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Companies in our Building Material coverage universe are expected to post 3-year CAGR of 13% (median) in Revenue and 11% (median) in EBITDA in 2QFY23 (3%/ 4% respectively on QoQ basis,). Weakness in demand during July-August due to slowdown in the pace of construction activity, given the inflation across building products, was offset by strong recovery in September ahead of the festive season. Cost inflation remained high for most companies except plastic pipe makers, which saw a sharp decline in PVC resin prices (-19% QoQ; -39% from 31st Mar’22 to INR88/kg). We estimate gas cost (relevant for ceramics companies) to rise c.8-17% QoQ as spot gas increased 76% QoQ. For wood panel companies, softening in chemical costs was offset by higher timber prices. MDF segment to continue to post superior performance than ply/laminate segments. Greenpanel Industries, Century Plyboards, and Kajaria Ceramics are our preferred picks in the Building Materials coverage.

* Plastic pipes - further decline in PVC resin prices to lead to significant inventory loss; primary demand remains impacted: We estimate Prince Pipes’ volume growth to be muted 2%/17% on 3-year CAGR/ QoQ respectively (-15% YoY on strong base) due to a) plumbing segment demand being impacted by slowdown in pace of construction and renovation activity during July-August; however, recovery was seen during September, and b) further decline in PVC resin prices; channel continues to be cautious in carrying high inventories and, therefore, prefers to keep low inventories. Domestic PVC resin prices have dipped c. INR 17/kg (-19% QoQ) during 2QFY23 due to a) decline in global PVC prices on account of easing supply chain issues and concerns of global slowdown (especially in China), and b) higher imports led by removal of ADD in Feb’22 and reduction in import duty to 7.5% from 10% in May’22. The Recent initiation of investigation by Dept. of Commerce on imports of suspension grade PVC resins from China is a modest positive for the industry as imports can come down in anticipation of retrospective actions. We estimate that decline in PVC prices could lead to inventory loss of INR 600mn for Prince Pipes and expect EBITDA margin to contract 1,440bps YoY/550bps QoQ to 1.8% in 2QFY23, the weakest quarter ever for the company.

* Ceramics - muted demand, elevated gas costs continue to hurt margins: We estimate Kajaria/Somany to post c.9% growth in volumes on a 3-year CAGR basis (up 9-13% QoQ). Demand and supply mismatch coupled with elevated cost of production led the ceramics players based in Morbi to cut production by taking a month-long holiday during Aug-Sept’22, though leading players’ owned and JV plant in Morbi continued their production. Gas costs continued to be high during the quarter; we estimate gas costs to see 8-17% increase QoQ for Somany and Kajaria. We expect EBITDA margin of Somany / Kajaria to contract 30bps/ 80bps QoQ to 7.7%/14.4% respectively, as price hikes partly offset the gas cost inflation.

* Wood panel - weak demand in July-August was offset by strong recovery in September: Wood panel companies are expected to deliver relatively better performance on 3-year CAGR basis (c.3-29% revenue growth; Greenpanel at the highest end) on the back of sector tailwinds and price hikes taken in the last 10-12 months. Demand momentum, which slowed during July-August on account of slowdown in construction activity, was offset by strong recovery in September, ahead of the festive period. Growth in MDF segment is expected to be relatively better than in other segments (29%-13% 3-year CAGR in volume) due to lower base, strong demand from both segments (OEM and retail), increase in applications and lower imports. Export revenue for companies like Greenlam and Greenpanel could be modestly impacted due to higher focus on domestic business. Leading players are expected to gain share from smaller, regional players as they continue to struggle from unavailability of timber and elevated input costs. Operating margins are expected to remain healthy (on 3-year CAGR basis) led by operating leverage and timely price hikes to pass on the cost inflation.

* Recommendation: Greenpanel, Century Ply and Kajaria Ceramics are our preferred picks in Building Materials coverage.

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