Plywood firms in India see flat future despite GST lift

The future hasn’t panned out the way organised plywood and particle board makers envisaged post the coming of the Goods and Services Tax (GST) regime.

Benefits of the new tax regime which was supposed to accrue to the industry leaders have played out, but slowly, and in bits and pieces.

The sector was largely unorganised where small units controlled 75 per cent of the market before GST while there were a handful of organised players having the balance 25 per cent mostly controlled by two listed entities: Century Plyboards and GreenPly Industries.

The GST system was supposed to change all that, making the moderately sized players in the unorganised space start paying taxes while forcing the smaller ones above exemption limits for GST to close down, thus benefitting the larger players.

Things haven’t panned out that way.

“The benefits of e-way bill and GST implementation have been limited as only 25-40 per cent of invoicing is formally processed in the sector,” says a research report from BoB Capital.

“The GST has done better, but a long way to go. Even in our product we see that tax avoidance has come down, but not to the level we have been expecting or we desire,” Sajjan Bhajanka, chairman Century Plyboards had said during a conference call post its third quarter earnings.

On the brighter side of GST’s impact, the organised players, which were earlier subjected to a cumulative 30 per cent tax incidence, are now paying only 18 per cent, while the most of the smaller units, which were earlier exempted or avoided tax, are paying up thus creating some sort of level playing field for the sector.

However, due to the overall weakness in the construction sector leading to poor capacity utilisation in the particle board market, the sector is looking at a difficult time ahead.

“We see a continuing supply glut in the medium-density fibreboard (MDF) market in India. Realisations and margins are likely to remain under pressure,” global research house CLSA has said which has just downgraded CenturyPly to sell.

Greenply’s South Indian capacity is operating at just 30 per cent capacity utilisation while Century has put its MDF capacity addition plans on hold, the report says.

For GreenPly, overall capacity utilisation in MDF or medium density fiberboard during the nine months was at 48 per cent.

The complete U-turn in CLSA’s optimism about the MDF sector is interesting.

A year back, the global research house made a Buy recommendation on the stock saying it is bullish on the sector with India’s furniture market “undergoing a major shift with a move towards readymade furniture and a rising preference for MDFs over plywood in line with global trends”.