After losing over half of its investor wealth just in the last 1 year, experts now see a strong recovery in building materials firm Greenpanel Industries.
While the stock performed exceptionally between mid-2019 and May 2022, skyrocketing 2400 percent, from ₹25 to its record high of ₹625, it has been on a downward trend since then. It has tanked 56 percent from its peak hit in May 2022.
It has also given negative returns YTD, down over 20 percent in 2023 so far. It has lost over 4 percent so far in March, extending losses for the fourth straight month. It shed over 13 percent in February 2023, nearly 4 percent in January 2023, and around 13 percent in December 2022. The stock hit its 52-week low of ₹265 last week (March 15, 2023).
Greenpanel Industries is a small-cap stock with a market cap of ₹3,316 crore. The company is a manufacturer of medium-density fiberboard (MDF), plywood, decorative veneers, flooring, and doors. According to the company's website, it is the largest MDF manufacturer in India as well as the largest MDF manufacturer in Asia. The company's manufacturing plants have a combined annual capacity of more than 5,88,000 cubic meters of MDF.
Another reason for the recent decline was its weak December quarter results. In Q3FY23, the company's consolidated net profit declined by 40.57 percent to ₹37.5 crore versus ₹63.1 crore in the same period last year. Sequentially, the net profit fell 48 percent. The fall in net profit was due to sluggish demand in the US and Europe and growing MDF imports into India.
The management stated that demand for MDF remains strong, but higher imports have impacted domestic demand for the company. Its revenue from operations in Q3FY23 also fell marginally by 2.36 percent YoY to ₹416.1 crore, while the operating profit came in at ₹92 crore, down 17.11 percent. Meanwhile, its EBITDA margin fell to 21.90 percent, a drop of 428 bps YoY.
However, recently, domestic brokerage house Systematix Institutional Equities retained its ‘buy’ call on the stock with a target price of ₹455, indicating a 68 percent potential upside in the stock from its current market price of ₹270.95, as on March 20, 2023.
The brokerage believes that while there are concerns regarding the industry, the 50 percent slide in the stock seems overdone.
According to the brokerage, India’s MDF industry is well placed to replay its over 30 percent CAGR seen during 2018-2022, to flourish into an over ₹15,000 crore industry over the next five years. Increasing acceptance of the product and its growing applications (e-commerce, packaging, white goods etc., apart from readymade furniture) should drive this growth, it noted.
The brokerage further pointed out that high input costs (resin, timber, etc.) and healthy collaboration among leading MDF players have helped them maintain product prices in the domestic market, notwithstanding the tough competition from imports.
The MDF industry is growing at a healthy pace even in the prevailing challenging environment, where inflationary pressures are hurting consumer sentiments. However, rising MDF imports have limited the volume growth of domestic players, it stated. Imports could fall in the next 6 months on better global demand (EU, US, etc.), predicted Systematix.
The brokerage likes Greenpanel for its market leadership in the fast-growing MDF industry (finding support from the rising acceptance, strong demand revival in housing units and readymade furniture) and robust financials.
Notwithstanding the ₹600 crore capex, the brokerage believes that the company's RoE (return on equity at 19 percent currently), RoCE (return on capital employed at 23 percent currently) and FCF (free cash flow) should remain healthy in the future.
"The sudden rise in demand for readymade furniture during COVID drove a strong turnaround in Greenpanel's financials and led to a re-rating of its valuations, resulting in its share price generating hefty returns. However, the scrip has corrected 50 percent since its peak, on concerns that demand would moderate, margins could slip and competition could intensify owing to rising imports and huge capacity additions in India’s MDF industry over the next 1-2 years. While we acknowledge these concerns, these are transient, in our view, and believe the correction in the scrip is overdone," said Systematix.
"We find Greenpanel's scrip compelling at ~11x FY25E P/E. Hence, we maintain BUY, with an unchanged target price of ₹455, based on 21x/18x FY24E/FY25E P/E," it added.
Earlier, another brokerage ICICI Securities had also maintained its "buy" call on the stock with a revised target price of ₹532 apiece from ₹668 earlier. The new target indicated a significant upside of over 96 percent.
ICICI Securities stated that the company has near-term demand headwinds led by high imports and lower prices of MDF in the export market. However, the company plans to negate it over the long term by increasing distribution and higher branding.
"We continue to like the company for its strong net cash balance sheet, leadership in the MDF segment, which has strong growth prospects, and attractive valuations," said the brokerage.
12 analysts polled by MintGenie on average have a 'strong buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
