Rushil Decor - Real Estate revival + MDF Adoption Play

Rushil Decor is a building materials company which is into manufacturing of MDF, laminate sheets and PVC boards. On a TTM basis, MDF division comprises of 64% of revenues whereas laminate sheets comprise of 35% and the PVC boards < 1%. Company sells its products under the brand name - Vir (Vir MDF, Vir Laminates).

Industry Analysis

1. MDF vs plywood - In the furniture industry, traditionally India has been a plywood market. MDF adoption is a fairly recent story (Since 2010s). Globally, MDF comprises of 65-70% value share in the furniture industry whereas plywood only has 30-35% share. In India, the %s are reversed with MDF only having a 35% share. However, MDF adoption has picked up massively in recent years as modern furniture manufacturers prefer MDF over plywood. One of the main reasons for MDF being a preferred furniture material is because MDF manufacturing is a 100% automated, factory-led process with zero manual labour involved whereas plywood is almost 100% manual labour led. This obviously leads to much higher uniformity, consistency and smoothness of colour and finish in the quality of MDF surfaces compared to plywood surfaces which makes it a better material for furniture manufacturers. For the same reason, MDF also gels better with millennial aesthetics and therefore most of the low cost furniture we see today from brands like Pepperfry or Urban Ladder or IKEA are made of MDF (The costlier ones are made from real wood).

2. Organized vs Unorganized industry - While most of the plywood industry is comprised of unorganized players, 100% of the MDF industry is organized and it will remain that way going forward. Reason for this is that setting up a state-of-the-art MDF plant is very capital intensive as it requires German machinery. Fixed asset turns are in the range of 1.2x-1.6x. Foe example, Rushil’s new plant in AP was setup for a capex of INR 450 Cr and depending on realizations per CBM, can generate a max topline of INR 720 Cr at full capacity. A 100% organized industry provides a lot of comfort to investors as the behaviour of industry participants are more rational and predictable.

3. Raw materials - The main raw materials used for manufacturing MDF is wood fibres and binding chemicals and adhesives. The wood fibres (primarily eucalyptus) are all taken from plantations in India and to that extent there is no wooden raw material risk
risk from China or other countries. Chemicals may be imported to an extent but I don’t expect them to be greater than 15-20% of the total r/m cost of MDF manufacturing companies. This protects MDF companies largely from shipping costs and forex risks.

4. Imports from China and SE Asia - Whenever we talk of any commodity, our biggest risk factor is dumping of cheaper material from China and SE Asia. Fortunately, going by the commentary from the leading MDF players in India, it seems that imports are not likely to be a threat at least for the coming 4 quarters. This is on account of increased usage of MDF in home countries and increased share of furniture exports to Western markets from China and SE Asia. Therefore, their capacities aren’t free for less remunerative volumes in India. As you can see below, imports of MDF (HSN codes : 44111300 and 44111400) are down by 30-35% on a yearly run rate basis. Imports are a key risk for this kind of an industry and the present situations seems to protect the MDF industry from this particular threat for the foreseeable future.

5. Exports - Due to Covid there has been a global shortage of MDF availability. This gave an opportunity for leading Indian players to increase their share of exports at good realizations (Generally export realizations are lower than domestic realizations). This opportunity of higher export realizations is also likely to continue for a few more quarters.

6. Demand - All industry participants expect demand to grow robustly in the medium to long term with growth CAGRs of 15-20%. Real estate revival and increased substitution of plywood by MDF are the two key triggers driving demand growth. Present demand is at a yearly run-rate of ~14-15L CBM and at a CAGR of 15-20% is likely to be at 21-25L CBM by end of FY25.

7. Supply - Present per annum installed capacities and upcoming capacities are as follows:

Greenpanel - 6L CBM
Action Tesa - 4.2L CBM
Rushil Decor - 3.6L CBM (New capacity. FY22 utilization will be ~60%; full utilization from Q4 FY22 onwards)
Century Ply - 2.2L CBM
Century Ply - 4L CBM (Upcoming capacity - Greenfield plant in AP - Q3 FY24 and brownfield in Hoshiarpur, Punjab - Q2 FY23)
Greenply - 3L CBM (Upcoming capacity in Gujarat - Q1 FY24)
Other players - 1.3L

Total visible capacity by FY24 end - 24-25L CBM. Its likely that capacity in FY25 will be around 28-30L CBM (Greenpanel is expected to announce new capex in coming quarters). At a projected demand of 21-25L CBM, this will mean an overall capacity utilization of 75-85% which is high enough to ensure margin stability. In summary, there is no over capacity problem anticipated in the medium term (provided import situation remains as described)

Rushil Decor Opportunity

While the MDF industry as a whole is a great investment opportunity in the long term (5+ year horizon) Rushil Decor is best placed to provide outsized returns to investors in 1-2 year horizon I believe. Reason for that is they have recently commissioned their 2.5L capacity AP Plant in Q1 FY22. After overcoming initial hiccoughs in running the plant at higher capacities, this Quarter Management has come out with very bullish commentary regarding the Plant and has said that they have been able to operate the plant at 80% capacity in December. Going forward they expect to run both their plants at 75% capacity (Demand is not a problem). Realizations have also increased 15% Q-o-Q and a further 5-10% increase is expected in Q4. Realizations are still some way away from market leaders Greenpanel (less by 7-10%) but this gap will go away as ramp up of value added MDF production happens in the newly commissioned AP Plant. Given the bullish commentary by management on demand environment and new plant capacity ramp-up, quarterly EPS is likely to jump to and sustain at INR 6/share from Q4. This would mean the company is currently valued at 17x FY23 EPS (CMP 415). This seems cheap for a company with long term growth prospects such as Rushil.

The present debt/equity ratio is high at 1.5x. But this isn’t a major concern in my opinion for the following reasons:

  1. The nature of the beast is such that high capex is needed to setup a plant. Given that Rushil was in a lower EBITDA business of laminates before, it was natural it had to take on a large debt burden to do the capex of INR 450 Cr. Players like Greenpanel have gone through the same high debt cycle but now they are paying back debt at a rapid rate thanks to full capacity utilizations and good cash flow.
  2. A large part of the debt is German debt financed at 3.2% p.a. and the forex risk of the loan is more than 100% hedged by its exports. Blended interest cost p.a. for the company is low at 5.9%. Given that Rushil will operate at full capacity from Q4 onwards, cash flows and EBITDA will improve and therefore I don’t expect the debt to be an overhang on company performance.

The laminates business is a stable business with ~200Cr yearly run-rate and EBITDA ranging from 8-10%. PVC boards business is very new and is EBITDA negative. Therefore, not much to analyze in the other 2 segments.

I see the MDF industry and Rushil Decor especially as a great play on real estate revival in the medium term and secular MDF adoption as a replacement of plywood in the long term.

Disclosure: Invested in both Greenpanel and Rushil Decor with transactions in Rushil Decor in last 7 days.

24 Likes

Company has been meeting investors aggressively since the Q3 results. Hoping for a brokerage house to start coverage of Rushil Decor from this quarter after the meetings.

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Thanks @nirvana_laha for thread and industry view , some additional points on timing of margin trajectory change for Indian players and valuations stab at Rushil.

Tailwind and sustainability - structural or temp?

  • Q2 21 seems to be when exports became totally in-competetitive, avg price went 2-3X long term averages and has stayed there - thus no more dumping/low cost imports. local players started seeing high utilization and operating leverage - can this go back to pre corona situations, once shipping cost normalize? Per Rushil concall not a possibility in near future, tracking import data+ shipping costs can give us cue. Ofcourse India real estate revival is here and demand front looks good.
  • Among real estate proxy plays - this sector seem to have higher gross margins( e.g. compared to Tiles and sanitaryware, pipe players etc), has been able to show resilience in operating margins as well.

Possiblities for Rushil vis a vis Peer

  • We can see Greenpanel margins sustaining above 20% post Q2 20 ( again connected to above point on imports reducing dramatically) AND Improve from mid teen to mid 20s with demonstrated operating leverage. Fixed asset has been 1100 cr type since last few years, thus 1.6X asset turns at current quarterly revenue run rates.( MDF is major portion of revenue so for simplicity keeping that as key offering)
  • Annualized Q3 for greenpanel is 1700-1800 cr revenue, 450 cr+ EBDITA , and a market cap of 7100 cr+ I.e. 17X EBDITA type valuations and strong balance sheet with 1100 cr fixed asset.
  • Rushil - considering sizable shutdown of Karnataka plant for 2 months in Q3, New AP plant doing only base products( valued added products yet to start), a better measure will be Q4

Valuations

  • However using fixed assets of 600 cr for Rushil, at 1.6X asset turns( similar to peers) they can deliver 900-1000 cr revenue, assuming they start to catch up on EBDITA front with peers (Greenpanel at 25%) and deliver 15-18% over next few quarters- 150 cr -180 cr EBDITA is doable in FY23, given debt heavy balance sheet, at some discount to peers( Greenpanel at 17X) they trade at 13X-15X in FY23 - gives a market cap of 2000 cr to 2800 cr - current market cap is 1150 cr. Seems mkt is ready to give good valuations, as Q4 annualized margins at 80 Cr and market cap is 1200 cr( 15X).

  • Technicals on chart look strong as well, weekly chart below, 650 will be multi year breakout,

Anti thesis

  • Biggest risk seems global supply at lower prices if they come back.
  • Margins improvement trajectory - reduced gap with peers to be established
  • Frequent incrase in share capital base
  • Debt on balance sheet( just coming out of heavy capaex phase, should reduce with cash flow)

Disc - tracking

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Rushil seem to be in a very sensitive phase from balance sheet prospective ( based on my limited knowledge), this need to be kept in mind on allocation/sizing/risk

AR 21 notes

Summary / Key monitorable

  • Debt reduction is key monitorable
  • High utilization, mdf realization is key for cashflow
  • WC improvement- mdf ratio in product mix increase - a better WC mix
  • PVC though small but is negatively impacting bottomline
  • Forex hedging policy given high share of foreign loan
  • Rushil execution capabilities as key guy( he was instrumental in AP plant setup)
  • Cash flow, cash flow, cash flow
  • Competetitive intensity and any realization pressure
  • Hopefully no Capex in near term

With all of above bit surprising TTM 20X EBDITA valuations given by market, not far from peers. Lot of expectations are built in leaving no margin of safety at current prices.

Tracking

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@Dev_S Great scuttlebutt from the Annual report. The observations and the key risks you have highlighted will help in taking the discussion on Rushil Décor forward in the right direction. My overall response would be, you are absolutely right wrt where the puck is currently. Perhaps what the market is discounting is where the puck is going to be in 2 years’ time. Let me elaborate.

You are right, the company at present is quite debt laden with a Debt/Equity ratio of 1.5. Interest coverage ratio (EBIT/Interest) was also quite low at 2x last FY and will most likely end up at 1.75x for the current FY thanks to the Covid wipe-out in Q1. However, next FY, company should deliver an EBIT in the range of 57-87 Cr which would mean an interest coverage ratio range of 2.5-4x, a substantial improvement over current ratio. At full utilization of their new plant, EBIT should be above 100 Cr (Assuming INR 24000/cbm realizations and a conservative EBITDA of 15%) resulting in a comfortable interest coverage ratio of about 4.5x.

Also, w.r.t. how market values Rushil, interesting to look at the pre-covid period of Apr 2018-March 2020. In these 2 FYs as well Rushil had an interest coverage ratio of 2-2.3x, but the median PE during this period was still around 27x.

Rushil’s cash conversion cycle has been constantly declining and it was at 26 days in last FY. Working capital investment is going down y-o-y and CFO/Net income ratio is increasing in the last 2 years at a good clip. All this points towards a company/Management which is keenly aware of the importance of cash flow which is a great sign.

I think their global borrowing is adequately hedged by export revenues and therefore there is no net forex risk in the company.

As per my calculations, their annual USD borrowings repayment burden is around 4.5mn USD (2.5mn USD to Bank of Baroda and 1.8mn EUR to German Bank). Add an interest rate of 5%, their gross USD outflow should be capped at 4.8 mn USD per year. (Analysis via Note 15 in Notes section of Standalone B/S - each loan item is detailed here)

Against this, their reported revenues from exports last year were ~104 Cr INR which translates to ~13-14mn USD depending on exchange rates. So, if at all, Rushil has any forex currency risk its on the INR appreciating side as they have a net USD inflow. If USD is appreciating against INR, its good for Rushil. Since exports are 3x foreign borrowing outgo there is no material risk even if exports drop substantially.

As far as hypothecation of equipment and attachment of Chairman’s personal assets go, I think its a good sin for minority shareholders. It goes on to demonstrate the conviction and confidence the promoters have in the business. They have real skin in the game. Also, in terms of related party transactions, there was nothing that really sprung up at me. Two management controlled organizations (Surya Panels and Rushil International) transact substantially with the company but total revenue/COGS exposure to these companies is a small % compared to company revenue and COGS. Also Rushil International has provided substantial loans to the company but at very low interest rates of 3-4% (Page 131-132). This is too good to believe for me, but I re-did the calculations and they seem right.

You spotted the audit observation very well in terms of early recognition of revenue. The same observation was present in last FY’s AR as well. This either means the observation is not serious enough or that the Board is negligent in remedying it. There are no such observations for Greenpanel in its AR. This remains a monitorable but perhaps not very material.

To round off the discussion, let me present my base and bull scenarios for Rushil for FY23 and FY24:

I think a company like Rushil in the right industry (MDF) should get a stable PE multiple of 30x.

The key monitorables for me are:

  1. Import volumes from Asia and price realization in Indian market (Entire thesis is based on two pillars: 1. Secular adoption and growth of MDF in India 2. No cheap imports from Asia)
  2. EBITDA margin improvement as operating leverage plays out (Huge gap to bridge with Greenpanel)
  3. Cash generation and Interest coverage

Disclaimer: I am a shareholder with bullish views on MDF industry and this company, so analysis may be biased. No analysis/projections are recommendations/advise.

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Why will a MDF player get 30x Pe? Assumptions are too aggressive in my view. All being said, it remains a commodity business. Just go back in the past (2018). See the massive oversupply in the industry.

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Yeah this industry is cyclical and an investor has to be aware of supply-demand conditions to know when to enter and when to exit. New capacities of Greenply and Centuryply won’t be live substantially before FY24. So overcapacity conditions shouldn’t develop before FY24 end. Unless the import situation changes, which I have highlighted as a key risk. Even after that there won’t be a glut of supply. Look at the commentaries made by Greenpanel in its calls and interviews - it stresses that the industry has learnt from the supply glut of 2018 and is unlikely to repeat the same.

With the planned new capacities, industry is still expected to operate at 70%+ utilisation in FY25 as per commentaries by all the players. As long as utilization is 70%+ there is no material margin risk. Therefore, even after FY25, margins should taper gradually, not fall off a cliff.

These are the reasons why I think Rushil can get a 30x PE right now. Time to get out would be when oversupply conditions start emerging. But that’s not in the next 2 years hopefully.

This stock requires quarterly monitoring. Not an invest and forget kind of stock.

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Thanks for your views @nirvana_laha , key challenge in my view at current valuations is risk reward - market being forward looking has already priced in multiples( re rating part), what’s left on table is margin improvement driven bottomline growth related part. Infact any miss in such cases bring back swift corrections ( time /price or both). @Worldlywiseinvestors call out on this being a commodity at the end of day is a key factor to keep in mind.

Margins are broadly slave to utilization + product mix + realization. Rushil also is weakest balace sheet among all players currently.

What is still unclear to me is that longevity + sustainability of local MDF realization ( india) is significantly higher than global ( either incoming or being exported from India). How long this can go on structurally once ocean freight comes down+ supplies are being added , mgmt may believe it may not happen in near term, but these are same set of folks who have burnt fingers in past.

One explanation is that for now end industries are happy to share plywood vs MDF differential gains with industry and majority supply being organized players, its a pseudo cartel for lack of better words ( 30-40% mfg Cost difference per some interviews if I remember correctly - hence higher GM in mdf) - it’s a win win for both. However as supply keep growing it may change. Just my interpretation and could be wrong.

Would be happy to add on meaningful dips though.( esp in light of Balance sheet current state). For now tracking positions.

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One key area of analysis for me is the huge difference in gross margins between Greenpanel and Rushil. In 9M FY22, Greenpanel has a gross margin of 58% whereas Rushil has a gross margin of 47%. And this difference has consistently been there for the last few years. What explains this difference? There can be three causes of difference for gross margin difference IMO:

  1. Gross margins of MDF business are structurally better than plywood and laminates and hence Greenpanel has higher GMs because 80% of its topline comes from MDF. On the other hand, only 66% of Rushil’s topline comes from MDF.

  2. Greenpanel has structural sourcing advantages in MDF (Self owned plantations for e.g.) which enables them to keep sourcing costs low

  3. MDF gross margins are similar for both Greenpanel and Rushil, but Plywood has substantially better gross margins than laminates and this is what causes the difference in overall gross margins

Of all the 3 reasons, if reason #1 is the cause for GM difference, then that’s good for Rushil because the gap will be bridged to an extent when Rushil’s MDF contribution to revenue increases closer to 80% (Which is likely next year when both plants operate at full capacity for all 4 quarters). This will add to EBITDA margin above and beyond the operating leverage effect.

On the other hand, if reasons #2 or #3 are the cause for difference, then Rushil may not be able to bridge the gap. In my view, its unlikely that reason #3 is the actual reason because plywood and laminate %s of revenue are only 20% and 30% respectively in Greenpanel and Rushil. To cause a 11% difference in GM at company level is unlikely. Similarly, wrt reason #2, I haven’t heard of any structural sourcing advantages for Greenpanel in any of their interviews. So I hope the reason for difference is #1 and the GM difference starts to normalize as Rushil’s MDF revenues grow.

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One of likely factor is mdf product mix - Rushil as of now is not making any value added products, while Greenpsnel is. Both GM and ebdita should inch up as mix improves. Realization for value added products are much higher per Rushil concalls as well.

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Hi Ishmohit Sir, These are the projections that were tweeted by Varinder Bansal Sir on Twitter. The forecasts have been done by different financial institutions.

This does show how cheap Rushil Decor is in terms of valuations.

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Given key thesis pillar here is margins expansion, operating leverage and realization - some data points from Greenpanel concalls - they were the first in MDF journey and have had a longer experience than peers.

Here are some of relevant snapshots from concall



Infrences

  • First thing first , is MDF commodity, if yes what are margins - answer is evident from global perspective that it is commodity, realization around 14-15K/CBM . Optimist case margins being 14% and base at 10%. Each of players in India does some export to utilize capacities optimally. However India realization are superior and demand supply balance helping.

  • Domestic margins range 24 - 30% per last few quarters range( Greenpanel)- this again depends on Thick vs Thin(70:30) mix, Retail vs OEM mix(65:35), Sount vs North realization(1:1.25), alongside optimum capacities.

  • Although not in screenshots We will need to factor Value Added products in mix vs base MDF also as later fetches much higher margins.

Rushil case

  • South geo has higher suppliers capacities, will be relatively lower margins, more share of newer capacities coming in south.
  • Rushil realization Per last 2 Qtrs 21K(Q2), 25K(Q3) for base MDF, predominantly south Geo - indicates strong strong demand for now.
  • As of now making base MDF , value Added products can up the margins, to be seen if they can ramp up
  • Believe Rushil has higher share on OEM( per YT video of Omkara on Greenpanel), has lesser pricing power and relatively lower margins, need to check retail mix and ability to increase it

Net net in current scheme of things Rushil has few levers in control to increase margins - Operating lvg, Value added in mix, thick vs thin mix. Increasing retail mix vs OEM

Realization will be lead indicator to watch for demand supply balance, we know worst case ( international mkt prices), currently near term looks good till next major supply addition coming in by FY 24.Thats what most mgmt seem to be saying ss well, expansion is calibrated as well.

Oppotunity size 2.5K - 3K cr is opportunity size from 25K cr market in India for MDF at currently approx 2M capacities( majorly organized+ unorganized ), globally ratio of MDF is 80% and india mdf is still 20%, Per greenpanel - India is likely to go at 50:50 from current sub 20%, even if mkt expand slow - over longer term we are looking at 12-15K cr for MDF, will need 5X capacity increase at industry level, space for everyone to make money as long as supply grow rationally.

Small positions, studying

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Retail v OEM is no longer a factor in gross margins as last quarter onwards all players have equalized retail and OEM pricing. Refer Greenpanel Q3 concall screenshot below

Same was announced in Q3 concall by Rushil as well

When the entire industry moves to eliminate price differences in B2B vs B2C, one can imagine the demand visibility players are seeing in the near term.

Export realizations for Greenpanel in Q1-Q2-Q3 of FY22 respectively have been 15.6k/cbm, 18.9k/cbm and 21k/cbm - steep increases signalling global supply-demand mismatch and higher freight charges. Global realizations have been on average 30-35% less than domestic realizations in FY22. Monitoring this quarter’s global realizations will give us a good clue about how long the global demand scenario will persist. If there is a steep drop from 21k levels, then global demand-supply may have started normalizing relatively.

As on date (from Apr to Feb FY22), total imports of MDF (Thick - 44111400 and Thin - 44111300) into India are only ~130Cr. Adding sales margins of 30-40% on the import price, net sales value of imports would be in the range of ~200Cr. In contrast, sales by domestic players in the same period would be ~ 2700Cr (Greenpanel + Rushil + Century + Action Tesa; 9M sales are approximately 2200Cr, extrapolated at same rate for Jan-Feb). Therefore, imports as % of FY22 sales is only about 7-8%. In FY21, the import % was ~12-13%.


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Thanks @nirvana_laha for good data on spike in export realization, given sharp spike ( and being commodity), it makes one wonder and be more cautious if the story is similar to other commodities spikes ( metal and so on), or there is something structurally different about MDF

  • Let’s look at last decade of global demand supply scenario, here is a good resreach paper from a Brazilian Institute

https://www.google.com/url?sa=t&source=web&rct=j&url=http://www.scielo.org.mx/scielo.php%3Fscript%3Dsci_arttext%26pid%3DS2007-40182019000300413&ved=2ahUKEwiDp8_23Yj3AhWaqVYBHa7kDqYQFnoECBEQAQ&usg=AOvVaw2x79tCwewHoZwjDMlKhC_T

Here is summary

  • We can see only Asian countries being Thai and China. These were the times( till 2016), where India was yet to see any meaningful capacities of MDF

  • Supply side situation , pre corona world has capacities popping up all over world, including South East Asia, South asia( india in particular) - one can see smaller South East Asian countries have much larger capacities than India has today in 2019 itself.

https://www.wbpionline.com/features/brazil-and-china-continue-to-invest-egypt-has-new-project-7418430/

Current situation and what has changed in last year - THE BIG QUESTION

  • Demand side view - let’s look at viewpoint from a US player - late CY 21 view


  • Has war further affected this industry - appears so, given sizable MDF capacities exist in Europe as well( see table in first bullet point), there is impact on RM, energy
  • Now EU supplies being affected, south Asian and south east Asian countries do get benefits. How long is anybody guess - but such global disruptions takes time to ease

  • Let’s look at multi decadal trend of global MDF price index - last 1-2 year 90 degree rise is quite visible

Above post is only from global scenario, India has its own local demand playing out, however world is connected at end of day, tracking is key here.

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Omkara Capital & Varinder bansal understand the MDF sector quite well. Their video on the sector freely available on Youtube is very good to understand the sector.

So as per his prediction based on above table Rushil Decor with expected EPS of 53 & 58 in fy 23 & 24 remains one of the cheapest stock in MDF with capex both greenfield & brownfield in Vizag & Chikmaglur plant coming in time.

Mkt is a slave of earnings & if they are on track MFs & other instt investors are bound to come in stocks like Rushil, EKC, UML all small caps suffering in perception problems of promoters & hence available cheap . BETTER BE INVESTED WHERE PUCK IS GOING TO BE.

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Maybe market is looking beyond FY’24. Commodity companies rarelynget huge reratings - you buy at high PE and sell at low PE.

Pre cursor for Rushil - Mdf realization

significantly jump in mdf realization in Q4 per Greenpanel.

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Point to note though , due to covid waves in jan and elections greenpanel was not able to deliver on the volume front. Their MDF production volume was 78% . Rushil seems like a great buy around 450 . :grinning:

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Yes, will wait for the Greenpanel concall to understand how much demand moderation was due to higher prices and how much was due to Covid and elections. Key monitorable.

Recent rate hike by RBI is not great news for Rushil with its high debt. I hope Management aggressively starts paying down debt now that considerable free cash flows should be available. Debt burden is the only big risk for Rushil at present.

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Not to mention if the real estate cycle slows down due to consistent rate hikes . That would be a major risk for all MDf players also.

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