E-way bill implementation during FY19 is likely to be positive for organized plywood manufacturers.
* Company is set to benefit from the incremental shift of unorganized towards organized segment in home building solution with its presence in plywood, laminate and MDF segment.
* We tweak our estimates to factor in upcoming laminates capacity and also introduce FY20 estimates. We roll over our valuations on FY20 estimates and arrive at a revised price target of Rs 398 based on 27x FY20 estimates. (Rs 295 earlier on FY19 estimates). We upgrade the stock to BUY from ACCUMULATE earlier.
* We believe that with implementation of e-way bill on inter-state movement of goods from Feb, 2018 and intra-state movement of goods from June-2018, ramp up of MDF capacity as well as incremental laminates volume from new capacity will result in valuation re-rating for Century Plyboards
* Key risk to our recommendation would come from lower than expected utilization of MDF plant, delays in e-way bill implementation, continued slowdown in real estate sector.
Key highlights about the company and industry
E-way bill implementation to benefit organized players
The GST Council has decided to start e-way bill for inter-state movement of goods from February 1 while states have up to June 1. E-way bill is an electronic document that is required if goods worth more than Rs 50,000 is transported and carries the details of supplier, buyers and goods being transported. States have been given the option of choosing when they want to implement the intra-state e-way bill between February 1 and June 1.
A pilot project of e-way bill has been successfully run in Karnataka and the IT system is fully geared to meet any requirement. E-way bill is an electronic way bill for movement of goods which can be generated on the GSTN (common portal). Movement of goods of more than Rs 50,000 in value cannot be made by a registered person without an e-way bill. When an e-way bill is generated, a unique e-way bill number (EBN) is allocated and is available to the supplier, recipient, and the transporter. Trade and transporters can start using this system on a voluntary basis from January 16.
We expect this development to be extremely positive for organized players as the volumes for organized players were continuously impacted by lack of checks for the unorganized players. This is likely to compel the unorganized players to follow tax compliance and hence provide a level playing field for the organized players.
Plywood division growth may remain impacted by real estate slowdown
Plywood division performance was impacted adversely since past few quarters due to real estate slowdown as well as de-stocking due to GST implementation. Channel volumes were also impacted in Q2FY18 due to expectations of cut in the GST rate. Also during Q2FY18, plywood realizations were under pressure on both YoY and QoQ basis. Going ahead, growth in plywood division is likely to come from improvement in volumes while realizations may remain flat. Going ahead, we expect the premium segment volumes to remain sluggish while we expect GST implementation to benefit the Sainik brand volume sales. We expect plywood division revenues to grow at a CAGR of 4% between FY17-20.
Valuation and recommendation
At Rs 339, stock is currently trading at 28.1x/23x P/E and 17.9x/15.3x EV/EBITDA on FY19/20 estimates. We tweak our estimates to factor in upcoming laminates capacity and also introduce FY20 estimates. We roll over our valuations on FY20 estimates and arrive at a revised price target of Rs 398 based on 27x FY20 estimates. We believe that with implementation of e-way bill on inter-state movement of goods from Feb, 2018 and intra-state movement of goods from June-2018, ramp up of MDF capacity as well as incremental laminates volume from new capacity will result in valuation re-rating for Century Plyboards.
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