Greenply Industries Limited (GREENPLY) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Greenply Industries Limited Q3 FY '23 Conference Call hosted by Asian Market Securities Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ from such expectations, projections, et cetera, whether expressed or implied. Participants are requested to exercise caution while referring to such statements and remarks. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Karan Bhatelia from Asian Market Securities Limited. Thank you, and over to you.

Hi, everyone. On behalf of Asian Market Securities, we thank you for joining us on the Greenply Industries' 3Q and 9-month FY '23 conference call. In the panel today, we have Mr. Manoj Tulsian, Joint Managing Director and CEO; Sanidhya Mittal, Joint Managing Director; and Nitin Kalani, CFO; along with Gautam Jain, EVP, Strategy and IR. May I now invite Manoj sir to begin the proceedings of the call. Thank you, and over to you.

Thank you, Karan. A very warm welcome to everyone, and thank you very much for joining us today to discuss Greenply's operating and financial performance for Q3 FY 2023. Before discussing our performance and outlook, I would like to put forward a clarification that we have categorized plywood business as a sum of standalone numbers and Greenply Sandila numbers because Greenply Sandila numbers is the only plywood business for better understanding when we are comparing on a quarter-to-quarter basis or on a Y-o-Y basis, and this is after eliminations. And the objective is to provide fair reporting of our combined plywood business under the 2 legal entities. On our performance, we started the quarter on a weak note, due to festive season, which is very normal during the third quarter of the year. But post the festive season also, the demand pickup was below our expectations. In our plywood business, we have achieved a sales growth of around 8.7% in Q3 FY '22 on a Y-o-Y basis, supported by volume growth of 2.4% and a realization growth of 6% in quarter 3 FY '23 on a Y-o-Y basis. Despite the demand challenges, we were able to maintain our sales contribution from premium category at around 57% as compared to 55% in trailing quarters, which held us in achieving our best-ever realization per unit of INR 249 per square meter, without any price hike in the last quarter. Our plywood business adjusted operating margin was 10.3% in quarter 3 FY '23 and 10% in 9 months FY '23, a decline of 72 basis points and 30 basis points, respectively, on a Y-o-Y basis. During the same period, we have achieved realization growth of 6% and 5.3%, respectively. So it is evident that despite our command in premium category business and price hike, the cost escalations were steep and impacted our margins. In the current scenario, chemical prices stabilized after reaching their peak while the cost of timber remains elevated to some extent. The net debt at the end of quarter stood at INR 556 crores. The year-end net debt is likely to be in line with our guidance of around INR 650 crores and -- which is post the major CapEx on the MDF line, which will be completed by the year-end. Going forward, we are assuming no major external challenges we should be able to meet our increased sales growth guidance of 20% for this full year with similar margin profile in the plywood business. In our Gabon business, as indicated in our previous call, last quarter has been very challenging due to energy crisis in European regions, which contributes significant portion of our business. Resultantly, our financials has got impacted severely during the last quarter. Recently, there has been some positive traction in order inflow, but it's too early to provide any guidance on this in the near-term. From a demand perspective, we remain optimistic on the back of resilient demand in the residential sector, consumer shift towards organized segment and most importantly, our commanding premium category, our value brand reach and innovation. With this, I would like to hand over to Sanidhya to update on the new projects and manufacturing partners. Over to you, Sanidhya.

Thank you, Manoj-ji, and good afternoon to everyone on the call. Our plywood manufacturing unit at Sandila with its capacity -- with the capacity is 13.5 million square meter per annum has started contributing significantly to our volumes. We have been able to ramp up the utilization to almost 60% now in Q3 FY '23 and our focus to further streamline the machines and labor with an aim to reach 80% to 90% from the next year onwards. Competitive timber cost and product premiumization makes Sandila unit a significant contributor in the overall portfolio. In our asset-light model, we have 2 manufacturing partner units in Bareilly, UP for manufacturing of plywood and light products. We are already fully utilizing the capacity of the first project. In the second project, we have started partial production last year and working to streamline the remaining capacity for doors soon. In another such unit at Hapur, UP with a capacity of 7.5 million square meter per annum, construction activities are progressing well, and we are expecting to start trial runs in this quarter. In our upcoming MDF plant in Vadodara, Gujarat, machinery installation and civil construction work has now been completed. We are expecting to start trial runs in the quarter. Further, most of the sales force for this segment have been recently onboarded, and we are working on the distribution channel and developing a robust marketing strategy to get a good hold in the market. With this perspective, I would like to open the floor for Q&A session. Thank you.

[Operator Instructions] We have the first question in the line of Anand Venugopal from BMSPL Capital.

So my question is, so the debt has increased substantially. Is this for the new MDF plant? And secondly, what is the…

Yes, yes. Yes, purely on the new MDF plant, as I said, in the opening speech that for the year-end also, we have projected a net debt of INR 650 crores. So we have used around INR 100 crores addition in the debt also during this quarter. And all of it is towards the MDF plant only.

Okay. Okay. And secondly, what is the current size of domestic MDF production in cubic meters? Because how much will it be in 2 years from now given a number of players are putting up new capacity?

Can you please repeat your question?

Yes. What is the current size of domestic MDF production in cubic meters? And how much will it be in 2 years from now, given a number of players are putting up new capacity?

See, right now, it is close to around 2 million CBM annually. And as much as the information, which is there with us, this will be anything around 3.2 million in the next 2 to 3 years because every plant which will come will also take time to ramp up their capacity.

[Operator Instructions] We have the next question in the line of Udit Gajiwala from Yes Securities.

Just a couple of questions from my end. Firstly, could you give us an overview of the demand scenario, which is currently [indiscernible] shaping up outside your standalone business?

Your voice is not clear.

Just asking on the demand situation, which is panning out in the ongoing quarter.

[indiscernible]

Mr. Gajiwala, request you to kindly go off the speakerphone because your voice is breaking up in between.

This is better?

This is better, yes. Please go ahead.

So sir, I repeat my question, sir, can you highlight the demand scenario, which is going on currently, say, from January?

Well, quarter 4 also January, if you ask me, I would say that could have been much better, not still as per the expectation, the way quarter 4 should have picked up, has still not seen it really picking up.

And sir, on the subsidiary Gabon front, are you seeing that the orders are [indiscernible] up or last quarter, we were at nil orders. What is that [indiscernible]?

Gabon, please, you have to repeat, sorry, but your voice is not so clear.

Sir I'll do, I'll come back in the queue with [indiscernible]

We have the next question of the line of Nikhil Agrawal from VT Capital.

Sir, I just wanted to understand, since you're putting up the MDF plant in the west. So how is the market out there? Like in terms of adaptability, are you taking any steps to increase the adaptability of MDF out there or will it -- I mean, have you started taking any steps?

So in the west, since our plant is in the west, our primary focus is going to be the Western India market. So I don't think there's a challenge in terms of acceptability. The competition is already selling enough material today in the west. So I don't think there's any acceptability challenge there's already a ready market, and we are going to address and capture that ready market very soon. And for sure, the price advantage we'll have in terms of freight, we'll be passing on to the consumer in the western region, which will help us capture the market much faster than planned.

Okay. And will you be focusing on exports as well or will it only cater to the domestic market?

I think time will say, we have no export obligation as a company. I believe there are some competition players who had export obligation because of the way they were importing machinery. We have no such export liability. So we will be exporting on the need basis whenever we get good prices or on value-added segment, we will be exporting very little quantity and whenever we get good prices.

Okay. Got it, sir. And sir, just 1 last question. Will you be -- like the machines that you have ordered these are from the German vendor, right?

Yes, absolutely.

We have the next question from the line of Achal Lohade from JM Financial.

My first question is with respect to the ply business. If you look at our growth, it's somewhere around 4%, 5% for the last few quarters, while the competitor is showing a bit higher than us. So can you elaborate a bit in terms of the premium segment growth, nonpremium for us and for the industry?

See the industry, we can't say much, but in terms of this year also, on volume, we have a growth of around 15% and value for the full year, we are saying, we'll be growing around 15% on volume and around 20% in terms of value, okay? And yes, see, if you look at our company, we have a very different business model. We are a premium player. And today, the volumes are actually they are at the economy level. So we are also strategizing that how do we need to improve further in terms of our volume in the premium segment itself. Okay?

Okay. So you're saying, basically, you are still focused on the premium segment, and that is kind of reflected in slightly lower volume growth. Have I got it right?

Yes, yes, yes.

And any particular reason why we are slightly nonaggressive for the economy segment? Is it to do with the distribution margin, pricing, competition? Anything you want to highlight, sir?

Well, look, traditionally, if you see, Greenply has always been a premium player, okay? And there was a time when almost 70% of our business used to come from the premium segment and almost 30% from economy. I'm just talking of, let's say, last year and maybe the year before and earlier also. And that equation to some extent has already changed. So it is not that we are not growing in the economy segment, but most of the volume growth actually is coming in the economy segment, which will continue to grow. Otherwise, we would not have even got a 15% volume growth. But if you look at the focus for sure, we believe that we are the only 1 in the country who is serious about the brand in the premium segment, and we will continue to work on that also. We don't want our premium segment not to grow. At the same time, the focus on economy segment is also there. Otherwise, the volumes will not be even to the extent what we have picked up.

Got it. And how do you see the growth in FY '24, '25, you think you will be able to deliver a double-digit growth or that's a bit of a challenge as we speak?

Are you saying 2 years…

Yes, FY '24 and '25 in terms of volume growth for the plywood business, sir.

See, today, I mean, if we really look at, I feel that a 10% volume growth is something which we have started looking at for every year and volume growth, so base is the same. Actually, value growth will totally depend on how the raw material prices are also going up, down or is stable because last 2 years, there has been too much of changes in the raw material prices. But as far as volume growth is concerned, internally, we are very clear that minimum 10% growth, we'll have to try and achieve in the years to come, at least next 2 to 3 years.

Understood. And how about margins?

Well, margins right now is in the range of 10%. We will work towards improving the same. But at the same time, our investments also will go up because if you have to get a 10% volume growth in this business, somewhere our investment on the business will also go up. So marginally, the benefit of the operating leverage may actually get adjusted with my additional expenses. But for sure, double-digit margin is 100% we are looking at.

And this is ex of ESOP charge, you mean, basically, right?

Exit?

Excluding the ESOP charge. Can you give us the ESOP quantum for FY '24, '25, roughly, how much would that be?

'24-'25 or '23-'24?

FY '23, '24, '25, if you could, sir.

'23, '24 right now, basis whatever brands has been issued, it is only to the extent of around INR 6 crores, which will be in quarter 1 and 2 and nothing beyond that, at this point in time. Total 3, only 3. Sorry, only INR 3 crores in the next year and nothing beyond that.

FY '24, INR 3 crores and nothing beyond that, right, sir? Have I got that…

As per the grants, whatever has been issued. So any fresh grants which will get issued, we'll add that cost.

Got it. Sir, if I may ask on the MDF business, how has been the progress? You mentioned about the trial runs are beginning this quarter. But if you could also highlight is there any cost overrun we have seen? And what kind of utilization are we looking at for FY '24 as a year -- as a full year?

So see, this -- in terms of cost overrun, we had mentioned maybe around a year back itself, that our initial cost was around INR 550-odd crores. And we mentioned that we are able to see a 6% to 7% increase in the cost. We are almost on target, and possibly we will be anywhere around INR 600 crores, maybe INR 595 crores, maybe INR 600 crores. But having said that, there were some changes, additional scope change also, which we did during the journey. So it's not purely, purely cost increase or cost escalation, but a few new things also which we did during this period. So it is including everything. What was the second question?

In terms of the utilization for FY '24 and '25 and what kind of margins 1 would look given the current prices where we are?

In terms of capacity utilization, we are targeting that we would be able to start the commercial production from the month of May, mid-May because since we are taking the trial production in the month of March, normally, after that, there is a shutdown, which has to be taken and which lasts for anything between 30 days to 45 days to correct all the [indiscernible] and then the full commercial production will start. I mean full means, of course, it will be a ramp-up. We are assuming, given these timelines that we should be able to do somewhere around INR 300 crores of sales in the coming year. At INR 300 crores, margin is something which we'll have to see because initially, you will have a ramp up, you will have a few sizes, and we may not be able to produce the premium products from day 1. So everything will become a part of the ramp-up plan. We are at best trying to cash breakeven on a INR 300 crore sales in the coming year.

We have the next from the line of Shrenik Jain from LIC Asset Managers.

Sir, my question is relating to our MDF segment. So as we are seeing that the influx of imports have increased significantly and as our plant is near the ports. So what will be the MDF pricing strategy? Will we have to sell close to the imports price? And so, previously, at peak utilization, we were assuming a EBITDA margin of 20%. So is there any change in the assumptions for the margins, assuming what are the pricing we plan to sell at?

So our pricing level is going to be very much in line with the competition. In certain markets, especially Western India, where we will have the advantage of being locally present without disturbing our margins, we will definitely pass on the benefit of freight to the local market in the west, so that we are able to capture the maximum market share in that area. And I think 20% should not be challenging. Once the utilizing capacity is probably maybe the year 2 and year 3, which we can easily look at this number or something better at today's realization for sure.

Year 1 may not be 20% or may not be equivalent to 20% or plus, because initially, we will ramp up. And as we said, that we'll not be started to produce all premium category from day 1. So those may start after 3 or 4 months. And that also, there will be a ramp-up in the same also. So first year margin can be anything around maybe on INR 300 crores, 14%, 15% itself. But from next year, definitely, as Sanidhya said, basis the other players also whatever is their EBITDA margin, we should be maybe minus 4% or 5% compared to that. And the subsequent year, possibly, we will all be at the similar levels.

What is the current pricing difference between imports and domestic brand in west?

Sorry, come again?

What is the pricing difference between the domestic brand and the imports in Western India?

See, it's -- we don't have these numbers to that extent because we are still waiting for our production to come. But I can only hint on this is there are already other players who are there in the market. We have not seen any significant dips in their margins also during this period. What they have done, they have not even corrected their prices. It's just that they have given some schemes in between. And if it remains so, then I think on a 80%, 90% utilization, our margin also will be much better than 20%. We have said also that imports only happened in the plain category. And we will start focusing as our line is fully prepared, we'll start focusing on the premium category also from day 1.

Okay. And can you throw some light on the OEM market? I believe 60%, 70% of the OEM market is in South India. How much of the OEM market were MDFs in West India? And also, can you explain us about the sales team strength for MDF, how much like hiring you'll have done for sales team?

See, sales team hiring, I will not share exact numbers on that. But now we are fully geared up our batch is joining -- in fact, it has joined today and which has now started undergoing the training also, induction training and everything. So we are now fully geared up in terms of our sales team for Phase 1. For Page 2, maybe we will again start looking at ramping up the team after 6 months or 7 months. And again, the second question? On OEM, see, on OEM, the way we have looked at and when we conceived this project also in west, there are OEMs who were struggling to get their material on time from some of the suppliers in north or south. That clearly gave us an opportunity, and we have done all our due diligence at that point of time that if we have a local plant in West, they will 100% prefer us compared to others. Second, we also found that it is like a chicken and egg story. So since there is no producer there, the OEMs also didn't wanted to set up their shop there, though they were convenient doing it in rest of India, but they didn't want it to because of the logistics challenges. So as we have put our plant, we will also see influx of more OEM now coming and setting up their shop in west.

We have the next question the line of Arun Baid from ICICI Securities.

The question was more on the MDF front. Sir, could you just explain like in this MDF plant, we were focusing on what thin MDF, thick MDF and more so on the wood cost because we have heard players in North India have seen a wood cost pressure, so is the case in South India. So how is the wood pricing in western part of the market?

Yes. So I'll first answer the wood cost. So our wood cost, definitely, in the current scenario, the wood cost continues to rise across India, it's on the higher side. But now we are in a situation where we've already started building stock for wood because right after we start producing, we are going to see monsoons very soon. So we have to start planning our wood in advance. So our cost of procurement of goods is absolutely at par with anybody who's producing in North India but definitely not as low as south, but our cost is definitely at par with north India or slightly lower than north India.

Broadly, what would be the range Sanidhya, can you just help us with that?

Anything between INR 5,400 to INR 5,500, somewhere between that, will be the average purchase of goods delivered to our plant.

Okay. And on the thick and thin MDF part, can we make both in this plant or how it…

So this particular plant is designed in a fashion since it is our first line that we can give any thickness from 1.5 mm right up to 35 mm. So we have the entire thickness range. And also when it comes to the sizes, we can almost give every size which is selling in the Indian market, whether it's 8x4, 8x6, 7x4, 7x3, I don't know, any size you think of, we can give, 10x4, 12x4, all the sizes.

And Sanidhya, on the front there was a south player who has taken a price cut 5%, 6%. What's your view because we are going to be in production ASAP. What's your view, do you think the industry will have to take price cuts based on whatever you see on the pricing front or that's not going to be there -- what's your view as a…

I think the view is very clear. In the past also, this industry has been slightly cyclic. There is a lack of capacity in the country, the prices really go up and the manufacturers really enjoy a very good margin. Then again, there's a lot of capacity which comes in. There's a lot of fight. The margins come down and then again. But what we've seen in the period when Greenply was one entity, at the lowest time, we've seen 18%, 19% EBITDA margins. So all our payback, everything is designed on that. And even if you see today with the increased wood costs with our location in west, when we make our calculations, we are much more than comfortable. So the cash flow is designed very conservatively, we are ahead of that, even today with all the increased cost. So I'm not worried.

And Arun, I think the industry numbers are already there from the other players also. Whatever numbers I have seen, we have not seen any significant dip in terms of their margins. And our own understanding of the market also is that none of them have actually cut down the prices. They have come out with some schemes. And possibly, that is -- they are able to manage at this point of time.

Manoj-ji, you are right, but they have seen significant dip in margins, significant dip. If you look at Q-on-Q, the margins have come off by a huge number, [indiscernible]

If we compare it with the 35%, 36%, then that was unreal.

No, no, I'm not comparing 36% like, for example, Century revised its margin guidance of 20% to 25%, and they are full utilization. So I'm not comparing with the 30 number at all. So Q-o-Q, they have come out dramatically. If I do that number of the 34%, which was in Q1, then it will be a big fall. This quarter, if my memory is right, the margins of Century was down to 20% to 23% from the peak of 30% to 35% as you mentioned just 2 quarters away. And that too on utilization because they obviously have the benefit of that advantage, which they had. But ballpark, what I'm trying to get to is that, in your view, there would not be any big price cuts in the industry on the domestic side. Is that -- I'm just trying to get that point.

No, if you ask me, I have always been advocating that margins above 25% in a business like MDF is unreal.

No, Manoj-ji that margin number is [indiscernible] I've said that a number of times, because that is based on CBM. So margins on -- just to get your perspective, the margins of both Green Panel and CenturyPly has come down without taking any price cuts. So that is not the point. You should look at EBITDA per CBM. That is the way you have to model this business, it will not work. The percentage will not work here, [Foreign Language] There's a lot of difference there. But anyway, so the point which I'm trying to drive is, you don't think there's going to be price cuts or is there a material price cut we can expect from the industry?

I mean with more and more production coming in, there might be a price cut. We have made our cash flows and our planning on the worst, Arun-ji. So we are very confident that we are better than that. It will not be lower than the 18%, 20% on which we've planned our cash flow.

So just 1 thing, you mentioned INR 300 crores of sales in FY '24. So it's at what utilization…

What utilization?

Yes. [Foreign Language]

No are you asking for the full year, see that amounts to around 40%, 45% utilization, okay? But if you will see quarter 4, then possibly in quarter 4, we will be somewhere around 65% to 70% utilization.

Fair. So basically, we are penciling at about 1 lakh CBM sales, right? So like…

Yes, yes, yes. Around that number, yes.

So we are building at 30,000 realizations then?

Sorry come again?

INR 33,000 per CBM realization you have been taking, right in that case? Because 1 lakh CBM…

So will be slightly more than 1 lakh CBM only, I'm saying ballpark, you are almost right.