Greenpanel Industries Limited (GREENPANEL) Earnings Call Transcript & Summary

Good day, everyone, and thank you for joining us on the Greenpanel Industries Q2 and H1 FY '21 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 very much for joining us today to discuss Greenpanel's operating and financial performance for quarter 2 and H1 FY 2021. I do hope that all of you and your families are safe and well. Business has improved significantly in this quarter. Net sales were up by 21.5% year-on-year at INR 218 crores. Gross margins were up by 80 basis points year-on-year at 56.3%. EBITDA margins were up by 320 basis points due to increase in capacity utilization in MDF and focus on wastage reduction and cost optimizations. PAT is up by 228% year-on-year to INR 18.06 crores. We are targeting double-digit growth in the remaining 2 quarters of the current year and are optimistic of better margins in the future quarters. I will now request Mr. V. Venkatramani to run you through the financials in greater detail.

Good afternoon, everyone. I thank you all for joining us to discuss the Q2 financial performance of Greenpanel Industries. In Q2 FY '21, our top line was up by 21.5% compared to the year-on-year quarter. Net sales stood at INR 218 crores compared to INR 179.38 crores in the corresponding quarter. Plywood sales degrew by 4.5% at INR 52.86 crores. And MDF sales grew by 33.2% at INR 165.14 crores. Plywood volumes fell by 4% at 2.14 million square meters and MDF volumes increased by 31.3% at 82,133 cubic meters. Uttarakhand MDF operated at 74%, and the AP plant operated at 52% capacity utilization. In Q2, gross margin improved by 80 basis points at 56.3% as compared to 55.5% in the corresponding quarter. Gross profit grew by 23.3% at INR 122.82 crores as compared to INR 99.62 crores in Q2 FY '20. EBITDA grew by 44.3% at INR 44.71 crores as compared to INR 30.98 crores in the corresponding quarter. EBITDA margins were up by 320 basis points at 20.5%. Profit after tax increased by 228% at INR 18.06 crores for Q2 FY '21 versus INR 5.50 crores in Q2 FY '20. In H1 FY '21, net sales stood at INR 304.26 crores compared to INR 377.83 crores in the corresponding period. Gross profit was INR 161.02 crores in comparison to INR 199.22 crores in H1 FY '20. EBITDA stood at INR 38.3 crores compared to INR 58.51 crores in the corresponding period. PAT was negative at INR 16.01 crores in the current half year compared to a positive PAT of INR 8.21 crores in H1 FY '20. Dispatches for plywood in the half year stood at 2.91 million units with capacity utilization at 50%. MDF volumes were 108,315 cubic meters with blended capacity utilization of the 2 plants at 40%. Our debt-to-equity ratio stands at 0.74 as on September 30, 2020 compared to 0.82 as on September 30, 2019. That concludes my presentation. Please start the Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Nehal Shah from ICICI Securities.

Congratulations, sir, for a very good set of numbers. Sir, a couple of questions. One, on the volume growth on the MDF side, the volume growth has been pretty robust. So can you take us through where has the growth come from, particularly considering the weakest environment we are in? And secondly, on the realization, the domestic realizations are down while exports have been up significantly. So -- yes, so these are the 2 questions, which I would want to throw upon.

I think the smaller towns and cities contributed to a significant growth in both MDF and plywood volumes because the larger cities and metros saw degrowth, except for Delhi and NCR. So -- and also, I think work-from-home culture and people opting to reduce their expenditure, these are contributing to the growth of ready-made furniture and consequently, the growth for MDF, which is a low-value product as compared to the premium plywood.

Sure.

And regarding realizations, realizations have been more or less steady. If we look at it, our domestic realizations were 22,738 compared to 23,147 in the corresponding quarter. So a degrowth of about 2%. And here, value-added products also determine the nature of realization. So -- and since margins have improved -- the operating margins have improved. So I don't think there was a negative -- reduction in realization. So realizations are more or less steady on the domestic front. And they have improved on the export front, primarily due to the depreciation of the rupee.

Okay. It's primarily because of currency.

That's correct.

[Operator Instructions] The next question is from the line of Balaji Vaidyanath from NAFA Asset Managers.

Congratulations on a good set of numbers. Sir, just wanted to understand in terms of -- is there kind of a one-off element in this particular quarter that has led to sort of a strong domestic growth that we have seen. And also in terms of exports, the sort of difficulty is in general, in world trade, has it hampered imports to some extent, which has contributed to our domestic volumes also growing so much. And so can it kind of -- so is this a one-off element? Just wanted to understand.

Balaji, regarding the first part of your question, I do not think it's one-off element in this quarter because we are seeing month-on-month improvement in volumes, like July was better than June. August was better than July. September was better than August. And even the current month of October has been better than September. So I think, yes, consumer confidence is increasing. People have started to spend on furniture. Although the exact reason for the same are not really visible because of the short period of time. So we have seen the improvement happening month-on-month. And like Mr. Shobhan mentioned during the call that we are expecting double-digit growth in the remaining 2 quarters. So I think we are cautiously optimistic of growth in the remaining 2 quarters of the current year and better margins as compared to this quarter.

Okay, sir. And in terms of costs, just wanted to understand, Shobhan had mentioned in the opening remarks that some amount of cost measures had also contributed to margins expanding. So have we seen the end of that? Or do you think there is still some more scope for cost reduction? Or once if things get back to 100% normalcy, we can see some higher costs going forward, sir?

No. I think we have not yet seen the full benefits of the cost optimization, especially on the raw material and power side. So going forward, I think we will see some further improvement in the gross margins and also the operating margins as and when capacity utilization improves and we reach levels of 85% and above.

The next question is from the line of Deepak Poddar from Sapphire Capital.

So you are talking about we have not seen the full benefit of cost optimization. So what sort of additional benefit we are looking at when we are talking about -- when we are reaching about maybe 85% capacity utilization?

It's very difficult because the different factors which could impact the margins, like the mix of MDF and plywood in the total business, the mix of domestic and exports in MDF and also the mix of Uttarakhand and Andhra Pradesh in the total MDF business. So it's difficult for me to state that the margins could improve by 50 or 75 or 100 basis points. But yes, I think we have significant scope to improve the operating margins by the time we reach the optimum capacity utilization.

Okay. Okay. Fair enough. And any kind of growth outlook we have for the next year?

No. Like -- we are not giving any growth guidance even for the current financial year. So while based on the experience of the past 4 months, we feel that we could achieve double-digit growth in the remaining 2 quarters of the current year, I would wait to see the results of the same because the pandemic is still having a significant impact on businesses, especially in the Southern and Western regions. And internationally, also the reports are not exactly boosting our confidence. So I think we'll look at guidance for the next financial year when we discuss the Q4 numbers.

The next question is from the line of Venkat Samala from Tata Asset Management.

Congratulations on a very good set of numbers. Sir, just wanted to understand, firstly, the source of the demand that you're getting. Because as I understand that a large part of demand originates from the commercial office segment, which I understand is sort of weak. So is the ready-made furniture doing so well to more than compensate for the shortfall in the commercial segment? Because we witnessed 30% odd growth year-on-year, right? So just wanted to understand which are the areas from which you are seeing very good growth.

See, it's -- I think it's a mix of factors which is contributing to the growth. Like I mentioned previously that people are possibly reducing the expenditure on furniture. So in that way, ready-made furniture manufactured from MDF helps them to significantly reduce the expense on furniture. Again, people are hesitant to allow carpenters into their homes to do furniture from plywood. So that's also possibly contributing to growth in MDF volume. The difficulties in availability of containers and ships, which is impacting our exports is probably also having an impact on imports. So there are various factors which have contributed to the growth in our volumes during the current quarter. It would not be right to exactly attribute 1 particular reason for the growth.

Right. The commercial segment as it is, is witnessing challenges, right? So is the retail portion where you are seeing good traction? [indiscernible]

Like -- I think possibly 2 or 3 months is a very short time frame to decide exactly where the demand is coming from. So I'll probably able to give you a better reply by the end of the next quarter.

Sure, sir. Sure, sir. Fair enough. And if you could help us understand with the exports versus domestic mix for the quarter and how was it in the base?

Yes, just a minute. Our total MDF volumes were 82,133 cubic meters in the current quarter. And exports contributed 32% of the total.

Sorry, 22%, is it?

32%. 32%. 3-2.

32%. Right.

Export volumes were 26,505 cubic meters and domestic volumes were 55,628 cubic meters. If you look at the corresponding quarter last year, our total sales were 62,530 cubic meters. Exports contributed 16,490 cubic meters or 26% of the total. And domestic contributed 46,071 cubic meters or roughly 74% of the total MDF volume.

Okay. Sure, sir. That was very helpful. And one more thing which I noticed is, with respect to ply segment also, the degrowth was much lesser than what previously other companies were indicating. So do you think the industry as a whole also sort of recovered meaningfully towards the end of the quarter? Or you sort of bucked the trend?

No. I don't think it was just a special case for Greenpanel. I think industry volumes as a whole are increasing. And that's possibly the reason why we are seeing stability in prices during the past 1 year. And we expect this trend to continue in the future. I don't think we will see an increase in prices primarily because I think all the manufacturers will focus on achievement of the optimum capacity utilization before concentrating on prices. But yes, we definitely expect prices to be stable.

Right, right. So then it's more a function of industry recovering as a whole quite meaningfully?

That's correct.

Sure, sir. And 1 last question, if I may squeeze in. So with the traction and the demand that you were witnessing and the sequential growth continued in October also, is it?

Yes, that's correct.

The next question is from the line of Achal Lohade from JM Financial.

Congratulations for the great numbers. Sir, my first question is, with respect to the MDF business, can you help us understand how the -- so you indicated that there are issues with respect to container availability for exports. So could there be a meaningful impact for the quarter on the exports momentum? And how is the opportunity looking like where we are kind of seeing some export opportunity in the other segment. So is it looking better for us for MDF business or not really there isn't much change?

See, we really do not have a significant interest in increasing our export volumes. So we are primarily doing exports to have a better utilization of the capacities and also discharge our EPCG liabilities for import of capital goods. So I think we'll try to maintain the exports volumes at the current level and concentrate more on increasing the domestic volumes over the next few quarters and also the next financial year.

Right. And with respect to domestic business for MDF, in terms of the number, we are looking at like a 20% plus kind of a growth in the second quarter. You mentioned that you're looking at a double-digit growth for the second half. Is that at the company level or is that specifically for the MDF business?

Yes. I think we'll do it both at the company level and also for the MDF business because plywood has a share of only about 25% in the total business. So yes, we can achieve double-digit growth in the -- at the company level during the next 2 quarters.

Understood. And could you please help us understand the profitability? Sorry I missed that. In terms of the ply business, we're looking at 16% kind of a gross margin -- sorry, EBITDA margin. So how sustainable is that? What is the margin we should kind of work with for ply business?

Yes. I think we can expect this to be a stable margin while we improve the capacity utilizations in the plywood business. Yes, I think we are still operating at low capacity utilization. So possibly there's scope to further improve the plywood margins as and when we touch optimum capacity utilization. So we operated at about 78% capacity utilization during the current quarter. So definitely, yes. But probably for the next couple of quarters, since there are challenges due to COVID, I think we should -- we can keep this as a stable margin for the next few quarters.

So you mean 16% is the new margin. What has driven this margin improvement, if you could help us understand that? Sorry, I -- pardon me if I'm asking the repeated question actually.

So we have managed to reduce our raw material cost on the plywood side. So I would not like to explain the exact reason for the same due to competitor actions. So -- but I think, yes, those benefits are to stay with us in the long term, and we expect plywood margins to be relatively stable or improve further with increase in capacity utilization.

Understood. And just with respect to MDF business, any update on the government measures like we were kind of expecting some measures on the imports of ready-made furniture or the antidumping duty?

Shobhanji, can you please take that question?

Sorry, can you please repeat that once again?

With respect to government measures on the MDF, any update on that since we were looking at like import restrictions on the ready-made furniture or antidumping duty?

No. So the matter is ongoing, if I'm not wrong. Three different antidumping cases ongoing, rather 4. One is the renewal of the existing antidumping that is in place. Second is the inclusion of some countries which are currently not a part of the existing antidumping policy. Number three is investigation on thin MDF for antidumping is also subsequently ongoing. And number four, the government has also initiated investigation into the countervailing duty on -- across all MDF products. So these matters are all undergoing -- under [indiscernible] at the moment. And I mean, of course, with the pandemic situation, things are a bit slow at the moment. But the industry is hopeful that we will see some positive remarks in the favor of the industry. Barring -- apart from this, there is also a BIS implementation, which is something that has been put on hold, but which may come into play in the near future. Whereas like you see in products like tires, et cetera, where importers have to start applying BIS specifications for products being imported into India, that would also help the domestic industry as it would be an entry barrier for imports coming into our country. So all these things are still very much in process.

It may also be relevant to add that antidumping duty on thick MDF, which was expiring in October has been extended for a further period of 3 months till 20 January. So that could possibly be an indication that the government would complete its investigations and take action over the next 3 months.

Understood. And just 1 more question with respect to pricing of MDF in the domestic market. How is the pricing? Are we looking at any price increase? How is the situation in terms of the new players or the capacity, which were kind of expected to be added?

Prices have been stable during the past 1 year. And we expect that to remain stable for the current year and possibly the next financial year, while both Greenpanel and the industry will try to have the optimum capacity utilization of the capacity. So possibly price increases will take a backseat during this period of time. We'll be concentrating on achieving the optimum capacity utilizations and improving the margins. And regarding new capacities, I think Rushil's capacity has been deferred primarily because of the German engineers cannot travel to India at this point of time. So I think that would possibly reduce the volume of new MDF coming into the markets possibly for the next 6 to 8 months.

The next question is from the line of Divesh Gandhi from [ Finance Stockbroking. ]

My question was simply on the cash flow. As per the working, it shows that probably we'll do INR 130 crore, INR 150 crore EBITDA for the year. And cash flow conversion rate of 80% in working capital. So we'll do free cash flow of roughly INR 80 crores to INR 100 crores because we're not doing any CapEx in the current year. So the cash flow will go towards repayment of debt or we can also think of doing a buyback or improving return ratios by doing a certain amount of buyback?

See, we have about INR 50 crores of repayments during the current financial year post the moratoriums that were taken between April and June. So I think, yes, we'll have additional cash flows during the current year. So while we will not be looking to reduce our equity because it's a very small equity base that we have of only INR 12 crores. So possibly what we would -- while we may not be able to repay term debt beyond what is already due during the current year, so we'll possibly park those in our cash credit accounts and thereby reduce the net debt as on 31st March 2021. Our gross debt was INR 506 crores as on 30th September 2020. So I think we could possibly look at a figure of INR 450 crores as on 31st March 2021.

Okay. So basically, we're looking to reduce the interest cost by servicing -- by repaying the loans earlier which is also helping in improving the ROE also?

That's correct.

Okay. Okay. And in terms of any partnership we are looking at in the next 18 to 24 months in terms of any strategic partnership we're looking at?

Not really. We are not looking at any organic or inorganic growth till we reduce our debt by a significant level.

Okay. And 1 last question, sir. What is the breakeven capacity utilization level for us?

For the MDF business, it would be roughly at about 52%, 53%.

And for the plywood business?

For the plywood business, it would be roughly about 70%.

The next question is from the line of Ankit Goradia from VC Investments.

Congratulations team on an amazing set of numbers. If you could just throw some color on how's the whole competitive intensity in the market right now? Are we seeing a very strong thrust on shifts from organized players such as you taking a very strong market share from unorganized? And what is our component between export and domestic market?

So I think during this quarter, growth has been steady for all the major players. I don't think we are taking away significant market share from the competition. And possibly, MDF is taking growth from -- is taking away market share from other furniture manufacturing raw materials like plywood, et cetera. And as for the domestic/export mix, our domestic/export mix was 68% domestic and 32% exports during the current quarter as compared to 74% domestic and 26% exports in the corresponding quarter last year.

Understood. No, that's okay. So we are pretty much in line over there. Going forward, how are we seeing the market evolve? And in particularly, the organized guys, is MDF going to be sort of now the new growth engine for the broader industry? And 2 is, are we -- I mean, of course, too early to say, but would we be kind of launching any new products or we are pretty much going to sit back and trying to get our house in order right now?