Shares of furniture companies—plywood, medium density fibreboard (MDF), particle board and laminates—have underperformed over the last one year. But this could be a good time to look at these companies, particularly MDF, according to Balaji Vaidyanath, Director and CEO of Chennai-based NAFA Asset Managers, which manages around Rs 300 crore. Vaidyanath’s core strategy is to identify stocks in sectors where a change in consumer preference leads to market share moving from unorganised players to organised players. The MDF industry within the home improvement pack is one such.
MDF is an engineered wood product made by aggregating wood fibre with wax and resin into panels by applying heat and pressure. Rating agency CARE estimates the size of the MDF industry in India at Rs 4,000 crore and growing at 15 percent annually.
Changing preference
Vaidyanath is betting on the rapid shrinking of home renovation cycles, and the growing acceptance of lighter furniture as households move away from plywood towards MDF.
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“Home renovation cycles have shrunk to 8-10 years now, and people are now buying very light and sleek furniture, compared to very heavy and bulky furniture, earlier,” said Vaidyanath.
“If you look at any Western economy, 70-80 percent of their furniture is MDF, only the balance is plywood. In India, it is the other way round,” he told Moneycontrol in a freewheeling conversation.
Vaidyanath said MDF was 30-35 percent cheaper than plywood and growing almost twice as fast the plywood segment. Market research IMARC pegged the size of the plywood industry at roughly Rs 21,000 crore at the end of FY23.
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“Previously, there was lot of skepticism about MDF furniture as the common view that these products are fragile and only suitable for European markets,” he said.
“I have spent a lot of time visiting IKEA showrooms in Bangalore and Hyderabad, and there are enough signs of growing customer acceptance for value for money furniture,” he said, adding that MDF products were a big hit with commercial establishments because of their low costs.
“In the short term there will be demand supply imbalances, but if you were to take a long term view, MDF can garner a significant market share ,” he said.
Valuations
The other point in favour of MDF stocks was that unlike most other home improvement companies, these stocks had not seen a massive expansion in their price earnings multiple.
“If you take a ceramic industry or tile industry, it is not a specialised line of business and there is plenty of competition from unorganised players. Yet that has not prevented a Kajaria or Cera from being rerated. Around 10-15 years back, these companies quoted at a PE of 10, today they quote at 45-50 times, Vaidyanath said.
“In comparison, you are getting some of the good MDF companies at 19-20 times,” he said.
Headwinds
The near term concern for the sector is cheaper imports since 2021, Vaidyanath said.
“And there is also some amount of capacity expansion that has happened within the industry itself. For that to get absorbed is going to take some time, and that explains the time correction in the stocks as the market is waiting for the earnings to catch up,” he said.
Contra approach
“The only times when you get stocks at a reasonably cheap or a reasonable valuation is when there is a distress in the sector or the company, it can be due to economic reasons or it can be due to reasons such as industry specific reasons or company specific reasons like when the company is in the process of a huge capex,” Vaidyanath said.
“I think both are happening in this particular sector. So, but with this demand scenario, over a period of time, things should surely start looking up,” he said.
He also said that at a time when most promoters were selling shares, the promoter of Greenpanel has been buying shares of the company over the last month.
“In a market when there is a huge amount of selling in other sectors, when there is some amount of buying happening, it probably indicates the promoter confidence,” Vaidyanath said.
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