Indian wood panel industry, growth drivers and present trends

• Current market scenario in the Indian plywood industry
• Growth in the housing sector and rapid urbanisation to provide the boost
• GST rationalization to reduce price difference between organised and unorganised players
• Current market scenario and growth prospect for the MDF industry

The wood panel industry includes plywood sheets, engineered wood panels (MDF [Medium Density Fibreboards] furniture board and particle board) and decorative surface products such as laminates.

The Indian wood panel industry is estimated to be around INR 28,000 crore and is growing at the rate of 10-12% annually. This is driven by a healthy demand for wood panels, mainly for new housing construction (~90% of the total demand) and the remaining (10%) from renovation activity.

Plywood is the most significant product in terms of the overall demand for wood panels and the market size for Indian plywood industry is approx. INR 18,000 crore. In the last five years, the segment witnessed a CAGR of 6-7%. The Indian plywood industry is highly fragmented with ~75% of the market share controlled by the unorganised sector, while the residual 25% is with the organised segment.

Moreover, among the few organised players; Century Plyboards India Ltd. and Greenply Industries Ltd. are the two pan India companies which dominate the organised market with a share of 52% (26% each). Kitply, National Plywood and Uniply are some of the other players in the sector, but none of these companies has a market share of more than 5%. Further, unorganised players compete with organised players on prices due to the tax advantage (although these offer low-quality products).

Demand for plywood to remain healthy:

• The growth in the plywood industry is highly correlated with the progression in the housing sector. The housing sector in India contributes around 5-6% to the GDP. The segment is expected to grow at a CAGR of 11.2% during  FY18-20. The central government is undertaking certain decisive measures to reduce the housing shortages in the country, which at present is 60 million units. The central government’s policy (Pradhan Mantri Awas Yojana) to ensure ‘Housing for All by 2022’ will be in a position to boost the revenue for the plywood sector. In the next seven years, there is a projection that 110 million houses will be built across 205 cities in 9 states. The implementation of the Real Estate Regulatory Act (RERA) will pave a way for a speedy settlement of housing disputes and would amplify foreign and domestic investments due to increased transparency. This could improve buyers confidence and increase the sale of houses. In addition, the growth of retail, hospitality and healthcare sectors have raised the demand for the commercial real estate. Additionally, as the FDI in real estate has been relaxed, foreign investments are expected, these will cater to the demand and would elevate the commercial real estate market.

• Another factor influencing the plywood industry is the rapid urbanisation. Presently, roughly 33% of the overall population in India is settled in urban areas. This number is anticipated to reach 40% by 2030. The growth in the replacement market will also provide a boost to the plywood industry as people would strive for a better standard of living as their per capita income increases. Currently, the replacement cycle for furniture is estimated to be 8-10 years, but this number is likely to come down to 5-7 years. This would ensure that the replacement market grows at a steady pace.  

In the past five years, the organised segment in the plywood industry grew at a CAGR of 12% and thus, outpaced the industry as a whole. This shows a clear trend towards organised segment, which is gaining the share from the unorganised sector. This tendency is projected to continue as consumers are showing a clear preference towards branded products. The organised players such as Century and Greenply have consistently invested close to 3% of their revenue on advertising and brand building. The organised players also have an advantage in terms of volume and supply chain. These players provide better product innovation, wider choices and warranties. It influences consumers to pay a slight premium for a quality product. This behaviour is going to be more prominent in the future as the price difference between organised and unorganised segments will drop considerably post-GST (Goods and Services Tax) rationalization on the plywood from 28% to 18%.

Price differential gap between organised and unorganised players will narrow down post-GST implementation

In the pre-GST era, plywood dealers paid excise duty and VAT (Value Added Tax). Furthermore, excise duty was charged at a rate of 12.5%, VAT charges were 12.5% in most states and 5% in few states. Dealers received input credit for VAT, but excise duty was a cost since dealers did not get an input credit for the excise duty. This was applicable to the organised segment of the market, but unorganised sector did not incur the cost as the turnover was generally maintained below INR 1.50 crore. In the post-GST phase, the central GST will replace excise duty and state GST will replace VAT. Further, both CGST (Central GST) and SGST (State GST) will provide credit benefits to dealers. Hence, dealers' cost of purchase for branded plywood will reduce by 10% due to these credits. This reduction is significant and is bound to influence the purchase of high-quality branded products by paying a minimal premium. Addedly, the exception limit for the GST is considerably lower at INR 20 lakhs which means that most of the unorganised players will fall in the GST net and will further reduce the price differential.

In November 2017, there was a revision of the GST on plywood from 28% to 18%, this could see a strong shift from cheap unorganised to organised branded plywood.

Increasing focus of the organised players towards MDF where unorganised sector’s presence is nil

MDF which is considered as a high-quality substitute for low-end plywood is made by break down of hardwood or softwood residuals into wood fibres, combining this with wax and a resin binder through heat press. A high-quality MDF board is 50% cheaper than a high-end plywood and is moisture resistant alike plywood. It is nearly 5-10% more expensive than the cheapest priced local plywood. At present, the MDF makeup around 6% of the Indian plywood and panel industry and is also the smallest segment. Globally, the MDF to plywood consumption ratio is 65:35, but in India, the ratio is skewed in favour of the plywood at 10:90. This number suggests that there is enough room for the growth of MDF in the country in the future. Further, unlike plywood, MDF is a capital-intensive business and thus, unorganised presence is nil in this segment.

Indian MDF industry has a market size of nearly 1,600 crores. In the past five years, the industry grew at a CAGR of 20%. Century and Greenply dominate the local MDF plywood market with a share of 26% and 23% of the current MDF capacity. Presently, roughly 30% of the MDF is imported but it is expected that the share of imports will decline to 15% by FY20 as Indian companies ramp up the MDF capacity.

The shelf life of MDF is considerably lower than plywood. Thus, MDF furniture is generally replaced in a period of 5-7 years as compared to the plywood furniture which lasts for more than 20-25 years. Thus, this shorter replacement cycle provides another avenue for the growth as MDF acquires more market share in the upcoming years. Further, another demand driver for MDF is the rising requirement for ready-made furniture. It is also more suitable for aesthetic purposes over other substrate products as it has strong carving capabilities.

To conclude, Indian wood panel industry is projected to benefit from the growth in the housing sector and through favourable government policies. A rapid urbanisation, high per capita disposable income and a shortening of the replacement cycle will also increase the growth in the sector.

In the plywood segment, the organised companies; primarily Century and Greenply are bound to gain from the reduction of a price difference between branded and inexpensive plywood manufactured by unorganised players due to a rationalization of the GST from 28% to 18%. The growth in the organised sector will also be driven by advertising investment, brand awareness and assurance of a better-quality product at a slight premium. In the present global scenario, Televisory expect MDF to become more prominent in India as major companies increase their capacities. Televisory believe that the 30% MDF import number will reduce and anticipate improved margins for both the Century and Greenply as MDF is a high margin business.