Greenply Industries Ltd: Banking on MDF and Laminates

Greenply Industries (GIL) is the leading player in the Rs13,000cr wood panels industry in India, with a 35% organized market share in plywood and 18% in laminates. Given its strong expansion plans and high - RoE business model, we assign a target multiple of 8x FY2012E EPS of Rs36.4 to arrive at a target price of Rs291, implying an upside of 57 %.

Banking on MDF and Laminates

GIL is foraying into the lucrative, high-growth MDF market, with the largest MDF plant in India (1,80,000m3/yr capacity), while continuing its strong expansion in laminates (88% capacity expansion), that is estimated to drive 25% CAGR in sales over FY2010-12E. GIL is witnessing very strong demand for its laminate products, with both its new production lines running at full capacity. The MDF opportunity is especially huge: MDF constitutes 20% of wood panel consumption in India while plywood constitutes 80% - the reverse holds true globally. China alone consumes about 10-11mn m3/yr of MDF v/s 0.6mn m3/yr in India. Going forward, with a strict control on issue of new plywood licenses and 5-7% CAGR in panel demand, MDF is likely to meet this demand, translating into 25-30% CAGR for MDF. Moreover, even out of present consumption, 80% is being met through imports, which GIL can substitute given high freight costs and 25% anti-dumping duty on imports.

Strong brand, high ad-spend and massive distribution

GIL has leading plywood and laminates brands, supported by ad-spend as high as 3.3% of sales. The company also has the largest distribution network of over 15,000 dealers in this industry. These advantages underpin the strong RoE profile of the company's brand-driven business model (20% over FY2010-12E).

Key  Financials

Y/E  March  (Rs  cr)	FY2009	FY2010E	FY2011E	FY2012E
Net  Sales	725	825	1,044	1,292
% chg	33.8	13.8	26.6	23.7
Net  Profit	37	46	52	88
% chg	(3.7)	22.9	14.1	67.8
FDEPS  (Rs)	22.0	19.0	21.7	36.4
EBITDA Margin (%)	10.9	13.0	14.0	15.0
P/E (x)	1.9	9.7	8.5	5.1
RoE (%)	22.7	20.4	17.3	23.3
RoCE (%)	13.7	11.0	13.3	17.6
P/BV (x)	0.4	1.5	1.3	1.1
EV/Sales (x)	0.4	1.0	0.8	0.7
EV/EBITDA (x)	4.0	7.9	5.9	4.3
Banking on MDF growth Transition from Plywood to MDF Currently, the estimated consumption of plywood in India is around 25 lakh m3/yr, and the demand is expected to grow at a CAGR of 5-7%. However, the government has reduced the issue of new licenses on on addition of new capacities of plywood, which will result in a shortage and increase the prices of plywood. Thus, as the production of plywood cannot be increased from the current levels, we expect this 5-7% increase in plywood demand to be substituted by MDF (and allied products), which will result in a huge demand for MDF in the coming years. Currently, the estimated demand for MDF is around 600,000 m3/yr, which is set to grow at a CAGR of around 25-30% (to substitute for the increasing demand in plywood). Around 80% of Global Wood-Panel Market Constituted by MDF In most countries, around 80% of the wood panelmarket is constituted by MDF and particleboard products and only 20% by plywood. However, the situation is reverse in India, where around 80% of the market is controlled by plywood. With the government controlling the issue of new licenses on plywood, there has been an additional growing demand for engineered panel products like MDF. The fact that these engineered panels have a very high utilization of raw-material resources as opposed to plywood, and considering India's scarce supplies of raw-material, has resulted in the government strongly promoting the manufacturing of these products. MDF is widely used by furniture manufactures globally, and the same trend is being adopted by Indian furniture manufacturers, as it is cost-effective, easier to apply and more flexible than plywood. We believe that MDF will slowly but surely substitute plywood in various applications (thin plywood can be substituted by MDF in the production of cabinet backs, drawer bottoms, door-skins, panelling applications in house building, internal decoration etc, while thicker plywood can be substituted in table tops, cabinet construction, moulding production etc). Globally, MDF is widely used in furniture, architecture, indoor decorations, loud speaker boxes, TV boxes, musical instruments, flooring, sports equipments and isolated panels. Consumption Pattern to Change Currently, India has around 20% of the world's population, but only consumes 1% of the total MDF produced, even though it's a cheaper, more environment-friendly and versatile product. This was partly attributable to the fact that plywood was relatively cheap in India and was well-accepted in the largely custom-made furntiure market in India. However, going forward, with the control on plywood capacity, as plywood prices keep going up, MDF is likely to increasingly subsitiute the lower and mid-range plywood demand in the country, offering a more attractive price vs. quality trade-off. This is also likely to coincide with an increasing preference for cheaper, factory-manufactured, modular furniture by the Indian consumer, which compulsorily requires MDF rather than plywood as an input. Accordingly, we expect demand for MDF to pick up significantly in the future; thus, we believe that GIL will be well poised to benefit from the future growth in this segment. China is currently the largest manufacturer of MDF in the world by a wide margin, with a massive production of about 24.9mn m3/yr (as compared to just 0.3mn m3/ yr in India). While direct exports of MDF in China account for about 15% of total production, a large chunk of the MDF is consumed by the furniture and other household fixtures and accessories industries. China is also the world's largest exporter of furniture and allied products and industry data indicates that about half of the output is exported. This still means that almost about 40% of MDF manufactured in China is currently being used to manufacture furniture and allied products that are domestically consumed. This translates into an approximate MDF consumption of about 10-11mn m3/yr in China as against just about 0.6mn m3/yr in India at present, indicating the vast potential market for MDF in India. Exhibit 1: Top Five Producers of MDF in the World Producers Production Exports Imports Consumption China* 24,986,000 3,841,102 1,324,877 22,469,775 Germany* 4,380,000 613,992 1,274,440 5,040,448 United States of America* 3,334,680 306,977 3,059,303 6,087,006 Turkey* 1,952,000 515,000 184,000 1,621,000 Brazil* 1,879,000 120,000 4,000 1,763,000 World* 57,313,163 India** 200,000 1,600 420,000 618,400 The Indian Furniture Industry Greenply Industry (GIL) expects to sell around 40% of its MDF products to Indian Furniture manufacturers. The India furniture industry is a Rs36,000cr industry, and is highly unorganised (85% of the market is unorganised). India is ranked among the top 14 furniture markets in the world (CSIL Milano), and the wooden home furniture segment has the biggest market share in the industry. In FY2009, the Indian Organised Furniture Industry registered a healthy growth of about 13-15%, and is expected to grow around 25-30% over the next five years, on the back of the real estate and housing boom, tourism and hospitality Growth, increasing per capita income, and the increasing consumption of lifestyle products, including furniture. Some of the leading Furniture manufacturers in India are Godrej & Boyce, BP Ergo, Featherlite, Haworth, Style Spa, Yantra, Renaissance and Millenium Lifestyles.