After doing a sanity check on the numbers and inputs from the Q2 conf call, here is what the situation looks like to me -
FY19 Plywood business likely to do between 1350-1400 Cr sales
EBIT of 9.5-10% doable over the medium term in plywood, at a PBT level it works out to around 120 Cr
At a tax rate of 33%, PAT purely from plywood business should be in the range of 80 - 85 Cr
Given the industry structure and economics of the plywood industry it would be reasonable to value the business at a TTM PE of 15 (if anything this is conservative over the medium term), hence plywood business could be valued at 1200 - 1300 Cr.
Current market cap of < 1700 Cr means that the entire MDF business is being valued at less than 450 Cr, question being how should this been seen
MDF market in India is approx 1800-2000 per annum growing at 15%, almost 1/3rd being imported
Key players and their capacities in MDF are -
Greenply - 540,000 CBM
Action Tesa - 510,000 CBM
Centuryply - 200,000 CBM
Another 100,000 to 150,000 CBM coming from some smaller players
Total capacity installed = 1,300,000 CBM
At current realization of approx 24,000 per CBM (as per Q2 numbers), installed capacity in MDF across players in India is approx 3100 - 3200 Cr. This is almost 1.6 times the current industry size in India, if one adjusts for the imports, the supply glut is more than 2X the current domestic production. If MDF industry keeps growing at say 15-18 % per annum, it will take 3 years for the market size to grow to be able to absorb all the capacity already in place.
Realizations in India are almost 10% higher in thick MDF segment and 25% higher in the thin MDF segment compared to export realizations (one can check the international prices of MDF easily, for a good quality variant the per CBM rate is approx USD 275).
Now what does all of this gyan mean -
MDF EBITDA margins will most likely way lower than than the 25% level which Greenply has traditionally operated at at least for the next 3 years. Management is talking of a 20% EBITDA level but one can discount that by 4-5% to be conservative. So 15-16% EBITDA margins are more likely assuming capacity utilization can be maintained upwards of 60% - which is a challenge in the domestic market
All the 3 large players will increasingly look to scale exports rapidly to keep utilization levels higher, margins will be way lower in export market but profitability can be achieved
As the large players sweat their assets more and turn EBIT positive, competitive intensity in domestic market may come down over a period of 12-18 months.
Over the medium term Greenply will be the largest and lowest cost player in the MDF segment, the next 2 years will be tough (which explains why stock price has corrected so much) but over the medium term as capacity utilization crosses 50%, EBITDA margins should be closer to 15%+
So looking at just the MDF business, one will get a 500 Cr topline for FY20 at an EBITDA margin of 15%, business can grow at 15% over the medium term. The forex losses that company has seen over past 6-9 M should stabilize as the INR finds its feet. Interest expense by itself is actually not high since cost of borrowing from European banks is way lower, it is the MTM impact of the borrowing that has hit finance cost badly over past few Q’s
Given this context, the call has to be - is the MDF business (given the near term economics) worth at least 400 Cr? It will be interesting to see what the individual businesses trade at once the demerger is effected