Greenpanel Industries Rating ‘Buy’; Demand revival a shot in arm for company

Greenpanel Industries has been trading at benign valuations ever since its listing in Oct’19 (post its demerger from Greenply Industries), largely attributed to demand and pricing headwinds in the MDF category and large capex (Rs 7.9 bn) committed on its Andhra Pradesh project leading to under-utilisation of its MDF assets and muted profitability. However, with faster-than-expected demand recovery in MDF category (which also seems sustainable) post Covid-19 breakout, GNPL may sweat its capacities much faster than envisaged earlier.

Besides, delay in greenfield MDF projects of CPBI and Rushil Décor, coupled with stable MDF pricing and recent productivity enhancement and cost control measures at its MDF units, may drive significant improvement in profitability going forward. Upgrade to Buy with a revised TP of Rs 100 (15x FY22 earnings) vs Rs 39 (10xFY22 earnings) earlier.

Increase earnings by 163%/71% for FY21/FY22: Adjusting for the improving demand and earnings visibility in MDF segment, we increase our revenue/earnings estimates for the company by 19%/17% and 163%/ 71%, respectively, for FY21/FY22. We expect the company to report revenue/PAT CAGR of 15%/138% over FY20-FY22e.

Key beneficiary of capacity vacuum likely to be faced by MDF majors: Despite incremental capacity addition announced by few unorganised players in the recent past, we expect GNPL to be the biggest beneficiary of the burgeoning demand for MDF (post Covid-19).

Ebitda margin at inflection point: Stable category pricing, operating leverage, recent measures and improving revenue mix would drive strong margin recovery in FY22e for GNPL.

RoCEs may scale up in double digits in FY22e: We expect MDF category RoCEs to inch upwards of 17-18% by FY23 vs 12-13% witnessed in FY19/FY20. This is likely to be driven by higher asset turns for large MDF players and expected improvement in their profitability. GNPL, too, may scale up its RoCEs to double digits (12.7% by FY22e) driven by higher capacity utilisation, greater profitability, higher FCF generation and subsequent debt reduction. This we believe will drive P/E multiple expansion for GNPL going forward.