Greenpanel Industries Limited (GREENPANEL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Greenpanel Q2 and H1 FY '23 Earnings Conference Call. [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, Mr. Barar.

Good day, everyone, and thank you for joining us on the Greenpanel Industries Q2 and H1 FY '23 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. Good afternoon, everyone, and thank you for joining us to discuss Greenpanel's operating and financial performance for quarter 2 FY '23. We had good revenue growth of 11.66% year-on-year in quarter 2. MDF segment saw revenue growth of 17.8%, while plywood revenue saw a degrowth of 16.6%, although volumes were subdued. Net sales stood at INR 456.12 crores. MDF gross margins improved by 205 basis points. Plywood gross margins fell by 239 basis points, leading to an overall increase of 211 basis points in gross margins year-on-year. EBITDA margins were down by 96 basis points at 27.3% due to raw material cost increases and significant fall in plywood volumes. PAT is up by 8.05% year-on-year to INR 72.46 crores. Net working capital days at 24 days has shown an increase of 10 days compared to the year-on-year quarter. Net debt has reduced by INR 42 crores during the quarter and stands at negative INR 59 as on 30th September 2022. We also made advanced payments of INR 30.5 crores during Q2 against the expansion project. For FY 2023, we are guiding for 12% volume growth for MDS in the domestic markets, although export volumes are expected to be flat. We expect to improve maintaining the operating margins in MDF and plywood as volumes pick up in the subsequent quarters. Mr. Venkatramani will now run you through the financials in greater detail, post which we will have a Q&A session.

Good afternoon, everyone. I thank you for joining us to discuss the Q2 FY '23 financial performance of Greenpanel Industries. In Q2, net sales increased by 11.65% year-on-year at INR 456.12 crores. MDF sales grew by 17.8% at INR 395.09 crores and contributed 87% of the top line. MDF sales volumes were lower by 7.9% at 126,232 cubic meters due to reduction in export volumes. MDF domestic revenues were INR 333.85 crores, while export contributed INR 61.24 crores. MDF domestic volumes were 99,495 cubic meters, up from 92,144 cubic in the corresponding period last year, while export volumes were 26,737 cubic meters. Domestic realization were up by 24% at INR 33,554 per cubic meter, while export realizations were higher by 21% at INR 22,906 per cubic meter. Branded MDF realizations were up by 28% at INR 31,299 per cubic meter. Uttarakhand MDF operated at 83% and AP plants operated at 70% with blended capacity transition at 74% on enhanced capacity of 660,000 cubic meters. Plywood sales degrew by 16.6% at INR 61.03 crores. Plywood sales volumes were down by 22.1% at 2.04 million square meters, and the unit operated at 68% capacity utilization during the quarter. Plywood sales realizations were up by 7.2% at INR 299 per square meter. In Q2 FY '23, gross margin increased by 211 basis points year-on-year at 58.6%. Gross profit increased by 15.8% at INR 267.43 crores. EBITDA margins were lower by 96 basis points at 27.3%. EBITDA in value terms grew by 7.86% at INR 124.35 crores. Profit after tax increased by 8.05% at INR 72.46 crores versus INR 67.06 crores in the corresponding year-on-year quarter. I'll now provide an update on the performance details for H1 FY '23. Net sales grew by 29.8% at INR 918.87 crores. MDF sales increased by 23.5% at INR 786.99 crores, while plywood sales increased by 11.3% at INR 131.88 crores. Gross margins were up by 373 basis points at 60.1%. Gross margin in value terms was up by 38% at INR 552.37 crores. EBITDA margins were up by 258 basis points at 28.6% compared to 26.1% in the year-on-year period. EBITDA and value terms increased by 42.6% at INR 263.14 crores. Post-tax profits were up by 55% at INR 150.06 crores. Overall, MDF sales volumes were flat at 251,260 cubic meter with blended capacity utilization of the 2 plants at 78% compared to 76% in the year-on-year period. Dispatches for plywood increased by 4.3% at 4.56 million square meters with capacity utilization at 79% compared to 77% in the corresponding period. Gross debt to equity stands at 0.18% as of 30th September 2022 compared to 0.42% as on 30th September 2021. Net debt reduced by INR 119 crores during the 6-month period, and currently stands at negative INR 59 crores as on 30th September 2022. That concludes your presentation. Please open the floor for the Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Harsh Shah from Dalal & Broacha Stock Broking Private Limited.

I have a couple of questions. Firstly, on the import. So in the month of September we have seen quite a bit of a rise in the import volumes of MDF. So would you be having any data whether -- what type of MDF and where exactly is this being imported? And another related question is what's the strategy to deal with the imports coming back now that our volumes are also been impacted, so do you envisage going forward that our overall capacity utilization would be on the lower end?

See, as far as the imports were concerned, imports were higher at approximately 13,600 cubic meters in September compared to around 3,000 cubic meters in the previous months of June and July. But it could also be a one-off factor due to logistic reasons. I think we'll have to wait for at least a couple of months more to access whether imports are indeed increasing or whether it was a one-off case. As far as our performance were concerned, imports did not impact our volumes. To compare, volumes were quite similar in quarter 2 as compared to Q1. And any reduction was only on the export side. So there has been no impact on our volumes at all.

Okay. And on the margin end, so one of the peer company is of the opinion that in the longer -- medium to longer term, the operating margins would be in the range of, say, 18% to 20%, while there is another company which is saying that the operating margins would be in the range of 25% to 27%. So what's your take on that? So what do you feel in the medium term the margins would look like? Obviously, the margins right now are peak.

I won't say they are at a peak. I would say they were probably at peak during quarter 4 of last year or quarter 1 of first of the current year. But currently I wouldn't say they are at peak. So I think for the next 18 months we should be able to maintain margins at this level. But I agree with you that long-term sustainable margins would be around 27%, 28%.

Okay. And any price hikes that have been planned? Are we planning to take any hike in the MDF segment?

No. We have not taken any price hike in quarter 2. And at the moment we are fairly comfortable on the gross margin side. So we are not looking at any immediate price increases.

[Operator Instructions] The next question is from the line of Dhananjai Bagrodia from ASK Group.

Sir, would you say sir realization with what would sustain?

See, I think realizations are sustainable at this point of time. We have been able to sustain realizations during the past 3 months. And although we were not able to increase the realizations although there was a corresponding increase in raw material costs. But at this point of time, we don't feel that realizations would trend lower.

Dhananjai, do you have any further questions?

Hello, can you hear me?

Yes, I can hear.

And so would you have any -- in terms of volume guidance, like let's say, next year, FY '24 considering your steady state and how would ramp up?

See, it's difficult to give a guidance for any particular year. But we have been guiding for a 14%, 15% volume growth on a 3-year or a 5-year basis. So I think we'll continue to be in that range.

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

Sir, on the export side, this is the second consecutive quarter where we are at somewhat 26,000 cubic meter. So correct to assume for the full year as well, we'll be clocking such averages?

No. I think we can probably increase the export volumes in quarter 3 and quarter 4. So I think we possibly did around 125,000 cubic meters last year, although it was higher in H1 as compared to H2. But I think on a year-on-year basis, export volumes should be flat in FY '23 as compared to FY '22. So which means that we should basically be around that 125,000 cubic meters mark.

Right, right. And any dealer distribution addition for the first half?

No, I haven't really obtained that data because we normally obtain it on an annual basis. So I'll update you over next week.

Okay. And just to continue on this -- any target for the branding expense which was INR 18 crores for the previous year. Excuse me? Sales and branding expenditure, which was INR 18 crores in FY '22, any guidance for the current year?

I'm sorry, your voice is breaking, could you please repeat?

Sales and branding expense for FY '22 was INR 18 crores.

You are saying marketing expenditure?

Yes, yes, yes.

Yes. I think marketing expenditures this year should be around the same level of 1% to 1.25% on sales. And we'll possibly be looking at an increase in the next year. We are also targeting some ATL activities next year. So that will possibly see an increase in sales and marketing expenditure from around 1% to maybe 2%, 2.25%.

We'll move to the next question from the line of Udit Gajiwala from YES Securities.

Sir, could you reiterate that what kind of margin guidance that you have mentioned in the opening commentary?

Yes. Like Mr. Shobhan Mittal said, we are targeting similar margins to what we achieved in Q2 for the rest of the year. And next year we'll possibly, depending upon the volumes we are able to -- the increase in volumes we are able to achieve, we should be looking at either improving or maintaining the margins.

Understood, sir. And sir, on this 660,000 which we'll be having for, say till FY'24, post which only we'll be having the new capacity. So what could be the peak utilization we can expect from this unit on 660,000 altogether?

Okay. On the manufacturing side there are no restrictions. We can have the full capacity utilization, subject to the mix of value-added products remaining in the same proportion as it is today. But I think if you look at the next financial year, we should be targeting somewhere within 640,000 to 660,000 cubic meters.

Understood. And sir, just last part, sir. In last call you had mentioned that demand could be subdued given the higher interest cost and everything. So what gives the confidence for us to grow the domestic volumes in H2 and also similar for FY '24?

Okay. Like if you recall, I mentioned at the time that there could be an impact because of frequent rate increases by the RBI. But what I also mentioned was that we expect it to be for a short term, maybe for a couple of quarters, not for an extended period of time. So I think that's why we are giving a positive growth guidance.

The next question is from the line of Nikhil Gada from Abakkus Asset Managers LLP.

Sir, my first question is just baked from a more broader perspective. Now that we have more or less a broaden understanding of all the other peers who have come up with their capacity announcement, can you sort of guide for the next 2, 2.5 years how the supply-demand equation would expand and how much of capacity absorption time would it take for the entire new capacity to get absorbed? And in that, if you can factor in imports as well -- like what level of imports you think the demand supply would be in equivalent?

Okay. So it's difficult to predict what imports would be for a slightly longest period of time. So I base my reply on -- if imports remain at more or less current level. So if you look at the current situation, so at the end of FY '22, domestic capacities were about 2.34 million cubic meters, and we expect that to reach about 3.4 million cubic meters by the end of FY '25, which is -- which means approximately a 47% increase on current capacities over the next 2.5 years. And we think that these capacities should be fully absorbed by FY '26 or max by FY '27.

Understood, sir. But in this you are factoring in that the imports would remain at the current levels of around 7%, 8%, right?

That's correct.

Understood. And in case because we have seen the reason the entire street is concerned about the level of imports because in FY '18, '19 we used to see exports upwards of close to 35%, 40%. And by any chance do you see foresee these imports level going to 20%, given that at that point of time I don't think there was so much capacity in place in India.

See, I'll explain to you why it's difficult to predict imports. I can give you reasons why imports were higher in the past, primarily because we had very few capacities in the domestic markets. And most of them were set up in North India, and import each happened more or less in the port areas of Southern and Western India. Now imports has been falling over the past few years. So there's various reasons why imports have been falling. There were logistics issues, containers and ships getting stuck up at ports, steep increase in ocean freight costs, then sustained the increase in international MDF prices, replacement of China by Vietnam and Indonesia furniture exporters to the U.S. and Europe. So there's not one single reason why imports were high or why imports have been falling over the past few years. So there are multiple reasons. And we cannot really imagine, not a change in one factors could have an impact on imports. So like the 2 factors to change -- one factor could change or 3 factors would change. No, so there will be different level of impact for each change. So that's why it's difficult to predict how imports would behave over the next 2 to 3 years.

Understood. And sir just one last question on what was your value added next this particular quarter?

In this particular quarter it was about 49% on a volume basis. And on a value basis, it was about 60%.

The next question is from the line of Manan Shah from Moneybee Investment Advisors.

Am I audible now?

Not very clear still.

Yes. Can you hear me now?

Yes. Yes.

So, is there any difference in the landed cost of the imports versus the domestic realization that we are achieving?

Yes. I think if you compare apple to apple, then there would be about 8% to 10% pricing difference between domestic and imports.

So the imports will be 200% cheaper.

8% to 10% cheaper, that's correct.

Okay. And these imports are primarily of the plain vanilla MDF or even value-added products are getting imported?

Majority would be of the plain industrial MDF and there would be a few small shipments of prelaminated MDF. But you don't have the value-added for us or at least it's insignificant as far as the tough grade and exterior grade are concerned.

Understood. So if at all, just hypothetically, if it all imports increase even further from here onwards and if it all effects our plain vanilla MDF volume. So is it possible for us to further increase the value-added mix? Or do you think at current levels it is difficult to go beyond?

No, we say it's difficult to predict what can happen because 2 years back our value-added mix was around 30%. And at that point of time, we said that it was a fairly high figure. But like I mentioned in this -- in the current quarter it was about 50% on a volume basis, about 61% on a value basis. And even if you look at the first half of the current year, it's about 49% on a volume basis and 60% on a value basis. So it's difficult to predict how far the value mix can improve, although our internal targets are to take this up from about 50% to about 55%.

On the volume side?

On the volume side, correct.

Okay. And just last question on the raw material inflation. So you were -- earlier you used to indicate the inflation on the raw material prices. So do you see those stabilizing and now on a downward trend, as you know, oil prices also stabilized and has come down from the peak. So our recent prices as well as on our timber prices, if you can just throw some light over that?

Yes. We don't see any further inflation in raw material prices.

And are they on a decreasing trend or have they stabilized?

We are seeing some decline in the resin prices, but we are not seeing any decline on the timber side.

Okay. And you are very confident of maintaining your margins that you've achieved in Q2?

Yes, sure.

The next question is from the line of [ Darshit Zaveri ] from Crown Capital.

Hello, Am I audible.

No, you are not. You have to speak higher.

Sorry, sorry. Am I audible?

Yes, you are.

Thank you so much for taking my question. So first I just want to ask that our revenue guidance of last year around INR 2,000 crores top line target, would that be achievable with some decline in exports? Or do we see any change in that part?

I think we'll probably be somewhere between INR 1,900 crores to INR 1,950 crores.

Okay. So not any major impact. So that's...

No, nothing major.

And a broader-based question around, currently we have, as mentioned, our domestic capacity in general for Coal India would be around 2.3 million cubic. So at what point would import be able to cannibalize it? So what would be the domestic demand of the country? And at what point would imports start hurting domestic players? Could that be -- I would not require any exact but...

Yes. Against the current capacity of 2.3 million cubic meters, demand would probably be around 1.9 million cubic meters. And it's -- like I mentioned, there are a variety of reasons why imports were higher in the past or have declined during the past 2 years. So it's difficult to predict a trajectory for imports, whether we will see rising imports or falling imports in the future?

Okay, sir. So demand is a bit lower than our current capacity. So we're seeing still with the number of value, with the number of CapEx addition by other players than we are doing. So do we see any competition which will lead to realization being lower because if the demand is not as much as supply then there would be some kind of price war, could that be a fair assumption?

So like if you look at FY '22, when we had that capacity of 2.3 million cubic meters, capacity utilizations were around 77%. And by the time all these new capacities are ready and operating. So by the end of FY '25, we expect that capacity utilization will be back around 77%. So we don't see any major gap between demand and supply, which will have a significant impact on prices. And also I think from past experience, management of different companies have realized that it does not pay to cut prices. We don't gain market share by reducing prices. So I think they will be much more responsible as far as pricing is concerned in future.

The next question is from the line of Ashish Kumar, Infinity Alternatives.

Congratulations for a steady set of numbers. Sir, my question was more around the capital allocation. Given the fact that we are now generating cash flows on a predictable basis and the visibility for the next 4, 6 quarters is strong, our cash flows are significantly higher than what we will need even for the expansion projects that we are talking about at INR 100 crores per quarter run rate. In terms of the capital allocation policy, how are you guys thinking about it? Are you thinking about a larger dividend payout? Or are you thinking about the buyback? Or what is your thought process around that, sir?

As far as dividend is concerned, I think the Board will take a view depending upon profits and utilization of cash flows over the next 12 months. And as far as the utilization of surplus cash flows is concerned, like we'll be investing approximately INR 600 crores over the next 18 to 20 months on the expansion projects. So I think we will not be having any surplus cash flows up to FY '24. And beyond that, I think, yes, the policy is clear. So if we have any avenues which will help to increase the investment value for the shareholder, we will opt to invest in new capacities. And we feel that it's not really profitable to invest in new capacities, we will return money to the shareholders by the way of dividends or buybacks.

Sir, if I look at it, today we -- as of today we seem to have INR 300 crores of cash on the books. And over the next 6 quarters if you're generating -- operating at current levels, we will generate at least INR 100 crores of cash flow per quarter, which means over the next 6 quarters INR 600 crores of cash flow will be generated, which will be -- and obviously on the new plant, as I -- I think last call you had mentioned that you'll be taking some amount of debt as well. So in which case, obviously, the cash flows are significantly higher and the INR 300 crores of current cash is obviously sitting and depressing the ROCs of the business. So given the fact that your stock price has also collected almost 40-odd percent of the peak, what we would suggest if you guys should think about distribution of the cash to the shareholders either through a buyback or some of the mechanism so that we are both the ROCs and everything else is kind of sustained.

Okay. At the moment there's nothing to complain as far as the return ratios are concerned ROCs continue to be robust even in the current quarter. So I think like we mentioned earlier, the management will evaluate the opportunities from time to time. And whenever there is a feeling that we cannot deploy cash flows profitably in new ventures, we would return cash to shareholders.

Sir, any thought poses of diversification away from MDF and any other plans as of now that you guys are thinking about, in particular board or plywood or anything else that you guys are thinking about? Shobhan Ji, can you take that, please?

We are just at this point of time at a very intensive stage of exploring other avenues, but there are no concrete plans at this point of time. We are just exploring those opportunities in other avenues, but there are no concrete plans at this point of time.

And Shobhan Ji if I may ask, push my luck further, will it be more towards the larger plywood segment or the particle board, the more capital intensive particle board side?

Well, yes, it could actually be neither. So like -- I mean, definitely given the plywood market scenario at this point of time, we are not very inclined for any growth -- organic growth at least in the plywood segment. So at this point of time that's all I can say. And we are still continuing to explore other business opportunities.

The next question is from the line of Abhishek Getam from Alpha Invesco.

Am I audible?

Yes, yes. Please go ahead.

Sir, my question was regarding, as we discussed earlier, [indiscernible] and also on the alternative side, on the MDF side -- I'm sorry, on particle board, the lot of players put in capacity. So do we see there's sort of a shift towards an MDF for particle board or -- particle board capacity is also increased, so we see the industry dynamics changing or how do we see this?

See, particle board capacities were existing in India even before MDF came into the country. So it's been there for a much longer period of time. And there are limitations to particle board applications which you do not find with MDF and plywood. MDF and plywood can replace wood in all applications, whereas particle board has limited applications. So because of significantly lower density, it's primarily used for vertical applications where there would not be a requirement of any substantial load-bearing capacity. And it's not used in horizontal applications where there would be a requirement of significant load-bearing capacity. So particle board has existed for quite a longish period of time. So we don't think it will replace MDF in any applications as far as the future is concerned. So it's already being employed for certain applications.

Okay. Do we see Greenpanel getting into MDF after this new round of CapEx. Are there any [indiscernible] or do you stick with...

Yes, we are exploring new opportunities, but nothing we can discuss right now. It's very initial stages.

Okay. And also the last question was sir regarding our exports. Our realizations in domestic and exports are -- there's a big difference. So who are we exporting mostly, any geography?

There are reasons for different -- difference in pricing between domestic and exports. One is, yes, there is a pricing depends on an apple-to-apple basis. Export realization would be about 15% low as compared to domestic. And the other is the proportion of value-added products in exports is insignificant, whereas it's at a fairly high percentage in the domestic markets. Like I mentioned earlier, almost 50% of our volumes in the domestic markets constituted value-added products, whereas it would be insignificant in exports. So yes, there is significant difference between domestic and exports for the reasons I mentioned.

We'll move to the next question from the line of Nikhil Agrawal from VT Capital.

Sir, I had a couple of questions. So I believe you are the only manufacturer of thin MDF in India. And it is the thin MDF that has been imported more. So that is kind of a threat to you going forward. Is it possible for you to switch your capacity from thin MDF to thick MDF?

Your vision is incorrect. We are not the only manufacturer for thin MDF. Everyone manufactures thin MDF.

And If you look at -- almost 70% of our MDF is on the thick category. 30% is thin.

We are very small manufacturer of thin MDF.

So sir, for that capacity, the 30%, can you switch that capacity to manufacture thick MDF or is it, you can only manufacture think MDF from that?

No. It's absolutely possible. The production line that we have is completely flexible to convert from thin to thick or thick to thin depending on the market demand. But at the same time, this assumption that imports are primarily happening in thin MDF is also incorrect. There is a fairly large amount of thick MDF also coming into the country. In fact, imports, at least the bigger consumers, the OEMs, et cetera, do not consume a lot of thin MDF, they primarily consume thick MDF.

Okay, sir. Sir, and my second question was on the plywood segment. So what exactly went wrong in the quarter? I mean, your gross margin fell down. So was it because of the price hike? Have you taken any price hikes? Or is it because of the timber prices that have increased? What was the reason? And what is the guidance going forward?

Okay. We have taken a small price increase of 2% in July. So that was insufficient to take care of the inflation on the raw material side. So that's why we saw a significant fall in the gross margins.

Okay. And sir, do we expect margins to improve going forward? Or will it be...

We do expect yes, we do expect margins to trend back to about 10% in future quarters.

Okay. Like from the immediate -- from this Q3 or from FY '24 going forward?

Q3 is not a very strong quarter because of the festival season. So I think we'll see the improvement in Q4.

[Operator Instructions] The next question is from the line of [ Bismith Naik ] from RW Advisors.

What would be the export volumes for this year?

You mean for the first half of the full year?

No, Sir. For Q1 '23 and Q1 FY '23 and Q2 FY '23?

Okay. For Q1 it was 26,000. And for Q2 it was 24,997. So for H1 it was INR 51 597.

Okay. Sir, one related question to that is, I think most of our exports go to Middle East nations, right? And crude being where it is, I would expect that the economics would hold and the drop in realization and improvement in volumes, I mean, volume should improve and realization should at least remain stable. Is that understanding correct or?

Shobhan Ji, can you take that please?

Sorry, can you please repeat that? I did not fully catch that.

Yes. So crude being where it is and most of our exports to my understanding at least goes to Middle East nations. So volume decline and your realization decline, I mean does it not look opposite to the thesis? I mean, what is going wrong over there? Or is it non-Middle East...

What is happening is basically with the lull around other markets, the Middle East is heavily dependent on Asia for its supplies of MDF. So basically additional volumes which were being consumed in more lucrative markets from producers in Thailand and Malaysia are now being diverted to the Middle East, which is resulting in oversupply there and also some -- to some level of pricing pressure, why there has been a reduction in the export volumes. But it's because there is a subdued demand or anything of the sort. The demand is fairly robust even today. It's just that producers who were not supplying to the Middle East are now focusing on the Middle East and there is an oversupply because of that.

Sir, if I recall our conversation -- I recall your past commentary also, I mean we use better quality of wood than Southeast Asia nations and they get preference in priority and selection, not in pricing. So is that not playing out now? Or are they discounting at a much higher level compared to us?

Yes. I mean, eventually it is the commodity end of the day. If someone is offering apples at similar price points, then obviously we would get that preference. But if the pricing pressure comes in and someone starts offering a lower pricing, then these benefits basically get eroded out, the people don't consider these.

Okay. And one last question, sir, on MDF. What kind of inflation that we see in wood.

Yes. I think as far as inflation in raw material is concerned, I think it's almost at its peak. So we don't see any significant increase in raw material prices.

The next question is from the line of Priyam Khimawat from ASK Investment Manager.

Good evening to you, sir. Just wanted to understand, last year we got EPCG benefit which contributed to around 2% of our margins. So this year any such thing is there or these are margins without that?

These are margins without that because we had exhausted our EPCG obligations in March 2022. So the current year margins are without any EPCG benefits.

Okay. That's great that we've been able to maintain margins despite that renewal. Just on the other part on your guidance, you highlighted that for the next 18 months we're expecting similar kind of margins that for the next 6 quarters and after that it can fall to around 27%, 28%. So why is that like why is that we think that next 6 quarters margins will be higher. In fact, capacity additions are higher in the coming 6 quarters from essentially from Greenply. So why is that you think that margins will be maintained?

Okay. So if we look at -- like I mentioned, the next 18 months, most of these capacities will probably come up in the second half of the next financial year. So there's not much capacity addition coming up over the next 12 months. And the second point is, like I mentioned, we have given a positive guidance on the volume side. So that's the reason why we expect to increase or maintain our margins.

Understood. So just operating leverage will play out on the next 1 lakh or 125,000 CGM, which we said in FY '24. Is that understanding correct?

That's correct.

So even like 4% to 5% realization drop, I think we'll be able to maintain our margins at current levels because of the operating leverage playing out?

That's correct.

The next question is from the line of Ankur Nahata, Individual Investor.

Am I audible?

Yes.

My question is to the entrepreneur. Are you looking for any forward integrations?

Like I said, we are currently exploring other business opportunities, but they are at a very -- at an infancy stage. At this point of time, obviously, the focus is on the new plant -- on the new line expansion at Andhra Pradesh -- the new MDF plant that we are setting up. But simultaneously while that work is ongoing, we are exploring other avenues both in terms of value addition, forward integration as well as independent business, but related businesses. So these are just under exploration stage at this point of time.

Okay. So as the new plant come up, how will -- like how are we increasing the awareness or we are building communities as volumes degrew this year of MDF. So if we...

Our volumes have degrown primarily on account of the export business as we have mentioned. However, on the domestic side the demand has been fairly robust. And like Mr. Venkat mentioned, we are also planning on increasing awareness next year, especially focused on brand building by way of ATL promotions, et cetera. So that would be the focus. Also, do keep in mind that the new line that we are investing into is primarily a thin MDF production line. I mean the focus of that line would be production of think MDF. That is the segment where -- which we currently don't -- we are not present in the south of India in our existing Andhra Pradesh line because that line does not produce thin MDF. So that is a market segment where we are currently not present in very actively in the south of India. So that market will immediately be available for us to take some market share away from -- that was the logic of investing into the thin MDF line in the South of India.

The next question is from the line of Vipin Taneja, Individual Investor.

Yes. Am I audible, sir.

Yes, you are.

Yes.

Yes. Sir, the ADD moved in this current year and the freight costs are dropping. So -- and your plant is also in South India, Andhra. So do we see good export competition on that front, sir?

The anti-dumping has been removed for some time now, to be honest with you. It hasn't been -- and even when it was present it was not a blanket fan. So it wasn't really helping to a very large extent. But the freight cost has gone higher. It has come down. But import threat would always be limited to the coastal markets for that matter. The moment material start transporting more inland, the additional freight required to do that makes them at par or not competitive with us. At the same time, people have with the current currency situation, which is very volatile, people have realized that the import is -- it's always a situational kind of a business, but it's not a long-term kind of scenario. So many importers who used to have a business model based on imports are now -- have now moved to domestic producers. So it will always be some level of competition, but I won't say that it is a very serious matter of concern that would always prevail.

Okay. Okay. And sir, my second question was that the entire global market which is shifting towards -- gradually from MDF to a particle board or the percentage of particle board in the entire market and the exports and the production volumes in particle board is a much higher segment compared to MDF and the market is gradually moving towards that. And we have been reading articles that MDF is a makeshift arrangement and gradually the market will shift towards particle board. And can you shed some light on that?

No, I think that, that information is absolutely incorrect. MDF is a far superior product to particle board. See, particle board always, if you take -- like if you take 100 panels, 70 panels would be particle board and 30 panes will be MDF. Traditionally, all across the world that has been the scenario. So particular wood has always been a 2:1 ratio to MDF historically and even today. So there is no shift happening, like Venkat mentioned earlier as well that the particle wood applications are very, very limited to certain table top applications and vertical applications. But they cannot replace solid wood. They cannot replace plywood. So MDF is the product that is as versatile enough to replace all these other applications. At the same time, if you look at countries like the Middle East, or climatic conditions play an important role here. Countries where weight is considered quality, like India is one of those countries where weight is considered quality. In that case, people give a preference to particle board. In the Middle East countries there is 0 particle board. The whole market is dominated by MDF. So it all boils down to market presences and application styles and usage of materials, but the disclaim that the market is shifting from MDF to particle board is absolutely untrue.

And what is your take on India share of particle boards versus MDF?Is it going to be same...

Yes. Obviously, because -- see, because; A, particle board in India has been existing for a much longer period than MDF; B, it's obviously a much thick product as well. So obviously the volume currently -- in terms of engineered panels, particle board is higher. But as we see the volumes of plywood reducing the unorganized segment going -- getting more and more and competitive, that segment is not going to shift to particle board because that will -- like, for example, carpenters will not start using particle board when plywood is becoming more and more expensive and more and more uncompetitive. They will start shifting to MDF, not to particle board.

We'll move to the next question from the line of Prasheel Shah from Kitara Capital.

So our MDF margins are sitting at close to all-time high, upwards of 30%. You have explained why they -- why you think they will remain stable for the next 12 to 18 months and why they would fall down later on. What are some of the -- some of the risks that you see because of which margins can deteriorate from these levels over the next 12 months and move closer to 27%, 28% faster than you think, what are some of these reasons?

See, the one way you think which could disturb the margin is demand. So if demand starts to fall down substantially, we would have capacity utilizations at much lower levels, which would lead to lower margins. So that's the only risk I can visualize at this point of time.

Okay. And then what are we doing differently than others that will help us protect these margins at these levels in the near future?

So it's not like we are the only ones who are earning high margins. So look at the organized competitors apart from Rushil. I think their margins are closer to us. And Rushil's margins would be lower due to a mix of lower pricing and lower capacity utilization.

The question is from the line of [ Diksha Agarwal ] from Equitymaster.

Sir my question is...

Sorry, [ Diksha ], your voice is not audible.

Is it better now?

Yes, better now. Please go ahead.

Okay. So my question is related to the capacity expansion of INR 600 crores. Sir, in which year do you see it start getting reflected in the revenue? And by which year do you expect the utilization to be close to maximum level?

So we expect commercial production to start in Q1 FY '25, and we expect optimum capacity utilization in FY '27.

Okay. And potentially I think you mentioned that this capacity would be dedicated to thin MDF. So I just wanted to understand in terms of profitability, it's very different from your current product versus what you're going to get in this new capacity?

No. There is no significant change in profitability. It would be almost similar.

Okay. And sir in your presentation, in one slide you have mentioned that value-added mix is at 12% for the first half year. So just wanted to understand from a 2 to 3-year perspective, will you see this shift -- do you see this mix shifting more towards value added or do you expect the ratio to probably remain the same?

I'm not sure where you have seen that. So, like I mentioned earlier during this call, our value mix in the MDF segment is around 49%, 50% in volume terms and about 60% in value terms. And the value-added mix in the plywood business is around 10% to 12%.

The next question is from the line of Dhananjai Bagrodia from ASK Group.

Just a follow-up question. So what was the exceptional item we had this quarter?

Okay. There were actually 2 exceptional items. One was, if you recall, we had -- when we demerged from Greenply, we had made a provision for excise duty, which may be payable by Greenply Industries. We had made a provision of about INR 10.8 crores. And as far as the terms of the demerger agreement with Greenply, that liability did not crystallize by March 22, then Greenply would not be liable to share that liability. So since that demand did not happen by March '22, we wrote off that liability. And the second part is the Andhra Pradesh Electricity Board had installed a transformer on our site. So as part of the agreement, we had to hand over that plot of land with the assets on it to the AP Electricity Board. So the first -- the liability reversal was INR 10.8 crores and the write-off of assets due to that gift to the Andhra Pradesh Electricity Board was about INR 4.5 crores. So the net impact is around INR 6 crores.

So why did we have to give them a gift? I didn't get that part, sorry.

So it's because they have also installed assets on that and they will be maintaining those assets that we had to give.

Venkat Ji, I'll explain that more in detail if you allow me. So basically when we had set up -- when we had set up this plant because of the remote location of the land that we had, we had 2 choices. One choice was to bring a 33 kV line from an existing substation which was very far away, okay, which would have costed us a much larger sum as opposed to -- there was already a 400 kV line available close by to our manufacturing location. So the proposal that was made was that we draw -- we bring the 400 kv line next to our plant and create a new substation which was far more economical. But because our substation generally is a government asset, hence it was agreed upon that post the creation of the substation, which was at our cost, the asset would get transferred to the government because that is the regulation. But the whole idea was economics or reduction in capital investment.

And would we get reimbursed completely in terms of what our CapEx was, or how is that done in terms of...

No, no, we won't get any reimbursement. That's why we wrote off that as the reimbursement.

Okay, sir. And sir, what would be the tax rate for next year?

Approximately 25%.

The next question is from the line of Nikhil Gada from Abakkus Asset Manager LLP.

Sir, just a couple of questions. So when you say that you expect exposure to be flat for FY '23, then we are talking about a growth of somewhere around 70 odd percent, 65%, 70% in the second half of FY '23. And while you mentioned that you're already seeing a lot of supply in Middle East, what gives us this confidence that we'll be able to achieve this kind of growth?

We have already got some orders in hand which will be executed during the current quarter. And those are significantly higher than what we executed in the first half of the year. And we expect those to be sustainable. So that gives us the confidence that we'll be able to match the export volumes achieved last year.

And the realization would be at similar level even for the price increase and some...

No, like Shobhan ji mentioned that due to the reduction in export of MDF to Europe from Asia, exports to the Middle East have increased. So that will lead to a lower realization in future quarters.

Okay. And just secondly on plywood front, the second quarter, apart from the margin impact, the volume impact has also been quite significant. We have seen almost a 20% decline. Any specific reason was it because of slower demand? Or was it some amount of destocking by the channel because of the way the prices increased and the demand was slow?

I think it was timely due to both the demand slow down in July and August. So that was the primary reason I think.

And you expect that to improve going forward? Or you still feel that this could also be at similar levels in terms of...

I don't see any significant improvement happening in Q3 because October was again discussed due to the festive season and normally will probably resume from around the 10th or 12th. So again, Q3 will probably be almost a similar quarter to Q2 as far as the plywood business is concerned. So I think improvement will possibly start reflecting from quarter 4.

The next question is from the line of Harsh Shah from Dalal & Broacha.

Just a clarification. You mentioned 12% volume growth in the domestic MDF segment, right?

That's correct.

And exports to be flat for the whole year?

That's right.

Thank you. As there are no further questions, I now hand the conference over to management for closing comments.

We thank everyone for joining this call, and we look forward to speaking to everyone again in the next quarter. If anyone has any further questions or clarifications, please feel free to reach out to us. We wish everyone a very belated Happy Diwali and take care. Thank you.

Thank you.

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