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Century Plyboards (Century) reported a weak quarter with revenue being flat YoY (-8% QoQ, +11% 4-year CAGR) while EBITDA/PAT declined 13%/16% YoY respectively. Demand momentum was weak, particularly in Apr’23, leading to weak growth in volume for Ply (+2% YoY /-14% QoQ) and MDF (+6% YoY; +4% 4yr CAGR) while Laminate volume was flat YoY. Timber prices remained high; however, that was offset by softening in key chemical prices, leading to gross margin expanding by 20bps YoY/30bps QoQ to 47.4%. The company has lowered its revenue/ volume guidance for FY24 across segments on account of a) weak 1Q performance and b) slight delay in commissioning of laminates capacity. We marginally trim our FY24-26 estimates (2-3%) and maintain BUY with a revised Jun’24 TP of INR 710, basis 32xJune’25EPS (earlier INR730). Lower-than-expected ply/MDF volume is a key risk.

* 1QFY24 summary: Revenue was flat YoY (+11%, 4-year CAGR; 10% below JMFe) largely due to muted revenue growth in Plywood segment of 3% YoY (-14% QoQ, +12% 4-year CAGR). MDF segment revenue grew 7% YoY (+16% 4-year CAGR, 8% below JMFe). Laminates/ Particle board revenue fell 5% YoY /23% YoY (10%/12% 4-year CAGR) on capacity constraints. Gross margin expanded 20bps YoY/30bps QoQ (260bps below JMFe) to 47.4% as higher timber prices were marginally offset by softening in key raw material prices. EBITDA margin contracted 210bps YoY to 14.4% (210bps below JMFe). EBITDA declined 13% YoY (-20% QoQ, +8% 4-year CAGR, 19% below JMFe) to INR 1.3bn. Adj. PAT declined 16% YoY/27% QoQ (+14%, 4-year CAGR) to INR 807mn (20% below JMFe).

* Plywood volume disappointed (+2% YoY) on weak demand scenario: Plywood revenue grew 3% YoY (+12% 4-year CAGR, 11% below JMFe) driven by 3% YoY growth in realisation (+3% 4-year CAGR, 4% below JMFe) while volume grew 2% YoY (+11% 4- year CAGR). EBITDA grew 35% YoY (-26% QoQ, +10% 4-year CAGR) as margin expanded by 320bps YoY (-230bps QoQ, 10bps below JMFe) to 13.7%, led by lower chemical cost. Timber prices remained elevated in 1Q24 and are expected to stay that way in the coming quarters (up 5% YoY in Jul’23). The company hiked prices in Jul’23 and has planned a price hike of 2.5% in the coming quarters. The management has guided for 6-7% volume growth (vs. earlier guidance of 13% volume growth) and with planned price hike of 2.5% of price hike, 8-10% revenue growth (vs. earlier guidance of 15%), and sustained EBITDA margin of 14% for FY24 in this segment.

* Modest MDF volume growth (+6% YoY) on stabilisation challenges: MDF revenue grew 7% YoY (+16% 4-year CAGR; 8% below JMFe) as volume rose just 6% YoY (+4% on 4 years CAGR, 3% QoQ, 12% below JMFe) due to challenges in stabilising the brownfield expansion at Hoshiarpur. Realisation grew 1% YoY/ QoQ (+12% 4-year CAGR). Higher timber prices led to EBITDA margin contracting 880bps YoY/90 bps QoQ to 26.2% as cost inflation was not passed on. Nonetheless, the management highlighted to improve the segment profitability through higher mix of value added/ premium products to 40% (current 34%). Century’s brownfield expansion at Hoshiarpur (350cbm per day), which commenced production in Mar’23, has stabilised in 2Q. Its greenfield south India plant is expected to be commissioned in end-3QFY24 or early 4QFY24. The management has reduced its volume growth guidance to 20% (earlier 30% YoY) and retained its 20-25% EBITDA margin guidance for this segment.

* Weak performance in laminates, volume flat YoY (+6% YoY) while new launches impact margin: Laminate revenue declined 5% YoY (+10% 4-year CAGR, 18% below JMFe) on account of lower realisation (-3% YoY, +3% 4-year CAGR, 4% below JMFe) while volume was flat YoY (+4% QoQ, +7%, 4-year CAGR, 13% below JMFe). Laminates EBITDA margin contracted 410bps YoY/430bps QoQ (320bps below JMFe) to 9.3% on account of launch of laminates under the mass category (‘Sainik’ laminate) and in the high-end category. The company’s 1st phase of greenfield expansion in laminates is slightly delayed and is expected to come on stream by 3QFY24. Thereby, the management has reduced its guidance for value growth to 12-15% from the earlier guidance of 25% while maintains operating margin of 13-15% in FY24.

* Particle boards’ performance continues to be impacted by high imports; capacity expansion on track: Particle board revenue declined 23% YoY (+6% QoQ, +12% 4-year CAGR, 9% above JMFe) as high imports impacted volume (-12% YoY) during the quarter. EBITDA margin saw significant contraction of 13.7ppt YoY to 22.7%. However, volume and profitability has improved sequentially (+14% QoQ/+460bps QoQ). The green field particle board manufacturing unit in Tamil Nadu is expected to be commissioned by 4QFY25, though the company has revised its capex guidance from INR 5bn to INR 5.5bn towards this facility. The management has guided for flat YoY volume growth and marginal decline in value growth.

* Trim EPS estimates; maintain BUY: We marginally trim our FY24-26 estimates (2-3%) and maintain BUY with a revised Jun’24 TP of INR 710, basis 32xJune’25EPS (earlier INR 730). We like Century for its a) comprehensive product offering in wood panels, b) strong brand recall, c) robust pan-India distribution network, d) continuous product innovation, e) robust balance sheet and return ratios, f) industry leading performance, and g) most importantly, significant improved balance sheet construct. (RoE/RoCE>20% post tax). We maintain BUY.

* Other highlights: - Working capital days increased to 69 in Jun’23 (58 days in Jun’22/54 days in Jun’23) on account of rise in inventory (from 26 days to 36 days YoY). The management expect sustainable working capital days c. 52-53.

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