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Company Background

Century Plyboards (India) Ltd (CPIL), promoted by Mr. Sajjan Bhajanka, Mr. Sanjay Agarwal and Late Mr. H P Agarwal, is India’s largest manufacturer of plywood with ~25% of organised market share. It has a production capacity of 239000 CBM of plywood; 7.5 mn units of laminate sheets, 54,000 CBM of particle boards and 600 CBM/day Medium Density Fibre Board (MDF) spread across 13 manufacturing units in India and abroad. It also has two Container Freight Stations (CFS) near Kolkata Port.

Investment Rationale Subdued quarter led by Covid-19 disruptions

* During Q1FY22, net sales improved by 123.7% y-o-y (lower base) but declined by ~39.2% q-o-q to Rs 4,488.8 mn on back of the back of regional lockdowns in the months of April and May, impacting demand. Consequently, (1) Plywood segment reported ~44.2% q-o-q decline in revenue on account of ~45% decline in volumes, while realisation improved by 2% q-o-q to Rs 49,589/CBM (2) Laminates revenue fell by 42.5% q-o-q led by 40.6% decrease in volumes coupled with realisation decline of 1.7% q-o-q to Rs 734/sheet (3) MDF segment revenue declined by 23.5% q-o-q on the back of volume decline of ~32.4%, while realisation improved by ~9.8% q-o-q to Rs 26,230/CBM (4) CFS business witnessed ~15.9% q-o-q decline in revenue to Rs 184.3 mn.

* With COVID-19 second wave induced lockdown in many states, demand momentum moderated in the months of April and May. However, with ease of lockdown restrictions, the Company witnessed July 2021 revenues reverting to July 2019 levels and management is hopeful of strong demand pickup going forward.

* However, they refrained from giving any guidance for FY22 and highlighted that they will provide a detailed roadmap for next three years post Q2FY22 results. The management remained optimistic on the MDF demand led by higher acceptance of ready-made furniture in the domestic market and negligible imports due to high freight cost.

* During the quarter, in order to mitigate the rise in raw material cost, the Company has taken a price hike of ~2% in plywood, ~3%+ in laminates, average 6% in MDF with two products of different thickness witnessing increase of ~15% and ~3% in particle board.

* CPIL is well positioned for growth in coming years. We have built in a revenue growth of ~20.8% and ~17.6% for FY22E and FY23E respectively on back of subdued FY21 and keeping in view CPIL robust track record and expectations of rise in demand pickup post ease of lockdown restrictions. Further, our estimates are contingent upon the future uncertainties of COVID-19 disruptions which might impact our forecasts.

Margins to improve at ~18% by FY23E

* During Q1FY22 the EBITDA margin declined by 354 bps q-o-q to ~13.6% on account of rise in input cost across all segments and unabsorbed fixed cost. The PAT for the quarter declined by ~59.3% qo-q to Rs 338.9 mn mainly on account of lower operating margin.

* CPIL had engaged Boston Consulting Group (BCG) to rationalise its cost structure in MDF division, which identified possibilities of cost reduction to the tune of Rs 300 mn annually, aiding margin expansion. Seeing BCG’s valuable contribution, management had further engaged with them to boost sales, production and cost reduction in laminates business for the next one year.

* Going forward, we expect EBIDTA margin to improve to ~18% by FY23E, on the back of prudent management of operating efficiencies, better cost control and structural shift towards organised players, which is further expected to generate traction in the industry. On the balance sheet front, the net working capital increased by 40 days q-o-q to 108 days led by a rise in inventory days by 43 days. Thus, on account of higher working capital requirement, the net debt during June 2021 end stands at ~Rs 480 mn against net cash of ~Rs 810 mn reported in March 2021 end.

Capacity expansion plan to propel growth

* CPIL has incurred capex of ~630 mn in FY21 and embarked upon a capex of ~Rs 2.98 bn for FY22E across segments wherein it is 1) expanding MDF capacity at Hoshiarpur, 2) setting-up plywood plant at Punjab (Rs 510 mn) and enhancing existing capacity by adding balancing equipments 3) solar plant (Rs 140 mn) and 4) veneer unit at Gabon (~Rs 112 mn).

* The Company is undertaking a brownfield MDF (400 CBM/day) expansion at its existing Hoshiarpur unit at a capex of ~Rs 2.2 bn, which is delayed by one quarter and now likely to get commissioned by H1FY23. Post expansion the MDF capacity at Hoshiarpur will increase to 1,000 CBM/day from the current 600/CBM/day. At peak utilization the additional 400 CBM/day capacity has a potential to generate revenue of ~Rs 4 bn.

* Further, the Company Greenfield expansion planned in Andhra Pradesh for MDF of 700 cbm/day capacity has been deferred due to a delay in receipt of approvals on account of Covid. Post receipt of approvals, the plant is expected to get commissioned in 18 months.

Valuation

Better than expected rebound in demand across segments, augurs well for organised players like CPIL in gaining market share which is sustainable going forward. Further, signs of green shoots visible in the residential real estate sector bode well for organised players and we expect CPIL to emerge as a stronger player with stronger brand recall and deleveraged balance sheet. We have currently valued the stock on the basis of P/E of 30x and recommend an ‘Accumulate’ on the stock with a target of Rs 472 in 18 months.

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