CRISIL Research expects the profitability of small and medium enterprises (SME) in the plywood industry to be under pressure because of high fragmentation and a gradual shift in demand towards medium density fibre (MDF).
SME players are expected to be mostly restricted to the traditional plywood segment due to their limited financial flexibility.
Their margins, too, are expected to be under pressure. As such, the margins of SME players in the industry are much lower at 4-6 per cent compared with 11-13 per cent for large players due to high fragmentation, lack of pricing power, technology and scale of operations.
To be sure, SMEs account for 70-75 per cent of the industry. And over 60 per cent of these are concentrated in clusters such as Kolkata, Yamuna Nagar and Morbi.
The shift to MDF is led by lower cost and better durability compared with medium and low-quality plywood. Additionally, large players in the industry have commissioned significant MDF capacities in the industry, increasing its availability.
This has led to significant pressure on demand for medium and low-quality plywood.
Given the shift towards MDF and slower growth in the housing industry, the plywood industry is expected to log a slower compound annual growth rate of 5-7 per cent over the next two years, compared with 7-9 per cent growth in the previous three years.