Why this brokerage is betting big on wood panel segment & its top stock recommendations

Amid reasonably strong underlying demand and improvement in home improvement activity, coupled with stronger balance sheets, JM Financial continues to remain bullish on the wood panel sector.

The brokerage firm in its recent report highlighted that the wood panel companies delivered 2-24 per cent growth in volume (3-year CAGR basis) on the back of robust underlying demand from the real estate sector and home improvement activity. Also, a healthy demand environment enabled these companies to effectively pass on rising input costs, which led to an EBITDA margin expansion of 90 bps YoY.

The medium-density fiberboard (MDF) segment continued to outperform the ply/laminate segment led by steady demand from the OEM segment, distribution expansions, increasing applications/ acceptance, and subdued imports. Operating margins, however, were impacted by rising raw material costs and delay in price hikes.

"Wood panel companies’ managements are optimistic on future demand given the sector tailwinds and have guided for 10-15 per cent volume growth in plywood and 15-25 per cent volume growth in MDF in FY23," it said.

Greenpanel, Century Plyboards and Greenply are among the top picks and the brokerage firm also maintained a 'Hold' rating on Greenlam given its fair valuation. "Century ply's performance was significantly better than that of Greenply. The companies expect underlying demand to remain strong in the medium term given the tailwinds in the real estate sector. Greenply/ Century has guided for 10/15 per cent volume growth in the ply segment," it added.

For Century Plyboards, it noted that Core plywood/MDF/laminate volumes delivered a strong performance as it grew by 15/7/11 per cent, respectively, on 3 year CAGR on the back of sustained demand momentum and pick up in real estate absorption. The company also took 20 per cent price increase in MDF and 15 per cent in particle board in FY22. It has given a target price of Rs 700 on the stock.

"Greenpanel's MDF volume declined 11 per cent YoY (+3 per cent QoQ, +24 per cent 3 year CAGR) on a high base and weakness in Jan-Feb due to the covid 3rd wave. Management is evaluating capex proposals for the MDF segment and may finalise by 1HFY23," it said. The target on this stock stands at Rs 630 per share.

For GreenPly Industries, the brokerage house noted that the contraction in margins was due to a delay in passing on the price increase and higher ad spending. However, it said that the management is optimistic about achieving 10-11% volume growth in FY23 on the back of healthy real estate absorption, strong demand from smaller cities and market share gains from unorganised players. It has given a target of Rs 250 on this stock.

If you compare it with the current market price, Century Plyboards, Greenpanel and GreenPly stocks have an upside potential of 33 per cent, 35 per cent and 44 per cent, respectively.

Lastly, JM Financial said that the price inflation in chemicals is emerging as a key monitorable (constitutes 20 per cent-50 per cent of RM cost for Ply, Laminate and MDF categories) given the sharp rally in Brent crude prices. The companies have also indicated that further price hikes are likely given the rise in input commodity prices.

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