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Demand trend remains steady

Our recent interaction with dealers and industry players indicates that in the ongoing Q2FY23 (Jul-Sep’22), demand trends remain steady in the wood panel sector led by continuous momentum in the residential market and higher spending on home improvement post the pandemic. We believe demand will continue to remain healthy going ahead (post the festival season, too) as underlying drivers are intact. In the ongoing quarter (Q2FY23), Century Plyboards (CPBI) has not taken any price increase (so far) in its key categories of plywood, laminate and MDF. However, the price hike announced in Q1 for plywood and laminate has been implemented, which will enable margins to remain steady. In plywood segment, demand for mass market products continues to remain higher as compared to premium products due to the inflationary environment and is likely to remain so in the near term. We maintain estimates, but downgrade our rating from Buy to ADD post the strong rally of ~22% in the stock price over the past 3 months with an unchanged Mar’23E target price of Rs750, set at 35x PER FY24E.

*  Demand trend in woodpanel remains healthy: The demand for wood panel products has remained steady in Q2FY23 despite strong H1CY22, as per our interaction with dealers and industry participants, driven by the continuous uptick in residential market and higher spending on home improvement post the pandemic. Plywood market has continued seeing higher demand for mass market brands like Sainik due to inflationary environment which may continue in the near term. Demand in MDF segment, too, remained steady due to increased acceptance of readymade furniture. We believe demand should improve for woodpanel market post the festival period as underlying drivers continue to remain favourable. We model revenue CAGR of 19.5% over FY22- 24E for CPBI aided by expansion in MDF segment

* Margins to remain steady due to earlier price hikes: CPBI has not taken any price increases in the ongoing quarter but will get the full benefit of price increase of ~2-7% in plywood and ~3-4% in laminate taken in Q1FY23. Plywood margins may see some pressure in near term (but still be better than the low base of Q1FY23) due to higher demand for mass products (which have lower margins) whereas MDF margins will decline ~120bps YoY to 30.5% in FY23 on account of higher raw material cost. Laminate margins will increase QoQ due to tepid base, steady raw material prices and benefit of price hike taken earlier. We have modelled blended margins of 17.2%/17.4% for FY23/24E (vs 17.6% in FY22), respectively.

* Downgrade from Buy to ADD: We continue to like CPBI for its strong growth prospects, high return ratios and healthy balance sheet and believe it will be a major beneficiary of the uptick in housing demand and higher spending on home improvement post the pandemic. However, we downgrade the stock from Buy to ADD due to strong rally in the stock price (~22% over the last 3 months). We maintain estimates and Mar’23E target price of Rs750, set at unchanged 35x PER FY24E. Key risks to our call: 1) Slowdown in housing demand, 2) continuous higher input prices, which may adversely affect demand / profitability

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