Laminate & MDF segments drive operational beat
CPBI’s sales grew 4.4% yoy led by MDF (+27% yoy), & laminate (+22% yoy) segments, while plywood was down 2% yoy due to weak demand. Gross margin came at 49.8%, up 200bps yoy driven by lower RM costs (phenol and glue) in its laminate and MDF units. EBITDAM expanded by 259bps yoy & came 5% ahead of estimates. PAT increased 38% yoy due to strong margins, higher other income (sale of corporate office) & lower interest cost (-30% yoy). Despite challenging environment, NWC improved significantly from 86days in Q4FY19 to 71days in Q2FY20 as H1FY20 growth was primarily driven by laminate & MDF units which require relatively lesser working capital than plywood. Total debt has reduced from Rs4.7bn in Q4FY19 to Rs3.3bn in Q2FY20.
Diversified play in wood panel sector
CPBI is the only integrated diversified player in the domestic market to provide all products in the wood panel sector and hence a better story in our view as it is not dependent on any one product segment. Management expects double digit revenue growth with 15%+ EBITDA margin in H2FY20. Plywood/ Laminate/ MDF/ Particle board segments are expected to grow at 3%/ 15%/ 20%/ 10% yoy in FY20 with EBITDAM of 14%/ 12%+/ 20%+/ 25% respectively. We cut our sales estimates by 3%/4% in FY20/FY21 to factor the delay in plywood demand recovery however raise earning estimates by 6%/3% owing to favorable RM prices. We expect CPBI’s sales/ EBITDA/ PAT CAGR of 9%/19%/23%, respectively, over FY19-21E. At CMP of Rs167, the stock is trading at P/E of 20x/16x on FY20E/FY21E earnings. We retain BUY rating with TP of Rs204 set at 20x FY21E EPS, implying PEG ratio of 0.9 Key risks: Demand slowdown, MDF pricing war & RM prices voltality
Expect 6-7% plywood volume growth in H2FY20
Plywood and allied products sales remained broadly flat yoy in H1FY20 however sales dropped by 3% yoy due to demand slowdown while realizations improved 2% yoy. Gross margin came at 30.2%, down 200bps yoy on the account of higher core veneer prices (higher use of Okoume, PQ cedar) and adverse product mix. Commercial veneer trading volumes/sales fell 37%/35% with a shift in some face veneer sourcing to Okoume/PQ cedar (cheaper than Gurjan veneer, hence lower realizations). We expect contribution from this division to decline gradually. While real estate demand remains subdued from metros and tier-I cities, CPBI has been seeing traction in its mid plywood segment in tier II & III cities/towns.
Growth in laminates to continue
Laminate volumes/revenues grew by 15%/19% in H1FY20, while EBITDA margin expanded by 410bps yoy due to lower phenol, chemical & paper prices. We expect margins to sustain in H2FY20 with stability in crude prices, prices of phenol, formaldehyde and melamine (chemicals form ~40% of laminate production costs). We expect laminate revenues to increase to Rs5.9bn by FY21E with a 16% sales CAGR over FY19-21.
Planning for capacity expansion of MDF and particle board
MDF and particle-board are currently operating at optimum utilization, which has led to management planning for capacity expansion of both products. CPBI is planning a joint plant in Uttar Pradesh for which it is exploring suitable land with water and electricity availability. The joint plant can be completed within 12-15 months once execution on the project starts. The company has put its brownfield expansion plan at Hoshiarpur unit on hold for now.
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