Greenpanel Industries Ltd- Analysis
Are you aware that most of the furniture we buy online or through organized retail are made of engineered wood. Greenpanel is one such company supplying raw material to the furniture manufacturers. The company was incorporated in December 2017 and remained as an inactive company till the demerger of the MDF(Medium Density Fiberboard) division and part of plywood division of Greenply into it.
The demerger came into existence in July 2019 and the new entity was listed on 23rd Oct 2019.
Greenply is into branded plywood business for more than three decades. Plywood is used for a wide range of applications, spanning from wardrobes and tables to shelves and cabins. The MDF business of Greenply Industries Ltd has been in existence only since 2010 and was earlier sold as in the brand name 'GreenPanelMax' .The idea behind the creation of a separate entity was to house the MDF(Medium Density Fiberboard) business of Greenply and focus on growing the new business. Another reason I think was the separation of businesses between families.
The management of Greenpanel are assured that the future of wooden furniture is the use of MDF as the raw material for factory made furniture. Greenpanel derives about 75% of revenue from MDF and 25% from plywood.
Globally, the market share dynamics is reverse of India where MDF consumption is 80% of the market whereas Plywood captures a mere 20% whereas in India Plywood has a market share of 80%.
Today in India MDF is the fastest growing sub-segment pushing to all companies in the space expand or create new capacities.
In the paragraphs below, I will talk about the market dynamics of Plywood and MDF as well as the trend in the furniture market.
Indian Furniture Market
Due to pandemic, everything is moving inside driving demand for furniture. Indian furniture market is expected to increase at a CAGR 12.9% between 2020-24. According to the management MDF is the one of the fastest growing materials used in furniture products.
MDF as well as Plywood both find application in furniture. While Plywood needs to be worked on with hand, MDF can be used in factories.
Differences between Plywood and MDF
Indian furniture market traditionally has been dependent on carpenter who would make the furniture at customer's home. But there has been a gradual shift happening towards ready made furniture much before COVID due to lack of time and oversight. But COVID accelerated the trend as now people are wary of bringing people into their home and opting for ready made furniture.
Earlier furniture were thought of a one time investment but with the introduction of cheaper wood varieties with modern design, there is a gradual shift happening to cheaper, factory made furniture.
Furniture can made from various kind of wood. While Solid wood is the most durable but is also most expensive. There are alternate forms of wood which can also be used to make furniture at a much lower cost such as particle board(uses waste wood), MDF etc. Example of Solid wood be seesham wood, mango wood etc where engineered wood would be Plywood, particle board, MDF etc
In terms of most common engineered material used to make furniture, its particle board, it is also the cheapest being made of waste wood/wood chips. It is followed by MDF which is being used for a bit higher end furniture. Since the use of ready made furniture and application of MDF is at an very nascent stage, it offers immense room for growth.
In the article I will be talking about Plywood and MDF, the 2 core business segment for Greenpanel.
Medium Density Fiberwood
Since the wood used to make MDF is much cheaper than that of Plywood as well as higher quantity of resin used, the cost of MDF is quite low. MDF primarily competes with lower quality plywood which has a market size of about ₹5000cr. In terms of cost competitiveness, MDF is cheaper than medium quality plyboard by 30% and top quality ones by 55%.
MDF is an extremely price conscious market implying brand name is secondary.
At present, the growth rate of plywood in the Indian market is about 4-5% whereas the MDF business today is about ₹1,900 cr, growing at around 15-18% per annum. MDF is the fastest growing subsegment in this space. In recent quarters the growth has crossed 20-25%.This had led to all major players in this space adding capacities to manufacture MDF.
MDF mainly caters to factory made/ready made furniture. Typical life of a furniture made out of MDF wood is 7-8 years compared to 20 years of plywood furniture but MDF is also quite cheap. Factories use MDF as their raw material mainly on account of uniformity in the material of the product as is visible in the image above as well a strong carving capabilities. Greenpanel's OEM client would be Godrej Interio, Amazon, Shapoorji Pallonji etc
According to management there are some structural issues with plywood such as surface variation, core gaps inside the material which make it unsuitable for ready made furniture.
MDF has fairly Organized market due to the large capex required whereas Plywood is majorly unorganized (70-75%). Also, MDF plants do not require much labor and the entire process is automated compared to labor intensive plywood industry.
There has been a gradual shift happening in terms of usage of ready made furniture from custom made furniture.
Entry of IKEA in India is likely to widen the acceptability and experience of factory made furniture
MDF furniture trend is catalyzed by emergence of online furniture brand which are widening MDF intensive furniture products
Furniture is now being marketed online as well as sold in organized retail stores.
Growth drivers of MDF-
Steady growth in affordable real estate market
Increased purchase of readymade furniture
Reduced imports
Gradual shift from low end plywood to MDF
Work from home culture
Decline in cost of home financing
Coming to Greenpanel's MDF, the company derives a large portion of sales from the domestic market where the realization is much higher. In terms of export, the company's key markets are Middle East, Sri Lanka, South East Asia, etc where people prefer MDF over plywood but the competition is equally intense in these regions leading to lower realization.
Greenpanel's MDF sales split:- Thick MDF: Thin MDF::70:30
Because of higher freight cost, MDF is a regional business.
Given that MDF is a commodity product and the customer first priority is 'Price'. Greenpanel is trying to differentiate by:
Largest installed manufacturing capacity in India.
Entire production is from European manufacturing line
Serviceability from the company's plant is the fastest which enable the OEMs to minimize their inventory
Company's product quality is much better compared to others
How is MDF made?
Plywood
The company also sells premium quality plywood and Greenpanel has a 7 year non-compete agreement with Greenply for not expanding the plywood capacity.
Greenpanel Industries Ltd
Greenply Industries traces back its origins in 1984 and one of the largest manufacturer of Plywood in India. Greenply ventured into MDF business at its Pantnagar (Uttarakhand) plant in 2010, which is now carved into Greenpanel industries.
Greenpanel is one of the largest integrated MDF manufacturing companies in the country and commands an established position in the organized MDF market with its quality product and strong brand image.
MDF market degrew by 37% in FY21 but Greenpanel grew by 20%, simply implying market share capture. As of 31st March 2021, the company had a market share of 33% in MDF.
Greenpanel also have entered into a contract with a Korean marketing company to build series of products that could graduate the company into global household brand.
Products:
1. MEDIUM DENSITY FIBREBOARD
1.1)GREENPANEL MDF:
This can be used for contemporary and carved furniture and indoors panelling.
Thickness of this board vary between 2.3mm to 35mm
1.2)GREENPANEL EXTERIOR GRADE MDF:
Can be used for semi-outdoor and outdoor furniture like garden tables and balcony chairs.
Thickness can vary from 3.6mm to 35mm
1.3)GREENPANEL PRE-LAMINATED MDF:
Suited for areas where dimensional stability is of key importance. Like kitchen cupboards and bathroom cabinets.
THICKNESS: 5.5mm to 35mm
2. GREENPANEL WOOD FLOORS:
2.1) GREENPANEL LAMINATED FLOORS:
It consists of four distinct layers: an abrasion-resistance top layer, a decorative design layer, a 100% hardwood HDF core, and a moisture-resistant backing layer.
Greenpanel offers a warranty of 10 years on AC3 grade floors that are well suited for residential and low footfall commercial spaces.
2.2)GREENPANEL VENEERED FLOORS:
It look and feel of natural wood, along with all the advantages of a high-density fibre (HDF) board core.
3. GREENPANEL PLYWOOD
4. GREENPANEL VENEERS
Greenpanel Veneer offers an range of unique and exotic designs such as Teak veneer, Spectrum wood veneer, Natural Veneer etc
5. GREENPANEL DOORS
Raw Materials:
Unlike other countries, India does not allow industrial plantation i.e. companies such as GreenPanel, JK Paper, can't grow plants for their own consumption. They need to depend on farmers to grow the trees for them.
Greenpanel uses eucalyptus tree wood(hard wood) to make MDF panel.
Life cycle of trees used in production of MDF: 2-3 years
Cost of Eucalyptus wood consumed for MDF= ₹3.25/kg
Life cycle of tress used in production of Plywood: 6-7 years
Cost of Eucalyptus wood consumed for Plywood= ₹5.5-5.75/kg
Company is providing tree saplings to farmers at 50% of cost to encourage them to grow eucalyptus wood as well as assurance to purchase the wood.
Distribution
Post the demerger of businesses, Greenpanel had to create separate distribution channel for plywood for its own brand whereas the MDF distribution channel was transferred totally to Greenpanel.
That explains the slow plywood sales initially.
In terms of branding and promotion, the management has repeatedly said it will continue to be Below the Line(BTL) promotion which include carpenter meets etc. And the expected spending towards it will be around 1.5% of sales.
Some other marketing initiatives:
1. Glow Signboards
2. Promotional material
There is a myth that MDF absorbs water and some other rumors' as well. To tackle these company has a dedicated carpenter training team as there is hesitancy among the carpenters to use a fairly newer material. Greenpanel is providing warranty on its product up to 7 years.
Although MDF sales are primarily to furniture manufacturers, the company is routing its distribution through dealers and distributors as it gives them higher margins compared to dealing directly with OEMs where the OEMs have higher negotiating power owing to the voluminous orders from them.
Sales through dealers and distributors are about 85-90% of the total sales compared to 10-15% to direct OEMs.
In terms of clients, the company is trying to stay from very large OEMs as they are ask for higher discounts. So as of now, the clients are majorly smaller furniture manufacturer.
Management:
The current management of Greenpanel are the ones associated with the plywood company 'Greenply' since that company's inception. Greenply now being amongst the top plywood companies in India implies that they have proved their mettle and have used their experience to take Greenpanel to ₹1000 cr company since its demerger in 2018.
Capacity:
Greenpanel has 2 manufacturing plants:
Pantnagar (Uttarakhand): Here the company manufacture both MDF & Plywood. The annual plywood capacity in this plant stands at 10.5MnSqmt whereas MDF capacity 1,80,000 cubic meters (CBM)
Chittoor(Andhra Pradesh): This plant manufacture only MDF. 3,60,000 cubic meters (CBM) . This plant is spread over 200 acres of land, thus giving enough room for the company to expand capacities in the future. In addition, the plant is just 80km from Krishnapatnam port, enabling export opportunities. From this plant, Greeenpanel export to Middle east, SE Asia, etc where the demand for MDF outstrips that of Plywood.
Total MDF Capacity= 5,40,000 cbm
Total Plywood Capacity=10.5Mn sqmt
In terms of MDF capacity, it is the largest in India, 3rd largest in Asia and 5th largest in the world.
The current capacity utilization stands at close to 100%. Every call they keep getting the question given that it is a sunrise industry and they are the leader, ideally they should keep expanding to continue capturing the market share. But the management is of different opinion.
The company is expanding capacity by 20% by investing around ₹55 cr i.e. adding some new machinery. The added capacity will come online by Q3FY22. These new machinery will also help the co reduce wax consumption by 30-35%.
The management has assured to reach a revenue of about ₹1600cr+ with the small capacity expansion from the FY21 revenue of ₹1021cr which is an increase of 60% by improving product mix as well as debottlenecking capacity.
The management of Greenpanel wants the following factors to be fulfilled before expanding any further:
Net debt of ₹250cr (Current Net debt of ₹376cr)
Optimum capacity utilization
Maximize product value mix
Maximize margin
Presently, the company is catering to the less profitable segment of the market i.e plain MDF. Idea is to convert it inti more profitable one by selling more of value added MDF.
In addition, Company is installing treater machine at Andhra plant which would enable the company to do a faster turnaround of pre-laminated MDF. That would lead to substantial increase in pre-laminated volumes
Value of laminated flooring MDF is three times(3x) of the price of plain MDF.
Pre laminated MDF /Veneered MDF sells at a premium of 40% compared to plain MDF.
As of Q4FY21, the capacity of Greenpanel is running at 100% capacity.
Product Pricing:
MDF is a commodity product and its pricing is dependent on demand-supply scenario. Only a small percentage of premium can be achieved by branding.
Greenpanel's Andhra plant was commissioned in July 2018. Given the large size of the plant and some smaller plant coming during the same time, it created a glut of supply leading to pricing pressure.
In last 3 years(Since 2018), the Capacity for MDF has grown 3x creating a glut of supply thus leading to pricing erosion. During the period, Greenpanel's 3,60,000 cbm Andhra capacity on stream, Action Tesa's 2,25,000cbm and Century's 1,80,000cbm capacity came online as everyone was in a rush to grow the capacity witnessing the high growth and demand for MDF.
Even today there exist a oversupply in the market.
Installed capacity in India= 15,00,000 cbm
Imports= 2,50,000cbm
Total Supply=17,50,000cbm
Demand for MDF= 11,00,000cbm
Implying significant overcapacity. Company has applied for anti dumping duty and counter veiling duty. DGTR has recommended the duties and now its upto the finance ministry to apply the same. There is a ADD on thick MDF(6mm+).
Govt has rejected DGCA recommendation of duty for less than 6mm MDF.
But there is an ongoing CVD(Counter vailing Duty) investigation on imports.
Competitors:
Rushil Decor, Century Ply and Action Tesa
Company also faces competition from cheaper imports. That is the reason they have applied for Anti Dumping Duty(ADD) and Counter Veiling Duty(CVD) on these imports. The threat is much more prominent in south India and becomes uncompetitive in North India due to high logistics cost of around 12-15%.
Price differential between imports and thick MDF= 10% and between imports and thin MDF=30%
Financials
A large percentage of the company's debt is in foreign currency
So that the company vulnerable to forex losses. Every quarter the company faces some short of forex loss.
Around 55% of the loan is in the form of Euro dominated loan, 15% is from US$ dominated one and the rest in rupee dominated. While Dollar dominated loan is fully hedged, Euro loan is unhedged.
As is visible that the company has almost doubled the sales in last 3 years mainly by increasing capacity utilization of the new plant. That also helped spread the fixed overhead leading to increase in profitability.
Greenpanel has substantially improved its cash flow from operations.
Going further, the company plans to further sweat its fixed assets and increase the sales of its value added products, which will help the bottom-line immensely.
Real estate is the key driver of demand for the company's product which had been subdued since the past many years. The company has been able to grow mainly via increasing its distribution network.
With the recovery in real estate gaining pace in the very recent past, the growth is likely to continue with better profitability.
In terms of most common engineered material used to make furniture, its particle board, it is also the cheapest being made of waste wood. It is followed by MDF which is being used for a bit higher end furniture. Since the use of ready made furniture and application of MDF is at an very nascent stage, it offers immense room for growth.
My other blogs on GreenPanel Industries Ltd:
Further reading: