Greenply Industries Limited (GREENPLY) Earnings Call Transcript & Summary

Good morning, and welcome to Greenply Industries Limited Q1 FY '23 Earnings Conference Call hosted by Phillip Capital India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Dhiral Shah of Phillip Capital, PCG Desk. Thank you, and over to you, sir.

Thank you, Michelle. Good morning, everyone, and thank you for joining us on the Greenply Industries Q1 FY '23 conference call. In the panel today, we have Mr. Manoj Tulsian, Joint MD and CEO; Mr. Sanidhya Mittal, Joint Managing Director; Mr. Nitin Kalani, CFO; and Mr. Gautam Jain, AVP, Strategy and Investor Relations. Before we begin, I would like to state that some of the statements made in today's discussions 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 invite Mr. Manoj Tulsian to begin the proceeding of the call. Thank you, and over to you, sir.

Thank you, Dhiral. 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 quarter 1 FY 2023. To start with, our performance during the quarter was the outcome of our concerted focus on staying resilient in a challenging macro environment of high input costs and geopolitical uncertainties. Let me share some insights on our standalone financial performance in the current quarter. We achieved a volume growth of 79.5% and a realization growth of 3.1% in quarter 1 FY '23 on a Y-o-Y basis. The top line increased by 85% to INR 395 crores in Q1 FY '23, on a Y-o-Y basis again. Considering good traction of volume growth in quarter 1 and supported by our recently commissioned Sandila plywood plant in Lucknow, we are confident to achieve our top line growth guidance for the full year FY '23. Our growth in the last quarter could have been better, had we commissioned our Sandila plant and one of our partnership plant facility in Q4 of last year. So there were some amount of capacity constraints, which we had to go through in quarter 1. Sustained recovery in real estate from the past couple of quarters would continue to gain momentum even with the increased input cost and interest rate hikes by RBI. So at this point of time, we are not really still worried in terms of the market traction. The growth is expected, pan India, with inclination towards Tier 2 and Tier 3 cities, where the desire for the large and better furnished homes has propelled the demand, and we assume that, that will continue in the near future. Our adjusted core EBITDA margin stood at 9.4% in quarter 1 FY '23. That's a 100 basis point decline from quarter 4 FY '22. Primarily, this is due to sharp increase in raw material prices as well as the change in product mix, which resulted in an impact of almost 5% on a Q-o-Q basis. Although we have taken further price hikes in this quarter of almost 2%, but that only became effective starting June. So we'll see the impact in this quarter. But that was not, I think, sufficient to absorb the entire cost increases. Going forward, we expect the overall raw material prices to start softening from quarter 3 onwards, which possibly will have resulted in improvement of margin profile. At the forefront of driving innovation, we recently launched Green Platinum in the premium segment. The product features with 2x fire resistance and 2x waterproof. It is a new generation product with better value proposition. The initial response has been encouraging, and we expect this launch will definitely support us in meeting our top line guidance for this year. We continued with our prudent working capital management and the net working capital cycle stood at 29 days at the end of June '22 at par with March '22 levels. We are also on track in many of our improvement initiatives, which we have been talking in the past, in the areas of IT automation, product offerings, enhancing capacities, line balancing, distribution reach and the brand building initiatives. As far as the Gabon business is concerned, we have achieved robust sales of almost INR 59 crores in the last quarter with growth of almost 24% on a Y-o-Y basis. This was majorly on account of improvement in supply chain and logistics. Order book has never been a challenge till date. Operating margin was 13.2% in quarter 1 FY '23, improved by almost 453 basis points on a Y-o-Y basis. The demand scenario continues to look good from the European and Southeast Asian markets as far as the Gabon business is concerned. The overall outlook is favorable, and we are well positioned to deliver long-term consistent growth. With this, I would like to hand over to Sanidhya to update on our new projects and manufacturing partners. Over to you, Sanidhya.

Thank you, Manoj ji, and good morning to everyone on the call. Let me share the progress of our new project initiatives. In our greenfield plywood manufacturing unit at Sandila, Lucknow, we have achieved commercial production in the unit [ with support ] to cater to growing demand. In our upcoming MDF facility in Vadodara, Gujarat, the machinery dispatches and installation has started and civil construction work is going as scheduled. Due to some bottlenecks in international ocean freight movement and congestion at ports, we are expecting some delays in machinery inflows. However, we are still trying to complete the project in our time line of Q4 FY '23. In our asset-light model, we have 2 manufacturing partner units in Bareilly, UP for manufacturing of plywood and allied products. We are already fully utilizing the capacity of the first project. In the second project, we have started partial production in Q3 FY '22 and expect the remaining to start soon. Our another plant with manufacturing partners for manufacturing of plywood and allied products in Hapur, UP should be operational by Q4 FY '23. With this perspective, I would like to open the floor for Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Pranav from Equirus Securities.

Sir, I wanted to understand on the Gabon part of the business. So now with Europe facing severe problems on importing from Russia, with wood being top 5 commodity imported from Russia by the European Union, do you think that there is some structural shift going on for Gabon wherein you see very strong growth coming in from the Gabon unit?

Pranav, so yes, I would say that our market -- European market has always been good for us, and we have not seen any problem during this period also. If you see the robust performance, it is also because the throughput from the European sales has been good. And actually, you answered the question itself, looks like the traction will improve further. So we are very hopeful this year that Gabon possibly will continue to run at the existing run rate of quarter 1, if not better.

Sure, sir. And sir, my other question was related to this only, that since wood is now becoming a kind of scarce commodity for European Union and European Union being a large supplier to the Germany and Italy and all of those guys being the large supplier to the EU itself and to the other parts of the world, do you think that structurally for at least next 1 or 2 years we will see wood prices not coming down and because of that, the overall prices will also not come down very substantially for plywood and, let's say, MDF and particle board?

Are you talking about the international market or for the domestic market?

Yes, sir. Yes, sir, because in domestic market, sir, we are also facing a lot of challenges on the wood supply, particularly unorganized side. So just wanted your thoughts on [ this scene ].

So on the domestic market, yes, for sure, there has been very mixed -- I would say, a continued mixed environment in terms of the increase and decrease in certain categories of the raw materials. So in quarter 1, we saw the chemical prices again going up and even the timber prices, to some extent, only going up. Quarter 2 now, we have seen a scenario where the chemical prices have eased out, but the wooden timber prices have not. In fact, they have actually further gone up. When we are talking to the industry players and we are talking to the supplier source and everything, looks like this might stabilize at this price. And everyone is talking that the price is crazy. So that's a wish list, basis the past experience that it should not go up, but I think something which remains to be seen.

Sure, sir. And sir, on the international side?

No, international -- I mean at this point of time, we are not seeing -- I mean, at least for us in Gabon, we are not seeing an increase in the prices of timber. It's the other operating costs, which is creating a problem. So like fuel has become a crisis commodity there. And if I just talk about between Q1 and Q2, because of sharp increase in fuel prices, almost to the extent of 30%, 35% there, I might have to take a 1% hit in my margin only on account of that. So of course, we are going back to our customers, and we are taking a price increase to mitigate that. So something or the other has been hitting Gabon more from these operational environment challenges.

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

Sir, could you please explain that what kind of volume and value growth are we expecting for '23? And given the macro scenario, what confidence do we have in this [ thing ]?

I think, Udit, we had given a guidance at the beginning of the year of overall growth of around 15%-plus. We maintain the same guidance on the revenue side and, out of which, we were talking of a volume growth of 10% to 12%. So we still maintain the same. So we think very much we can do all these numbers.

Understood. And sir, what kind of price hikes we should expect going ahead, given that you have stated on the timber prices, which is a key RM? So do we see that more price hikes could follow in the industry? And how does it help us by not losing market share to unorganized or something like that?

Well, I think -- so let me answer the second thing first. See, again, there are no industry data which says whether the overall volume of the industry is growing or not. So if we assume that the overall industry size is similar, then players like us have grown during this period and which for sure is improvement in market share from the unorganized players. That is one. Second, in terms of coming back on the price increase, it is something which we have been continuously working. We have passed it on in the past also. There is a significant increase, which has happened in the last 12 months, very volatile situation all along. And over and above that, in quarter 1 also, we took a price increase of close to around 2%, but that was only effective in the month of June. So we get the benefit during this quarter. And while we are sitting in the first week of August, we are looking at maybe one more price increase in the value segment and not in the premium segment. And then again, we are watchful, we are careful. We will see how things pan out in quarter 3. And maybe directionally, we will look at it, what needs to be done next.

Got it. And sir, just a last question, if I may squeeze. Are we seeing any escalation into our CapEx cost for the MDF business?

Yes. Last time also, we said that it was approximately looking like around 7%, though a few things still are to be ordered, but I think it should be in that range.

The next question is from the line of Sneha Talreja from Edelweiss Securities.

Just an extension to the previous participant's question now. So you mentioned that you're maintaining the growth guidance to about 10% to 12-odd percent. Even if we assume a 12% volume growth, you're actually guiding for a 0% 9-month growth for the rest of the period. Just wanted to clarify that part. Why a 0% volume growth in the coming 9 months?

Yes, I knew that this will be coming, okay? See, if you see at the beginning of the year when we had given a guidance of overall 15%-plus, okay, I was keeping in mind the type of challenges which we are facing on the capacity side. So what has happened is you know that our dependence on the trading model of business is also very, very high. But there is always a learning. Whatever we do in business, we have some type of learning. We faced challenges in the last 2 to 3 quarters in terms -- because there is a continuous price increase, you know which has been happening on the raw material side. And in the increasing price trend, you get to understand that there will be supply side constraints coming from the trading partners. Because the moment there is a price increase, they don't have the patience to wait for negotiating and all those things. And when, as a company, we have so much of dependence and at times, you will end up either paying them a higher price or you end up, some way, compromising on the supply side. Our own plant -- our Bareilly facility, which was due to be operational in quarter 4, somehow, for some reason or the other, has still not become operational. Sandila plant, which also we felt that we would be able to get a full production in quarter 1, had just started doing production, and we are only thinking or seeing that it reaches a good production capacity by quarter 3. And our Hapur facility, in any case, is going to come in quarter 4. So I would say that we have the supply side challenges because of which, I think, somewhere there will be the subdued growth during this period and because of which we maintain that guidance. But we can only be slightly better than that.

Okay. But according to that, even after Sandila plant, we are facing these issues. As you said, the right impact of the same plant will come in H2. So Q2 could be a trouble in terms of volume where we could see a dip also. Is my understanding correct?

No, no, no, not a dip, but what will happen is that we can better use the Sandila facility. So once my capacity is up and running, okay, I have that option that in case I am getting any trouble -- facing any trouble from the trading partners, I can use that facility and optimize that facility to use and produce my value segment from that plant in the near term, okay? So at least on the volume side, we will not face a real challenge in terms of some of the supply side challenges which we faced in quarter 1.

Understood, sir. Sir, secondly, on the margins, last time you've also guided for around 11% -- around 100 [ bps of an ] improvement from FY '22 level, which means actually more than 11% margin for the plywood business. In the particular quarter, we have seen some bit of pressure because of the raw material prices, and as you said, you only see cooling down happening post-Q3. So again, some sense there of where the margins looking at now for FY '23. Is there any revised guidance again here?

No, we are not revising the guidance. But as I said, quarter 2 also looks that possibly because one price increase, which we are looking at to take in the value segment, may only come in the month of September and the impact of that again starts reflecting from quarter 3. Also, there is an assumption that this unprecedented continued increase in raw material prices will soften in quarter 3. If it doesn't, then we will have to look at ways and means -- other means to further look at price hike to improve the margin. So quarter 2, I would say that I'm looking at maybe some pressure to continue, but from quarter 3, it will improve. And having said that, I think we'll still -- at this point of time, we are trying to see that we don't drop on our margin compared to last year for sure for the full year. That's the immediate thing what we are looking at.

Understood, sir. Sir, one last one, if at all, I mean just -- [ this is on ] regarding our MDF business, although I know it's yet to come in, but how is the scenario that you're seeing in the Western market, given that one of the leader in this particular space has recently spoken about some amount of subdued demand, which they are forecasting along with the fact that raw material price pressure is something that is already seen in the market and they are unable to take price hike? What's your sense? Are you seeing imports coming back? Are you seeing subdued demand in the MDF segment? Or we are again happy with our earlier guidances and we'll be able to quickly ramp up the unit? What's the sense there?

I would say a few things and then maybe I'll ask Sanidhya to add further on that, if I'm missing out on anything. See, first thing what we are looking at on the MDF business is that the MDF business can continue to grow at 20% in the country, if not more, okay, in the next few years. Second thing, if you really look at, we always believe that the margin today, where it has reached possibly is not sustainable. I mean, we had done all our calculations at only 20% margin. But I think, looking at today, the margins, which we see is almost in the range of 35%. Our fair assumption is that possibly it will not drop down below 25% even in the near future. Third thing, in terms of imports, where -- I was just looking at some data, though the sea freight has come down, but it is still significantly high. So I don't see, again, there is an opportunity for imports to happen in the country. In fact, possibly, I mean, this is slightly a wish list, but possibly a scenario may develop that India, as a country, starts exporting in the next 2, 3 years, not because of the pressure in terms of pricing or something or demand, but maybe because there will be a natural benefit in terms of efficiencies, which may come in, in this country. And all are very organized players who are actually the MDF players in the country. The market is more of an organized market, if you see. So these are very advantageous things what I see from an MDF perspective. Sanidhya, anything?

I would just add, and we'll remain to be the only MDF plant in Western India. So -- and the product cost is very low and the outward freight will play a very important role. So we've already started working in the market. We've already started collecting data. We're already meeting MDF dealers across the country, especially focusing on West because in West, we'll be able to have a pricing advantage in the market because of the outward freight component. So without disturbing our margins, we'll be able to capture the market at a lower price because of the outward freight favoring. So our focus -- we would want to sell 50%, 60% of our production in the West and the balance across India.

[Operator Instructions] The next question is from the line of Nilesh Doshi from India Capital Markets Private Limited.

Sir, my question is related to the volume and it is on a quarter-on-quarter basis. See, our total sales volume was 17.1 msm in the quarter 4, '22, and it is now 16 msm in quarter 1, '23. First question is why there is a sales slowdown? Number 2, the -- mainly the sales is, own manufactured product is down, not the trading and the JV manufacturing. And because of that, I think the margin is shrink because we are claiming that we are producing the branded and our realization is higher in our own manufacturing products and margin is, therefore, high. Can you explain the reasons for the same, sir?

Yes, yes, sure. So first thing first, if you see, quarter 4 in our industry has always been better than any other quarters. And normal quarter 1 is slightly subdued. But if you see during this quarter, we have actually done reasonably well because when we compare from quarter 4, of course, we wanted a similar volume. That's what we were trying to drive. And in my opening speech, I somewhere mentioned also that we missed out on certain amount of volume because we were not able to get or we were not able to regularize the supply side, okay? And coming in terms of -- what was your second question?

See, because we manufactured the branded products and we claim that our realization is higher compared to the trading volume, and so the margin may be shrink in this quarter. Is it the right understanding -- mine?

Well, yes, again, that also I mentioned in my opening speech, Nilesh-ji, that there is a shift, there is a change in product mix also, which we saw in quarter 1 and we are assuming that, that may continue, though, of course, we, as a company, are mainly dependent on the premium brand. We are leaders in that premium brand category. But because of continuous price increase, which has happened in the last 12 to 14 months, and also, to some extent, there were some visible signs of some slowdown, there were some cash flow issues which we -- which our dealers community has been mentioning, we saw that there was some level of possible downtrading, which was happening and which also reflected in our numbers. So -- and that's where, because we were not prepared to that extent, even our trading partners were not prepared to that extent to deliver those type of volumes, somewhere we missed out on the volumes also.

Okay. Sir, recently, we introduced a new product. I forget the name of that product. But is it under the premium category or it is in the value category?

No, it is -- the product is Green Platinum, and it is a state-of-the-art product, thanks to my R&D team. And this is something which is not there in the market. After the E-Zero launch, I think this is the next level of innovative products which we have launched in the market. And this is in the premium segment.

Okay. And sir, when our own manufacturing capacity will be operated at near to 100% capacity of all the plants, sir?

Well, my existing plants, I think, is running right now at 90%-plus. But I can only tell you that we are very hand-to-mouth in terms of -- so we may speak about 100% as the capacity, but I think it's almost an optimum utilization of the capacity. So we were just now waiting for the Sandila plant which is my new capacity. And another plant which we spoke about in Hapur, which is under construction, which will start giving me new capacities in quarter 4 as of now.

Okay. Sir, increase in the raw material price is the industry scenario. So the other players are facing these problems severely than the -- our branded like the Greenply or Century or any other name, so -- but can -- we are not in a position to pass on the completely the raw material price hike to the ultimate finished good?

No. Nilesh ji, you are right also in what you are saying, and we have been passing it on. But as I said that if you see Greenply as a company, we were always a leader in the premium segment, okay? Because of this continuous price increase in the premium segment, somewhere, it is now going slightly beyond the sweet spot. And as well, you will see that the traction in the value segment has improved significantly, okay? But, in any case, if -- as I said earlier also, that if we are assuming that the overall industry is not growing, but a company like Greenply has grown both in volume and value, then it is purely that there is a shift that we are able to increase or gain market share from the unorganized.

[Operator Instructions] The next question is from the line of Priyam Khimawat from ASK Investment Managers.

Sir, you alluded that despite some delay in machinery imports, we are expecting our MDF plant to come in by quarter 4 of this year. So are we talking about commercial production here or just trial runs to begin?

No. Quarter 4, we are assuming trial runs only. And then from quarter 1 of next financial year, commercial production.

And at what speed are you expecting the MDF plant to ramp up? Should we expect 60%, 70% utilization in the first year? Or will it be significantly lower at 40%, 50% levels?

See, we have spoken about this. I think we would be in a position to almost ramp up the entire capacity or the utilization over a period of 3 years, okay? And year 1, if we are able to start commercial production, let's say, quarter 1 or maybe early quarter 1, then first year, surely, we are looking at achieving anything between 40% to 50% utilization. So year 1, 40% to 50%, year 3, almost near 100%. That's how it should be, plus or minus 5% or 10%.

Okay. Sir, I just wanted to understand about timber availability at our plant in Gujarat. Is the timber cost in West at similar levels to what it is in, say, South? Or will we have to pay a premium because of short availability of timber there?

I think I'll answer this question. So compared to South, we'll definitely be paying a higher price, but our prices will be very, very similar to what it will be in the North.

Okay. Sir, can you quantify that percentage premium, which we will be paying?

Over South?