No I haven’t done the potential earnings compression analysis. There are 2 clear triggers for short-to-medium-term earnings compression - significant capacity coming online starting FY24 and imports potentially increasing towards or close to pre-pandemic levels if freight rates continue to normalise.
IMO its too complicated to model earnings compression as there are too many factors at play. I am just looking at current price action for Greenpanel and Rushil and adding to it the borrowed knowledge of experienced investors who have seen multiple commodity cycles play out (I have no lived experience of playing a commodity cycle yet), to hazard a guess that evaluating Rushil on the basis of annualized Q1-FY23 EPS may not be how market will value it.
Having said that I still feel Rushil is undervalued even considering the potential earnings compression. Also, the earnings compression is likely to be temporary - maybe for a few quarters - as growth in demand is expected to absorb the supply that is coming online. Unless of course, there is a domestic demand slowdown or an import glut due to knock on effects of a global slowdown, both of which at present are not 0% probability events at all.
All this is of course in the medium term. If somebody has a 5 year horizon for Rushil, I am sure all this won’t matter. That’s because there is a secular trend of MDF adoption in India and there is still massive headroom for MDF to grow and replace ply. I don’t have a 5 year horizon however and hence I worry about timing my exit. During the next 5 years, Rushil’s price will significantly fluctuate in tandem with demand and supply situations. I will try to time an exit and time a re-entry during these cycles. Best case I succeed, worst case I learn a few key lessons on commodity cycles. My position size is under control.
PS : I may be completely wrong in my analysis. Invested and keeping my eyes on several metrics to gauge demand slowdown/margin compression.