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Near-term demand headwinds

We recently interacted with the management of Century Plyboard (CPBI) who indicated that demand has been tepid Q3-TD with Dec’22 likely to be the decisive month for the quarter. MDF brownfield expansion at Hoshiarpur (Punjab) is likely to be commissioned by end-Dec’22 (earlier guidance was Nov’22) and management expects to start its ramp-up from mid-Q4. Company has taken no material price increases across segments in Q3-TD as raw material pressures (except for wood used in MDF) have abated. Management indicated that the Q2 blended margins (~17%) are sustainable in the near term. Company had guided for >20% YoY revenue growth in FY23 (implying H2FY23 growth of ~5% YoY), which we believe is achievable. We tweak our estimates for FY23E-FY25E by 2%-3% respectively. Maintain BUY with an unchanged rolled-over Dec’23 target price of Rs775, set at 35x P/E 1-year forward.

* Tepid demand: Demand for wood panel products has been tepid during the ongoing Q3- TD (seasonally a dull quarter due to festivities, marriage season, etc.) with Dec’22 likely to be the decisive month for Q3. Our interaction with dealers suggests that demand is likely to pick pace in Q4 as the real estate market remains healthy and the trend of higher spend on home improvement is likely to continue post festive and marriage season.

* MDF seeing near-term headwinds: MDF demand has remained stable in Q3-TD though imports have started to pick up as international prices have corrected by ~20% QoQ to US$205-210/CBM (due to significant slowdown in demand from the US and Europe). This will likely result in lower growth for domestic players. MDF imports of 13,425 MT (+99.4% YoY / +3.5% MoM) during Oct’22 is closer to pre-covid levels and will likely remain high in the near term. MDF prices have not yet been cut by major domestic players in North India (a land-locked region not much affected by imports). However, in South India some players like Rushil Décor have taken price cuts of ~4-5% to compete with imports (which now have a price difference of ~20-25% vs earlier ~8%- 10%), but this has not been followed by other major players like Greenpanel Industries, Action Tesa and Century Plyboard. We have factored 7%/3% lower realisations in MDF for FY24E/FY25E due to increased domestic supply and rise in imports.

* Margins to remain at ~17%: Raw material price pressures have largely abated except for wood used in MDF, which will likely enable the company to maintain its margins similar to Q2 levels (~17%) in the near term. CPBI has not taken any material price increase during the quarter and has ruled out further increases unless raw material pressures resurface.

* MDF brownfield expansion to be commissioned in end-Dec’22: CPBI’s ongoing MDF brownfield expansion of 400 CBM/day in Hoshiarpur, Punjab (vs current capacity of 600CBM/day) is expected to be commissioned by Dec’22 (earlier: Nov,22) and the greenfield expansion in Andhra Pradesh in H2FY24. Company is hopeful of ramping up its MDF brownfield expansion from mid-Q4, thus enabling it to meet demand as its current capacities are running at optimum utilisation.

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