Greenply Industries Limited (GREENPLY) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Greenply Industries Limited Q1 FY'24 Earnings Conference Call hosted by Asian Markets 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 and other 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 cautious 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 Markets Securities Limited. Thank you, and over to you, sir.

Thanks, Seema. Hi, everyone, good evening. On behalf of Asian Markets Securities, we thank you all for joining us on the Greenply Industries 1Q FY'24 Conference Call. In the panel today, we have Mr. Manoj Tulsian, Joint Managing Director and CEO; Mr. Sanidhya Mittal, Joint Managing Director; and Mr. Nitin Kalani, CFO; and Mr. Gautam Jain, EVP, Strategy and Investor Relations. May I now invite Manoj ji to begin the proceedings of the call. Over to you. Thank 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 Q1 FY 2024. In our plywood business, we have achieved a marginal growth in sales volume and a 3% growth in realizations in the last quarter as compared to the corresponding quarter of last year, a better product mix and price hikes taken during the last year has supported in better realizations in the last quarter. On a full year basis, we still aim to achieve 10% volume growth. The gross contribution in the last quarter improved to 39.5% from 36.3% in the corresponding quarter, supported by better realizations and manufacturing cost efficiencies. However, the adjusted core EBITDA margin in our plywood business declined by 50 basis points to 8.7% in the last quarter as compared to the corresponding quarter. This is mainly due to enhanced branding and marketing activities during the quarter. This has led to advertisement and promotion expenses reaching 4.8% levels during the quarter as compared to normalized spend of 3% to 3.5% of sales for the year. A bigger challenge of cost escalations and timber prices are still persistent. With the objective of protecting our margins, we are planning to take some price hikes during this current quarter, although the benefit of the same mostly would reflect in the second half. Assuming no further cost escalations and efficient price hikes, we should improve our margins to double-digit level for the full year. Our Gabon business continued to remain under pressure due to demand side challenges, However, the quarter's performance has slightly improved as compared to the previous quarter. On a consolidated basis, our debt levels are elevated due to investments in MDF business and the related working capital requirements, which has gone into the business. It should start reducing as the MDF business starts generating cash flows. To achieve higher scale and operations, we continue to invest in our brand, people, processes and technology. As an industry leader, we have also undertaken plantation activities on a very big scale by planting over 27.8 million saplings in over 34,700 acres of land across the country. We have started our ESG journey and have voluntarily published our first sustainability report. We are the first in the wood panel industry in India to do so. With this, I would like to hand it over to Sanidhya to provide more insights on our MDF business.

Thank you, Manoj ji, and good evening to everyone on the call. I'm happy to inform you that we have started commercial operations of our MDF facility in the quarter under purview. We have successfully tested all the product thicknesses and categories in the plant. In our sincere effort towards sustainability, we have become the first and the only MDF and wood panel producing company in the country to have FSC FM certification. From branding perspective, we have launched the MDF products with the brand name Greenply MDF. For efficient marketing and distribution, we have a full team on board across the regions. We have already successfully set up a core distribution network across the region. As a strategy, our focus is more on the western and central region of the country. However, we are distributing across the country. In the last quarter, we had a commercial operation started on the 5th May. During the quarter, MDF business clocked sales of INR 18.1 crores with a net loss of INR 14.8 crores. Since these are our first few days of operations, the financial performance does not reflect to the true potential of the business. We expect the financial performance to subsequently improve from here on. For the full year, we are confident on achieving INR 275 crores to INR 300 crores of sale. As a product category, we are foreseeing the market expansion due to cost effectiveness, innovative product usage and rapidly gaining acceptance by consumers. With this perspective, I would like to open the floor for Q&A session. Thank you.

[Operator Instructions] We take the first question from the line of Mr. Keshav Lohathi from HDFC Securities.

Sir, firstly, I wanted to understand about MDF. Is it possible to share like 6,000 premium volume was for the quarter. What was the main volume? And what sort of volume you target for FY'24? And should we expect EBITDA breakeven in Q2?

Sorry, can you repeat the first part of your question, please?

Yes. So I just want to understand what sort of volume was done in the June month for MDF? And what's the volume target for FY'24? And should we expect EBITDA breakeven in Q2?

Yes. So I think this INR 18.1 crores of sales -- Gautam, what is the exact CBM number?

6,000 CBM.

6,000 CBM. We have achieved this over the -- over May and June, basically.

55 days of May and June.

55 days, we've achieved this. And we've done lots of trials. The vendor has handed over the line to us, and they have left in quarter 1 itself. For the full year, we still stick to our commitment that we will be producing 1 lakh CBM material, and we will be selling everything we produce, and we're typically trying to touch anything between INR 275 crores to INR 300 crores.

Okay. Understood. So quarter 2 EBITDA assumption is correct, right? EBITDA breakeven?

Hopefully, yes, that's the target definitely.

Okay. And 1 lakh CBM, how should be the export and domestic mix look like?

So we are assuming that in our case, Greenply has 0 export liability. Hence, export will not be an area of focus. However, just to fight with tough times, we might consider exporting to 3% of our capacity. And we will only focus on certain value-added products which we get. Because as a company, we have 0 export liability. So we don't want to focus on export, the realizations are very low our realizations for the quarter for being at the first quarter and the product mix not being what it's supposed to be, we are quite satisfied.

Okay. Understood. Understood. One last question from my side. If we see the live performance, one, you have highlighted due to higher A&P spend, the EBITDA margin is looking less. But if I see Q-on-Q, your gross margin, there is a jump about more than...

Sorry to interrupt you, Mr. Keshav, the management line has dropped. Please stay connected. [Technical Difficulty] Ladies and gentlemen, thank you for being on hold. The line of the management is now reconnected. Thank you, and over to you, sir.

So my question is on ply segment. If we see the ply gross margin have increased by 320 bps year-on-year, but still the EBITDA margin is down. I do understand you said one of the factors was A&P, which might be 100 or 150 bps, but are there any other factors?

Well, yes, I'm certain other costs also have gone up in terms of some selling and other sales-related costs have gone up during the quarter because -- and today, if you really see, the market is slightly subdued at this point of time.

Okay. So what is the idea behind increasing the A&P spend in a muted quarter.

No. See, there are certain marketing activities, which are planned during the year, okay? Like the first quarter, we had already signed up for the IPL. So that is the event which will happen in quarter 1 only irrespective because we already signed on to the same. So these type of aberrations during the year will happen. And you know clearly that the accounting started now very clearly says that whenever you spend this money, you have to book it into that quarter irrespective. So in a particular quarter, even if we spend around 5% or 6% of the sales for that particular quarter, we'll have to report all those numbers during that quarter only. For the full year, however, we are still assuming that we have taken a budget of anything between 3% to 3.5%, and we should try and maintain within that number.

We will take the next question from the line of Ms. Sneha Talreja from Nuvama.

Just two questions from my end. Firstly, I just wanted to understand the pricing as of now. How are you pricing your MDF products in the market? And what is the raw material availability looking like? Are you getting it from West or how many kilometers far for you to go for raw material availability of MDF, so some clarity there on the MDF side.

Right. So I'll first answer on the raw material side. So our -- more than 60% dependency is on local raw material, which typically means 200-kilometer areas of our factory. And the balance raw material is coming in practically from all parts. We are also -- maybe potentially we could also look at importing something in the middle of this year. As far as raw material cost is concerned, we are not at all worried because we are absolutely at par with any of our competitors sitting in North. Definitely, prices in South are slightly more advantaged than what it is in West. And what was the other question, other than the raw material?

How have you placed the pricing?

Right. So our pricing is pretty much at par with competition. In certain markets, however, we are priced anything between 1% to 2% cheaper than competition in markets where there's too much competition. For example, [ LCR ], and that is our introductory price for say the first financial year. And by the end of the financial year or next year the beginning, we will be at par of the competition.

Sure. And just wanted to understand, you also maintained your guidance of double-digit margins in plywood. So how do we see that happening? Because we have clearly low single digit right now. So where are we looking at margins going ahead, what are the plans in the plywood business, which can take our margins forward from here?

So two things. One, I think our performance in the quarter has not been as good as what we perceived at the beginning of the year. And I'm expecting a bounce back from quarter 2 onwards, the market has not been so supportive, I would say, I mean, that's at least what we felt in quarter 1. So once -- if our run rate improves from quarter 2, we'll get the benefit of operating leverage. And second, we are also taking a price increase in the coming months. So both these initiatives hopefully will help us to go back to double-digit margin.

Understood. And lastly, if I may. We saw some bounce back happening in Gabon with margins also improving, but again suddenly as even Gabon's performance getting impacted back again, what's the status here, what is the demand scenario in Gabon at this point of time? Are there any green shoots in the market, so some clarity even there would be helpful.

So as I mentioned in my opening speech also that, that is slightly a very uncertain market where we have not been able to do anything which gives us some very sizable visibility going forward. We are actually measuring quarter-to-quarter basis at this point of time. And I mean, I've been maintaining this for last almost 6 to 8 quarters, but some challenges or other keep coming and hitting that business. So we are not so bullish about it. I think how I can place it at this point of time is we are looking at how can we reach to a breakeven level on a quarterly basis. That's the first target. The demand side is not so exciting even now for the Gabon business.

The next question is from the line of Mr. Udit Gajiwala from Yes Securities.

Sir, firstly, on MDF, when you say that from next year, your prices will be at par, but -- with the peers, but how do you see the overall industry prices shaping up from 25%, given that multiple capacities are coming up?

I think it's very difficult to predict something like this. You don't know what the government stand is going to be. You don't know in case of MDF, what the ocean's rates will be, how the imports will be. So I think more capacities coming in is one problem, imports coming in is another problem, ocean freight is another issue. So I think a lot of these factors put together control how the pricing in India is going to be like. But however, in the value-added category, so inferior grade for me is nonvalue-added, everything else in my portfolio from me is value-added. So however, the other products, they seem to be kind of unaffected, which is kind of insulating the industry and helping us to perform in times when import has opened up an ocean . So I don't see that as too much of a challenge. And given the capacity has, we don't have a very large capacity. So I'm very confident we'll be able to sell and move ahead. People who have multiple capacities should worry. I mean, we are not worried.

Understood, understood. And sir, are you hearing anything? I mean, given that antidumping duty is unlikely to come, but are there any developments on the CBD that you're hearing from the ministry or any update on that front?

I think it's too early for us to apply. I think you have to be a manufacturer 2 years old to get into that process and appeal to the government. However, obviously, we keep in touch with the industry to know what others are applying, but no news on that front. And we are imagining that that's not going to happen. So we have to -- given the scenario, we need to [ slide ]. So we are making all our calculations and working on that. If that happens, then it's an additional tailwind we get.

Got it. And sir, lastly, if I may squeeze for -- do you maintain for 25% to -- I mean, basically to ramp up your MDF capacity in 3 years. So is that still on what you had targeted earlier?

Absolutely, absolutely. We are looking at 1 lakh CBM this year, slightly higher next and the third year, we are looking at a full capacity utilization. And definitely, like as our cash flow allows us, we'll keep adding value-added -- we'll add more short cycles and we'll keep doing value addition in MDF to further improve the realization and make sure that we're profitable.

By next year, we can do around 160 lakh to 180 lakh CBM -- 160,000 to 180,000 CBMs. The annualized number for this year itself, if you take the full 1st quarter should be like annualized rate of 120,000 CBMs. That's what we are hoping. So next year, 150, 170, something which for sure we will do.

We'll take the next question from the line of Mr. Karan from Asian Markets.

Sir, we did send our first consignment from Gabon to U.S.A., and we were slightly optimistic of a bigger order if it clicks, so any update on the same?

[Technical Difficulty] Karan, sir, you may go ahead with your question.

Yes. Sir, we did send our first consignment from Gabon to U.S., and we were slightly optimistic if it clicks. So any update on the sales?

No, it actually didn't work out. We didn't get any subsequent inquiry from them, okay? So at this point of time, we don't see anything with U.S.

That's right. And on our standalone ], we've seen good inch up of the working capital days. So what explains that? And how do we see that shaping for the coming quarters?

See, we are somewhere around 40, 41 days now working capital, . So we are around 40 days, okay. And I think we should be in this range only, maybe it can come down by around 2 to 3 days, mainly primary also quarter 1, we carry some extra inventory because of the rainy season. We carry some extra inventory on the raw material side also. And -- but otherwise, I think this is the level possibly where we will be stabilized, 38 to 40 days.

Right. And last from my side. Sir, you mentioned of 1 lakh CBM of sales. So if you can give some breakup of to value add and now non-value add for our MDF portfolio? And how do you see that shaping for the next 2 years?

Sorry?

Sir, while we are targeting 1 lakh CBM this year for MDF...

Yes. Yes. I think it is -- it will be like a speculation to kind of predict in advance how they're going to sell. We are committed to make that much material and sell. And obviously, anything other than interior is our preference to sell, that is value added.

Preference is clearly value added, but since it's a new facility, and you all know that there is a ramp-up also, which takes place. So everything also depends on how well we are able to ramp up. And by quarter 4, I think new people will be able to understand the trend also because by that time, we will almost be through, we'll be very -- we're doing our sustained level of production. So possibly quarter 4 will be a good reflect of the mix, which we are able to sell.

We take the next question from the line of Mr. [indiscernible] from Investec.

Sir, my first question is related to MDF. Sir, can you tell us what is the import parity price of MDF right now?

From both landed cost of [indiscernible]

Import parity price, he is saying. It's something around -- something around INR 20,000 -- around INR 20,000 per CBM.

Sir, that is the landed price, right?

Yes.

Can you just break it up between the cost and the freight?

I think around 10% is what you can consider. Out of that, so -- actually 18 plus 2, 2.5x.

Sir, can you just repeat it. Could not get it, sir.

It's around base price of INR 18,000 plus, let's say, INR 2,000 to INR 2,500 other components. Yes, somewhere around 18,000, yes, $220 per CBM is the price. So INR 18,000 will be the base price and then around INR 2,000 to INR 2500 as freight and other components.

Sir, my next question is related to plywood. Sir, with Sandila now up and running since last week...

The line for Mr. [indiscernible] seems to be disconnected, sir. We move on to the next question from the line of Mr. Achal Lohade from JM Financial.

Sir, my first question is with respect to plywood business. In the conference call for fourth quarter, you had indicated we are confident about 10% to 12% volume growth, we were in mid-May or probably end of May. And we see that the volume growth is actually just 2%. So is it fair to say that June was extremely weak to have this kind of a number? Or -- and b, when you say 10% for the full year, it implies a 13% kind of a volume growth for 9 months. So is it basis being macro improving alone? Or are there specific steps which you want to elaborate what you're doing, which should drive the volume growth from here on?

So first thing, you are right, June was nowhere near the expectations what we thought, okay? And so that was clearly a dampener, and going forward, yes, as I said, that we'll try to do a 10% volume. I agree with your numbers. It's not going to be easy. But we are prepared, right? We are prepared as a company. We have been doing a lot of things on the ground, and we have also been doing some good activities on the branding side despite like the margins are slightly lower, but we are not going to stop some of those things, some of those initiatives now from here on going forward because I think many other things we have already corrected in our system. And so I mean, I would say my team is prepared. We just need some level of push from the market. And I truly believe that the market is good, market will bounce back because -- I mean, I don't see that there is any reason that the market should be subdued. Though we have been hearing this from some other industry players also and even in the building material, but we are all optimistic that the market will bounce back. And the market bounces back, plus the level of ground activity, what we have already done, the way we are doing things, I'm pretty confident that we should be very near to that number. 10% for sure is difficult, 13% rightly thing. But we are prepared, and we have taken that as an internal task also, how to make up in these balance 9 months. Let's see.

Got it. Sir, is it possible to get some clarity in terms of how the premium segment has done in the plywood versus nonpremium? Or what has been the volume growth for the first quarter?

Volume growth. Just one second. We'll get back on this.

Sure. Where I'm coming from is that we have another equally large player who has been outperforming in terms of percentage growth, the difference between 2 of you has widened quite significantly in the last 4 years. So I'm just trying to understand the underperformance? Is it to do with the segment exposure like we are focusing a lot more on premium. We are spending on the A&P, but the bulk of the growth is probably happening in the nonpremium. Is it to do with that? Or is it to do with simply the receivable tightening what you have done? And if there is a rethink with respect to being a bit lenient, which would drive the volume growth?

No, I don't think, first of all, receivable corrections and other things are still playing on the mind of our dealers. It's something which is already done and dusted. Okay. Coming back to the difference, see I would say that we have to look at our model, our business. We are different in terms of what we do things. Yes, in the last couple of years, I mentioned also in the last few calls that we suffered quite a bit in between on our capacity platform also. So especially when the price increase takes place consistently into the market, the trading model creates lots of challenging because it was like every month, they will ask for a price increase. And they know that we have no other choice. So if we done after volume, we'll have to just agree to their prices. If we agree to their demands, then they continue to ask some crazy price increase month after month. So we pass through that difficult time. We also learned that this trading model is not something, which really works in all types of situations. Our capacities at Bareilly actually never did which we are expecting that our Bareilly plant will give us good additional capacity. So some of the line of products where we had good orders, we...

Sir, I'm lost. I'm not able to hear you after what you were talking about Bareilly plant, but I couldn't follow up.

So what I'm saying is that we had issues even in terms of capacity enhancements because we are expecting a lot from our Bareilly plant to give us new capacities in certain product lines, but that never happened. Even while we speak, we had one full line for our doors business there, but till date also, we have not been able to even start that line. So those are putting loss of business to us also because we had orders. We were expecting every month that the line will be up and running and that is somewhere we will lose customers. So we face these type of challenges. But I think many...

I can hear you. I can hear you.

So we know we had these type of challenges. Some of these challenges still continue, like Bareilly was a clear disappointment to us. And because of that, somewhere our capacities in some product lines, still we are rethinking on how to gear up those capacities. So we had some of these challenges.

Can you elaborate on this? What is the exact challenge? Is it internal, external, availability of raw material or equipment?

No, no, no. It is not about availability of raw material. It is about the facility could not really produce the product, okay? And somewhere, again, this JV model on which we worked has not given us very successful result. So we are also rethinking that is -- because of that only, one of the step also was to put up a facility in Sandila. So one, let me summarize, receivables issue has not created any challenges. Second, yes, we have our way of looking at our business. Third, we had supply side issues also.

Understood. Sir, just a couple of questions on the MDF. You mentioned you don't expect any antidumping duty related measures. I was just curious to understand your thought. Is it that we are very, very competitive and that's why you can't argue that you require any such measure? What is driving that thought actually?

I think we are too new to comment on this, honestly. I have mentioned that we are not calculating in our margins that, that is going to come in. We are imagining for our practical working that this is going to be a scenario. Imports are going to be open and the market will be challenging. In this scenario, Greenply needs to thrive. So we are working on that. In case the industry or the government decides to put something like that, then it was an added tailwind to us.

Fair point, fair point. And just in terms of the new capacities, anything incremental in the last 3, 4 months, you have come across in terms of new players entering into MDF industry or new capacity?

Honestly, not at all. The listed players, I'm sure you guys are aware, and we are also very well aware of the big players, what and where they're putting up the capacity. And rest, we are actually working hard to sell MDF and focus on the ramping up rather than focusing on who is coming. So honestly, we don't have an answer on that.

Understood. And if you could just quantify...

[Operator Instructions] We'll take the next question from the line of Mr. Rishikesh Bhavat from Kotak.

So first question is related to the plywood. I think you did speak about the working capital. But clearly, on the receivable days part of working capital, that also has at least on plywood. When I look at both stand-alone plus Sandila capacity. So is it that we have, again, slightly loosen the terms of credit? Or is it something else? How should we read it?

No, it is not. See, first of all, it is not anything significant. Second, there are 2 lines of business. One is the trade business and second is the institutional business. Whenever we do institutional business and that is where also we have a lot of focus in the last 2 to 3 quarters, the institution of business receivable days are different compared to the trade base. So they are normally always hired by 30 days compared to the trade day. So it's not that we have any major from our discipline. And that's why I said that this looks like the new norm because the institutional business is growing.

Sure. I think that's helpful. The second is, when I look at the consol interest cost, it is INR 13 crore, clearly on the debt of INR 700-odd crores looks fairly low in terms of annualized interest cost works to less than 8%. So has some part of interest -- is the MDF interest fully reflected? Or it's some part it's still capitalized on balance sheet?

See, borrowings -- first of all, the borrowings also has increased in these 3 months over a period of time. Our opening borrowing was not around INR 750 crores. So quarter 2 will be a true reflection of our interest costs.

Okay. So that will be somewhere around how much on an annualized basis, if not on the quarterly basis?

about INR 39 crores. MDF interest [ percentage ] of INR 39 crores. And other interest cost will be about, I would say, for INR 6 crores roughly to INR 45 crores on an annualized basis for overall business.

Yes, annualized, yes. Sorry, it was not clear, the annualized interest.

The annualized interest cost is -- saying -- our CFO is saying, would be somewhere around INR 45 crores to INR 46 crores.