Excess Capacities to Hit Near-term Profitability of Greenply, Century and Others: Report
Overcapacity in the medium density fibreboard (MDF) industry will persist till FY21-22 at least. Due to the overcapacity, MDF prices to remain suppressed for the rest of current financial year, says a research report.
In the report, India Ratings and Research (Ind-Ra), says the MDF sector has witnessed capacity growth of around 200% through a greenfield and brownfield project in the last couple of years. The total capacities in India, which stood at about 0.5 million cubic meters (CBM) in FY16-17, are likely to cross 1.5 million CBM by the end of FY18-19 and 1.8 million CBM by FY21-22.
In FY18-19, the industry witnessed capacity addition from Greenply Industries, while FY20-21 will see Rushil Décor Ltd (RDL)'s greenfield capacity become operational.
"Given the overcapacities, the sector has witnessed a price correction 10%-12% in the first two quarters for FY18-19. The agency expects prices to remain suppressed for the rest of the year because of overcapacity. Known brands, however, are likely to fetch a premium of around 10%-15% in line with historic trends," it added.
The government has supported the MDF industry by levying an anti-dumping duty (ADD) up to $64.35 per CBM on imports of thick MDF till July 2021 from China, Indonesia, Sri Lanka, Malaysia, Thailand and Vietnam, which have together accounted for a major proportion of India's thick MDF imports historically. This measure has provided some respite to the industry.
However, Ind-Ra says post-July 2021 the ability of manufacturers to convince the ministry to extend the duty further will be critical. Imports of thin MDF are duty-free and do pose a threat to domestic producers.
From its interactions with industry players Ind-Ra says that the volume of thin MDF business in India is relatively low. Hence, the absence of ADD does not have a major impact on domestic players.
Based on discussions with industry players, the ratings agency says it understands that the average cost of raw material (agro wood) is Rs1.4-1.5 per kg for global players and over Rs2/kg for Indian producers. "There is abundant availability of agro-wood globally. However, restrictions on exports agro wood in some countries and high freight cost have adversely affected the ability of Indian players to import the product," it added.
The MDF industry is dominated by a few players such as Greenply Industries, Balaji Action Buildwell, RDL. In addition, Century Plyboards India Ltd (CPIL) has set up a new unit.
These players, along with some other smaller capacities and imports about 30%, made up the entire MDF industry in India in FY17-18. "Historically, the total fixed cost (excluding interest expense) for established players in the MDF segment has accounted for 15-20% of their revenues. Barring RDL, which has raised large debt for its upcoming facilities, all these players have low debt on their books," Ind-Ra says.
According to the ratings agency, given the low fixed costs and debt, at an average capacity utilisation of around 70%-75%, these players will be able to cover their fixed costs as well as scheduled debt payments, including interest and instalments.
"Players with higher debt levels will need higher-than-average capacity utilisation. Capacity utilisation in this industry was more than 95% in FY17-18, indicating a cushion of 20-25% decline. The agency expects MDF oversupply of 35%-40% till FY21-22, as the anticipated annual industry growth of 11%-12% will be much lower than the rate of new capacity growth," Ind-Ra added.
Ind-Ra says it expects players to record deterioration in their credit profiles as they would have to resort to cuts in prices and margins to survive. This could result in rating downgrades/changes in the outlook to Negative.