Greenply Industries Ltd Q2 FY2025 Concall Summary

Key Takeaways

• Plywood steady, MDF hit by shutdowns: Plywood core EBITDA margin improved 70 bps YoY to 8.3%, while MDF margins fell sharply to 11.8% from 16.6% QoQ due to a 7-day plant shutdown, Gujarat floods, and raw material cost increases not passed on.
• Price hikes taken, more needed: Plywood price hikes of 2%-3% were absorbed by the market; an MDF increase of 1%-1.5% took effect October 1, but management wants further hikes to offset rising timber costs, contingent on industry acceptance.
• New revenue streams are delayed, not derailed: The furniture fittings JV launch slipped from July to November due to machine delays, and the HDF flooring line is now expected mid-Q4, pushing revenue contributions further into H2.
• Raw material headwinds to persist: Management sees no drastic reduction in raw material prices for the next 2-3 quarters, with the whole of FY25 remaining challenging; relief is expected only from calendar year 2026.
• What to watch next quarter: Whether the October MDF price hike sticks and expands in Q3, the pace of the furniture fittings commercial ramp-up from November, and any movement on the new plywood plant beyond the drawing board.

MDF: Margin Pressure and Recovery Path

• Shutdown and floods hit output: A 7-day annual maintenance shutdown of the main press line in September, combined with intermittent power supply from Gujarat floods, reduced production and sales volumes versus Q1.
• Inventory destocking amplified the margin hit: Lower production forced a reduction in finished goods inventory, causing under-absorption of fixed overheads that compounded the raw material cost pressure.
• One-time employee cost bump: Annual increments added a one-time increase to employee costs during the quarter, further depressing MDF margins.
• Timber costs are cyclical and rising: Timber follows a 3-4 year price cycle; margins dip when timber is very high, and the current upcycle is squeezing the industry, prompting the October 1 price hike attempt.
• Recovery levers are in motion: The in-house glue plant (completing Q3) will provide raw material security, the HDF flooring line (mid-Q4) will lift realizations by using existing MDF output for higher-value products, and value-added products like Boilo and HDMR 710 are already improving the blended mix.
• Management maintains 18% margin is achievable: Once full capacity is in place and ramped optimally, moving from the current ~16% to 18% by next year is considered doable, with an expected improvement of around 200 basis points.

Sanidhya Mittal: "The way cost has gone up, especially on the timber side, we definitely want to take, but it's again, market scenario. If everybody in the industry is taking and the market is accepting, definitely, we'll also push. But it depends."

Plywood: Steady Gains with Capacity Constraints

• Margins improved despite raw material headwinds: Core EBITDA margin rose 70 bps YoY to 8.3%, supported by price hikes of 2%-2.5% taken in August and September that were absorbed by the market.
• Growth is broad-based but economy-led: Volume growth is coming equally from premium and economy segments, with the economy side growing faster, aided by market share gains from unorganized players facing GST compliance pressure and raw material availability challenges.
• Near-term growth capped by capacity: Existing capacity constraints are limiting volume upside; some partner manufacturing arrangements did not work out, and only one unit remains under that model, making the company cautious about the format's future viability.
• New plant still on the drawing board: A new plywood facility is being planned but remains at an early stage, with no timeline or capex commitment yet.
• Management wants double-digit margins: The stated ambition is to return plywood margins to 10%, though if raw material prices continue rising, another industry-wide price increase may be needed in Q4, which management says is "too early" to call.

Manoj Tulsian: "Well, it's something which my promoter also keeps asking me, Sneha. You are sounding like my promoter is asking all these questions."

MDF Competitive Dynamics and Import Substitution

• Imports are not returning soon: Container availability issues are limiting imports, and the expected implementation of BIS norms is likely to deter importers further; neighboring countries also face raw material disruption and excessive rainfall, reducing their export competitiveness.
• Greenply competes against the top 3-4 branded players: The company does not compete against unorganized MDF players, who are smaller, concentrated in North India, and face a ~10%-12% manufacturing cost disadvantage versus Greenply on an apple-to-apple product comparison.
• Pricing power is constrained by industry overcapacity: Larger players with too much capacity, plus new entrants including Greenply and another competitor adding lines last year, have made it challenging for the industry to absorb capacity and take price hikes.
• Unorganized players are not a threat in the West: Freight costs insulate Greenply from unorganized competition in its Western India stronghold, though competitors are willing to deliver at the same cost to that region when industry capacity exceeds demand.
• Debottlenecking is under consideration: The Vadodara plant is designed for 1,000 cubic meters and brownfield expansion is possible, but it requires a long shutdown; the company is deliberating whether to do it now or first pursue another line expansion.

Sanidhya Mittal: "Honestly, unorganized, firstly, these guys are not being able to produce all products we are producing. And unorganized is not honestly such a threat because when we are going to the market, we are not competing against unorganized. We are straight competing against the top 3, 4 branded players who have Conti-roll plants like us."

New Business Lines: Furniture Fittings and HDF Flooring

• Furniture fittings launch delayed to November: Phase 1 machines arrived in October and trial runs were completed successfully, but the full commercial launch planned for July slipped due to machine delays; the aggressive go-to-market push now begins almost in November.
• Break-even is the first target: Management's initial goal is to break even in the furniture fittings business for the full year next year, with a best-case revenue target of INR400-500 crores in the next 3 years.
• Phased investment tied to sales and BIS norms: Phase 2 investment is planned around the end of next calendar year, with Phase 3 a year after that, but timing depends on the sales ramp-up and the implementation of BIS norms.
• HDF flooring line to commission mid-Q4: The new line will use existing MDF output to produce higher-value flooring products, lifting blended realizations; installation is expected to complete in Q3 with commissioning by mid-Q4.
• Pre-lam portfolio relaunch underway: The entire pre-lam portfolio is being relaunched this month (October 2024) with increased offerings in both finishes and designs, with a target to double sales in the category.

Raw Material and Cost Outlook

• No near-term relief expected: Management's team estimates that the whole of FY25 will remain challenging for raw material prices, with no drastic reduction in the next 2-3 quarters; prices could stay at current levels, slightly rise, or slightly fall.
• Calendar year 2026 is the expected turning point: Optimism for raw material price easing is pinned on the start of calendar year 2026, implying sustained margin pressure through at least the next two quarters.
• Timber is the primary cost driver: Timber's 3-4 year cyclicality is the dominant variable; the current upcycle is squeezing MDF margins and prompting the push for price hikes, while plywood has so far managed to pass costs through.
• In-house glue plant to provide security: The under-construction glue plant for MDF, expected to finish in Q3, will reduce dependence on external glue suppliers and provide raw material security, though it does not address timber costs.

Manoj Tulsian: "Their estimate is that, yes, the whole of FY '25 still can remain challenging. It can remain at these price levels, it can slightly go up or maybe slightly come down. But we don't see any drastic reduction on the raw material prices in the next 2 to 3 quarters."

Balance Sheet and Capex

• Debt optically lower due to one-off LC: Net debt stood at INR347 crores, but this includes a one-off large procurement of imported raw materials against a letter of credit (~INR70 crores); excluding this, debt is on track toward the guided INR450 crores by March.
• H2 capex is backloaded at INR45-50 crores: Second-half capex covers the MDF glue plant, HDF flooring line, and plywood investments, weighted toward the latter part of the year.
• Inventory build expected for Q1/Q2 preparation: Inventory levels are expected to increase seasonally, which will push debt toward the guided year-end level.
• MDF plant payback in 5-6 years: When pressed, management indicated a 5-6 year payback period for the MDF plant, though the response was redirected toward ROCE targets rather than a direct payback calculation.

Guidance & Commitments

Key Metrics