Greenply Industries Limited (GREENPLY) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '22 Earnings Conference Call of Greenply Industries Limited, hosted by Asian Market Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Karan Bhatelia from Asian Market Securities. Thank you, and over to you, sir.

Thank you, Rutuja, and good morning all. On behalf of Asian Market Securities, we welcome you all to the Greenply Industries 1Q FY '22 Conference Call. We have with us Mr. Sanidhya Mittal, Joint Managing Director; Mr. Manoj Tulsian, Joint Managing Director and CEO; along with Mukesh Agarwal, CFO. Before we begin, I would like to state that some of the 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 now would like to invite Mr. Manoj sir to begin the proceedings of the call. Thank you, and over to you, sir.

Thank you, Karan. 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 Q1 FY 2022. As part of our transformational journey, we are happy to announce that Greenply has decided to foray into MDF Boards business. The plant with an installed capacity of 800 CBM per day and the investment outlay of around INR 550 crores should be operational by Q4 FY '23. The unit has been strategically located in the western region market to get the first mover advantage and capitalize on the latent demand. This new business segment will act as a key catalyst for our long-term growth plans in terms of market penetration and profitability. Going forward, we see a greater consumption of MDF products led by increased preferences for purchasing ready-made furniture and other various applications of MDF. Post the gradual unlocking and things getting back to normalcy, we were moving at a good pace, if you have all seen our Q4 FY '21 numbers. However, with the unexpected disruptions due to second wave, our performance remained muted for this quarter, but the momentum is again picking up from July onwards, and we see a decent turnaround of demand scenario and financial performance at it, though there are still some bottlenecks like supply chain and labor availability as still there are some restrictions on public transport. Our under construction greenfield plywood unit in Sandila, Lucknow is on track. The site development activities have started. We have incurred the CapEx of around INR 5 crore in the current quarter, and the balance CapEx of around INR 85 crores will be incurred in the next 3 quarters. We are hopeful to commence commercial production by March 2022. The company is continuously working towards enhancing the product portfolio with focus on sustainability and operational efficiencies that is supporting maintaining the market leadership position. The market is showing signs of improvement, with both pent-up demand and new demand picking up in the industry. The future of real estate remains bullish in view of optimistic economic growth, new project launches in pipeline, rising GDP and all-time low interest costs, resulting in the positive future sentiment score. Looking at the improving dynamics of real estate, we thought it would be the best time for product portfolio expansion and take our company to greater heights. I would now like to hand over the call to Mr. Mukesh to discuss our financial performance. Mukesh, over to you.

Thank you, Mr. Manoj. Good day, everyone. I thank everybody for joining us to discuss Q1 FY '22 financial performance of Greenply Industries. Our efforts are continuously directed towards normalcy and improving our business while the second wave of COVID had some impact on the performance of this quarter. However, I do hope that all of you and your loved ones are safe and healthy. Our consolidated entity's net sales for the quarter stood at INR 260.1 crore compared to INR 132.2 crore in Q1 FY '21, an increase of 96.7% and a decline by 34.3% as compared to Q4 FY '21. Consolidated gross margins declined by 330 bps Y-o-Y to 43.2%, and EBITDA margin stood at 5.9% versus a negative EBITDA of 2% in Q1 FY '21. Stand-alone net sales in Q1 FY '22 stood at INR 212.6 crore versus INR 107.1 crore in Q1 FY '21, an increase of 98.6% and declined by 40.6% as compared to Q4 FY '21. Stand-alone gross margin for the quarter improved by 178 bps to 42.9% on Y-o-Y basis and EBITDA margin of 5.6% versus negative of 4.7% in Q1 FY '21. PAT stood at INR 4.2 crore versus a loss of INR 9.5 crore in Q1 FY '21. Our average realization in plywood came at INR 235 per square meter in Q1 FY '22 versus INR 224 per square meter in the corresponding period last year. On consolidated basis, debtor days have reduced to 53 days from 61 days as on March 2021 and 186 days as on June 2020. Working capital days increased at 63 days when compared to 53 days and 180 days at the end of the sequential and corresponding quarter, respectively. Our manufacturing capacities at all the 3 plants have been reassessed and revised, basis the chartered engineer's certificate. The same now stood at 34.9 million square meters. The second wave impacted the business at our Gabon Unit 2, while we are expecting better results than posted. We hope normalcy will return from our Gabon operations in coming quarters. On stand-alone basis, there was no major CapEx in the current quarter. However, we are expecting around INR 18 crores to INR 20 crores of maintenance CapEx in the financial year on -- from the India business and from Gabon business. Our balance sheet continues to be robust. Consolidated debt has reduced to INR 186.8 crore as on 30th June 2021 from INR 191.7 crore as on March 2021. Consolidated debt equity ratio also continues to decline and standing at 0.42 as on June 2021 as compared to 0.44 as on 31st March 2021. I would like now to hand over the call to the moderator to open the floor for the Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Hrishikesh Bhagat from Kotak Asset Management.

So 2 questions from my end on this MDF foray. So first, since it's on the western part and not many of the peers are present in that [ geography ], so just wanted to understand what will be the source of raw material in the sense is there any [ board cluster ] like what the peers have in western part of India, in Gujarat also? And secondly, on the end market for this plant, in the sense, will you be targeting export? Or within India, which are the regions, in the sense, whether it will be for southern region, northern region? If you can give some color on that, that would be helpful.

So I'd like to answer this question. So firstly, on the raw material availability, our team has been -- has done a detailed research on the raw material availability, and we have some data from third-party agencies also which do remote sensing and give us the plantation data of that area. So the data as well as the physical survey of our team says that putting a plant from the raw material availability angle is perfectly fine, and we should go ahead with it, number one. And on the other side, our focus is definitely going to be the western market because there's no other player in MDF industry in the western market. And without affecting our margins, we will be able to pass on the benefit of transportation on outward freight to our consumers in the western market. Hence, we'll definitely be 3% to 4% cheaper in the western market, and we'll be able to get a substantial market share in the west. And as far as export is there, we are not putting the plant thinking about exports. But yes, we will definitely take advantage of EPCG and not pay import duty on the machines we are importing. So we will have some amount of export liability, which we are going to fulfill. And as on the current scenario, even the export prices look very attractive. So looks like even on the liability, the export liability which we have, we will be making good money on it.

Sir, just one on there, you did cover that a large part of the western market. So currently, the demand in the western part of India is serviced by imports and southern plant or it comes from northern plant also? If you can help me on that, that will be helpful.

I believe there are 2 players who have plants in south. So I'm sure that for them, it was making more sense to supply from south. The rest players which don't have plants in south, they are supplying from north as well but not in a great quantity because that market is not a focus of them -- for them. And in the past, before the pandemic, a lot of import was happening in the west. Now after the pandemic and given the current global scenario, the import is almost down to negligible levels.

The next question is from the line of Yogesh Kulkarni from Quantum Mutual Fund.

Actually, my question has partly answered. But I just want to continue on that. Do you have any thought on the ESG point of view? I mean the flexibility of the raw material or something on the carbon emissions and all, water consumption. Any data is not available at present, but would you like to share any thoughts on that?

So as Sanidhya mentioned, that we have done a detailed [ reiki ] on all these aspects, and we were extremely comfortable. And the move is quite strategic in terms that if you really see our total capacity, annualized capacity would be around 240,000 CBM. And there's already an existing market there of close to around a similar number. And by the time our plant comes, that number is going to grow. Second, as much as all of us understand about MDF, it is also like a commodity, where the freight plays a major role. So there is some latent demand today which is not visible because once you add the sourcing from north or south, with freight costs, it does not become viable. So moment we have a plant in west, we are able to cater to those demands also easily. And in fact, we'll have advantage on the chemical purchases also because most of those chemicals are there in the Gujarat belt. So there, we will get, again, a pricing advantage. So overall, on the raw material side, we will get a pricing advantage. And the plant will be very strategic and near to the port, so we will always get the strategic advantage of even exports to Middle East, Europe, Africa, all those places.

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

My first question is with respect to the MDF foray, if you could give us a sense in terms of what kind of return profile are we looking at and what kind of payback period are we looking at for this segment.

See, the payback period would be anything around 7 years. And this is -- on a steady scale, we'll start generating ROCE of around 18% to 19%.

And this 18% to 19% you're saying post tax or pretax, sir?

Post tax.

Understood. And this is assuming the 15% tax rate, right? I mean the benefit of the new subsidiary investments, right?

Sorry, I didn't get you.

This assumes a 15% tax rate, right? Or 25% tax rate?

Yes, yes. That is one of the reasons that we are just trying to make it very fast paced. It's a challenge which we have taken as a team. We got some advantage by acquiring that company because a few spadework has already been done by them. So that helps us in slightly making it fast paced. Still, I would say that all of us know that setting up any new greenfield project on MDF takes -- as we see the data -- past data of all the recognized companies, they've taken anything between 24 to 30 months. So we are really trying to speed that up. And fingers crossed, we hope that we will be able to commence our production in Q4 of FY '23.

Understood. This particular facility, what is the area? And is that the final capacity we can set up there? Or we can further expand as we go along?

So since we acquired this company, they were looking at a parcel of -- land parcel of around 75 acres, which is much more than setting up the first plant. So we'll have adequate opportunity in the future to expand business horizon here in this land parcel.

Sir, of the 75 acres, how much are we using in the first phase?

Still -- we are still on the drawing board, but I think our internal assessment is we should be using around 30, 35 max. Yes. Not beyond that. I mean we are trying to do everything within 30 only, plus or minus 2, 3 acres.

That means potentially we can double the capacity if things get better and as years pass by. Is that a fair assessment, sir?

Absolutely. Absolutely fair assessment.

Understood. Sir, my next question was how do you look at the sales part of the MDF? Would that be more OEM driven? Will that be more retail-driven? And do you see a risk of any confusion with respect to the brand given Greenpanel is already there? So are we going to use the same Green brand? Or could that be some different so that there is a clear distinction between the 2?

I'd like to answer this question. So in MDF, our understanding is that we'll have about 20% of the channel which is going to be common. And 80% of the channel is going to be unique, which will include specific players who sell MDF and also OEMs. So as a brand, I think we'll have to work very hard and create our space there. The advantage we are going to get that this is a commodity product. And because it's a commodity and we are going to have a price advantage in Western India, we'll be able to capture the market very fast. That is one. Number two, I feel that even today, as we talk, Greenpanel has their own plywood in the market and Greenply has its plywood in the market. And both have been able to get their market share and survive and do well. And in fact, if you see, we are further expanding our plywood capacity. So when in plywood, where the branded game is much bigger and it's not that much of a commodity in India, we are able to successfully market both the products in the market without any confusion. So I'm sure in MDF also, we'll be able to do. And we haven't exactly decided what brand name we're going to market MDF under. Our marketing team is working on it. But most likely, we're going to do it under our flagship brand, which is going to be Greenply.

Right. Just a thought. I mean in case of Greenpanel, the ply business is relatively small and they are not looking at any further expansion in that business. While in case of MDF for us, we will look at further expansion. Isn't that -- I mean, isn't that a little different from the ply argument, I would say?

Well, it is different for sure. But when you compare our MDF scale and their MDF scale, their installed capacity is much higher. So if they are a small player in plywood, we'll be a small player in MDF for now, for sure.

They continue to be larger in MDF. They have already good capacity. And also, we will also look at expansion in future, right? But for us, it is more like rather than pure play in one side of the panel business, in a way, it derisks us also. And MDF, as we said, the application is manyfold, beyond furniture also. So it actually somehow balances us also in terms -- from a risk perspective. And whether it is Greenpanel or any other company, everyone will survive at the end of it. And today, if you really see both the companies, as Sanidhya mentioned, we are there in the plywood business, which was common. MDF was not common right now. Both of us have survived and both of us have grown. So we don't see that as a challenge at all.

Right. If I may ask one more question, sir. Before finalizing the MDF foray, given the large CapEx, the stress on the balance sheet, have we also looked at the other -- so what is the thought process before arriving at the MDF? If you could give some sense, that would be great, sir, in terms of the capital allocation, in terms of -- given our ply business has far, far higher, far bigger return profile, so what is the rationale for MDF? I mean I understand the opportunities there, that this is derisking is also another factor. But did you also kind of evaluate the other segments of the wood panel? And something like that, actually, that would be great.

So I think good that we missed out something and you asked that. So if you've really seen what we have done in the plywood business, which is our flagship business, and let me tell you also that this will continue to be our flagship business, the leader in the Greenply basket even after 5 years, I mean, the plywood business, okay? So as MDF and other businesses, some other businesses also which we may see in future, they grow, this will remain as a flagship product, plywood, okay? Now what we have done in the last 12 to 15 months? We have tried to improve the quality of our balance sheet. We have disciplined ourselves from many aspects in our plywood business. Now the visibility out of that is that you can see that we have a good amount of cash, free cash, which we have been able to generate in the last 12 months despite so much of headwinds. Now the idea is that since in plywood, we are not looking at any major investments going forward, and given the way we are working with even growth opportunities, which we are trying to find out in plywood, we'll have cash generations every year. And the best way and efficient way is to deploy it at a place where we make good ROE and ROCE, correct? And this is one business which we understand as a family because don't forget that at one point of time, it was all a combined entity and the promoters have excellent understanding and knowledge of the business. So you're venturing into a territory which is already a known territory. And we all know post the pandemic, things have actually improved for the MDF business. So much of new things, people are trying to move out from China. They're trying to set up shop here for ready-made furniture, other applications. The technology itself is improving for MDF, right? So we clearly see this as a good entry point. The balance sheet is clean. The balance sheet is healthy. We will keep generating good cash flow from the plywood business, and we'll use the same for our expansion, I mean, so that becomes our growth capital. That's how we look at it. And Sanidhya, please -- yes.

I would just like to add, also for Greenply, it is very important because we are mainly producing substrate, plywood is a substrate material. And for us to be present in this category and for us to always be a leader in the industry, we have to come out with new age panels. Beyond the point, the growth in plywood will always be eaten by new age panel products such as MDF. So we have to be present in both categories and grow both categories. Also, growth will mainly come from eating the share from unorganized. And in MDF, obviously, it's a new demand and new avenues, which India is learning. The west has already learned, so we're following them.

Understood. This is very helpful. Just last question, if I may. In terms of the ply business, what is the outlook? How has been the July month? And any guidance you could help us with in terms of the volume margins?

Well, see, as I said in the last call also that quarter 1 for sure was not as per our expectations, though June started picking up to some extent and July is better than June. But -- and which I mentioned in my opening speech also that even today, many part of the country, we all know that the public transport has still not started. So labor still somewhere is a challenge. Also, we are facing -- today also, we are facing, and I'm sure others are also facing, the challenge on the supply chain side, truck availability in certain pockets of the country. But having said that, we feel that the demand would be back, and we have done all the right things in the last 9 to 12 months. So I'm looking at it now positively. Assuming that there are no more waves, which really comes and then hits all of us as an industry, as a country, I'm hopeful that the next 3 quarters would be far, far better than what we have done in quarter 1. And in terms of margins, we'll have steady margins for quarter 2. If there are smooth operations from here on, then we'll have good margins, as we have mentioned in the past, for this 9 months -- balance 9 months.

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

So just building on the previous participant's question, just to understand a little bit more with respect to the rationale and the outlook for MDF business for the company moving forward. You did mention that ply would continue to be your like flagship business segment. But I'm just trying to understand from an incremental capital allocation standpoint, how do you see the outlook moving forward for the company? Because there may not be too much of a capital that your flagship business would be consuming. So shall we assume that moving forward, a lot of capital would hereon be deployed more from a medium to long-term perspective, I'm just trying to understand, towards this new business?

So Venkat, actually you have answered it. If you really see when -- for the first -- next, I would say, 3, 4 years, 5 years, what we are looking at is, one, to establish this plant, run it at its full scale, which we are assuming that by since FY '23. So we are assuming in FY '26, we will be able to be running the plant at full capacity, okay? And by the time, my existing business would be generating cash, which we can use to repay a lot of our existing loan going forward also and maybe even partially start repaying part of the loan what we take for MDF. So -- and once we get to see that how we start performing in MDF, yes, if I continue to generate cash there, either we look at expansion in the same business going forward or we decide, we have time. At this point of time, since the debt profile will go up, we have the easier option of repaying the debt also. And then depending on how will we grow in the plywood business and what type of cash we generate, we will also look at whether we can add other products going forward and whether those will be capital intensive or whether we'll look at a lighter model in those new product avenues. So these -- all these things, all these cost processes are coming because the balance sheet has become much stronger. And as an organization, we can tell you, as we are not the one who wants to leverage, we want to [indiscernible], we'll try to balance the capital allocation. We'll try to balance the leveraging. And then we will also continue to look at the growth prospectives.

Right, right, right. Understood. So maybe not from a very long-term perspective but maybe, say, from 3- to 4-year time horizon, would it be fair to assume that your focus would hereon be only on ply and MDF segment and you may not look at any other categories for now? And your management bandwidth would largely be invested to ensure that these 2 businesses would grow for you as a company? And largely because MDF is a new category for you and you're deploying so much capital, so therefore, you will ensure that you will scale up quite well in this particular business?

Well, look, I may not have a clear answer on your question at this point of time, but I can say with me also joining as a senior management personnel, we have actually increased our horizon of management bandwidth. At the same point of time, we are also hiring quality people. So we already have some very quality people on the MDF with tons of experience who understands from setting up the plant to running the business very well, right? So we are also building up a team where we only get into guidance mode initially. We help them to set up the business, start running and we look at more of capital allocation program that what next we need to do. So I think that today, bandwidth is not at all a challenge. And as I said that since at one point of time, Greenply was one entity, and the promoters were very hands-on from day 1. So we also want to leverage the experience what they have in the business which we understand best. Why not we start with those businesses rather than venturing into new territories, even though that might be like we have -- earlier also we have qualified that our interest always will be in the building material segment only. But I mean within that, the areas where we are very comfortable, where there is good knowledge base, understanding, which is already there, if we get an opportunity, why not look into those categories.

Right, right, right. Sure, sure. And -- okay. And given the fact that your net worth is at this point in time close to INR 450 crores, how did you decide on the size of the new MDF plant? I mean the total CapEx is around INR 550-odd crores, right? And one of -- when one of your peers had ventured into this particular category, I think they went with a smaller size plant. So I just wanted to understand, how did you get to this 800 CBM per day size for capacity?

See, as we said, we will have a distinct advantage of setting up the first plant in west. Today, there is already -- our own analysis says that there is already a market of close to around 2,50,000 CBM, okay? And our capacity is only 2,40,000, which also will become operational in FY '24. By that time, we feel the way MDF business is doing, it will grow further. Plus, as I said that there is a latent demand which is there in west. And since today, they cannot take supply from south or north because that becomes expensive, so they are looking at alternate. So they're maybe not even decided to really go big way on the MDF side. But the moment we do this, now we will get into -- we will start looking at some tie-ups also. So for us, the real true good market is the belt of Rajasthan, MP, Maharashtra, okay, part of NCR and Gujarat, right? These are the stronger markets for us. So -- and when we looked at 600 CBM versus 800 CBM, the capital cost was not proportionately going up. So we felt that this is when, when we are going to put so much of hard work behind the same, the rationale was that 800 CBM is making much more sense than the 600 CBM to start with. And that's how we came to this decision.

Okay, okay. Fair point, fair point. And last question, sir. What would be the EBITDA breakeven capacity utilization point for this new capacity?

Do you have it somewhere?

I think it should be around 44%, 45%.

50% -- first year, we took 50%. It should be around 50% to 55%, yes.

And when do you expect to get there?

Whatever we are talking right now is, we have been very conservative on this working 50%. So I think Mukesh is right. The way things are today, possibly even at 40%, we'll breakeven.

And when do you expect to get there?

First year, FY '24 itself.

FY '24 itself. Okay, okay, okay.

Yes.

[Operator Instructions] The next question is from the line of Romil Jain from Electrum PMS.

So my question is on the plywood side. I think about a year back, we had envisaged the plan on the distribution network going more into the semi-urban areas and a bit more on the rural area. So one is on that distribution, where do we stand right now? How is the progress going? Because distribution will play a key role in increasing our revenue on the ply side also because we are also doing the other expansion also which will come onboard next year. So that is the question. And along with that, how do we see the unorganized market -- unorganized to organized playing out?

Okay. So you see, that is something which we continue to work upon in terms of network penetration. And I think in the last -- so we started this initiative some time in August -- around August, we started this initiative. And we have been able to create a new network of almost around 600-plus dealers under the same. But as I said, it's not that we have started billing to all 600 on a monthly basis. On an average, we found that at least 1/3 of that, we have been able to now convert and start billing them on a monthly basis, which means if you look at it, this has added around 6% to 7% of my total turnover in Q4. Now we need to continuously work on this. There is a plan which is going on. Our team is working on the same, and we'll continue to expand this horizon. Also -- yes.

Yes. Sir, just to clarify, the 600 dealers, they are incremental dealers or -- since we started this initiative? Or how it is...

Yes, yes. These are incremental dealers I'm saying after we started this initiative.

Okay. Okay. And sir, today, where does our entire distribution chain stands at in terms of dealers or the retail points?

So we are spread across the country.

No. I mean in terms of numbers, so the total dealership number.

We have around 2,300-plus total, yes, dealer network that are on a pan-India basis.

Total, you are asking?