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Muted quarter, growth to pick up from 2HFY24E

Century Plyboards (CPBI) reported YoY flat consolidated revenue growth in Q1FY24. Plywood / laminates / MDF revenues grew 3.1% / (-4.7)% / 7.2% YoY with volumes being flat / flat / +5.9% YoY (4-year CAGR of 8.8% / 6.9% / 3.9%), respectively. Consolidated EBITDA margin fell 116bps YoY (-202bps QoQ) to 14.9%, primarily due to lower profitability in laminate and MDF segments, resulting in EBITDA / APAT decline of 7.0% / 5.8% YoY. Plywood margin expanded 280bps YoY (due to low base), while laminates margin fell 350bps YoY (higher A&P) and MDF margin contracted 950bps YoY (due to higher RM costs). Management has guided for operating margins of 14% / 13-15% / 25% in plywood / laminates / MDF for FY24. It stated that demand was subdued in Q1, but expects it to pick up H2FY24 onward as the housing market remains healthy. It has cut its volume guidance for FY24 to 6-7% / 15% / 20% YoY (vs earlier guidance of 13% / 25% / 30%) in plywood / laminates / MDF respectively. We cut our PAT estimates by ~4% each year for FY24E-FY25E and maintain BUY with a rolled-over Sep’24E target price of INR740 (earlier: INR732).

Flat revenue growth YoY due to subdued demand

CPBI reported YoY flat consolidated revenue with plywood / laminate / MDF segments reporting growth of 3.1% / (-4.7)% / 7.2% YoY. Plywood / laminates / MDF & allied volumes were flat / flat / +5.9% YoY (4-year CAGR of 8.8% / 6.9% / 3.9%). Management stated demand was sluggish in Q1, but is expected to improve Sep’23 onward as the housing market remains strong. For FY24, management has cut its guidance of revenue / volume growth to 8-10% / 6- 7% in plywood, 20% / 20% in MDF and 15% / 15% in laminates due to delay in commissioning of capacities and tepid demand. NWC in Q1FY24 was up 11 days YoY to 69 (primarily due to inventory days being up by 8 days YoY).

Operating margin dragged down by laminates and MDF

In Q1FY24, CPBI’s consolidated operating margin shrank 116bps YoY (-202bps QoQ) to 14.9% due to lower profitability in MDF and laminate segments. Plywood EBITDA margin expanded 280bps YoY to 13.4% on a low base. Laminate margins fell 350bps YoY to 9.2% due to higher A&P expenses and MDF margins declined 950bps YoY to 25.4% due to higher RM cost. Management indicated margin headwinds as timber prices continue to rise (it plans price hike of 2.5% in plywood segment in Q2). It has guided for ~14% margin in plywood, 13-15% in laminates, and 25% in MDF for FY24. We believe elevated timber prices could be partially negated with better product mix and lower chemical cost, and have factored-in blended margins of 15.8%- 16.1% for FY24E -FY26E.

Delay in commissioning of capacities

Management indicated delay in commissioning of capacity expansions across segments. Greenfield plywood expansion of 60,000cbm p.a. at Hoshiarpur is expected to be commissioned by Q1FY25 (vs earlier guidance of end-FY24). For laminates, the first phase of greenfield expansion which was expected to be operational by Q3FY24 (vs earlier guidance of H1FY24). For MDF, greenfield expansion in Andhra Pradesh, with capacity of 313,500cbm p.a., is expected to be commissioned early-Q4FY24. As per management, the Hoshiarpur MDF capacity (commissioned in Q4FY23) has also faced delay in ramping up, but has now stabilised. Management also indicated cost escalation in the capex for upcoming particle board project in Tamil Nadu with a capacity of 800cbm/day for a capex of INR 5.5bn (earlier: INR 5bn) due to higher machinery cost (due to INR depreciation against EUR).

Valuations and view

CPBI’s Q1FY24 operational performance was below our estimates and the company continues to faces near-term margin headwinds due to high timber prices. However, we continue to like CPBI due to its comprehensive wood panel product portfolio, wide distribution network and strong brand. We believe it will be a major beneficiary of the uptick in housing markets. Maintain BUY with a rolled-over target price of INR 740, set at unchanged 35x P/E Sep’25E.

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