Greenpanel Industries Limited (GREENPANEL) Earnings Call Transcript & Summary

Good day, everyone, and thank you for joining us on the Greenpanel Industries Q1 FY 2021 Conference Call. We have with us today Mr. Shobhan Mittal, Managing Director; and Mr. V. Venkatramani, 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 result presentation that was sent to you earlier. I would now like to invite Mr. Shobhan Mittal to begin the proceedings of the call. Thank you, and over to you, sir.

Thank you, Rishab. A very warm welcome to everyone present, and thank you for joining us to discuss Greenpanel's operating and financial performance for quarter 1 FY '21. I do hope that all of you and your loved ones are safe and well. We all pray for an early end to this pandemic. Financial numbers were significantly impacted in this quarter due to lockdown during April and May. I will now give you a quick brief on the financial numbers. Net sales were down by 56.5% at INR 86.25 crores. Gross margins were down by 590 basis points over the year-on-year quarter due to change in domestic export mix and sales from inventories. EBITDA margins were negative 7.4%. Our post-tax profits for the quarter were also impacted by foreign exchange mark-to-market losses of INR 6.95 crores on long-term borrowings of our Andhra MDF plant. There is a lot of uncertainty at this point with the changing nature of the pandemic. Hence, we are not providing any guidance for FY 2021 at this point of time. However, we are confident of achieving sales of INR 180 crores in Q2, which was the sales value in Q2 last year. I will now request Mr. V. Venkatramani to run you through the financials in greater detail.

Good afternoon, everyone. I thank you for joining us to discuss the Q1 FY '21 financial performance of Greenpanel Industries. In Q1, our top line was down by 56.5% compared to the year-on-year quarter. Net sales stood at INR 86.25 crores compared to INR 198.44 crores in Q1 FY '20. MDF sales volumes, at 35,086 cubic meters, degrew by 54.3%, while plywood business had volume degrowth of 62.9%. In Q1, gross profit fell by 62% at INR 38.2 crores versus INR 99.6 crores in the corresponding quarter. EBITDA fell by 123.3% in value terms at negative INR 6.41 crores compared to INR 27.53 crores in the corresponding quarter. Gross margins were down by 590 basis points, while EBITDA margins were down by 2,131 basis points due to very low capacity utilization. Capacity utilization was 22% in plywood and 21% in MDF. Net loss for the quarter stood at INR 34.07 crores compared to PAT of INR 2.7 crores in the corresponding quarter due to reasons mentioned earlier in the call. Our debt-to-equity ratio was 0.80 as on 30th June 2020 compared to 0.83 as on 30th June 2019. We had taken moratorium of some installments falling due between March and June '20 aggregating to INR 27 crores in order to preserve liquidity. We are confident of paying the remaining installments falling due in the current financial year. On the working capital front, although the working capital net days stood at 89 days, it was purely due to the fact that lockdown was prevalent for about half the quarter, and that has exaggerated the working capital days. If you consider that the lockdown was there for half the quarter, net working capital days remained almost constant at about 43 days compared to 45 days in the corresponding year-on-year quarter. That concludes my presentation. I now request you to open the floor for the Q&A session. Thank you.

[Operator Instructions] We take the first question from the line of Achal Lohade from JM Financial.

Sir, can you help us with the -- how has been the month of May, June, July, if you could give some color in terms of recovery compared to the last year's same month for domestic and exports? Would that be possible?

As far as July is concerned, there was an improvement in the performance in terms that we achieved the top line of close to INR 60 crores compared to INR 66 crores in the corresponding month last year. And markets are improving, although many markets are still in recovery mode due to lockdown happening in various parts of the country. And the major metros are the ones which have been the most impacted. And so we are trying to penetrate deeper into the network, enter more small towns and cities to expand the network.

Right. So July, you said INR 60 crores compared to INR 66 crores last year. Is that aggregate business or just the domestic business?

This is a mix of domestic and exports. So if you look at domestic -- MDF domestic, we did about INR 36 crores, and exports were about INR 6.5 crores. And on the plywood sales, we had a top line of about INR 16.5 crores.

Would you have the corresponding months of last year?

MDF domestic, we did almost a similar number. We had INR 35.5 crores last year. And exports were down in July primarily because our major shipment got delayed, which will now be shipped in August. So MDF exports were INR 6.5 crores compared to INR 12.5 crores in July last year. And on the plywood front, like I mentioned, we achieved INR 16.5 crores in July compared to INR 18 crores in July last year.

Right. Right. And in terms of the mix, you said metros have been impacted. Would you be able to give us some split in terms of how much is metro or Tier 1, Tier 2, Tier 3 towns?

Not immediately. I'll come back to you on that.

Sure. Secondly, I see the gross margins seem to have impacted quite a bit and looks like it has more to do with the inventory liquidation because if I look at the first half calendar year '20 compared to calendar year 2019 first half, the margins have improved. So a, is there any one-off in the margins apart from this understanding? Is there any one-off which impacted the gross margins?

Not really. Like I mentioned, it was partly due to the fact that we were selling a significant volume from the existing inventories, which also contained the factory overhead. And secondly, there was a significant change in the domestic export mix in MDF. If you look at Q4 last year, we had a mix of 68% domestic and 32% export, whereas in this quarter, it was 55% domestic and 45% exports. So I think once the mix improves in Q2, margins should be back to normal.

Understood. And with respect to value-added mix, can you help us what has been the mix for the quarter as compared to the same quarter last year?

Okay. Plain was 87% in this quarter compared to 89% in the corresponding quarter. And value-added products were 13% compared to 11% last year.

Right. Right. And in terms of the cash flow, how has been the cash flow for the quarter?

Cash flow is improving. As I mentioned, it was significantly impacted due to the lockdown which was there till almost the middle of May. So collections have definitely improved and are improving further in July and August. So I think as far as the working capital front is concerned, we should be back to normal in Q2.

Right. But if we were to look at absolute, what has been the cash flow from operation? Would you have that number handy now?

For Q1?

Q1, yes.

Yes, we had a positive cash flow from operating activities of INR 17.5 crores.

Okay. And if you could -- sorry if I missed this, but if you could help us with the debt as of 30th of June, what has been the debt? And what is the commitment for next 9 months in terms of interest plus debt outlook?

I couldn't get you. Could you please repeat that?

As of 30th of June, what is the debt we have on the book, gross debt as well as the net debt?

Okay. As on 30th June, gross debt was about INR 527 crores, and net debt would be almost similar. And we would be repaying approximately INR 52 crores during the current year. I think possibly we should be close to INR 500 crores by the end of the year.

Right. And the interest, how much would be interest outlook?

Yes, the interest should remain similar.

Sorry, if you could give us some numbers?

Yes, we had interest payments of about INR 6.5 crores in this quarter. And it's likely to remain almost similar in the remaining quarters because debt repayments are only about INR 50 crores. So that shouldn't have any significant impact on the interest numbers for the year.

Right. And any update you could share on the debt which you are planning to kind of rework with your lenders?

Not really. Like we have scheduled repayments of about INR 52 crores in this year after considering the moratorium that we have taken between March and June. So we would be quite comfortable in repaying those debts.

Okay. Got it. And in terms of the ForEx loss, you mentioned that ForEx loss was about INR 6.9 crores mark-to-market loss. Is that part of the other expenses? Or is it part of the interest?

It is part of the interest cost.

The next question is from the line of Balaji Vaidyanathan (sic) [ Balaji Vaidyanath Narayanan ] from Crest Wealth Management.

Just wanted to understand that in your previous conference call for the Q4 results, just on a macro level, you had mentioned that you are getting a lot of inquiries from American importers of furniture after this sort of a global diversification away from China. If you could throw some more light on that as to how things have been in term in Q1 and whether we are seeing any substantial export possibility in that regard, that is question number one. Question number two, we're also given to understand that Turkey is now the second largest manufacturer of MDF in Europe. So if there were to be any tailwinds due to U.S.-China trade war or this COVID-related issue and therefore supply diversification away from China, don't you think countries like Turkey would be more beneficiary -- would be more -- they will get more benefits compared to India?

I'll answer that, Venkatji.

Yes, sure.

So you see what we are seeing some positivity, of course, with regards to this trade restriction on China is that, yes, export business for us, maybe not directly, but there is a lot of additional demand coming in for furniture or handicrafts made out of India which consume MDF. So sales domestically are being benefited for that furniture makers or exporters who are selling materials to the U.S. are, in turn, now seeing an additional demand, which, in turn, is resulting in additional demand for us as well. With regards to Turkey, I don't foresee that to be a challenge for us because Turkey is -- MDF is a very regional business. And even today, if you see like Middle East is one of our major markets for export, we don't see much material from Turkey coming in because, a, the domestic market is a lot more lucrative for them. Turkey is a very big consumer domestically for MDF. And b, the freight element from Turkey does not work out economical to -- for them to sell material to places like Southeast Asia. Also, the cost of production in Turkey is higher because they are heavily dependent on raw material that is imported. So they are bringing in chips from countries like North American countries and Latin American countries. So their MDF business model is not very big on exports. It is primarily for the domestic market because it's very, very lucrative.

We take the next question from the line of Jignesh Kamani from GMO.

You mentioned that in July, we are almost flat on Y-o-Y on the domestic MDF sale. How is the scenario on the June month?

It was improving compared to the performance in April and May, which was significantly impacted during the lockdown. So in June, we achieved sales of about INR 51 crores.

Versus last June of?

About INR 57 crores.

Okay. So trend is pretty sustainable since the last 2 months.

Yes, that's right.

And how is the channel inventory in the secondary sale? It is also almost 90 to 100 percentage of last year in June, July month?

Yes, I think there's not much channel inventory in the MDF business. I would say channel inventory would probably be in the range of about 10 to 15 days. And that's also evidenced by the fact that we realize our payments within 1 month, between 20 to 25 days in MDF. So channel inventories are at a very moderate level.

Understood. And how is the current pricing environment on the -- is it just this are the pricing or are we able to hold back our pricings which was there in the fourth quarter and the first quarter?

Yes. Pricings are stable, I would say. We have not gone for any price increases at this point of time. We are primarily concentrating on volume growth. So we have not gone for increase in prices, but prices are stable, have been stable for, I would say, almost a year now.

Just to add to that, we have taken a very slight price increase in the OEM segment which -- where we were replacing imports. So because of the foreign exchange costs going up, we have taken a slight price increase in that very small OEM segment that we cater to.

Understood. And is it safe to assume that MDF is reviving faster than the plywood in our case?

Sorry, can you repeat it?

Yes, is it safe to assume the revival in the MDF is faster than the plywood in our case? Because plywood is still lacking, we can say the growth in the plywood is slightly weaker than the MDF since last few months? So safe to assume MDF revived faster?

Well, at a company level, yes, for us, recovery on MDF is faster than plywood, I would, yes.

That is the same feedback from the industry?

A bit too premature for me to comment on other plywood manufacturers because many of them, the results are not even out yet.

Sure. Understood. Okay.

The next question is from the line of Nehal Shah from ICICI Securities.

Sir, my question here is, is there any update on the likely CVD coming and also anti-dumping duty on the thin MDF side?

So there is -- the CVD investigation is ongoing. We recently had a hearing as well. We are estimating -- there have been some delays on account of COVID, and also there have been some changes. So we estimate the investigation to get completed because on a CVD investigation, there's a lot of responses required by foreign governments and foreign companies. So we don't -- we foresee some delays on that. But what we are requesting the authorities now is to have some sort of an interim protection in the meanwhile while the investigation is ongoing. So the investigation is ongoing. We are hoping that we would have some concrete decision towards the end of the year. But in the meantime, we are seeking, as an applicant, some interim protection in the meantime. There is a form of interim duty which can be implemented, and we are requesting the DGTR for that at the moment.

Right. And on anti-dumping duty on thin MDF?

Well, the anti-dumping duty you mean on thick MDF?

No, on thin.

That is a new ongoing case which is going on. I mean there's a concrete...

Yes, because the investigation is on, right, for initiation of...

Yes. Yes. So no, it's also taking its own course of time and action.

Okay. Okay, sir. Fair enough.

The next question is from the line of [ Subhash Nayak ], individual investor.

I have a couple of questions. First question is how comparable are the margins in export market vis-à-vis domestic margins?

Export margins are significantly lower compared to domestic because the international price is about 30% lower than the domestic market. So we do exports primarily to have absorption of the fixed overheads on a higher capacity utilization. So I think fair to say that domestic margins are around 20%, export margins would probably be in the range of about 7% to 8%, the operating margins.

Second question is on the -- looking at our capital employed and the gross loss, what is the optimum turnover we are looking at from the existing capacity?

I think from the existing capacity, considering both the plywood and MDF business, with the current capacities, we can achieve a top line of about INR 1,250 crores.

Okay. But will that meet your ROE, ROCE targets for the business?

Yes, sure.

At the current margins?

Margins will improve with capacity utilization. If you look at the last financial year, we had about 18% operating margins in the MDF business and about 11.8% in the plywood business. So with capacity utilizations improving, we'll probably achieve higher margins, which would enable us to reach the ROC targets.

So what are your targeted ROE, ROCE, if any, you wish to achieve?

Yes, we are targeting an ROCE of 18%.

The next question is from the line of Karan B. from Asian Markets Securities.

Sir, we have had INR 6.5 crores of loss in this quarter compared to what numbers on a comparable basis?

I couldn't get your point. Could you please repeat that?

So we have INR 6.5 crores of M2M loss this quarter. So what was the number last year?

We had a nominal gain of about INR 40 lakhs, INR 50 lakhs last year.

And also, if you can break up the INR 6.5 crores above the EBITDA and below the EBITDA line item?

It's entirely below the EBITDA. It's included in interest costs.

Okay. And sir, now that the currency has devaluated, what is the difference between imports and domestic realizations on the thick and thin MDF?

Excuse me, could you repeat that, please?

Now that the currency has devaluated, so what is the difference between imports and domestic realization of MDF for thin and thick MDFs?

Your voice is breaking.

Hello? Am I audible now?

Yes, you are.

Yes. So sir, what is the price gap between domestic MDF and import MDF on the thick and the thin MDF side?

Okay. So the gap would be about 6% to 8% on the thick MDF side and about 25% on the thin MDF side.

Okay. And sir, last question, if I may chip in. Even Rushil is coming up with a plant in South. And also, we are hearing small players, 4, 5 players in North to come up in some time once the demand scenario revives. So do we see any further pressure on realization going ahead?

No, we do not see any pressure on realizations even with the entry of new players.

The next question is from the line of Arun Baid from BOB Capital.

In the beginning of the call, you mentioned that you are expecting at least INR 180 crores turnover in Q2. Assuming we achieve that, will we be having margins up at 15%, 16% for the quarter?

Yes, I should expect that.

Okay. And the second thing is, what was the export number you mentioned was spilled over to August, that order which got spilled over to?

That would be approximately about INR 13 crores.

The next question is from the line of Gaurav Agrawal from Bowhead Capital.

Sir, I wanted to check about plywood. Like real estate is -- all the real estate construction in metro or in Tier 1, Tier 2 cities, it is completely in halt. So what proportion of this plywood sales for you or for the industry is from these new real estate projects which get completed? And what is to the existing real estate projects or to the existing households, if you can give some idea about how the consumption happens of plywood.

Okay. Plywood is primarily purchased by carpenters and contractors. Since it goes into the backbone of the furniture, so customer involvement in the product is very low. So they normally outsource the job to a carpenter or contractor. And in our case, the majority of our plywood sales, I would say more than 80%, comes from the residential segment. And we are not facing any significant pressure primarily because our plywood business is very small. We did about INR 215 crores last year. And probably at peak, we would be about INR 300 crores to INR 325 crores. So we are not seeing any pressure on the plywood business.

Okay. But sir, for the industry, let's say, plywood would be more impacted as compared to MDF, right, because it being of a higher price, first; and second, it is more pertaining to residential.

Yes, it is correct. I think at this point of time, it's correct to say that plywood is significantly impacted as compared to MDF. Two reasons: one, MDF is at a much lower price point compared to plywood; and the second point is significant volumes of MDF are consumed by small manufacturers of ready-made furniture across the country. So at this point of time, people would be hesitant to allow carpenters into their house to do their furniture. I think probably the trend would be to go in for MDF where there is no involvement of carpenters entering your residences.

Okay. Okay. Sir, last year, you said for FY '20, you did around INR 230 crores of plywood sales. Am I correct?

INR 215 crores.

Yes, INR 215 crores.

2-1-5, yes.

Yes. So sir, for this year, any broad indication like how much are you expecting? Even in your less severe case, it's very difficult to predict as of now, so...

I don't know. I think plywood sales would be impacted to a greater degree as compared to MDF. So at a very rough estimate, I think probably we would do about INR 160 crores to INR 170 crores of plywood sales this year compared to the INR 215 crores we did last year.

Okay. So can you give the similar kind of indication for MDF business?

At this point of time, it's very difficult to give an annual number. But I think probably 10% degrowth is what we are looking at in MDF.

Okay. Total, right, export, domestic put together?

That's correct, yes.

The next question is from the line of [ Vijay Karpe ], individual investor.

I just wanted to know what are the cost-cutting measures that we've undertaken during the quarter. How much of these are sustainable? And have we taken any more cost-cutting measures in Q2 as well?

We have taken pay cuts, which would be about INR 6.5 crores for the first 6 months, although we have not taken a decision on whether we would be retaining the pay cuts beyond Q2. So I would say the savings on that account would probably be somewhere about INR 6 crores for the first 6 months. We have done some cost reductions on the power side, where we are not purchasing wood for running our energy plants. So we are currently using the wastage from the raw material for running the energy plant. And we have also taken some reductions on the admin expenses. Part of that is also due to the fact that there has been extensive reductions on traveling side and also some general admin expenses. So yes, I would say, on a yearly basis, cost reductions could be in the range of about INR 18 crores to INR 24 crores.

Okay. And most of them are temporary, right?

No. Apart from the employee expenses, I would say the savings that we are expecting on the power side and the admin expenses side would be of a longer-term nature.

Okay. And coming back to the morat that we had taken, Venkatji, do you think that taking a morat will impact our reputation in front of the lenders?

Not really. I think it was primarily due to preserve liquidity that we took the moratorium. We had the funds in the bank to repay those borrowings on time. But since we were not aware of how long the lockdown would last, it was basically a precautionary measure that we took to take the moratorium.

The next question is from the line of Karan from Asian Markets Securities.

Sir, one more doubt I had. On the gross debt number, you mentioned we had INR 527 crores of debt. So like can you break that into domestic loans and foreign loans along with the rate of interest?

Okay. We had about INR 475 crores of long-term debt and about INR 52 crores of working capital debt. And the rate of interest on a blended basis would be about 5%.

This is ex of currency fluctuations?

This is exclusive of currency fluctuations.

Correct. So earlier you also gave some kind of breakup, euro loan, USD loan, along with some rate of interest. So can you throw some light on it?

Okay. Sure. So we have about EUR 38 million loan from a German bank, which is at 0.5%. Then we have borrowing in USD 9.9 million, which is at 9.2%. And the domestic borrowings would be in the range of 9% to 9.25%.

Okay. That was helpful. Sir, also if I break our plywood portfolio, so how do we see that mid-category, mass category and the premium end of plywood?

We are entirely in the premium range. We don't manufacture plywood for the mid-market or the cheap-segment plywood.

All right, sir. And sir, how steep was the fall for the decorative veneer segment, if I say?

Could you repeat that?

How steep was the fall in the decorative veneer, which is more of a luxury good?

Okay. So we had -- if you compare to the corresponding quarter of last year, we sold about 1 lakh 87,500 square meters of decorative veneers. And in this quarter, the sales was about 55,000 square meters.

Okay. And how has been the raw material prices, that is timber cost, in the last 6 months because we believe there was some uptake in that?

No, there have been no changes in timber cost. Prices have remained stable.

And sir, with no major capacity expansion at least for next 2 years, how much of maintenance CapEx do we factor in?

I think approximately about INR 5 crores a year for the current year and the next year.

[Operator Instructions] Next question is from the line of Achal Lohade from JM Financial.

Venkatji, in terms of MDF, what portion...

I'm so sorry to interrupt, but your audio is not audible, sir.

Better now?

Not yet.

So in terms of MDF industry at the industry level, how much would be residential, how much would be commercial? As we hear, the commercial real estate seems to have -- there might be a slowdown, so just wanted to get a sense.

Shobhanji, can you take that question?

Yes. See, at the moment, it's a bit hard for us to estimate that. I would say majority consumption of MDF directly in residential is not very high, barring some states like in -- in like Kerala or Andhra Pradesh. However, residential consumption happens by way of -- like Venkat mentioned earlier, by way of furniture makers, small furniture makers, et cetera. And then, of course, commercial is obviously a much larger component of MDF consumption. So it's a bit hard for us to pin down on a number because a lot of the residential consumption is happening in an indirect manner. But the commercial consumption is definitely a much higher percentage as on date compared to residential on a pan-India basis.

Would it be like 70%, 80% is commercial compared to residential?

If I have to put a number, I would say maybe, yes, 70% -- 60% to 70% would be commercial, and maybe 30% to 40% would be residential.

Right. And just for us, in terms of the mix, how much would be the mix coming from the small OEMs compared to the large OEMs? What would be that split?

Well, for us, the smaller OEMs is a higher percentage because larger OEMs tend to depend also on imports. And we are also -- payments is such an issue with the large-format OEMs. So at the company level, smaller OEMs are a much larger percentage for us, but we could deal with some large OEMs as well because -- I mean, yes, factoring in payment security and as long as they can work on our credit terms, et cetera.

What is the -- if I may ask, what is the typical difference in terms of the credit terms for the small and large OEMs?

Well, in most cases, we are working within the 28-day credit period with most of the parties. There may be a few where we extend maybe a 10-, 15-day or a 20-day extra credit period. But I mean from the top of my memory, I don't think we have any customer who we extend beyond 50 to 60 days. And that would be very, very -- a very small number on its own in terms of the number of people who avail that benefit.

Okay. Got it. And secondly, with respect to the export opportunity, like what are the key markets for us in terms of where we are competitive? And what would be our market share at aggregate level for those markets?

Well, I would say -- I mean the key markets for us at the moment are countries like -- the Middle East is one of our critical markets. Sri Lanka is an important market for us. And Southeast Asia, we are catering to countries like Malaysia and Indonesia a little bit. But Middle East is one of the primary markets for us. Recently, we've been able to obtain a very large order with a client, with a customer in Iran as well, who we will be catering to for the first time in the month of August. But in Sri Lanka, we have a very large market share. I would say we're probably the market leaders in Sri Lanka. But the other countries, I don't really have a percentage number on what our market share is because the market is very large. And due to our own limitation and willingness to allocate quantities to these markets, I won't say that we are a very, very prominent player because we are playing by -- the limit is our own capacity. And also, pricing is always challenging when it comes to export business.

Right. And for import, which countries do we typically import from?

Sorry, you cut out there. Sorry, you cut out there. I can't hear you anymore.

For the import, which countries do we import typically from?

Well, at the moment, you see that the thick MDF has anti-dumping in place from most of the countries, so majority of the thick MDF coming into the country would be from Indonesia and a little bit from -- and some from -- sorry, would be from Vietnam. And -- but when it comes to thin MDF at the moment, which is completely open, it would be coming in from countries like Thailand. Thailand is one of the major ones, then Vietnam and some from Indonesia and also from Malaysia, like so mostly the Southeast Asian countries. Sri Lanka is also supplying some material to India as well.

And what would be the mix in terms of the import? How much percentage will be thick and how much will be thin?

Well, I think thin obviously has a higher percentage. But generally, the market -- I mean the demand is -- I would say, is maybe 60-40 between thick and thin. So ratio would be similar. But when it comes to imports, I mean, thin has a higher dominance because there's no anti-dumping on it.

Right. Any ballpark number you could post, Shobhanji?

On what, on the percentage?

On the thin-thick mix in the imports, could that be 70%, 80%?

What do you mean, thin over thick is it? No, I don't think it would be 70%, 80%. I would like to say between 60% and 40%.

Thank you. Well, ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for their closing comments.

Thank you. Thank you, everyone, for attending the call. And we are very hopeful for improved performance in the forthcoming quarters. And we -- if anyone has any further questions, please do feel free to get in touch with us. And we look forward to again speaking to you for our next quarter call. Thank you so much.

Thank you very much.

On behalf of Greenpanel Industries Limited, that concludes this conference. Thank you all for joining. You may now disconnect your lines.