Greenpanel Industries Limited (GREENPANEL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 and H1 FY '22 earnings conference call of Greenpanel Industries Limited. [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 Q2 and H1 FY '22 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 for the financial year 2022. I take this opportunity to wish all a very happy Diwali in advance. I do hope that all of you and your families are safe and well. Business momentum accelerated in quarter 2 with the pace of vaccinations picking up. Net sales were up 87% year-on-year at INR 408.5 crores. Gross margins were up 30 basis points year-on-year at 56.5% as we took price increases to compensate for increase in raw material costs. EBITDA margins were up by 697 basis points at 28.2% due to operational leverage, continuous focus on superior product mix and cost optimization. PAT is up by 265% year-on-year to INR 67.06 crores. Net working capital days at 14 days has shown a reduction of 21 days compared to the year-on-year quarter. Net debt has reduced by INR 129 crores during the quarter and stands at INR 229 crores as on 30th September 2021. We have prepaid 4 installments of the German bank LBBW loan amounting to EUR 8.91 million. That is -- that equates to INR 78 crores during October 2021 and are targeting to be net debt free for the existing business during financial year 2022. I'll now request Mr. Venkatramani to run you through the financials in greater detail.

Good afternoon, everyone. I thank you all for joining us to discuss the Q2 FY '22 financial performance of Greenpanel Industries. I wish all of you and your families a very happy and safe Diwali. In Q2, our top line increased by 87% at INR 408.51 crores. MDF sales grew by 102.4% at INR 335.34 crores and contributed 82% of the top line. MDF sales volumes grew by 66.9% at 1,37,044 cubic meters. MDF domestic revenues were INR 250.32 crores while exports contributed INR 84.70 crores. MDF domestic volumes were 92,144 cubic meters, while export volumes were 44,900 cubic meters. Domestic realizations were up by 19% at INR 27,157 per cubic meter and export realizations were up by 31% at INR 18,863 cubic meter. Blended MDF realizations were up by 22% at INR 24,446 per cubic meter. Uttarakhand MDF unit operated at 94%. AP plant operated at 96% with blended capacity utilization of 95% for both plants. Plywood sales grew by 38.4% at INR 73.17 crores. Plywood sales volumes increased by 22.4% at 2.52 million square meter and the unit operated at 92% during the quarter. Plywood sales realizations were up by 13.41% at INR 279 per square meter. In Q2, gross margin increased by 30 basis points year-on-year at 56.5%. Gross profit value increased by 88% at INR 230.90 crores as compared to INR 122.85 crores in the year-on-year quarter. EBITDA margins were up by 697 basis points at 28.2% compared to 21.3% during the corresponding quarter. EBITDA in value terms grew by 148.3% at INR 115.29 crores compared to INR 46.43 crores during the corresponding quarter. Profit after tax increased by 265% at INR 67.06 crores versus INR 18.40 crores in the corresponding quarter. I'll now move on to the performance details for H1 2022. During H1, net sales grew by 132.3% at INR 708.04 crores compared to INR 304.76 crores in H1 FY '21. MDF sales increased by 153.7% at INR 589.59 crores while plywood sales grew by 63.7% at INR 118.45 crores. Gross margins were up by 353 basis points at 56.4% compared to 52.8% in H1 '21. Gross margin value was up by 147.9% at INR 399.19 crores against INR 151.05 crores in the corresponding period. EBITDA margins were up by 1,326 basis points at 26.1% compared to 12.8% in H1 FY '21. EBITDA in value terms increased by 373% at INR 184.52 crores as against INR 39.01 crores in the corresponding period. Post-tax profits were up by 635% at INR 96.80 crores. MDF sales volumes were up by 113.1% at 2,49,779 cubic meters with blended capacity utilization of the 2 plants at 93% compared to 40% in H1 FY '21. Dispatches for plywood increased by 50.2% at 4.37 million square meters as compared to 2.91 million square meter with capacity utilization at 77% compared to 50% in the corresponding period. Our gross debt-to-equity ratio stands at 0.42% as on 30th September 2021 compared to 0.79% as on 30th September 2020. Net debt reduced by INR 147 crores during the half year to INR 229 crores as on 30th September 2021. That concludes my presentation. I would now request you to open the floor for the Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Chirag Lodaya from Valuequest.

Congratulations on great set of numbers. Sir, my first question was on -- can you help us break up of North as well as South plants volume realization as well as margins?

Okay. For the North plants, domestic volumes were 41,579 cubic meters with realizations at INR 29,258. For the South plant, domestic volumes were 50,565 with realizations at INR 25,448. On the export front, North plant had 510 cubic meters at INR 33,630 per cubic meter and South plant had 44,389 cubic meters at INR 18,693.

And sir, in terms of margins, North as well as South.

Okay. The Uttarakhand plant had an EBITDA margin of 27.84%. And the Andhra plant had an EBITDA margin of 33.49%. But this included currency gains of 1.05%. So excluding that, EBITDA margin for the South plant was 32.44%.

Sir, second question was looking at the current supply chain disruption overall, what we are seeing in raw material inflation, what's your outlook on overall volume as well as margins say for H2?

We expect to operate at full capacity utilization during the balance 6 months. And for a part of the period, we'll also have the benefit of enhanced capacity, which is expected to be completed during Q3. So on existing capacity, I think we will be above 100% capacity utilization in the second half of the year. And on the enhanced capacity, we'll probably be somewhere between 90% to 95%.

Okay. So I mean you will be adding like 1,20,000 cubic meter in Q3 and you are saying that for H2, you'll be able to utilize that capacity also at 90%, 95%?

No. That capacity will probably be available only for -- on a quarterly basis only for Q4. So probably in Q4, we should do somewhere between 90% to 95% of the expanded capacity.

Got it. Okay. And sir, on overall margins outlook for H2.

It will depend upon raw material prices. Till date we have been able to take price increases to compensate for raw material increases. So it will depend upon how strong demand is in the future, whether that will enable us to take further price hikes for further cost hikes.

But looking at current scenario, current margins are sustainable. Is that understanding correct?

Yes, that's right.

Got it. And just lastly, sir, bookkeeping question. What is the ForEx element in the interest cost for this quarter as well as H1?

Okay. For this quarter, we had currency gains of about INR 5.2 crores. And for H1, we had currency loss of about INR 2.5 crores.

The next question is from the line of Udit Gajiwala from YES Securities. [Operator Instructions] The next question is from the line of Udit Gajiwala from YES Securities.

Congrats on great set of numbers. Sir, can you explain that how have been the imports for the quarter, of course? And how do you see the competitive intensity panning out in coming 2, 3 years?

Okay. As far as the imports have taken hit during the current year because of logistics issues, steep increase in ocean freight rates and logistics costs. And also steep increase in international prices of MDF. So we have not seen much of imports into India during the half year ending 30 September. And the short-term view is that imports will continue to remain subdued for the balance period of the current year. But on a long-term basis, we are expecting that imports could come back into the country whenever the logistics issues get resolved. So we are working with the government for imposition of countervailing duty on imports. On the competition intensity, yes. So I think current MDF capacities in the country are about 2.3 million cubic meters. And we expect that this will go up to close to 3 million cubic meters by the end of FY '25.

And sir, our price realizations that have been high. So of course, for the balance year, the price might be -- we'll be able to maintain that for following years FY '22, '23, where do you see realization stabilizing for domestic and exports?

I think if raw material costs remain similar, we'll be able to maintain the realization. And if raw material costs increase or reduce, we might take price increases or price reductions depending upon competition activity and future price hikes on account of raw material cost increases, so depend -- also depend on demand remaining strong in the domestic market.

Understood. last question, if I may, squeeze in sir. Our existing capacity can operate to what kind of peak utilization level and the new capacity will be fully utilized by what meters?

Our existing capacity is 540,000, and we are going for a capacity increase. So post that, our capacity will be 650,000 cubic meters. But again, this is on a particular mix of products having different densities. So if there is any significant change in the density of the product manufactured, which would depend upon market demand, then capacity utilization could change.

The next question is from the line of Ashish Poddar from Systematix Institutional Equity.

Many congratulations on strong set of performance in the current challenging environment. So my question is, again, very general in terms of demand outlook. So you mentioned that the current momentum will continue and it will even become more stronger as you are expecting capacity utilization to increase from here on also. And the margins, which were the highest, I think, for you in the MDF segment. So my question is that over next 2, 3 years time frame, do you think that this 31% kind of EBITDA margin in MDF is sustainable? Or there are some favorable things because of that it is a little elevated currently, and it should normalize to 28% kind of band. So your comments on that, sir.

Yes. I think the current margins are sustainable subject, of course, to the condition that there are no major hikes in raw material costs because any increase in selling prices will depend upon the demand environment. So if raw material costs go up steeply and demand environment is not strong, we might not be able to pass on the full extent of the cost increases. So to some extent, it would be dependent upon demand conditions remaining strong. But we are hopeful in the current environment that we'll be able to maintain the margins during the current financial year.

And plywood segment, were there any benefit of low-cost inventory during the quarter or even in the plywood this 15% margin is sustainable?

No. In fact, our plywood margins in this quarter were about 13.6%. And we'll probably have to take some price increases to compensate for raw material cost hike, if you are not able to pass on in the second quarter. So we'll probably look at some price hikes in Q3 depending upon demand conditions.

So you're saying that there is a scope for improvement in the plywood margin, right?

Yes. I think a sustainable margin should be around 14% to 14.5% for the plywood segment.

The next question is from the line of Prashant Kutty from Sundaram Mutual Fund.

Congrats on a very good set of numbers. Just one clarification. In the last call, you indicated that the demand trends were not kind of picking up well around the July month or so. When you're talking about -- obviously, I mean we ended with a much better number also driven by better realization as well. When you're looking at the current demand scenario, are we seeing a month-on-month improvement right now? Are we back to our old levels what we were when you're looking at September numbers? Or again, are you surpassing that. So could we actually say that maybe Q3 could be like a big quarter for us?

So I think I would say that demand conditions have improved month-on-month. So we saw improvement in August as compared to July and further improvement in September compared to August. But there will be some impact of the festivals in Q3. I think the Durga Puja festivals in October and Diwali in November. So perhaps we do not see any growth Q-on-Q in quarter 3. So I think best case would be to maintain similar numbers as Q2 in Q3. So probably if there's any improvement that could happen in quarter 4, where our capacity -- the increased capacity will also be available to us.

But sir, typically, like you mentioned, I think your MDF utilization levels are about 95%. I presume that because the July month was probably not that great. So when we're looking at, obviously, September and all shouldn't we be actually looking at a slightly better number going into -- because utilization will obviously kind of can get back to 100% levels as well because that is where you used to operate it around the Q4 level. So I was just asking from that standpoint.

Yes. I think probably you see, again, I think we should be around the 95% level, because of the impact of the festival season. But in Q4 I think we should definitely operate at 100% of the existing capacity. But since we will be having the increased capacity available to us in Q4, I think the capacity utilization will probably be somewhere between 90% to 95% of the expanded capacity.

Okay. So Q4, our new capacity will actually come?

That's right.

Okay. And sir, one last question from my end. Are we also seeing like from the last quarter, we've obviously seen realization improvement as well. Are we also seeing again further improvement in realizations from here on, let's say, for example, the export market and all, I mean, when we're looking at month-on-month numbers?

I think we'll see a small improvement in export realizations in Q4 -- Q3 as compared to Q2 because the full impact of the increased realization was not there in Q2 as we had some old orders which were fulfilled in Q2. So I think, yes, we should see a small improvement in export realizations. And domestic realization, of course, will depend upon raw material cost pressure.

Understood. Understood. Could I ask one more question, sir? Or should I come back to the queue?

Yes, please go ahead.

Okay. Just one thing, because like you said, the raw material pressure would -- it depend upon raw material pressure is obviously, this quarter also you would have felt some raw material pressure, but obviously, we've kind of made up for that with the most to realization. Are we seeing incremental pressure on raw material, as we talk about, let's say, the month of October and all because we've actually seen across the board energy prices all have kind of gone up. So are we even seeing in our materials as well increase happening in the raw material front, let's say, in the month of October?

Yes. We have seen an increase in the chemical prices in the month of October also. So we have gone for another round of price increases in October. So October, we'll probably not get the benefit of that increased price. So that could be available to us from November.

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

Sir, my first question is with respect to how are we planning further expanding our capacities beyond the brownfield expansion that you've spoken about? Because the way that I'm thinking about this is Q4, you're expecting 90% to 95% capacity utilization of the enhanced capacity, right? And this is about 120,000 CBM, which essentially means that H2 -- so basically, quarterly run rate in Q4 would be about 20% higher than what we are seeing in Q2, right, and will largely be running at full capacity utilization levels, exit Q4 or start of Q1 next year. So how are we planning to sort of cater to the higher demand that we are seeing?

Shobhan ji, can you please take that?

Sorry. Sorry, can you please repeat that question slowly?

Yes, about you were saying capacity addition beyond this mat expansion that we are doing in Q3, new capacity.

I mean, this capacity enhancement that we are doing, we'll expect this to sort of come into full play by probably the second half of the next financial year. And with regards to the new expansion or the new sort of substantial expansion that we are considering and in discussions with, we'll only be able to give any concrete information towards the end of this financial year. I think in the Q4 call, perhaps we'll be able to give you something concrete on that because it's still too premature and at concept stage at this point of time. We are exploring locations, we are exploring the required capacity, we are assessing the market. So any concrete information about that would only be available towards the end of this financial year.

Right, right, right. So sir, just as a follow-up to that, I mean, if we're going to be zeroing on something for expansion, say, by Q4 exit. At the same time, we are also expecting the enhanced capacity to run close to full capacity utilization levels, right, by the end of this fiscal. So won't it be a little too late to sort of...

Not by the end of this fiscal because -- I said towards the second half of the next financial year.

Okay. Okay. Okay. Sorry, sorry, my bad. Maybe I thought that, that enhanced capacity would be running close to full capacity utilization by Q4 of this year itself.

No, the concern -- I'm assuming your concern is that there will be sort of a lag between growth and availability of capacity. But I think we are okay because from the existing plant with the right product mix and the fully optimized, we are still able to push out close to 110, 112-odd percent, plus we'll get this additional 20-odd percent. So there's still growth margin available from our existing plants of up to 20%, 25%, which would comfortably take care of our growth requirements for the next 1.5 years or so, at least till the next financial year. And by that time, I'm pretty sure we'll be in quite an advanced stage with the new expansion that we are -- we have in our minds. So I think we should be okay.

Okay. Okay. Okay. Understood. Understood. So maybe it's just that I got it bad. When I heard it that, that enhanced capacity would be operating close to full capacity utilization in Q4 of this year. So you're basically saying that you'll be running at full capacity utilization for the next year, right, FY '23?

I think safe to say, like the combined capacity, including the new sort of enhancement that we are doing that will be full utilization levels towards the second half of the next financial year.

Okay. Okay. Okay. Understood. Understood. Right. Right. And if I just look at the exports volume mix, we are between 25% to 30% for Q2, right? So just trying to understand how is it trending at this point in time?

Yes, the domestic markets were impacted in Q1 and Q2 because of COVID, so the dealer segment definitely took time to recover. So to cover the gap, we put exports and export volumes were almost 33% of the total MDF volumes in this quarter. So going forward, I expect export volumes will be lower as compared to Q2 and Q3 and Q4. And yes, if you look at the next financial year, I think probably export volumes on a yearly basis would be somewhere between 1 lakh to 1,20,000. That would probably be our target for the next financial year. So our preference will always be the domestic market realizations and margins are higher, and exports will always be used as a balancing factor.

Understood. Understood. Sir, and my last question is, if I heard it right, you did mention that the South plant margins were -- ex of the foreign currency impact was close to 31% versus North was around 27%, 28%. So just trying to understand South where -- South plants where we have higher number of exports, especially in the current quarter, how did we manage to have better margins than North?

Yes. South plant capacity utilization was also marginally higher than North. And because of the larger capacity, that gives us benefit of scale, which is now becoming visible. And also, the export realizations have improved significantly in this quarter as compared to quarter 1. I think we have seen a growth of about 20% in export realization. And domestic realizations have also been strong. So that has contributed to a higher operating margin for the Southern plants.

Right, right, right. And what kind of margins do we make on exports now versus the domestic with the higher realizations.

So about 16% to 18%.

[Operator Instructions] The next question is from the line of Nikhil Agarwal from [ BP ] Capital.

So sir, I wanted to understand like, you source your -- the raw materials, the major raw material for MDF is eucalyptus timber, right? So you source it from your -- from plantations that are near your factory. And so I wanted to understand what is exactly the raw material cost because in an earlier con call, you had mentioned that these farmers are tied -- they have some tie-up with you. So is the raw material cost very much in your control?

No. We don't have any specific tie-up with farmers directly because a large part of the raw material comes from small farmers. So if we were to directly impact with all those farmers, it would mean that we will be impacting it anywhere between 1,000 to 1,500 farmers. So instead of that, we have a system of contractors. We have about 6 to 8 contractors across each plants who procure the raw material from the farmers and then supply to us. So we don't have any direct tie up with the farmers. So basically, we give targets to these contractors either monthly or quarterly target. And they also have incentives depending upon how they perform vis-à-vis the target.

Okay. And sir, what is the like what are the raw material price hikes that have been taking -- I mean the raw material costs that have increased.

Okay. So if you look at wood costs, wood costs have seen a significant increase in the northern belt, about 8% to 10%, whereas in Southern -- in the Southern part, raw material costs, wood costs have remained relatively stable, seen an increase of about 2% to 3%. But the major increase has happened in chemical prices. So wood comprises about 65% of the total raw materials, chemical resins the balance 35%. And we have seen very sharp increases in the chemical prices, depending upon different chemicals. There have been price increases ranging between 25 to -- if you look at a year or so, there have been increases in the range of 25% to 100%.

And sir, just one last question. What markets do you cater to the export markets?

Our export markets are primarily the Middle East, then the neighboring countries in Southeast Asia, then we are also supplying to U.K., Korea, et cetera. And recently, we have also received inquiries from Germany.

The next question is from the line of Aman Madrecha from Augmenta Research.

I just wanted to ask like since you already expanded the capacity for MDF, so what is the expected CapEx over the next 2 years, like do you have any number for that?

No. Like Shobhan Ji mentioned in an earlier question, we have not finalized our CapEx plan. So those will probably get finalized during Q3 or Q4, and then we'll be able to share the details with you.

So sir, like what was the amount of CapEx incurred for expanding this capacity from 5,42,000 to 6,60,000?

So this CapEx will primarily be incurred in this quarter. So for just the capacity expansion, the cost will be around INR 22 crores, INR 23 crores. And we are also adding some new machinery to reduce wax consumption, where there will be another CapEx of around INR 20-odd crores. So total CapEx will be in the range of about INR 40 crores to INR 45 crores.

Sorry one caveat here Please don't assume this cost of expansion of this 15%, 20% in proportion to the new plant. I mean it's not linked at all. This is a very small sort of expense to get this -- to debottleneck our existing plants.

It is not really on expansion, it's more like debottlenecking. We will be adding some new machinery to reduce the processing time.

Yes, exactly. So it is -- I mean the investment to output ratio is very different when we're installing a new plant compared to this. So this has got no relation.

Okay. Okay. And sir, just one more question, like there are no more imports. Imports are struggling for MDF. So like do we have any outlook for the imports in MDF coming back since we have already expanded the capacity, like we see in foreseeable future, the imports again come back, then what would be the impact like on us?

See, the logistical issues are continuing into the current quarter. So we are reasonably optimistic that there will not be any significant increase in import volumes during the second half of the current year. But if logistics issues get sorted out, we could see increased imports in the next financial year.

Sorry, do keep in mind that worldwide, there is a substantial shortage of MDF across the world. That is why even we are seeing inquiries coming from countries that we were never expecting to export to. So -- and for the primary importing countries into India, Southeast Asia, India is the least favorable market. So the silver lining is that because of the shortage across the world, they would also be first looking at satisfying the requirements of the other markets, the more lucrative markets before they start allocating capacities to India. So I think in the immediate future, in near term, we don't see any substantial threat from imports coming back into India.

Sir, why is India the least favorable market, like it's because of the quality or like what is the differentiator?

Well, it's primarily a pricing matter. India acts as like a dumping sort of market for them because where in Europe, prices are going at EUR 300, EUR 350 a cubic meter; in India, I mean people are buying imports at much lower cost, less than $200. So it's really like a market where they want to supply to fill capacities. They don't really make any substantial money by supplying to India. So always India has acted as like a balancing sort of market for them, where if they have surplus capacity, they allocate capacity to India.

So currently, you are saying everyone in the world is struggling with the capacity on the MDF front, right?

Well, there is a shortage. There is a substantial MDF shortage across the world. And even in Europe, mills are -- they have a backlog of -- the order books are filled till like for 2 years or so. So definitely, there is a shortage of MDF across.

Okay. And for us, the domestic market is more lucrative than the exports market, right?

Yes, absolutely.

[Operator Instructions] The next question is from the line of Nikhil Agarwal from [ BP ] Capital.

Sir, I missed you on the -- like the price increase in the wood costs quarter-on-quarter. Could you just let me know?

Yes. What I mentioned was we had seen an increase of 8% to 10% in the first half of the current financial year for the northern plant. Whereas in South India, wood prices have been relatively stable, has seen a small increase of between 2% to 3%.

Okay, sir. And sir, can you just give me the breakup for the demand that you cater to across India? So do you cater only to the North and South? Or do you supply to the West and Eastern markets as well?

Yes. We supply pan India, but I would say approximately 40% of our volumes come from South India, about 37%, 38% from North India, about 16% to 18% from Western parts and about 7% to 8% from Eastern India.

Okay. And sir, like this Greenply in the last quarter, they have announced the new capacity, like they've announced that they're foraying into the MDF business. So is there any threat to...?

No. In fact, it's not a threat because if we had stopped Greenply possibly some other company would have set up facility in Western India. So we figured that it was better to give the permission to Greenply which is an organized company and will not get into defective practices rather than have an unorganized company coming up as a competitor.

The next question is from the line of Girish Choudhary from Spark Capital Advisors.

Congrats on the strong performance. Firstly, if you can talk a bit on the volume mix in terms of the customer and also in terms of the product and as a follow-up. How much is the potential to improve or increase the mix, which we can add to your overall growth?

Okay. So if we look at the mix, our mix has been quite good. So we have a bouquet of value-added products in MDF, which are basically the Club Grade, Exterior Grade, prelaminated MDF wood floors and Veneered MDF. And then we have the industrial grade MDF. So in volume terms, the Industrial Grade MDF contributed about 52% and 41% in value terms. Whereas the value-added products contributed 48% in value terms -- in volume terms and about 59% in value terms.

Okay. And on the mix in terms of customers. So when I mean customers between retail versus OEMs?

Yes, the mix remained more or less what we saw in quarter 1. So the retail contributed about 68% and OEM, the balance, 32%. This is of the domestic volume.

Okay. Noted. And secondly, on the working capital, we have seen a meaningful reduction. And especially if I look at the receivable days, it has come down to 11 days. So what would you attribute this to? And how much is this sustainable?

I think the continuous focus on working capital, which has got about improvement. So Greenpanel since its very inception and right from the time we entered the MDF segment, we have been focused on working capital performance. So this is a work which has come across over a decade of concentrated focus on working capital.

So is this -- is the range of 11, 12 days...

[Operator Instructions] The next question is from the line of Akshay Chheda from Canara Robeco.

Congratulations on the great set of numbers. Sir, 2 questions. So one is on this margin improvement. So how should -- I mean what are the factors that have contributed to this margin improvement? I understand that one of them would be the operating leverage. And second would be the better realization in the international market. But then international market are strong around -- exports happen to be just 20%, 30%, so. What are the other reasons that have caused improvement in the margin? And secondly, sir, did mention that internationally, there is the shortage of MDF. So sir, any reasons what has caused the shortage? Yes, these 2 things.

Yes, so you can take the second part.

You answer the margin question. Yes. So I'll do the second part first. The shortage is basically what has resulted during the pandemic, of course, most of the mills had shut down. So there's obviously like some pent-up demand that is across -- in the markets around the world. Also no new expansions were taking place. So the plants -- because an MDF plant takes close to 2 years from a point of inception to come online. So during this period, obviously, there was no expansion taking place. And with the markets opening up and with the increased focus of people, especially on spending on home renovations and building this and the -- this created a sort of a sudden sort of surge in demand for which mills were not ready for. And now new plants are not yet coming online. So now you're seeing the cycle where new orders for new plants are being placed by people. And I think it's a process of to what it was before sort of that sort of neutralizes the additional demand.

And coming to the first question on the margin front. So like you mentioned the operational leverage, improvement in export realizations, improvement in domestic realizations, improvement in the mix of value-added products and the impact of price increases. So apart from the regular price increases, we have also done some price corrections in the OEM segment. So earlier, OEM prices used to be at a discount of about 8% to 10% compared to retail prices. So we had reduced that to between 4% to 6%, which also helps to improve the realizations and the margins.

So sir, is it fair to assume that the price hikes that we have taken are a little higher than the raw material inflation. And hence, some element of margin improvement is coming from there also?

No. If you look at the direct price increases, they have just about covered raw material cost because our gross margins have gone up by only 30 basis points. So it's primarily the operational leverage and focus on wastage reduction which has helped to improve the margin.

The next question is from the line of Devang Patel from NAFA AMC.

Congrats on a great set of numbers. Sir, given the international price increase and domestic price, are we seeing -- given the supply/demand scenario, are we seeing any -- I mean, the reduction in gap between the domestic prices and international prices? And the second question is like what is our current OEM mix in terms of revenue? And how many dealers we have added this quarter?

Okay. So -- if you look at the OEM dealer mix. So retail is about 68% of the domestic volumes and OEM the balance 32% And yes, if we look at the improvement in realization, so year-on-year, domestic realizations have gone up by -- from INR 22,400 to about INR 27,170, and export realizations have gone up from INR 14,300 to INR 18,800. So yes. It's a mix of the price increases we have taken to cover raw material costs, improvement in international prices and also improvement in the mix of value-added products.

Also, the average realization numbers for the domestic market are not directly comparable with the ones for the export market because the domestic market is an average of a little bit of flooring and all the different grades that we produce, the Club Grade, the high grade and the low grade whereas the export segment is primarily the standard grade product that goes. So it's not a very fair comparison to take -- if you're comparing. I mean the right comparison would be to take the standard grade of export versus the standard grade of domestic.

Then in that case, I think the fair comparison would be that domestic prices for the industrial grade would be between INR 21,500 to INR 22,000 whereas international prices are now close to INR 20,000 per cubic meter.

Okay. And how many dealers we have added this quarter?

Overall, in the first half of this year, we have added about 250 dealers.

Okay Sir, I just wanted to understand also 1 macro question is in terms of MDF given that it's widely used for furniture. Given the versatility and the durability of the product. Beyond furniture, are you seeing any other scope for which MDF can generally be used. For example, there is now a lot of wood-based solar panels, which are coming up across the world in various parts. So can MDF be used for things apart from furniture? And if so, what are they sir?

No. I mean, MDF, it's already a fairly versatile product. It is not only used for furniture. I mean, especially in India, there are multiple users of MDF. People are using it for photo framing. People are using it for handicrafts and for packaging, et cetera, et cetera. However, specific requirement that you are saying solar panels, I mean MDF will not be suitable for a product because I'm assuming that would either be like a WPC-based product or a waterproof product like a solid timber. MDF would not be suitable for a solar panel kind of a product because that is susceptible to the natural elements and the MDF would not be suitable for that particular thing. So -- but otherwise, MDF is already being used for at least in India for many, many other products. And the usage continues to grow. Avenues where MDF was not previously being used people are adapting that. And obviously, replacement of plywood is also happening at the same time. People who are not comfortable using MDF initially in wet areas like kitchens, now products are available that are far more superior and resistant to water. So expansion of usage within India is happening as well, a lot of it.

The next question is from the line of -- I'm sorry. The next question is from the line of Rishabh Jain from [indiscernible].

Rishabh from [indiscernible]. As you have widely pointed out a couple of months back in an interview, that there is a potential scope for growth for -- the MDF can replace the segment called low-quality plywoods, right? It is said to be about INR 2,500 crores of market. Currently, the MDF is about INR 2,500 crores. So the potential market rate in down line about the next 2 to 3 years, it's about INR 5,000 crores. Currently, we are -- even we have been considering that new capacities coming in the next 1 quarter and during this quarter. So our consolidated capacity in MDF it should be about 6,60,000 cubic meters. So what is the potential market sales for MDF in terms of volumes? What is the -- today we are gaining -- we are obtaining about more than -- we are having market share of about in between 35% to 40%. How we are going to retain this in the next 2 years. So what kind of volume growth that we can expect in this particular segment? That's my first question. In order to meet that demand, what is the CapEx that you are planning. I hope that you have early stated that the CapEx announcement will be there in about another 2 to 3 months, if you can provide some rationale in terms of market, it's what we are going to maintain that can make sense? That's my first question. Second thing is that in the first 2 quarters between 122 and 134 cubic meters they have done in terms of MDF, as you stated earlier, we have been maintaining the same level of Q2 in between 130 and Q4 and adding the new plant running at about 85% to 90% capacity, so about 225. So can I consider that we can end up with in between 585 to 610 cubic millimeters of volumes by this financial year, along with the realization in between about -- blended realization of about 22,000 to 23,000. My understanding is correct? Please correct me if I was wrong at anywhere. Third question would be what will be the sustainable margins that we can expect? What will be -- if not CapEx, what is the dividend payout ratio that you are going to -- incrementally going to reward to the shareholders?

Okay. So your first question regarding capacity utilization. So like I mentioned, we will probably be close to 100% of the existing capacity in Q3 and between 90% to 95% of the expanded capacity in Q4. So that's our estimate for the second half of the current financial year. Margins, I had already replied that we feel that the current margins are sustainable. So as we are able to take further price hikes to compensate for any future increase in raw materials, we have already taken a price hike in October to compensate for raw material cost increases in September and October. And future price hikes would depend on whether demand conditions continue to remain favorable. And on the capacity front, regarding substantial expansions like Shobhan Ji already mentioned, we'll probably be taking a decision on that during Q3 or Q4.

My question -- been replacing that -- MDF is replacing the lower-grade plywood, it is said to about INR 2,500 crores of market, what is the volume side, sir?

Our estimates are that cheap segment plywood is about INR 4,500 crores to INR 5,000 crores, not INR 2,500 crores. And volume estimates are not available because it's a completely unorganized market, and they have a lot of invoicing practices due to which it's not possible to estimate volumes or the realization from that grade of plywood. But the market size is somewhere between INR 4,500 crores to INR 5,000 crores. So I think a large part of that would be converted into MDF over the next 4 to 5 years.

Down line, we can expect that Greenpanel can sustain about in between 35% to 40% of the market share, including the replacement of cheap grade plywoods?

No. That, of course, would depend upon capacity expansion decisions we take in the future. So I would not like to comment on that at this point of time.

[Operator Instructions] The next question is from the line of Kedar Kailaje from Fortress Group.

I have 2 questions. So first is regarding your -- you gave your OEM retail mix. So in terms of OEMs are you seeing increased orders from the likes of IKEA and companies like these because they are also expanding very rapidly. And for -- within OEMs, what is the percentage of top 10 customers for you? That will be my first question. And secondly, Greenply has mentioned that they see MDF as a regional market. So do you also foresee the same over the long term? So those would be my 2 questions.

Okay. We are not supplying directly to IKEA. So there may be procuring finished goods from some of the vendors who are procuring MDF from us. So we are not aware of whether that's happening. We estimate that could be happening, but we don't really have any concrete information on that account. And yes, MDF will be a regional product because it's bulky product with low value, realizations are approximately about 45% to 50% of premium plywood and fixed costs are an important cost element in MDF. So yes, MDF will be regional product. And yes, I would like to look at a future where we have plans across all the 4 geographical regions.

The next question is from the line of Pranav Gala from I-Wealth Management. We lost his line, so we will move to the next question, which is from the line of -- the next question is from the line of Chirag Lodaya from Valuequest Investment Advisors.

Sir, my question was on overall export volumes. For this year, what kind of export volumes we are looking at?

Could you please repeat that? I could not catch your question.

What kind of export volumes we are looking for this financial year, FY '22?

We have achieved export volumes of about 80,000 in the first half. And I think we will probably be looking at something around 60,000 in the second half of the financial year.

Got it. And in terms of domestic volumes, will we be able to cross last year H2 domestic volumes?

Yes. At this point of time, I think we will be able to cross last year's H2 volumes.

Okay. And sir, is there further scope to improve North plant margins? Or these are the optimum margins we can get in North plant?

I think we are reasonably close to the optimal margins in the Northern plant. So possibly, we could see some improvement after the capacity increase.

The next question is from the line of [ Aksh Vora ] from [ Praj ] Financial.

Sir, just wanted to know what's the growth rate over the last 2 years for MDF? Like in CAGR terms?

Last 2 years, we don't have much data on how fast the MDF has been going specifically. But over the past few years, I think the MDF has been growing at a CAGR of around 15%.

Okay. Yes, that's helpful. Because last year would be kind of a low base and this year, we will have a higher base.

Higher base, yes, that's right.

That's why -- so just CAGR number would be a good indicator. Also, we have currently 35%, 40% of market share. Do we envisage many competitors coming in, in the near future? Or what's the feel on that factor?

Okay. So current capacities of MDF in the country around 2.3 million cubic meters, and we estimate that we'll reach 3 million cubic meters over the next 3 years.

And sir, what would be a greenfield capacity to put up 100 -- 1 lakh metric cubic meter -- the cost of...

Sorry, are you saying the cost?

Yes, yes. CapEx. Generally, if greenfield plant is put up for 1 lakh cubic meter, what would be the cost for that?

Putting a plant for 1 lakh would be very small, actually, to be honest with you, it wouldn't make economic sense. I think the smallest one would probably be around 2 lakh cubic meters with a continuous press. And I think at the current scenario could be looking at a INR 350 crores to INR 400 crores investment number.

The next question is from the line of Karan Bhatelia from AMSEC.

Sir, all the MDF players now have a very robust portfolio with respect to water resistant or a water proof MDF. But still, if you see the penetration level in East market is not very encouraging. So how can we look at East as a market?

Shobhan Ji, can you take that question?

Yes. So I think the East is -- I think it's still immature in terms of MDF comparatively. But at the same time, focus on the market has given good results. I mean if you look at the Northeast, at least for us, it has become a very lucrative market because market penetration and basically, education of users has resulted in a very positive sort of outcome for us. So I think in the long run, it will eventually happen. I mean, of course, you're right, it is the slowest in terms of acceptance of MDF compared to the other parts of the country. But I think it's more like a psychology thing. And in the long run, we don't foresee that to be a problem because the trends follow. The same kind of architects working across the country and carpenters also pick up trends from other markets. So in the long run, we don't foresee that to be a challenge that the East will not accept or it will continue to be remain out of the market.

Right, right. And just one bit of confusion. So the expanded capacities of 6.6 lakhs, will it be commissioned by the third quarter of this year or the second half of next year? Some confusion over there.

The commissioning will happen this year, but we are expecting utilization -- optimal utilization by the second half of next year.

Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments.

Thank you, everyone, for joining this call. We hope the call has been useful for everyone. If anyone has any further questions, feel free to reach out to us, and we'll be happy to answer them. And we look forward to speaking with you again at the next call at the end of next quarter. Thank you very much.

Thank you, everyone, and wish you all a very happy and safe Diwali in advance.

Yes, happy Diwali, everyone.

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