guided 10% volume growth.
• Industry volume question unanswered: When asked whether the plywood industry was flat on a 2-year CAGR basis and whether Greenply's flat volumes reflected market share loss, management declined to answer directly, stating industry numbers are "extremely difficult to answer" given the fragmented nature of the sector.

Raw Material Pressure & Pricing

• Persistent timber inflation: Timber prices rose 20-25% over the last 12 months and, unusually, did not come down in Q4 as normally expected. [10-11]
• Chemical price volatility: Phenol rose 35-40%, formalin rose 8-9%, and melamine swung from ₹130 to ₹270 and back to ₹135-140 over the period, creating a volatile raw material environment.
• Price pass-through executed: The company has taken ~10% in price increases over the last year, of which ~7% reflected in FY22 and ~3% will reflect in FY23; pass-through has been successful as evidenced by continued growth in all quarters.
• Further price action: Another price increase of 1% to 1.25% was taken in Q1 FY23; management feels "almost covered" on raw material cost pass-through as of now, but will take further calls if raw material prices rise further.
• Unorganized sector status-quo: Cost inflation has been similar for unorganized players in Yamuna Nagar; plants that shut down during the pandemic have not reopened, and the situation has been status-quo for the last 6-9 months.

Tulsian: "Every time we expect that the raw material prices stabilize or maybe it will start slightly coming down but that has not happened unfortunately in the last 6 to 8 months."

MDF Project: The Medium-Term Growth Engine

• Project status: Financial closure is done, civil construction is under full swing, and dispatches of imported machinery have just started and are broadly on schedule; first commercial board is expected in Q4 of this financial year.
• Western India freight advantage: With no other MDF manufacturer in western India and no competitor adding capacity there, Greenply expects to capture at least 50-60% of the western market initially by passing on the freight cost advantage to consumers without affecting its own bottom line.
• Revenue ramp-up: Management targets ₹350-400 cr revenue in FY24, the first full year, at ~50% utilization based on current pricing; utilization can reach 60-70% within six months, and ₹650 cr at 80-85% utilization by FY25.
• Margin expectations: Current market MDF margins are 28-30%; Greenply expects to reach 25-26% within two years, a 3-4% gap versus mature players that reflects the ramp-up phase.
• Distribution build-out: 90% of MDF distribution will be a new network with only 10% overlap with the existing plywood channel; a sales head has been finalized and will join in the next two months, after which network building begins.
• Export hedge strategy: The company has no export liability but may export 10-15% of capacity as an alternate market hedge for periods of domestic overcapacity, though domestic margins are currently better.
• Pricing sustainability uncertain: When asked whether current high MDF pricing will sustain given more capacities coming in 7-8 quarters, management acknowledged "there would be some level of corrections which will happen but we all have to wait and see it," offering no firm view.

Sanidhya Mittal: "In MDF outward freight will play a very important role because the product cost is very low and in western India as on date there is no manufacturer of MDF at present. Neither is anybody putting a capacity in western India. Without affecting our bottom line, we will be able to pass on the freight benefit to the consumer which we feel by that way we'll be able to tap at least 50%-60% of the western market to start with."

Gabon Operations

• Full-year performance: FY22 revenue grew 24% with EBITDA margins of 11.7%, though Q4 margins were affected by headwinds including raw material supplies, domestic logistics, and vessel availability; management advises looking at the full-year margin rather than quarterly.
• Total business scale: FY22 sales were ₹183 cr reported plus ₹40-45 cr of domestic consumption, totaling ~₹230 cr, short of the earlier ₹250-300 cr target due to shipping line challenges and raw material availability and quality issues.
• Demand not the problem: There is no demand-side concern; Europe demand is very good, South East Asia is picking up, and the order backlog stands at 2.5-3 months; the company is actually declining orders due to inability to serve.
• FY23 margin outlook: Management is slightly more bullish on margin improvement in FY23, expecting 100-150 bps improvement for sure during the year, but this is contingent on container and shipping line availability normalizing; if normalization does not happen, the year could be similar to the previous one.
• Revenue upside conditional: The ₹250-300 cr or even ₹300 cr revenue target is possible in the next six quarters once shipping challenges normalize, but the true demand test will come only when the company can serve orders in the same month they are received; right now, it looks very rosy.

Tulsian: "Right now, it looks very rosy. ... only when the situation normalizes and we have a time period when we are able to serve the order in that particular month only, then we will really come to know also on the demand side of the challenge."

Margins: The Recovery Path

• Q4 margin headwinds: Gross margin faced ~120 bps pressure from rising input costs, while marketing expenditure spiked to 5.2% of revenue versus a normal 3.5% full-year run-rate because IPL sponsorship costs and a TVC burst both fell in Q4.
• Full-year FY22 base: Standalone adjusted core EBITDA margin was 10.3% and PAT margin was 6.5%; rising input costs impacted gross contribution despite price hikes, but better economies of scale and a reduction in interest cost resulted in PAT improvements.
• FY23 margin target: Management expects to improve standalone EBITDA margin by 100 bps during FY23, from 10.3% to 11-11.3%, despite continued investments in operations and process capabilities.
• FY24 could be better: The following year could see stronger margin expansion because operational efficiency investments already made will bring operating leverage as growth continues, and any raw material price stabilization would further help margins.
• 14% margin vision intact: Management acknowledged the delay but expressed comfort with progress, calling 14% "doable" and "just a matter of time," with a potential trajectory of ~11.3% in FY23, possibly ~13.5% in FY24, and the long-term target unchanged.
• Peer margin gap unexplained: When asked why the EBITDA margin gap exists versus CenturyPly despite higher gross margins, management offered possible reasons including single line of business cost allocation and different business models, but stated "I'm not very sure" and "I have not seen all the numbers for sure," providing no definitive quantified explanation.

Tulsian: "If I am talking of 15% growth where 10% to 11% volume growth and I certainly feel that we can improve the margin by 100 basis points during the year if not more."

Balance Sheet & Capital Allocation

• Working capital discipline: Standalone working capital days improved to 29 days as of 31st March 2022 from 34 days the previous year, attributed to discipline; management expects to maintain the discipline in days, though absolute value may rise with sales growth.
• Debt peak: Net debt is expected to peak at ₹600-625 cr with gross debt of ~₹700 cr this year, driven by the ongoing capex cycle.
• FY23 capex: Total capex of ~₹475 cr is planned, comprising ₹420-425 cr on the MDF project, ₹30 cr of plywood capitalization in Q1, and ₹20-25 cr of maintenance capex.
• No major future capex planned: Management has no major plans as of now beyond the current projects; it may look at one or two more associate partner facilities requiring minimal capex, and possibly something further in the MDF line next year, but the immediate focus is settling down with the current large investment.
• No particle board or Gabon investments: There are no immediate plans for particle board, and no investment plans in hand for Gabon as of now.

Guidance & Commitments

Key Metrics