We explore the business of leading interior infrastructure player in the wood panel industry in India and assess the opportunities and challenges it faces.
Statutory Warning: This is NOT an investment advice to buy or sell shares. Please make your own decision, as blindly acting on anyone else’s research and opinions can be injurious to your wealth. I do not own the stock, but my analysis can be biased, and wrong. I have been wrong many times in the past. I, Vishal Khandelwal, am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014 (Registration No. INH000000578).
About Greenply Industries Ltd. (GIL)
GIL is a leading interior infrastructure player in the wood panel industry in India. Its product portfolio includes Plywood, Medium Density Fibre-boards (MDF), Veneers, Wallpapers, Flooring and Wooden Doors. The company was started in 1984 by Shiv Prakash Mittal and Rajesh Mittal. Within four years, the small saw mill operations graduated to a plywood manufacturing plant in Nagaland. The company was later incorporated as Mittal Laminates Private Ltd in 1990 and was taken public in 1994. The name was changed to Greenply Industries Ltd. in 1996.
About the Industry
The wood panel industry is a smaller part of a much larger furniture market (worth Rs 70,000 crore) where organized players command a mere 1.4% market share. Since the furniture industry is largely dominated by unorganized players, the usage of plywood is much higher because of its affordability as compared to more expensive options like wood or MDF. The size of wood panel industry, where GIL operates, primarily consists of materials used to make furniture and is pegged at Rs 28,500 crore. The product mix for this industry includes plywood, surface products (laminates and veneer) and engineered products (MDF & particle board). Plywood and MDF are the backbone material for furniture whereas laminates and veneers are used for decorative purposes. Wood panel market is again quite fragmented.
The primary levers that drive growth in this industry are – Rising urbanization, increase in disposable income levels, and growth of real estate sector especially in Tier II and Tier III cities. According to one estimate, Indian cities need at least 2 million houses every year to support the growing population. Government of India’s introduction of 100 smart cities plan is expected to boost this development. About 70% of the demand for wood based interior infrastructure comes from fresh construction and remaining comes from renovation.
In India, across industries, a game changing phenomenon is gradually transpiring. This is the wave made up of a massive shift from unorganised sector to organised one. Implementation of GST is fuelling this trend. The rising tide may lift all boats, including GIL’s. Here’s a quick primer on how the rollout of GST is going to have a significant positive impact for the organized players like GIL.
Before GST, plywood industry was one of the heavily taxed industries with overall taxes (including VAT, excise and octroi) adding up to 25-30%. Almost all unorganized players managed to evade taxes and many of them also availed the benefit of Small Scale Industry (SSI) by keeping their turnover artificially below the prescribed limit. These unfair advantages had enabled them to under-price their products vis-à-vis their organized counterparts. The price differential was as high as 30-50%. Under the new GST regime, these two advantages have disappeared, which would force all the mom and pop players to increase prices and narrow the price differential. Moreover, before GST, there was no credit that a dealer could avail for the excise duty paid, but under GST this will be allowed. As a result, the price for both dealers and consumers will be reduced by around 10%. Thus, the overall price differential between branded and unbranded plywood players is expected to fall by 10-20% under GST. This will accelerate the shift of consumption trend from unorganised sector towards the organised.
Let’s drill down further into different segments of the industry. Plywood has a share of 63% whereas MDF keeps 31%. Laminates cover 16% share of the industry followed by Particle board which constitutes 10% and the final 6% share is taken care by decorative veneers.
Let’s first focus on the plywood industry. As illustrated in the chart above, out of Rs 18,000 crore of plywood industry, 75% is unorganized. The overall plywood industry has seen a growth of 6% in last five years whereas the organized section of this industry has witnessed a growth of 12% in the same period, clearly gaining share from unorganized players. The major players in the organised space include GIL, Century Ply (CPIL), Sarda Ply, Archidply and Uniply. There is a virtual duopoly in the organised space as GIL and CPIL together command more than 50% of the organized market share each getting an equal slice. This can be attributed to their strong brand presence and well entrenched distribution network, which allows them a higher customer reach. The demand primarily comes from housing and corporates. Currently, almost 15-16% of overall plywood demand in India is replacement demand, which is much lower than the 35-40% in developed countries. It’s expected that the replacement demand will contribute 20% of overall demand in the next 2-3 years, for plywood.
The other section of the wood panel industry is the MDF market. MDF is currently the smallest segment of the Indian plywood and panel industry with FY16 revenues of Rs 1,600 crore. MDF is made by breaking down hardwood and softwood residuals into wood fibres; wood fibres are combined using resin and heat pressing them.
MDF is a very versatile product with worldwide application primarily in panelling. It finds use in wide range of furniture, handicraft items, display or exhibition stands and signs. Further, it can be used for ceiling, toys, carving, partitions, maritime applications and educational equipment. MDF can also be used as a wood substitute because of its intrinsic properties which facilitates carving. It can further be used in bedroom, kitchen furniture, lounge and dining furniture, home entertainment consoles, caravan interiors, shop fittings, snooker tables and caskets. Because of its flexibility MDF is also used in school projects. Thin MDF boards are suitable for drawer bottoms, cabinet backs, interior wall and ceiling panels, modular partitions and door skins.
Globally, the MDF-to-plywood consumption ratio is 65:35, whereas in India it is skewed in favour of plywood at 10:90. Given MDF’s low cost (almost 50% cheaper than premium plywood) and better utility (can be easily moulded, painted and machined), its consumption continues to increase in India, offering tremendous opportunities to organised players to ramp up capacity and capture this growing market.
Unlike plywood, MDF is largely organized with key players like Mangalam, Rushil Décor, Action Tesa and Shirdi Industries. GIL is the leader in this space with 30% market share. MDF market has shown a growth of 15-20% CAGR in last five years. The overall MDF demand in India is pegged to be 550,000 CBM (cubic meter) out of which domestic production caters to 400,000 CBM, and rest is by imports. So, although there’s no competition from small unorganized player, the threat comes from imports. As sigh of relief comes from government’s imposition of anti-dumping duty of up to US$ 64.35/CBM on the import of MDF board (thickness > 6 mm) from Vietnam and Indonesia. Since, around 70% of India’s demand is based on the thick MDF board, government’s decision will create a level playing field for Indian players vis-à-vis foreign producers. The demand of MDF is driven by increase in widening of applications in housing and interiors, increasing popularity of ready-made modular furniture and modular kitchens, ready-to-move offices and retail outlets, need to substitute low quality plywood, and affordability of MDF as a substitute for wood.
On account of MDF’s advantages over other wood products and reduced price-differential between MDF and cheap unorganised plywood, a shift towards MDF is happening.
More About GIL
As we mentioned earlier, GIL commands a 26% and 30% market share in plywood and MDF respectively. It has over 16 brands under it, namely – Greenply Plywood, Optima Red, Ecotec, Green Panelmax, Green Floormax, etc.
GIL has total plywood capacity of 32.4 MSM (million square meters) spread across 4 plywood manufacturing facilities and MDF capacity of 180,000 CBM in one MDF facility which is largest in the country. The Tizit (Nagaland) plant has a plywood production capacity of 4.5 MSM. Its proximity to timber belts in Nagaland gives it a strategic advantage for abundant supply raw material. The Kriparampur (West Bengal) facility enjoys a plywood production capacity of 6 MSM and the nearby Kolkata port enables a convenient international access.
The Bamanbore (Gujarat) unit is the biggest among 4 with a plywood capacity of 11.4 MSM. Its proximity to Kandla port enables Greenply an easy import of raw materials and supply to Western India. The manufacturing plant in Pantnagar (Uttarakhand) boasts of plywood capacity of 10.5 MSM and MDF capacity of 0.18 million CBM. This unit too has the advantage of vast agro forestry resources and access to the fast-growing North Indian markets.
When it comes to capacity utilization, all the manufacturing units are doing well. While the plywood units are working at 101% capacity utilization, MDF is operating at 99%. What’s even more astonishing is that these capacities, according to the management, can be further ramped up to 120% and 115% respectively. GIL is backward integrated through its Myanmar JV for the production of face veneers. Apart from that the company has its own plantations with fast growing and improved species of clonal plantations around its manufacturing units.
In FY17, plywood contributed about 71% of GIL’s total revenues of Rs 1,168 crore. The rest, Rs 477 crore was contributed by MDF. The net profit posted by the company was Rs 135 crore in FY17.
Let’s now analyse GIL using a set of questions to test the underlying business and management quality.
1. Has the company done well in terms of sales and profit growth over the past few years?
GIL has been a slow and steady grower over the past five years. Its revenue has grown at a modest 6% CAGR, while net profit has grown at a much better rate of 13% CAGR.
Wooden doors, wooden flooring and wallpapers are the next generation trends gaining traction in interior infrastructure space. In line with this emerging trend, GIL is investing in new line of businesses in decorative segment.
It recently ventured into wallpaper business which has a small unorganised market size of Rs 800 crore in India. The company has tied up with 10-12 manufacturers from some US and European suppliers and it will be sold under the brand ‘Greenteriors’. For FY17, revenue from wallpapers was at Rs 10 crore. The company expects this brand to become of a size of around Rs 100-150 crore by FY20.
The company has also launched natural veneer, which is a high margin business compared to its plywood business. It is included in the plywood segment as a value-added product. Another new line of business that GIL is entering is laminated flooring in its MDF segment. This initiative is to tap into the new trend of replacing the expensive designer tiles with laminated flooring. GIL’s Green Floormax is targeting this market.
Furthermore, over the past 7-8 years, GIL has spent over Rs 300 crore on advertisement and sales promotion. Not only that, the management seems committed to continue spending at least 3% of the revenue on this front every year. This may auger well for GIL’s brand.
2. How profitably have retained earnings been reinvested?
The company has done reasonably well on this account. Average ROCE stood at 22% and 21% over the last 3 and 5 years respectively. The operating profit margin for last 5 and 10 years stands at 13% and 11% respectively.
3. Does the business have a durable competitive advantage?
For plywood business, GIL’s closest competitor is Century Ply which is primarily in Plywood, Laminates and Logistics. As compared to Rs 50,907/CBM realisation of Century Ply, GIL’s realisation stands at Rs 62,468/CBM. Capacity utilisation wise, with more than 100%, GIL is way ahead of Century Ply’s 72%. Having said that, Century Ply’s capacity is about 60% more than GIL’s.
In the MDF industry, Mangalam Timber was the first to enter in 1985. In spite of Mangalam having a big head start, GIL entered the market in 2010 and has emerged as the market leader.
As the plywood industry is highly unorganized, a good distribution network is essential. The company has a widespread distribution network of 2,100+ distributors, 8,000+ retailers and 39 branches. On one hand GIL is increasing its dealer strength and improving the product mix, on another it has been able to create a brand equity in the highly competitive and fragmented plywood industry. The company has also segregated marketing strategies for both its product lines i.e., plywood and MDF.
With its JV in Myanmar, the upcoming new MDF plant in AP, the planned capacity expansion in Gujarat and Uttarakhand and setting up of new manufacturing unit in Africa, GIL is positioned as player with a reasonable competitive advantage.
4. How has the management fared?
GIL is owner-operated business where promoters own significant stake (55%) in the company.
Anticipating risk of raw material supply disruption, the creation of JV with a local supplier in Myanmar was a brilliant strategic move. The subsidiary commenced production of commercial veneers in October 2014 with a unit with an installed capacity of 42 MSM through which it sources quality face veneer at low prices. At the current capacity utilization, the company requires 24 MSM of face veneer. Out of total production, about 50% is consumed by the company to manufacture plywood, while the balance low grade face veneer is sold in the open market at a premium. The 15-25% premium on face veneer in India enables the company to enjoy higher margins.
In 2014, the company demerged its decorative business comprising of laminates and allied products into a separate listed company (Greenlam Industries Ltd.). Management’s decision to spin off the laminates business appears to be a rational one. The spin off not only reduced the debt on GIL’s balance sheet but the decision ensured a dedicated management focus and resource allocation for the respective businesses. Post the demerger, the net debt to equity stands close to 0.5x which is well below GIL’s competitors.
GIL currently has a pan India presence with the northern market contributing 55% of total MDF revenue and the southern market contributing 30%. Around 55% of GIL’s MDF revenue comes from the northern region as its plant is located there, leading to lower freight costs. However, to cater to its southern market, it had to incur high freight costs. Moreover, MDF is an emerging industry in India and its demand is expected to double over the next three years to 1.06 m CBM. Keeping these two factors in mind, the management is investing around Rs 730 crore in a new manufacturing unit in Chittoor district in Andhra Pradesh with an annual capacity of 360,000 CBM. Of the total cost, Rs 450 crore will come from external borrowings, Rs 50 crore from the issue of QIP and the balance Rs 230 crore from internal accruals. The new unit is expected to commence commercial production by September/October 2018. Commissioning this new MDF facility in South will lower the freight costs significantly and make GIL’s MDF more competitive in the South Indian market.
Apart from this, management is reconfiguring the business for greater value creation. Around 51% of GIL’s plywood revenue is derived from the luxury and premium segment. The company’s luxury brand ‘Greenclub’ contributes 9% whereas its premium brand ‘Greenply’ contributes 42% of plywood division revenues. Since all the capacities are running at 100%, it makes sense to utilize the capacity for high margin businesses. To free-up the capacity, the economy segment manufacturing (for its ‘Ecotec’ brand) is being outsourced. The management is consciously moving towards an asset light model in the economy segment will to free up more in-house capacity for the premium segment. The outsourcing model has ROCE of 35-40% vis-à-vis 18-20% ROCE for in-house manufacturing. The ‘Greenteriors’ business, as we saw earlier, is again based on the outsourcing model where the idea is to enter the wallcover segment by leveraging the existing distribution network. The company currently outsources 22% (in value terms) which it plans to increase over the next three years to 30%. This move will enable the company to generate better ROCE’s going into the future.
GIL’s management has shown good capital allocation skills. Their recent decision to enter Africa for setting up manufacturing facility is a good example of investing for the long term. Gabon, an equatorial country in West Central Africa, is spread over 267,667 square km, of which 85% is rain forest with 400 species of woods.
5. What are the risks to the business?
The first imminent risk is the discontinuation of tax and excise duty exemptions that company had been enjoying. Most of the corporate tax waivers for GIL have ceased in FY16. This is going to impact earnings in the short term.
The second risk is of capacity constraints. Since, the existing manufacturing units are already running at full capacity, the company may not be able to cater to the incremental demands. However, with upcoming MDF plan in AP and capacity expansion plans in Uttarakhand and Gujarat, this risk is taken care of. Here’s an excerpt from the latest annual report –
We also planning to set up a Decorative Veneer/ Decorative Plywood unit in Bamanbore, Gujarat (2.25 mn. sq. mts.) and a Plywood unit in Sandila, Uttar Pradesh (13.5 mn. sq. mts.).
The next is the supplier risk. Most of the industry procures its raw material from Myanmar, which is the world’s leading producer and exporter of teak wood (accounting for 75% of global market), as well as countries like Vietnam, Indonesia, etc. Any unforeseen regulation (like
Myanmar’s 2014 ban on raw timber export) may pose risk in the inability to procure raw material at the right time and price. GIL has mitigated this risk by entering into a JV with Singapore based company to control and run a veneer manufacturing facility.
The company is also setting up a veneer manufacturing unit at Nkok SEZ, Gabon (West Africa). This would help in securing future supply of veneer.
The other source of significant risk is related to currency. Although, company’s export revenues aren’t significant, the debt it’s planning to take on for Chittoor unit is in Euro denomination. Moreover, GIL imports wood and other raw materials like chemicals, etc. for other divisions, with imports accounting for 41.5% of raw material costs. Any unfavourable currency movements can pose sizable risk for the company.
In the future, with a change in consumer preference or trend, substitutes like plastic or steel could evolve and pose a challenge of disruption to the plywood and MDF industry. A slowdown in real estate can also adversely affect the demand scenario for the wood panel industry.
GIL’s stock is currently trading at around Rs 270 (as on 20th Aug 2017), which implies a P/E multiple of around 25x its trailing 12-months EPS of Rs 11 per share.
Statutory Warning: This is NOT an investment advice to buy or sell shares. Please make your own decision, as blindly acting on anyone else’s research and opinions can be injurious to your wealth. I do not own the stock, but my analysis can be biased, and wrong. I have been wrong many times in the past. I, Vishal Khandelwal, am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014 (Registration No. INH000000578).[/show_to] [hide_from accesslevel=’almanack’]
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