Greenply Industries Ltd Q2 FY2023 Concall Summary

Key Takeaways

• India demand resilient, Gabon collapsing: Domestic plywood volumes grew ~15% YoY, but the Gabon subsidiary is sitting on zero European orders and faces a larger loss in Q3, turning what was a tailwind into a material drag.
• Margins squeezed by deliberate choice: Raw material costs rose (timber +10% since April) while the company held prices flat to protect demand, and marketing spend jumped from 2.5% to 3.5% of sales as a long-horizon investment management refuses to trim.
• Sandila ramp-up is the bridge to recovery: The new plant exited September at 40–45% utilization and is guided to 75–80% by Q4; that operating leverage, plus any timber softening, is the margin recovery path.
• MDF entry on track but margin caution is loud: The Vadodara plant targets commissioning by March, yet management repeatedly flagged that current 30%-plus industry EBITDA is unsustainable and their own paybacks assume 18–20%.
• What to watch next quarter: Whether Sandila’s ramp stays on pace, whether the slight timber softening (~3–4%) becomes a trend, and whether Gabon finds any alternative geography to offset the complete loss of Europe.

India Plywood: Demand, Mix & Pricing

• Volume growth is market-share capture, not industry growth: The 15% volume increase came entirely from unorganized-to-organized shift; the premium category grew only 2–3%, with the rest in the value segment.
• Demand pattern turned erratic: Unlike last year’s smooth monthly sales, this year saw intermittent weekly pressure followed by sudden upticks; management delivered the numbers but with less predictability.
• October primaries strong, secondaries weak: Primary sales were good, but secondary sales dipped because festivals (Durga Puja, Diwali, Chhath) clustered in one month and labour returned to hometowns; dealers reported healthy order books and projects in pipeline, with secondaries expected to pick up from November.
• Channel discipline supports pricing: Industry working capital management has improved over the last couple of years, and the channel is not flushed with extra inventory, reducing the risk of destocking-driven price pressure.
• Price hikes sacrificed to protect demand: No price increases were taken in Q2 despite raw material costs moving up and compressing margin by 0.8–1%; management chose to balance a topsy-turvy demand scenario rather than push through hikes.
• Premium realizations face a competitor-pricing risk: If timber prices soften sustainably, management will watch how other players behave; if competitors drop prices, the premium segment will face pressure. Current trend is stable.

Manoj Tulsian: "We have been waiting for, I mean just waiting that timber prices will soften. And this has not happened in the last 12 to 15 months. It has just gone against all the trend charts what I understand, what I have seen of the past many years."

Gabon: The Earnings Hole

• Europe orders evaporated: At the end of Q2, European orders were put on hold with no clarity, and some were cancelled; the business is now sitting on zero orders for Europe, leaving only ~40% of Q2 volumes from other geographies.
• Q3 will be a larger loss than Q2: Management is not optimistic on Q3 or Q4 performance; Q3 does not look good at all, and the loss may even extend into Q4.
• Previously expected tailwind, now a drag: Just a quarter ago, Gabon was expected to do very well on easing shipping and other issues; those conditions have reversed, and the team is now scrambling to find new geographies and optimize costs.
• Structural changes add cost: Loans previously backed by standalone guarantees were shifted to Gabon banks at slightly higher pricing as a strategy to delist guarantees and push the Gabon team to stand on their feet, adding to interest cost.
• Operating cash flow hit from Gabon advances: Advances made to Gabon suppliers to secure better raw material costs contributed to H1 operating cash flow of only ~₹3 cr; this is expected to correct in 3–4 months.

Manoj Tulsian: "So as of today, we are sitting on zero orders for Europe. So if you straight away look at that, then my volume of business only remains is 40% of, let's say, even a Q2 number."

Sandila Ramp-Up & Manufacturing Partners

• Utilization trajectory: Q2 utilization was 15–17% overall, but the exit month of September hit 40–45%; management guided to 75–80% by Q4 FY23.
• Production mix spans premium and value: Sandila is gearing up to produce most of the range because plywood logistics costs are humongous; with increased capacity, some value products are also being made in own plants, though in a miniscule way initially.
• Partner volumes dipped on teething issues: Sales volumes from manufacturing partners came down over the past two quarters due to production challenges, plant stabilization bottlenecks, and the door manufacturing portion not yet started; a pilot launched in October with ramp-up expected from November.
• Hapur facility on track for March: Construction is going as planned, and the facility is expected to be commissioned by end of the fiscal, serving the mid-segment plywood market; management flagged that previous Bareilly and Sandila experiences had delays, so a month here or there is possible.
• Door manufacturing pilot launched: Production ramp-up is expected starting November, adding a new product dimension to the partner ecosystem.

MDF: Entry, Economics & Margin Reality Check

• Vadodara plant timeline holds despite port chaos: Major machinery dispatches are completed and installation is in progress; the delay risk is entirely from international ocean freight bottlenecks and port congestion, not from the supplier end. Management says the Q4 FY23 (March) target looks achievable.
• Cost overrun is modest and partly scope-driven: The plant cost is expected to land around ₹580–590 cr, a 6–7% increase partly from scope additions including a 31.4% stake in Renew Green for ~₹5.75 cr.
• Sales infrastructure being built from scratch: An experienced MDF sales head joined ~1.5 months ago, and the sales team is being built now; ~20% of existing dealers already deal in MDF with some brand and are low-hanging fruit, while new trade channels that only sell MDF are also being created.
• FY24 utilization and breakeven math: Full-year utilization of 50–55% is expected in the first full year of operations; at ~50% utilization, the plant is almost breakeven, with breakeven at PBT level at ₹300 cr+ turnover (max ~₹300–325 cr). Breakeven can be lower if value-added products ramp up well, or higher if not.
• Import competition is grade-specific: Competition from imports is mainly in interior-grade MDF, which the world produces in mass quantity at very low cost and dumps in India during global crises; value-added products are manufactured in India and not imported.
• Export as a crisis hedge, not a profit driver: Management wants to sell a small percentage (~5%) outside India to create an alternate market for crisis situations; the Middle East may offer freight advantages from the plant. Exports are not that profitable but serve a strategic purpose.

Sanidhya Mittal: "So I think the current level, we see the listed players and their margin. So honestly, when we see these margins, we feel very encouraged, but we also feel that these margins are not sustainable. So on a long run, honestly, all our paybacks and calculations are made at 18%, 20% level EBITDAs."

Margins: The Investment Overhang

• Raw material cost squeeze: Timber prices increased almost 10% from April to October, while chemical prices eased (phenol down 12–14%, formalin down 25–30%, melamine down 45–50% though low usage in plywood). The net effect, combined with no price hikes, compressed margin by 0.8–1%.
• Marketing spend stepped up structurally: Spend rose from ~2.5% to ~3.5% YoY and will continue at 3.5% for the full year; management views this as long-horizon investment and will not back out even if short-run margin impact.
• No further margin improvement expected near-term: With similar performance, EBITDA margin is not expected to improve; standalone margins may remain at current levels for the next six months.
• MDF industry margins flagged as unsustainable: Current 30%-plus EBITDA levels will correct, otherwise substitutes will come back; management sees 22–25% as sustainable, with their own paybacks calculated at 18–20%. In the short run, Greenply expects to also get 30%-plus but says it looks very difficult due to imports and domestic capacity challenges.

Manoj Tulsian: "And so whatever is needed to be done to the business at this point of time for future growth, we'll not back out, we'll continue to invest, even if in the short run there is some impact on the margins."

Balance Sheet & Cash Flow

• H1 operating cash flow nearly vanished: Only ~₹3 cr was generated because (a) Sandila becoming operational required extra working capital build-up, expected to stabilize and come down in 2–3 months, and (b) Gabon advances to suppliers to secure better raw material costs, expected to correct in 3–4 months.
• Peak debt still ahead: Net debt is expected at approximately ₹650 cr by end of FY23; debt will only go up further this year, with the remaining ~₹210 cr of MDF debt mostly to be drawn by March.
• Full-year capex capitalization: Around ₹600–625 cr, plus routine capex of ₹10–20 cr, totaling ~₹630 cr.
• Internal target to end the year with decent operating cash flow: Management wants to manage debt guidelines, with working capital at Sandila and Gabon advances expected to correct in the next 3–4 months.

Guidance & Commitments

Key Metrics