Greenply Industries Limited (GREENPLY) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q2 and H1 FY '21 Earnings Conference Call of Greenply Industries Limited. [Operator Instructions] 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 Greenply Industries Q2 and H1 FY '21 Conference Call. We have with us today Mr. Sanidhya Mittal, Joint Managing Director; Mr. Manoj Tulsian, CEO; and Chief Financial Officer, Mr. Mukesh Agarwal. 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 results presentation that we sent to you earlier. I would now like to invite Mr. Manoj Tulsian 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 Greenply's operating and financial performance for Q2 and H1 FY 2021. As this pandemic continues, we hope and pray for return towards strong positive news in the New Year for health of all of us, our people and also, most importantly, the economy. I'll begin by briefly touching upon some of the financial highlights. Net sales for stand-alone in Q2 FY '21 stood at INR 237.4 crores versus INR 344.1 crores in Q2 FY '20, a decrease of 31%. Gross profit stood at INR 94.1 crores versus INR 136.5 crores in Q2 FY '20. Stand-alone Q2 FY '21 EBITDA margins are relatively strong at 10.6% despite decrease in sales, while PAT stood at INR 14.3 crores versus INR 22.9 crores. You would recall that on our previous call, we had indicated our belief in delivering operating margins similar to the last year. We are delighted that this belief has been found to be justified and are optimistic that margins will be at similar or better levels in the second half. Our average realization in plywood, though, have decreased from INR 224 in Q2 FY '20 to INR 211 per square meter in Q2 FY '21 due to product mix change, but the same is expected to improve in coming quarters. Stand-alone debt-equity ratio improved significantly to 0.21 as on September 30, 2020, as compared to 0.47 as of September 30, 2019, and 0.4 as on March 31, 2020. Our net debt level stands only at around INR 15 crores as on 30th of September. We continue to focus on making Greenply future-ready, as we spoke last time. Our sustained endeavor is on improving operational efficiencies, strengthening our marketing and distribution, and increasing automation, all of which we believe will put in place a strong platform for sustained growth. We are engaged by some of the near-term results of our initiatives in the form of improved working capital cycles and healthy operating margins despite a very difficult macro environment. An example of this is the significant reduction of our receivables by almost around INR 155 crores in H1 FY '21, which has been achieved through a stringent focus on keeping credit in check and tightening our supply chain. The environment, too, is also gradually getting better as evidenced in our improved capacity utilization, which stood at 107% for the quarter under review. I look forward to steady progress and improving performance going forward. We have also taken several steps towards strengthening our sales penetration and expanding our distribution network so as to improve our rural presence. Cognizant of our relatively weak presence in rural India, and as we saw that rural actually bounced back faster in this pandemic situation, we have added a large number of dealers across these areas. These additions, we hope, will contribute well to sales in the medium to long term. The performance of our Gabon operations have also been encouraging, and we are optimistic of tracking similar level of growth in the second half. I must also take this opportunity to thank you all and the employees for the hard work that was put during these challenging times. We'll be happy to discuss your thoughts and views during the Q&A. Now I would like to hand over the call to Mr. Mukesh to discuss some more details of our financial performance. Over to you, Mukeshji.

Thank you, sir. Good day, everyone. I thank everybody for joining us to discuss Q2 and H1 FY '21 financial performance of Greenply Industries. Although economically we witnessed positive changes gradually with ease in restrictions, we still hope and pray that all of you and your loved ones are safe. Our consolidated entities net sales for the quarter stood at INR 294.6 crores compared to INR 378.9 crores in Q2 FY '20, a decrease of 22.3%, primarily the result of the ongoing pandemic as well as increasing discipline being adhered to with regard to credit terms. Gross profit stood at INR 116.6 crores versus INR 159.7 crores in Q2 FY '20. Operating margins remain healthy at 11.4% as compared to 11.9% in the previous corresponding quarter despite the decline in top line. We have made encouraging progress towards strengthening our balance sheet and operations. Consolidated debt has reduced to INR 194.7 crores in H1 FY '21 versus INR 282.5 crores in H1 FY '20. Consolidated debt reduction of INR 72.7 crore in the ongoing financial year. Consolidated debt-to-equity ratio also continued to decline, standing at 0.51 as on September 30, 2020, as compared to 0.75 as on September 30, 2019, and 0.71 as on March 31, 2020. Maintenance CapEx incurred in H1 FY '21 for Greenply consolidated accounted to INR 8.3 crore. Our thirst continues to be towards strengthening the financial metrics of the company. I would like to hand over the call to the moderator to open the floor for the Q&A session. Thank you.

[Operator Instructions] We have the first question from the line of Nehal Shah from ICICI Securities.

Congratulations for a great balance sheet [ easing ]. So first, to start with on the plywood side, can you give some sense as to what is happening between the mid-category and the premium category and even the low category as to how we are doing and what we are doing, considering the fact that our realizations have dipped in the quarters? And what is the way ahead for each of these categories?

Nehal, thank you. See, this reflection of reduction in the overall average realization is something which is within our control only. If you see one of the statements which I made in my opening remarks is that we have also now moved to rural. And that rural penetration, there has been initial placements, which has been -- as per strategically, we thought that the mid or the low end is something which will take a space there. So we are evaluating because the first level of placements have happened. And that is one of the reasons that the realization has been slightly lower. But if you also see, the margins have not got impacted at all because of the [ sales ]. So -- and which I also mentioned in my opening remarks that, going forward, this will again improve. So this is a trial-and-error method. We have to also establish the market that what is the true demand in the rural segment and, accordingly, we are also working on looking at placement of some of our premium products also. So give us a few quarters, and I think we will be in a better place to answer this particular point to you.

Sure. And so is it safe to assume that low end would have grown and mid would have, like, partially degrown and premium would have degrown more as a category?

Yes, you can say so. One of the reasons also I'll tell you is, which we have also discussed in the last call, is the metro cities are still not contributing to the extent what they were contributing in our overall sales in the last couple of years, right? So that sales is still low, and we are now very hopeful that most of those markets have now opened up in the month of October and November. So that also is going to boost my overall realizations.

Right. And sir, on the demand side, has October started turning around as far as premium category is concerned and also as far as overall plywood volumes is concerned?

Yes, we actually have not seen a real pressure, to be very honest. We have not seen any real pressure on the premium side of the category also, okay? As I told you that, mainly, these numbers shows that pressure only because most of the Tier 1 cities, the metro towns, have still not performed to their potential. And you would have seen that we have done a massive correction in our debtors realization strategy, the credit control. So to some extent, the pipeline inventory has also got corrected. In fact, we are so happy that despite that correction, we have been able to do a decent number in Q2, which means going forward, we can only think of doing better performance.

So possibly, our volumes would have been held back because of our consistent correction in receivables. And now with receivables largely in place as far as correction is concerned, is it the right way to assume that our sales also will now find more legs than earlier?

Well, that is how I would look at it for sure. But of course, we have to work hard. And for sure, I can tell you that we are working on all sites to make sure that this actually becomes a reality.

Great, sir. And sir, my last question would be on margins. Despite the fact that we have moved our contribution from low and mid as well as lower contributions of decorative veneers would have -- so on a 30% decline in volumes, probably I would have anticipated a much more decline in margins. So can you give some reasons as to where -- as to how margins have held up so far? And what is the likelihood of margins with the volumes recovery likely in place going forward?

So 2 points, Nehal. One, we use this pandemic as an opportunity to cut down some of the expenses, which we failed, is more of good to have rather than must have, right? So we worked on that principle. So that is still helping us because if you really see, travel is still not back to the same level where it was. And I think expenses on items like travel or even maybe a few other expenses like the office expenses and other things, we have been able to cut down. And we feel that, that can be the new normal. There will be definitely some amount of increase which will happen. And I'm sure once the vaccine gets announced sooner or later, 3 months, 6 months, 9 months, for sure, the fear of the people will reduce. And of course, we will do more groundwork also. Today, to some extent, we are also holding our employees to do a groundwork to that extent because we also care for our employees, right? But having said that, I think some of these expenses, which we were able to cut down, will come back once things become normal. But at the same time, I have also been speaking last time that we have done significant improvement in terms of building up the efficiencies. And that's why I was very confident in the last call also that despite the lower sales for the full year, we will be able to demonstrate a margin in double digits and looks like we will be on track for the same.

Right. And sir, what about the A&P spends?

A&P spends is slightly low. I think it's around 3%, Mukeshji?

Yes, it's around 3%.

It's around 3%. This is one area where, of course, going forward, we would be maybe increasing our spend to some extent also in the coming years. And we are very confident that since we will be adding up a lot to the EBITDA margin, we would be able to still maintain our decent EBITDA margin with a higher spend on A&P going forward. The idea is that we have to -- I mean every step what we are taking now is to make the company future-ready, whether it is from the balance sheet side, whether it is from efficiency buildup, whether it is from a supply chain, whether it is from an automation perspective.

Your next question from the line of Arun Agarwal from Kotak Securities.

Sir, my first question is on the plywood side. Can you just help us out as to how the industry growth was on the plywood side in the second quarter? And how do you see in second half and maybe next year?

Arun, to be very honest, even I've been struggling to get a proper release of data in terms of the size of the market and this, right? We don't have a construct to really commence straightaway on this query. So what we are actually doing is we are only looking inward, and we are only trying to benchmark our own numbers and see from where we can bring in growth for ourselves.

All right. Sir, then how do you see -- I mean even within your own internal estimates, how do you see second half panning out vis-à-vis how [indiscernible] in second quarter? So do we expect we should be returning to growth in the plywood side in third quarter onwards? Or it will take some more time for us to return to growth on a year-on-year basis?

No, on a year-on-year basis, I think if Q3, we are able to reach very close to our last year number, we would be a happy lot because, as I mentioned, and you would have noticed that we have done a big time correction on the receivables front. And this is something which the market also is testing us. But we are very clear as an organization, including our sales and marketing team and everyone in the organization, that this is the way the business would be run from here on, right? So there is some amount of testing which has happened, but I'm sure that things are going to bounce back because our relations with the dealers goes back for 20, 30 years. So we were doing business in a particular way, which was acceptable. Now we have started doing business in a different way, and now this becomes the new acceptable norms. So having said all these things and looking at the month of September and October, because even if you see in quarter 2, July was not so good. Things only picked up in the month of August and September, right? So when we look at September and October, we are quite bullish that we would be very near to our next year -- last year H2 performance even this year. Of course, we will try for growth and all those things, but I'm not promising any growth during this point of time in H2.

Sure. Sir, in terms of cost, you pointed out, there were some costs, which probably would be a bit more structural in nature and some would be a bit more temporary. So looking at your employee costs, employee costs last quarter we did around INR 45 crores; this time, we are INR 35 crores. So we have been between INR 38 crores to INR 40 crores, INR, INR 45 crores kind of number. So all the cost -- I mean is there any further increase in employee costs expected? Or these are the normalized employee cost levels what we are running right now?

Well, these are the normalized costs, okay? But I'm sure that some of these things like the bonuses for the full year and other things, we are still awaiting to see how things pan out in Q3, right? And we have still not done anything on the increment side, and the incentives also is slightly under check. So there's some of these things which we want to take a call after Q3. So you might see some added costs. But I can only promise you one thing that all these costs will be good costs to have, right? So even if it goes up, what I'm promising is we will be able to protect the EBITDA margin. That is what we are targeting. So if this cost goes up, we will definitely look at other revenues, where to improve our efficiencies and make sure that we are into double-digit EBITDA margin.

Yes. No; because -- see, the reason I'm asking you this question is because even with significant decline in revenues this quarter, we still were at around close to 11% sort of margin on a consolidated basis. And with, hopefully, revenues improving from here on in Q3 and Q4, so do we expect to reach somewhere maybe another, say, 100 bps sort of increase because of operating leverage and all those things? Because I know -- I understand there would be some cost increases. Especially, I think, partly it could be on the employee side and could be on the ad spend as well. But I was just wondering if we can actually move towards 12% mark within this year...

Are you talking about only H2?

Yes, only H2. Yes.

Yes. If you are talking only about H2, I think I would tend to agree with you, okay, because I'm also looking at an overall margin of double digit for the full year. I know it is still difficult, okay, but we promised that in the last call, and the signs of improvement is definitely much better, though we still are in the same pandemic thing, but I think people have taken this to their stride. They have understood that this is the way things have to be, we have to step out, we have to do everything, right? So businesses are bouncing back. So keeping all these things in mind, yes, only H2 margin should be better than the Q2 margin. And the full year margin can be somewhere around 10%. I mean we might miss out slightly depending on the sales. But if the sales is good, then maybe we can cross 10% also for the full year.

All right. And sir, coming back to sales, just one more question there on the sales part, can you just throw some light as to when we compare September and October sales for you all this year, how it has been vis-à-vis last time around? So maybe you can give a festive-to-festive comparison as well or maybe month-to-month comparison as well?

Arun, honestly, we are looking at things this time very differently. And that is what I have been advocating to my team also that forget about what was the precedence of last year like festive season and all those. We must also embrace the reality that during the first 5 months, almost, labor were without any job. Whatever we may say, but the truth is that their earnings was almost zilch. And what we see as a change than in the month of October also during festival times like in West Bengal and many other parts of the country, labor continued to work. And we feel that the same momentum will continue in the month of November also despite being a Diwali month. So we are not working with these excuses now in our mind. The whole team understands that we have to deliver. We have lost quite a bit in Q1 this year, and we'll have to be on the recovery path. So the whole team is buoyant. We are not trying to make any of these things as an excuse. We can always live with excuses. But we definitely feel that even if there would be some amount of the challenges, we will try and come out better in these months. Last year, if you want me to compare, I strongly am not doing that comparison because we have totally changed the basis of sales. From a period when our overdues used to be around 90 days, 120 days, 150 days versus when you strictly monitor your overdues, the quality of sales is significantly different, and it is much better. So we, as an organization, are very happy today. We know that whatever we are selling is quality sales. It gives us much better visibility as an organization. It helps us in planning better also. It helps us in doing a correction, post-correction also to find out where are we going wrong and what do we need to improve quickly on the same.

All right. And sir, lastly, could you throw some light on the Gabon operations, how they have been -- they have done pretty well this quarter. So could you just throw how...

Gabon has definitely done pretty well in Q2. But also, to some extent, I'll bring it to the notice of everybody that there was some amount of trading sales in Q2, which will not repeat in Q3 and Q4, right? So it is not the correct reflection of the full year performance, but that definitely supports us also because that is an added activity, which we get a limited period normally by the end of Q1 and Q2. So we use that as an opportunity also to make some extra money. But it is doing a decent job. The issue is, which I also maintained in the last call and I would still repeat the same thing, that earlier we used to get a visibility, let's say, from Europe, 3 to 4 months of order visibility, which is now reduced to 1 to 1.5 months. But having said that, we are getting orders -- repeated orders every month. So keeping these things in mind, plus India business slightly has improved now from end of Q2. So we are expecting some amount of India business also to support us in Q3 and Q4. So looking at all these things and the H1 number, I think we are pretty confident that we will register a growth over last year full year. This is what I think I can tell you at this point of time.

Okay. And sir, last question, can you help us over the CapEx and your investment plans this year, how much we would be investing in CapEx and some investments that we do in...

See, CapEx, since we are looking at improving our efficiencies, we are looking at also improving on the quality front, certain areas. So we have a targeted CapEx of anything around INR 8 crores to INR 8.5 crores in H2. And H1, we have done, how much?

INR 8.3 crores.

So the total can be around -- anything between -- depending on the cash outflow and all those, but it will be around INR 16.5 crores, INR 17 crores.

Okay. And sir, investments, how much we'll be having this year? We are investing in certain joint -- in certain ventures, right, or subsidiaries or we're picking up some stakes in...

We have taken equity participation of -- through Bareilly-based unit. So probably in this half, another INR 1 crore, INR 1.25 crore for the balance amount of equity participation.

Did we spend something in first half?

No, no, we have not spent. It was till March, but in this H1, there was no investment.

[Operator Instructions] We have next question from the line of Venkat Samala from Tata Asset Management.

Just wanted to understand in the plywood industry, we have a fairly large unorganized sector as well. So are you witnessing any market share gains as such?

Venkat, again, these are guesswork. So we did see amount of -- some amount of pressure, which has built up on the unorganized segment because of the pandemic, right? And as I said that the only way we can look at is to compete with ourselves and keep giving better performances, right? So we have got mixed view from the market. We have seen some amount of pressure on the unorganized segment, which means there will be a shift to some extent. And we have also seen that to some extent when we have gone into the rural penetration, right, that some of the dealers, who we have appointed, were actually doing organized product, and they felt it is better to get related to one of the leading plywood manufacturer in the country. But at the same time, in the last 1 or 2 months, we also got feeling that some of them, who had almost shut their shop, are also again trying to come back also. So once they are in business, of course, they will have to work out something for their survival, right? But I think there would be some amount of consolidation. Some amount of consolidation has already happened, and some more will also happen.

Right, right, right. Sure, sure, sure. And if you could help us with the mix of urban versus rural in the base? And since you are now moving towards the rural, how has that changed in the last quarter?

Well, look, rural -- actually, we started working on rural in Q2 only. So I think it is again too early. We have just been able to convince dealers. We have been able to open new dealers there. We have done some initial placement. So that placement cannot be a right reflection of a breakup between urban and rural. So I would say that this question will become much more relevant even for us and for everyone, all our investors in this, going into the next year. So give us some time. Let it mature because, see, we are also testing water there. But I can only tell you that our team has done a phenomenal job of doing a decent amount of legwork with a lot of conviction to go to the rural market and quickly create a good dealer base. Now it is for us to see that how we help them grow, how we give these dealers the confidence that their relationship with Greenply is going to be profitable and long term. So we are concentrating a lot on doing a handholding with them. Give us some time. We will let you know, maybe starting next year, once we do some significant inroads from a number perspective. But it's a good beginning. It's a good change. And I'm sure that -- I mean this is how we have to look at growth opportunities. We have to look at distribution network expansion, and we have to find out growth opportunities for ourselves.

Right. So sir, how many distributors have you added in the rural?

Well, if you see, around -- [ billable ] is close to around 125 to 150, though we have opened more numbers, but we have almost built around 125 to 150 dealers during this period.

Right, right, right. And that would be...

It's a good number.

Right, right, right. And that will be all, is it? I mean if you're considering the rural mix, I mean, the number of distributors towards the rural?

Sorry?

So if you -- if we were to calculate the total number of distributors in the rural segment, what would be that number?

Again, I'm really sorry, Venkat, but our data in this business is not so organized. We are even struggling to do it. But we are doing our own internal mapping. We have found some madness in the style of working. We have done some internal mapping, which I would not like to share on the call all the details, right? But I can only tell you that, yes, it's a significant achievement, and we are not going to stop here. So our team continues to work on this.

Sure, sir. And the dip in the realization is just a function of movement towards rural, is It? If you were to compare like-for-like, has there been some sort of downgrading witnessed as well? Isn't it...

No, the downgrading, as I said on the call itself, is more visible because my metro cities have still not reached to their momentum level. Also to some extent, since I mentioned in my last call also that we were heavily dependent on the metro sales. One, the metro was not doing as great as the Tier 2 and Tier 3 cities were doing. Second, since we also took the journey of correcting the receivables, we also wanted some amount of pipeline inventory to get corrected during this period because the idea is that how we can actually improve the ROCE of each and every dealer of ours. So we have to make the entire supply chain efficient. And keeping all these things in mind, I feel it is a temporary correction which has happened. Things will start now moving up from Q3. It is not the end consumer down-trading.

Your next question is from the line of Naitik Mody from Ohm Portfolio.

Sir, could you please comment on the growth of plywood versus that of MDF?

No, I won't be in a position to comment on this again, right?

Actually, the base of MDF as compared to plywood is very small. So MDF market is 10% to 15% of the total furniture market, whereas plywood is more than INR 19,000 crore. So in the past, MDF has grown better than plywood. So MDF has grown 15% to 20%, whereas plywood has not grown to that extent, okay? So basically, it's not a comparable thing to compare plywood and MDF.

No, what I'm trying to understand is, will it sort of -- will the growth of MDF sort of restrict the growth of plywood?

See, we have to also see the overall opportunity in terms of the market size growth. The base for MDF, as Mukeshji said, is much lower compared to the base for plywood. What I look at it is that there will be a growth in the overall market, and MDF will not be able to cater to that entire demand, even if there is a demand for MDF, right? So for us, it is that we feel both the businesses is here to grow. Yes, if you ask me specifically my own view, I would say, because of the smaller base, MDF can grow faster than plywood, for sure.

We have next question from the line of Hrishikesh Bhagat from Kotak AMC.

Sir, can you highlight what was the trading revenue in this quarter and compared to same quarter last year in Gabon that you...

Just on second. Do you have, Mukeshji?

So Mr. Hrishikesh. So trading volume from Gabon was INR 10.76 crore. And as compared to last quarter, it was INR 4.9 crore.

This was -- last quarter you meant is Q1 or Q2 FY '20?

INR 10.76 crores was in Q2 FY '21 and this INR 4.9 crore is in Q2, corresponding quarter last year.

Okay. Okay. Okay. Sir, my second question is on -- firstly, congratulations on the good job done on the working capital front and getting the receivables back under control. So my question related to that is that this whole change in strategy on the working capital front, and as you -- one of the comments you made in the earlier has been that you have changed this way of doing the business effectively. And sir, just wanted to understand in that context, how are you addressing the dealer discontent that could have been seen? Because your dealers were used to the earlier way of doing consumers. So any thoughts on how you are seeing in the distribution channel on that, sir?