Understanding MDF - real estate proxy on steroids? 🪵
Outstanding housing loans have grown at a strong double digit growth over the last few years, signaling a upward cycle in the space in the years to come
FY21 15,00,094cr
FY22 17,05,233cr (+13.6%)
FY23 19,49,920cr (+14.3%)
Naturally this has got focused real estate investors quite excited. But most people shy away from investing in RE directly for obvious reasons.
But can we get exposure to the growth via a proxy - sectors that will also grow as real estate grows, but make for better investments
The wood-panel industry in India, which includes plywood, laminates, MDF, Particle board and veneer is currently dominated by plywood.
Because constructed houses will need furniture - the sector's growth often follows the RE growth in the country with a lag.
India's wood-panel industry however is quite different from the world, and it is important to understand the cause of these differences when we're trying to truly understand the sector.
Global vs Indian wood-panel mix
Global: Plywood: 20%; Non plywood: 80%
India: Plywood: 54%; Non plywood: 46%
Prima-facie there are three major reasons that explain this start difference:
1. Plywood is labour intensive while MDF, Particleboard etc are quite capital intensive. India historically has had abundant labour.
2. The furniture market in India has carpenter pay linked as a mark-up to material cost (driving his incentive for the higher cost material) with a focus on durability
3. MDF was a relatively late entrant in the Indian market, with most players scaling capacity after 2010.
This however is slowly changing -
1.Younger customers are now comfortable booking furniture online paying for the unit as a whole and prefer look and form over lifecycle.
2.The price difference (30-50%) is also impacting the purchase decisions of middle-income customers.
3.The economy playwood (30% of plywood market, 100% unorganized) is ripe for disruption from MDF
4.Parallelly, MDF players have also materially scaled up capacity and are ready to cater to much wider demand.
MDF is also made from shorter lifecycle Eucalyptus and Acacia trees that grow within 3 years, making the product relatively more environmentally friendly.
As a result players in the space have been able to scale both their volumes and realizations well, while maintaining strong operating margins.
Here's how listed players have ramped up volumes, realizationa and EBITDA over the last few years
Greenpanel (Volume, Realization, EBITDA)
FY20 98.6, 19570, 22.4%
FY21 138.0, 21739, 28.6%
FY22 495.0, 26850, 30.9%
FY23 506.7, 30283, 27.3%
Rushil (Volume, Realization, EBITDA)
FY20 83.5, 19733, 13.6%
FY21 77.5, 10041, 11.6%
FY22 176.5, 24416, 14.8%
FY23 236.5, 26234, 21.6%
Century (Volume, Realization, EBITDA)
FY20 153.1, 22874, 24.7%
FY21 147.2, 24396, 25.8%
FY22 177.9, 31215, 31.7%
FY23 185.3, 34406, 27.3%
The other large player in the space (Action) is currently unlisted.
Together these four control nearly 70% of the total MDF market in India, making it a largely organized market. All four of them continue to add capacity to cater to the growing MDF market in India.
But no good thing comes without challenges. The MDF market has two main challenges that it can face
1. Over capacity
2. Cheap imports
The over-capacity problem was faced by the industry back in FY18, where a sharp jump in capacity driven by over-optimism followed by muted demand had dented margins for almost every player in the industry.
Imports
~45% of India's MDF demand is from South India. This region is also very susceptible to dumping because inland logistics costs are relatively low in these regions.
For the international players, there are two major factors that determine how much they ship out
Their own furniture industries: Growth of domestic furniture industries in SE Asia have brought down export pressure, atleast in the medium term.
Freight cost: Rising freight cost post COVID added reduced the competitiveness of their products in our markets.
Imports had fallen from 249 MT in FY18 to just 59MT in FY22, but have since begun increasing as freight costs come down, increasing pricing pressure, atleast on the southern MDF players.
Zooming out: Broadly the sector will always have to deal with a sword of suppressed pricing over its head - either due to supply or imports. This fear is also reflected in the multiples these businesses command.
That being said, as more Indians move into newer and bigger houses, and aspiration and furniture life shortens replacement cycles, the demand for wood-panels and MDF will keep growing, building a strong demand growth story!
Disclaimer: This is a purely educational post and is NOT intended as investment advice.
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