In a recent update, Prabhudas Lilladher has reaffirmed an ‘Accumulate’ rating on Greenpanel Industries, adjusting the target price to Rs450 following a challenging Q2 FY25 performance. The company faces competitive pressures and elevated raw material costs, particularly in the MDF (Medium Density Fiberboard) segment, impacting its margins and overall profitability. The research house notes signs of gradual improvement with targeted volume growth and cost efficiencies expected in the second half of FY25. Here’s a breakdown of Prabhudas Lilladher's assessment of Greenpanel Industries.

Q2 FY25 Financial Highlights

Revenue and Profit: Greenpanel’s net sales declined by 15.5% YoY to approximately Rs3.4 billion, led by reduced volumes and lower pricing in the MDF segment due to domestic competition and rising timber prices. The plywood segment also faced a 14.7% YoY revenue decline, contributing to an overall drop in profitability.

EBITDA Margin: EBITDA margin compressed to 8.9%, down from 17.3% YoY, reflecting a reduction of ~850 basis points. Key drivers for margin contraction included increased freight costs, limited export opportunities, and higher input costs.

PAT Decline: Profit after tax (PAT) plunged by 54.9% YoY to Rs185 million, largely impacted by declining revenues and constrained EBITDA margins.

Challenges in the MDF Segment

MDF Volume Decline: MDF segment revenues dropped 15.6% YoY to Rs3.0 billion, with volumes contracting by 17.9% YoY due to competitive pricing domestically and a decrease in exports.

Domestic and Export Realization: The domestic MDF realization dropped by 4.4% YoY due to intense price competition, while exports were impacted by limited container availability and elevated freight expenses, reducing margin potential.

Timber Prices and Supply Chain Pressure: Rising timber costs have significantly affected Greenpanel’s production expenses, with North and South India timber prices up by 16.7% and 20.4% YoY, respectively. The management expects some price relief only from FY26 when new timber crop supplies come in.

Company Guidance and Strategic Focus

Volume Growth Targets: The management forecasts domestic MDF volume growth between 15% to 18% YoY for H2 FY25. This growth is expected to be bolstered by a focused push in the domestic market and gradual expansion in exports.

Cost Control and Dealer Incentives: To counter competitive price pressures, Greenpanel has introduced a 4% incentive scheme for dealers, aiming to encourage volume growth in a challenging market environment.

Expansion of MDF Capacity: The company is also enhancing its MDF production capacity, with a new plant expected to be operational by the end of Q3 FY25. This facility will achieve around 50% operational capacity by FY26 and reach up to 80% by FY27.

Revised Estimates and Financial Projections

Revenue and EBITDA Forecast: Prabhudas Lilladher forecasts a revenue CAGR of 15.9% from FY24 to FY27, with the MDF segment contributing a volume CAGR of 15.2%. However, the report indicates a consolidated EBITDA margin for FY25 is expected to remain low at 13%, given the prevailing cost pressures and competitive landscape.

Earnings per Share (EPS): The EPS is estimated to increase to Rs16.6 in FY26 and Rs22.1 in FY27, with significant growth projected for FY26, aligning with cost efficiencies and expanded production capacities.

Valuation and Target Price

Prabhudas Lilladher maintains a target price of Rs450, valuing Greenpanel at 20x FY27 earnings estimates. The firm’s ‘Accumulate’ rating reflects a cautiously optimistic outlook, based on the expectation that Greenpanel’s strategic initiatives will yield incremental improvements in the latter part of FY25, leading to more substantial gains from FY26 onward.

Long-Term Investment Perspective:

Greenpanel’s upcoming production facility and capacity expansion should enable the company to meet rising MDF demand domestically while addressing current production bottlenecks.
Cost-reduction strategies, including backward integration and dealer incentives, could support margins in the medium to long term.
With its geographical expansion and operational enhancements, Greenpanel is well-positioned to capture potential growth in the MDF and plywood markets, albeit facing a challenging immediate future.
While short-term challenges persist, Prabhudas Lilladher’s revised assessment reflects confidence in Greenpanel’s capacity to overcome these hurdles. Investors are advised to accumulate the stock, considering the potential for value appreciation as the company’s strategic shifts materialize.