 "Plywood")
The rally so far has been fuelled by a host of factors. Among the latest is the government recently imposing an anti-dumping duty on imports of fibre boards from Indonesia and Vietnam for five years. Given that imports form about 30 per cent of the country's demand, domestic firms, especially those with strong brand names, stand to gain.
Second, implementation of the goods and services tax (GST) will reduce the pricing gap between organised and unorganised firms in the sector, throwing up opportunities for market share gains for organised firms. Analysts peg the Indian plywood sector at Rs 20,000 crore annually, with over 70 per cent catered to by unorganised firms.
As reported, a GST rate of 18-20 per cent is much less than the current combined tax rate of 25-30 per cent paid by these companies (unorganised firms pay little or no tax). With all players falling in the tax ambit after GST, organised firms should get a boost even as they pass on the tax savings via lower prices.
Lastly, rising preference for medium-density fibre or MDF will be a positive as the two companies are focusing on this segment as a growth engine. MDF penetration of the total wood substrate market in India is in single digits compared to over 50 per cent globally, and its volumes are expected to grow 15-20 per cent annually in the next few years, estimate analysts. The replacement cycle for furniture is also reducing and, as a result, is leading to higher preference for inexpensive furniture by consumers. This will also boost demand for plywood and other wood products.
With these catalysts in place, earnings per share of these companies are expected to grow. This figure is pegged at 18 per cent for Greenply and 20 per cent for Century over FY16-18, going by Bloomberg consensus estimates. Both these companies enjoy market share of about 25 per cent in the organised plywood market and are ramping up their MDF portfolio to support the core plywood business.
MDF is cheaper than plywood and is witnessing increased demand momentum from low-cost housing segment. Century is making its single-largest investment so far of Rs 400 crore in its MDF plant and hopes to start it in the second half of FY17. Similarly, Greenply is ramping up its MDF production by setting up a plant, which will be started in FY19. Notably, capacity use at Greenply's MDF plant has increased from 73 per cent in FY14 to 99 per cent in FY16, reflecting robust demand for the company's products.
Going forward, most analysts are positive on the two companies which have been gaining market share from unorganised firms. "Century will continue to gain market share in plywood given strong brand and improving distribution, unparalleled raw material security and balance sheet strength," says Achint Bhagat of Ambit Capital.
At current levels, the Century stock trades at 29 times FY17 estimated earnings, which is at a premium of 26 per cent to Greenply, which trades at 23 times. While the valuations for the two companies are not cheap, most analysts believe this premium should be at around 10 per cent levels. Though the revenues of both companies are at similar levels, Century enjoys higher return ratios as well as earnings than Greenply. However, the high capital expenditure on MDF will suppress return ratios of both the companies over the next couple of years, till they achieve full capacity usage at the new plants. Investors wanting an exposure should have a two-three years' perspective.
