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Building material companies under our coverage are expected to post modest topline growth (+6% YoY; +12% 4yr CAGR) in 1QFY24, as sustained demand in home improvement and construction activity (median volume growth of 9% YoY, +8% 4-year CAGR) was offset by price correction in PVC pipes (lower resin prices) and lower MDF realisation (higher export mix). We expect ceramic and plastic pipe companies’ volume performance (+5% to +12% YoY) to outperform that of wood panel companies (-6% to 10% YoY) as rising MDF imports continue to hurt domestic MDF players’ volumes. On the EBITDA margin front, we estimate that margin will remain broadly intact YoY but fall QoQ on account of seasonality (4Q tends to be a strong quarter for most categories). On the raw material (RM) front, fuel prices softened during the quarter for ceramic companies, which is largely being passed on to the channel given high competition. Timber prices for wood panel companies rose further, by 5- 6% QoQ during the quarter, though that will be partially offset by softening in key chemical prices. Century Ply, Greenapnel and Prince Pipes are our preferred picks.

* Ceramics – steady demand persists; reduction in fuel cost leading to discounts/schemes to channel: We estimate that leading ceramic companies Kajaria and Somany will post 8%/10% YoY growth in volume (+7% 4-year CAGR respectively) on account of steady construction activity during the quarter. Demand was impacted during Apr’23 on account of unseasonal rains; however, that was offset by improvement in May-Jun’23. Demand for premium tiles and large vitrified tiles is robust and outperforming other categories. Competitive intensity among domestic players remains high as regional players expand their distribution footprint and product portfolio, putting realisations under pressure. Gas cost for tile companies has softened on account of a) reduction in RasGas (-3%QoQ; - 10% YoY) and Gujarat Gas prices, (-13%QoQ; -36%YoY), and b) switch to alternate fuels (LPG, propane and biogas). We expect fuel cost per sq.m for Kajaria/ Somany to reduce by 5%/12% QoQ (-29%/-32% YoY) while some of the savings are being passed to the channel in form of discounts/schemes.

* Wood panels – rising MDF imports and higher timber price continue to weigh on margins: Wood panel companies are expected to report a mixed performance as volume growth of plywood players (Century/ Greenply) outperforms that of MDF and laminate manufacturers (Greenpanel/ Greenlam). Moreover, rising imports of MDF during the quarter has hurt domestic manufacturers’ volumes and realisation (imports are at preCovid levels). For companies with exports business, disturbances at the port due to the cyclone (in Jun’23) are expected to result in deferment of volumes to 2QFY24. Timber cost continued to rise further during the quarter; they were up 5-6% QoQ leading to price hikes in plywood by regional players across the country. This should help leading players gain further market share as unorganised/regional players continue to face challenges on availability and price fronts. However, softening in prices of key chemicals should help offset higher timber costs to some extent. Operating margins for wood panel companies are expected to remain under pressure on account of adverse operating leverage for MDF and elevated timber cost for plywood players.

* Plastic pipes –plumbing demand continue to hold up; ERP transition dents Prince’s volume performance: We estimate Prince Pipes’ volume to grow 5%YoY (-1% 4-year CAGR) as the quarter was impacted due to challenges witnessed during migration to a global ERP system from a legacy system (already highlighted during 4QFY23 call). However, plumbing demand saw a robust pick-up during Jun’23, which we expect will offset the impact of transition. PVC resin prices corrected by INR 8.5/kg QoQ to INR 80/kg (as of 30thJun’23); average PVC price during the quarter remained at INR 82/kg (-10% QoQ, -37% YoY). Hence, we expect EBITDA margin to contract 610bps on account of adverse operating leverage and lower PVC resin prices, while we expect margin to expand by 600bps YoY on a lower base (high cost inventory liquidation in 1QFY23). We believe strong plumbing volume momentum will continue in FY24 given the industry tailwinds – steady real estate and construction activity and stable PVC prices.

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