Emerging opportunities in MDF Industry

Published by Sharekhan Education | November 17, 2022

Amit Pathak | Sharekhan Education

Introduction:

Medium-density fiberboard (MDF) is an engineered wood panel consisting of eighty percent wood fiber. It has a non-directional grain structure, making it an ideal wooden material for cutting and drilling processes. MDF finds usage for decorative purposes owing to its flexibility and can transform into any desired shape. It has attractive aesthetics, is easier to paint, and is environmentally friendly. These properties make it an excellent alternative material for applications where moisture-resistant and very high-impact-resistant are not the main attributes required. It gives high-quality finishing making it apt for manufacturing modern, branded, low-maintenance furniture. 

The use of MDF is increasingly finding market acceptance over plywood. Globally, the MDF to plywood consumption ratio is 80:20, but in India, the consumption ratio is 20:80. As per estimates, this ratio in India will improve to 50:50 by 2030. MDF is priced 50% cheaper than premium quality plywood and 25% to 30% cheaper than mid-range plywood. The life cycle of MDF is around 10 to 15 years which is much higher than cheap plywood. MDF is estimated to gain market share of low & medium-grade plywood (which constitutes 85% of the plywood market in India). This data suggests that there is enough room for the growth of the MDF sector in India.

Key Growth Drivers:

The growth drivers for the sector include the new work-from-home model. Consumers are now aspiring for better homes with branded furniture. With higher disposable income, the span of the home furniture refurbishing cycle has gone down from 15-20 years a generation ago to 7-8 years. IKEA is the global leader in ready-made, new-age, and cost-effective furniture. It procures around 20% of its products from India and is estimated to grow to 30% over the next two years. There is clear visibility of the expansion of export opportunities.

 The organized sector constitutes close to 70% of the MDF market in India. The threat of the unorganized sector is not a concern in this segment, as the business is capital-intensive. The quality of the product is inferior for unorganized players as they mostly use second-hand machinery.

 

About Greenpanel:

In this space, with a market share of 28% in the MDF, Greenpanel is the market leader in India.  Based on consensus estimate, it is expected to clock Revenue/EBITDA/ PAT CAGR of 17%/15%/ 23% respectively over FY 22-24E. The company has shown sharp improvement in its working capital cycle from 60 days in FY19 to 16 days in FY22 due to its focus on superior capital allocation. The company has the potential to tap into the opportunity unfolding on the strength of its product led by import substitution, growing domestic demand, and export opportunity for MDF.

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