Greenpanel Industries Limited (GREENPANEL) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Greenpanel Industries Limited Q4 FY '24 Earnings Conference Call. [Operator Instructions] There will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rishab Barar from CDR India. Thank you, and over to you, sir.

Good day, everyone, and thank you for joining us on the Greenpanel Industries Limited Q4 and FY '24 Conference Call. We have with us today Mr. Shobhan Mittal, the Managing Director; Mr. V. Venkatramani, the CFO. Before we begin, I would like to state that some statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. A detailed statement in this regard is available in the results presentation that was sent to you earlier. I would now like to invite Mr. Shobhan Mittal to begin the proceedings of the call. Over to you, sir.

Thank you. Good afternoon, everyone, and thank you for joining us to discuss Greenpanel's operating and financial performance for quarter 4 FY '24. MDF Domestic sales grew by 23%, while export volumes fell by 75%. We consciously stopped exports to large customers since it was not economical with 12% quarter-on-quarter and a 30% year-on-year increase in wood prices. Overall, MDF volumes were 7% lower at 127,239 cubic meters compared to 137,265 cubic meters in the corresponding quarter. MDF domestic realizations were lower by 11.9% at INR 29,058 per cubic meter due to introduction of volume schemes in quarter 4 and change in product mix. Export realizations were higher by 17.1% at 20,430 cubic meters. MDF's EBITDA margin is at 16.4% were impacted by reduction in domestic realization due to launch of volume-based schemes in quarter 4 and change in product mix, lower export volumes and 40% year-on-year increase in wood prices. Plywood volumes were lower by 30% and operating margin negative 10.4% were impacted by lower volumes and increase in raw material prices. Plywood realizations at INR 250 per meter were lower by 6.7% year-on-year. This was due to the reduction in decorative veneers volumes. We have restructured our plywood sales to recover market share and reached optimum capacity over the next 2 quarters. Post-tax profits for the quarter were lower by 57% at INR 29.8 crores as compared to INR 68.9 crores in corresponding quarter for reasons stated earlier. Net working capital at 28 days has shown an increase of 11 days year-on-year due to lower turnover and high inventory levels. We've improved the debtor days from 9 to 7 days. We have chosen to be disciplined with our credit terms, which has obviously had some impact on our sales. This competition is offering attractive credit terms. Net debt stands at negative INR 156 crores as of 31st March 2024. We paid INR 24 crores for internal accruals towards MDF expansion project during quarter 4, and we are getting to INR 150 crores till date. Apart from this spend from borrowing aggregate is INR 200 crores till date. Work is progressing on the expansion project, and we expect commercial production in quarter 3 FY '25. Mr. Venkatramani will now run you through the financials in greater detail, post which we will have the Q&A session.

Good afternoon, everyone, and thank you for joining us to discuss the Q4 FY '24 financial performance of Greenpanel Industries. Net sales during the quarter were INR 396.08 crores compared to INR 440.58 crores during the corresponding quarter. MDF sales fell by 6.6% at INR 360.41 crores and contributed 91% of the top line. MDF domestic volumes grew by 23% to an export volume fell by 75%. Overall, MDF volumes were 7% lower at 127,239 cubic meters compared to 137,265 cubic meter in the year-on-year quarter. MDF Domestic revenues were INR 338.34 crores while exports contributed INR 22.07 crores. Domestic realizations were lower by 11.9% year-on-year at INR INR 29,058 per cubic meter while export realizations are higher by 17.1% at INR 20,430 per cubic meter. Uttarakhand MDF operated at 80% and AP plant operated at 77% with blended capacity utilization at 78% on capacity of 650,000 cubic meters. Plywood sales saw degrowth of 34.6% at INR 35.67 crores. Plywood sales volumes were lower by 30.4% at 1.42 million square meters and the unit operated at 51% during the quarter. Plywood sales realizations were lower by 6.7% at INR 250 per square meter due to change in mix, as mentioned earlier. Plywood sales realization excluding decorative veneers were flat at INR 250 per square meter. In Q4 FY '24, gross margin was flat year-on-year at 53.7%. EBITDA margins were down by 510 basis points at 14%. EBITDA stood at INR 55.44 crores and PAT at INR 29.81 crores due to reasons mentioned earlier. I'll now update you on the performance details for 12 months FY '24. Net sales degrew by 12.1% at INR 1,563.92 crores. MDF sales were lower by 8.7% at INR 1,401.71 crores while plywood sales saw degrowth of 33.5% at INR 162.21 crores. Gross margins were down by 230 basis points at 55.8%. Gross margin in value terms was down by 15.5% at INR 873.19 crores. EBITDA margin was lower by 730 basis points at 17.2%. EBITDA in value terms fell by 38.4% at INR 268.33 crores. Post-tax profits were lower by 44% at INR 142.58 crores. Overall, MDF sales volumes were down by 4.3% at 484,953 cubic meters with blended capacity utilization of the 2 plants at 74% compared to 78% in the year-on-year period. Dispatches for plywood were lower by 28% at 6.18 million square meter with capacity utilization at 54% compared to 74% in the corresponding period. Gross debt, including borrowings of INR 186 crores for expansion project to equity ratio stands at 0.20 as on 31st March 2024, compared to 0.16 as on 31st March 2023. Net debt as of 31st March 2024 stood at negative INR 156 crores compared to negative INR 187 crores as on 31st March 2023. That concludes my presentation. Please start the Q&A session. Thank you.

[Operator Instructions]. The first question is from the line of Keshav Lahoti from HDFC Securities.

So is it possible to bifurcate the lower NSR in 2 part, what is due to incentive scheme and what might be due to change in product mix? And secondly, what was the sale of low-cost MDF in this quarter? And what was it's NSR?

So if you look at the fall in domestic realization quarter-on-quarter, there was a fall of about 8% and of this, 4.2% can be attributed to the volume scheme and about 3.8% due to change in product mix.

What was the low-cost MDF total sale and NSR for this quarter?

Okay. So the value -- so the volume of low-cost MDF was 40,924 cubic meters at an average realization of INR 21,029.

Okay. Got it. And any volume target for FY '25, what sort of growth you're targeting?

On the MDF segment, we are targeting a 15% volume growth for FY '25. And in the plywood business, we are targeting a volume growth of about 8%.

So the ply performance, which was already very sluggish, have another quarter of bad hedge, the margins are negative and on such a low base, the 8% volume growth. So how should we see the ply segment going forward?

Okay. So we expect the price environment to be stable in the plywood business. And definitely, it has taken time to get the plywood business out of the degrowth. And there has been restructuring both in the sales team as well as the dealer network, which is obviously taking time, and we expect that to be completed during the current quarter. So I think we should see the improvement in the plywood volumes happening from quarter 2 this year.

Okay. Got it. And what is the sense on the margin on ply? Like how is the margin looking in FY '25? Will it more be like a flattish margin?

We are not giving any margin guidance at the moment because of various factors, which would influence margins like imports are likely to resume from May since BIS implementation has been postponed for a year. And selling prices are under pressure while there is significant inflation in wood prices. So we will reassess the situation and then see whether we can give a margin guidance post quarter 1.

Okay. Got it. And one more thing is the incentive scheme still relevant in Q1? Or is it stopped now?

Yes, it will be operative in Q1, and then we will reassess at the end of the quarter.

Okay. Like what we have seen in MDF prices were more like a flattish for the last 2 years in spite of new capacity come in, import picking up. But this time, the prices have taken a knock and still it's not picking up. So what is the sense on the segment? How has the industry changed? So when you expect the prices to pick up?

I don't think we'll see prices picking up at least during quarter 1 and quarter 2 because there was significant expansion in domestic capacity last year and imports more than doubled during FY '24 compared to FY '23. And still more capacity additions happening during the current year. We estimate approximately about 850,000 cubic meter capacity additions in the current year. So at this point of time, I think we are not looking at increasing pricing in the MDF segment.

Next question is from the line of Sneha Talreja from Edelweiss.

Sir, more on the opportunity front of the pricing-wise, when do we see the raw material prices cooling off, especially in case of timber, can we get some guidance?

The primary reason for inflation in wood house prices has been due to lack of plantation activity during the COVID phase of 2020 and 2021, which has resulted in reduced availability of timber. So plantation activities resumed during 2022, and we expect the first output from those plantations to be available around June, July 2025. So at this point of time, we don't see any possibility of a significant reduction in wood prices. Rather, we are expecting that wood prices will be stable until around June July '25.

Sure. Sir, just one more year of high raw material prices and 6 months of no price increases at this point of time, what we could see.

That's correct.

Okay. And in terms of value addition, any new thoughts in terms of how can we increase the value-added by any strategy that we have at this point of time? Or what is the proportion that we are likely to touch in place of value-added share, sir?

We are focused on value addition, but considering that we are targeting a volume growth of 15% in the MDF business. And since the export volumes are expected to be flat, that will mean we'll have to grow at about 18% in the domestic segment. So I don't see any significant appreciation happening in the value mix. So we would expect the value mix to be stable on a percentage basis, along with a significant increase in volume.

Next question is from the line of Hrishikesh Bhagat from Kotak Asset Management.

So 2 questions. First, do you feel that the domestic MDF prices in South or where there's high import are close to import parity prices? Or do you think probably still the prices could have downside risk relative to imports -- imported prices?

Like I mentioned, imports were relatively low during the quarter 4 of the current year compared to an average -- compared to around 85,000 of imports in Q3. Imports during quarter 4 were around 45,000 since BIS was expected to be implemented from February. So I think we are expecting imports to resume from the current month. So I think we'll have to wait for 2 months to handle how much imports are coming in and also how much of an impact increased ocean freight rates will have on imports. So I think I'll be able to offer you a more clear reply to this question.

I'm not asking for the quantum. My question was more related to whether someone is importing MDF today. Do you feel that ...

As I said we don't have clarity on what price imports will be coming in because ocean freight rates have gone up significantly. So whether the overseas exporters will be increasing their selling price to absorb the additional ocean freight or whether they will take a hit on the margins. It's not clear at this point of time. So we'll have to wait for the new material to come in and see what the new prices are because if they decide to pass on that cost increase in ocean freight rates, so that would reduce the competitive intensity. So we'll just have to wait for the new material to come in before we can answer what kind of an impact it will have on domestic pricing.

And the second question is, what's your assessment, say, on the MDF growth in FY '24 in the sense how much demand must have grown according to you? Because if I look at your number on FY '24. obviously, there is an impact of capacity shutdown and some other impacts also. So how do you -- where do you -- what's your assessment, how much demand must have grown in FY '24?

I don't have any numbers for demand growth at this point of time because most of the results are pending to be released. But considering that imports have more than doubled and domestic capacities have gone up significantly. And we did not see any volume degrowth in the domestic segment. I think demand has been fairly stable. So possibly, we could expect a minimum growth of 10% plus.

[Operator Instructions]. The next question is from the end of Kushagra from Old Bridge Asset Management.

Just 2 questions. One, on your volume growth expectation of 15%, I'm just trying to understand the new capacity will start only post 3Q FY '25. So majority of it is going to be from the existing capacity, which implies that you should be working on minimum 85% utilization now. This is something you achieved only in FY '22 which was one of the good years because there was no capacity competition, no imports. But this time, with all the pressure, situation looks a little different. So I'm just thinking, let's say, even if you sort of go to 85% utilization, what are your expectations on realizations. So how are you thinking about trade-offs between utilization and pricing for the coming year, which is FY '25?

Okay. Like I mentioned earlier, it is difficult to comment on pricing at this point of time because we would necessarily be reacting to competitive action on pricing. But as far as demand is concerned, demand has been reasonably good over the past year and even during the month of April, which is normally considered a slow month. So we have had multiple rounds of discussions with the sales team and their targets for growth are much higher than the 18% domestic volume growth that we have guided for. So I think at this time, we are highly confident of achieving that volume growth number.

All right. Sure. The second question is just more like a data question, if you can help us with the share of the OEM sales in your overall sales. How has that number been for you in 4Q and FY '24?

OEM sales were 27% of the domestic volume in quarter 4.

And for -- and total FY '24?

I haven't looked at the numbers for the full year. So I will get back to you on that.

Sure. Can I squeeze in one more question? Just a broader strategy?

Sure.

So the question is really on the future capital allocation. So do you sort of see any cost disadvantage by being majorly a single product company. So the cost advantage could be on the distribution cost or the marketing cost, which other players are able to distribute over multiple product. So on these lines, are you thinking of allocating capital, let's say, 2 years down the line somewhere else because your current balance sheet is also strong. And even after this CapEx, in next 2 years, you will be net cash again. So any sort of plans on the future capital allocation, whether this will be also in MDF or the newer segments are also something you're looking at, at this point of time? Yes, those are my questions.

Okay. So we are making a significant capacity addition in MDF, which is approximately 35% of the exiting capacity. So I don't think we would be looking at any addition in MDF capacity in the foreseeable future. We are looking at expansion in the plywood business. But of course, that would depend on how far we achieve optimum capacity utilization in the existing business. We have achieved capacity utilization of around 85%, 90% in plywood by the end of the current year. We would be looking to maybe increase the plywood capacity. But at the moment, we are not looking at increasing MDF capacity further for the next 2 to 3 years. And also, we are not looking at any new product segment.

Next question is on the line of Vinamra Hirawat from JM Financial.

The domestic MDF volumes have grown solid 23% year-on-year. This mid-20% yearly growth trend in volumes, do you see this continuing into FY '25 and '26? Or is this due to a low base in Q3 and Q4 last year?

I won't say a low base in Q3 and Q4, I think it was more of a low base in the first and the second quarter last year. And at this point of time, we are not giving any guidance for FY '26. So we will reassess the situation at the end of current year and then see what kind of volume growth is possible in FY '26.

Got it. But as of FY '25, you're expecting this same mid-20s volume growth in MDF?

Not mid-20s. I said overall growth of 18% in the MDF business. And since we expect exports to be flat, that would translate into 18% volume growth in the domestic segment.

Okay. So one of my questions was your exports being flat. You see it at the 11,000 CBM level going forward until there is an increase in wood prices or even when -- sorry, until there's a change in wood prices or even when there's a change in wood prices, do you not expect to scale up your exports?

So see, we are targeting volumes of around -- we did about volumes of around 93,000 cubic meters last year, and we are targeting almost a similar number this year. So the quarterly numbers for exports would be approximately about 23,000 to 24,000 cubic meters. So on an average about 8,000 cubic meters per month.

Got it. My final question is, after modeling your export and domestic realizations for MDF, it almost seems like your export realizations are kind of a leading indicator for domestic realization. Because of the 2, 3 quarter lag, domestic realization is almost always a following our export realization. Is this a fair assumption? And have you seen this in your business?

No. Because there's no connection between domestic and export realization. So export realizations are dependent on international MDF prices since we are competing from other -- exporters from other countries like Vietnam, Thailand, et cetera and domestic prices are a function of domestic competition. So there's no connection between the 2 prices.

Sorry, just to add to that, the only place that there would be a direct link between export prices is because imports into India are also sort of defined by the international export pricing. And the OEM segment pricing also sort of linked to that because the primary competition in the OEM segment especially on the port areas is the important material. So that's the only link between international pricing and the domestic pricing. But the retail pricing otherwise is very insulated from the import pricing.

[Operator Instructions]. The next question is from the line of Parth Bhavsar from Investec.

I have 2 questions. Sir, you mentioned that there is a big capacity addition coming in FY '25. I guess the number was 850,000 CBM, am I right?

That's correct.

Just can you just help us with a breakdown if possible? Like apart from the organized players like the other listed players, any other names you could help us with?

Yes. So basically, 4 players. Our capacity of 230,000 cubic meters. Century's capacity of 310,000 cubic meters, which started commercial production in March, but I'm considering that in the current year because dispatches did not happen from that plant in March, I'm considering that as a capacity addition in FY '25 and a couple of capacity additions from one of them.

Approximately 300,000 cubic meters. Okay. The other question was on export margins. So if you could guide us a number, like if it was breakeven or percentage wise, how much was it versus domestic?

At a breakeven level. We are doing exports as long as there is a positive contribution to the fixed cost.

Next question is from the line of Praveen Sahay from PL India.

So my question is related to the low grade MDF and OEM. So as you have said that the 27% contribution in Q4 and also you have given around 40,000 plus of CBM contribution from the low-value MDF. So is this where you are operating currently to continue in the way forward like of 27% odd number on the OEM to continue as a volume or the low end if I'm considering the export is also of the same the low grade. The 40,000 number quarterly run rate would continue for the way forward? Or is there a material change you are expecting in the FY '25?

See, our targets are lower. So we are targeting that the OEM contribution should not exceed 20%. So that's the target we have given to the sales team. At the same time, we have also informed them that if they are getting any additional orders since we are not operating at optimum capacity. So if they are getting any additional orders from the OEM segment, so they're not to reject that they are to accept those. So internally, our target is to keep the OEM business at around 20% of the domestic volumes.

And the low-value MDF, any indication like how much of the contribution you are going to maintain there as well?

Shobhan ji, can you take that question, please?

Sorry, can you repeat that please again?

How much are we restricting the commercial MDF. It was around 35% of the domestic volumes in Q4.

Yes. so I think the only restriction you see where we see a challenge is in OEM segment. So that segment has been restricted. When it comes to margins in the retail segment between industrial grade and the commercial grade, I think that's fairly even because the benefit we get from producing a lower grade is that we are able to produce higher volumes. So that nullifies the, let's say, the lowering of the prices, but we do restrict in the OEM segment because that's based on the import pricing. So that's restricted to, I would say, about 8,000 to 9,000 cubic meter or a 9,000 a year. Again, that is subject to the demand in the rest of the domestic market. At the moment, we are able to sell higher volumes in the rest of the domestic market, we will curtail that further in the OEM segment.

Okay. Got it. Second question is related to the RM prices because RM prices continuously going up timber prices. And also, there is a competition -- competitive pricing, I believe, in the MDF realization of the pricing side. So from the fourth quarter to now the timber prices further has increased. How you will see the realization or the margin profile of the MDF business to be in the coming quarters and year?

Okay. So like I mentioned earlier, we are not giving any margin guidance at this point of time just for the reasons you mentioned, because while we are not looking at any reduction in selling prices, we might be forced to take action in case of competition reducing prices. And again, timber prices are increasing month-on-month. So compared to the average pricing for quarter 4, we have again seen a 7% increase in timber prices during April. So for these reasons, we are not giving any margin guidance at this point of time, we will reassess the situation after quarter 1.

[Operator Instructions]. Next Question is from the line of Utkarsh Nopany from BOB Capital Markets.

Sir, my first question is on the MDF pricing point. So if you see most of the Asian market...

Sorry to interrupt you, your voice is breaking. May I request you to come in a better reception area, please?

Hello. Is it better?

Little better.

Sir, my first question is on MDF pricing side. So if we see most of Asian market currencies has started depreciating quite a lot against INR in this calendar year. So I wanted to know, do you see any risk of further price correction in the MDF because of the currency effect?

No, not really sure about that. Yes, definitely, it happened in the past that if the currency is depreciating, there has been a change in selling price. But since we have not had much of material arriving in India during March and April, we'll have to see at what pricing the imports coming from the month of May. Because like I mentioned earlier, we have seen a significant increase in ocean freight rate. So we'll have to see whether they are going to be above that and take a hit on the margin or whether they are going to pass on that as a price increase?

The reason why I'm asking is like India imports roughly 75% of MDF from Thailand and Vietnam and Thailand currency has depreciated by more than 8% in this calendar year. So the imported MDF prices might become very competitive. So -- but you were saying that we are not seeing any price correction of imported MDF at the moment on the ground?

No, I'm saying that we don't have any visibility on imports MDF pricing because due to the expected impact of BIS implementation, imports were very low during March and April. And new imports are expected to come from the month of May. So we'll just have to wait for the new consignments to arrive before we see at what price is coming in and whether that's likely to have any impact on our pricing to the OEM segment.

Got it, sir. Sir, second question is like our MDF quarterly production has not moved up since March of 2021 quarter. As we were trying to act as a price stabilizer in the market by sacrificing market share. Now we have taken some price cuts in the current March quarter. Then also our MDF quarterly production run rate was down by 2% on a quarter-on-quarter in the current March quarter. Now you have mentioned that we are targeting to grow our domestic volume by 18% at the time when the industry is likely to see large capacity addition of 850,000 CBM in FY '25. So do you see local MDF prices to come down further in the near future because we are changing our strategy -- pricing strategy to gain market share?

Okay. We have not changed our pricing strategy to gain market share. We'd rather did it to protect our market share. Because if we have not reacted to competitive action on pricing, we would have lost market share. But like I mentioned earlier, demand has been reasonably good in the MDF segment as compared to other building material products during the last couple of quarters. And that's the reason we have been gaining volumes. It's not that we have gained volume because of those prices.

So in order to take the market share, do we intend to further cut down the prices?

We are not looking at reducing prices. But what I said earlier was that if competition takes any pricing action, we'll have to respond to that. But we are not looking at any price reduction.

And sir, lastly, sir, what would be the estimated CapEx for FY '25 and '26?

Okay. So for FY '25, it's expected to be around INR 250 crores. And -- sorry, INR 200 crores and another INR 50 crores in FY '26.

Next question is from the line of Udit from Yes Securities.

Yes. Sorry to come again to the margin front. But earlier today on a television interview, you mentioned that you'll be looking at full year to be at an exit run rate of the Q4 margins for MDF, which is at 16.5%, provided that prices don't decline further. So just to follow up on that statement. Are you looking at 16.5% as the base case? I mean margins for '25? And if prices go further, it would further decline activity.