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In-line quarter, outlook remains healthy

Century Plyboards (CPBI) reported standalone revenue growth of 11.4% YoY in Q2FY23 (3-year CAGR of 15.2%), in line with expectation. Standalone operating margin decreased 314bps YoY (+26bps QoQ) due to higher raw material costs as gross margin declined 239bps YoY, resulting in EBIDTA decline of 6.2% YoY. Management expects demand to remain healthy going ahead driven by uptick in real estate market, and indicated margins are sustainable with possible upward bias led by easing of raw material costs. CPBI has announced greenfield capex of Rs5.5bn (funded primarily by internal accruals) to setup 360,000CBM capacity of particle board in Tamil Nadu, which is likely to commission by Q4FY25. We believe this expansion will enable the company to have the most comprehensive wood panel product portfolio in the industry and augurs well for future growth. Other capacity expansion plans across segments are also on track, which will enable strong growth going ahead. We marginally tweak estimates and upgrade the stock from Add to BUY with a rolled over Sept’23E target price of Rs775 (earlier: Rs750), set at an unchanged 35x PER one-year forward

* Healthy revenue growth across segments despite high base: CPBI has reported standalone revenue growth of 11.4% YoY (3-year CAGR of 15.2%) on high base with plywood/laminate/MDF segment reporting revenue growth of 9.3%/7.6%/23% YoY (3- year CAGR of 15.4%/9.2%/26.4%), respectively. Plywood/laminate/MDF had volume growth of 2.5%/-0.1%/7.3% YoY (3-year CAGR of 12.3%/2%/10.7%), respectively. As per the management, demand is expected to pick up in H2 as housing activity remains healthy and it expects single digit growth in H2FY23 on high base YoY. For FY23, management has maintained guidance for volume growth of 15% YoY for plywood (20% in value terms), 15% YoY growth for laminate and 20%+ YoY for MDF segment. Working capital days in Q2FY23 decreased by 3 days QoQ to 55 and the company remained net debt free.

* Operating margin declined YoY due to high base: CPBI’s standalone operating margin decreased 314bps YoY to 16.7% (+26 bps QoQ) due to higher raw material costs as gross margin declined 239bps YoY, which resulted in EBIDTA decline of 6.2% YoY (3-year CAGR of 17.6%). Plywood margin declined 170bps YoY (+350bps QoQ), laminate 480bps YoY (+390 bps QoQ) whereas MDF margin declined 780 bps YoY (- 810bps QoQ) due to higher raw material costs and lack of price hikes taken. Management indicated margins are expected to improve in H2 led by chemical cost coming down and has maintained its operating margin guidance of 13-15% in plywood, in laminate 14-16%, in MDF & particle board 25%+. CPBI has decided to dispose of its investment in Myanmar subsidiary due to adverse political developments in the country. For this CPBI has recognised a one-time operating loss of Rs297.8mn (net impairment loss of Rs476.5mn), adjusting for which consolidated EBITDA stands at Rs1,528mn for Q2FY23.

* Significant capex in particle board: CPBI has announced a greenfield particle board capacity expansion of 360,000CBM per year in Tamil Nadu at capex of Rs5.5bn which is expected to commission by Q4FY25 and can do ~Rs6bn turnover on peak utilisation (by FY28) with 25%+ margins. The other expansion of MDF and laminates is on track and is expected to commence in FY23 and FY24, as guided earlier.

* Valuations and view: CPBI’s Q2FY23 result has been marginally better than estimates. We marginally tweak estimates and upgrade the stock from Add to BUY with a rolled over Sep’23 target price of Rs775. We continue to like CPBI due to its comprehensive wood panel product portfolio, wide distribution network and strong brand.

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