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2QFY22 preview: Back to the growth path

After weak performance in 1QFY22 (Covid-19 second wave lockdown), we expect building material coverage companies to post sharp recovery ( c.40-60% increase in volumes QoQ; flat to high single digit growth in volumes on 2yr CAGR) on the back of strong underlying demand scenario due to healthy traction in real estate sector, fully operational major markets and market share gains from the smaller/unorganised players.

Having said that, it will appear exceptionally high YoY optically due to low base in 2QFY2 (far stricter lockdown). MDF segment to post superior performance than ply/laminate segments on the back of higher share of OEM revenues and import substitution. We estimate Prince Pipes to post strong recovery in volumes (+9% 2yr CAGR) due to uptick in volumes expected from Plumbing and SWR segment.

PVC resin prices have moved up sharply by INR 30/kg to INR 148/kg in last 3 months due to which plastic pipe companies may post modest inventory gains. Margins are expected to come back to normal levels due to operating leverage benefit and pricing power with the larger players. Our channel checks suggest a) underlying demand scenario continues to be reasonably strong, and b) opening up of major markets has led to strong pick-up in secondary demand. Greenpanel Industries is our top pick in Building Materials coverage.

* Ceramics- Strong recovery but rise in fuel cost to offset operating leverage gains: Ceramic companies under our coverage are expected to post 9-10% growth in revenue on 2yr CAGR basis (+20-24% YoY) as volumes are expected to recover in a strong way post the second wave of Covid-19 due to strong real estate construction activity across regions, opening up of major markets and market share gains as smaller/unorganised players continue to face multiple issues. EBITDA is expected to grow by 16-22% on 2yr CAGR basis as margins are expected to come back at healthy levels due to a) operating leverage and b) better pricing power. Weighted average fuel cost for Kajaria and Somany is expected to increase by c.9% QoQ each as both RLNG and Gujarat Gas prices have moved up sharply and therefore will partly offset the operating leverage benefit.

* Plastic pipes- strong volume growth in Plumbing and SWR segment: Prince is expected post strong recovery in volumes (+16% YoY; +9% 2yr CAGR) due to strong demand from Plumbing and SWR segment as construction activity has picked up in all regions post the second wave of Covid-19. Prince’ revenue is expected to deliver higher growth (+56% YoY; +29% 2yr CAGR) as realisation (-2% QoQ) are expected to be at high levels as PVC resin prices have started moving up sharply (currently at INR 147/kg; increased by INR30/kg in last 3 months). We believe plastic pipe companies, including Prince, are expected to post modest inventory gains in 2QFY22 (likely to be significant in 3Q/4Q).

* Wood panel companies to come back to growth path; MDF segment to perform relatively better: Wood panel companies too are expected to experience sharp recovery and deliver high single digit volume growth (2yr CAGR) due to strong real estate absorptions trends and opening up of all major markets post second wave of Covid-19 while growth in MDF segment is expected to be relatively better (high double digit 2yr CAGR) due to strong demand from both segments (OEM and retail), increase in applications and lower imports. Export revenues for companies like Greenlam and Greenpanel could be modestly impacted due to container availability issues coupled with sharp rise in ocean freights. Operating margins are expected to come back to normal levels due to operating leverage while it may be impacted due to time lag in passing on the cost inflation.

* Top Pick: Our top pick is Greenpanel Industries (largest MDF player; robust performance; focus on de-leveraging and significant industry tailwinds) in building material coverage universe.

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