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Subdued tiles and plywood while plumbing to see robust growth

We expect the building materials sector to witness muted demand in Q4FY24. Real estate recovery remains strong with lower inventory and robust new launches, but demand for building materials usually follows a bit later; we expect a pickup in the latter half of FY25. Demand for plastic pipes used in plumbing was robust due to uptick in real estate and stable Polyvinyl chloride (PVC) prices. The tiles segment saw subdued domestic demand and exports impact due to the Red Sea Crisis. Plywood demand is likely to remain similar to Q3 while Medium-Density Fibreboard (MDF) and particle board may see an increase due to capacity additions. The extension of BIS standard implementation for MDF and particle board has been detrimental to the sector in the near term. Furthermore, an influx of inexpensive MDF imports has affected domestic segment realization. We expect demand to improve for tiles and wood panels in H2FY25, following the trend in pipes.

Plastic pipes to drive volume growth

We expect our Building Materials coverage universe to report revenue growth of 6.1% YoY in Q4FY24E at a five-year CAGR 12.1%, driven by 8.2% growth in plastic pipes companies and 7.2% growth in the wood panel segment. Paints and tiles firms are likely to underperform with 5.5% YoY and 5.2% YoY growth, respectively. In the paints sector, we expect double-digit volume expansion in decorative coatings, primarily led by BRGR and APNT while KNPL is set to deliver in the mid-single digits. For plastic pipes, ASTRA and SI may post 20%-plus volume growth on high base, although lower PVC prices may impact realization and sales growth. Within tiles, we expect mid-to-high, single-digit volume growth for KJC as well as SOMC, slightly better than Q3. Within wood panel, CPBI is poised to report robust double-digit volume growth in MDF and particle board segments. We expect plywood to post mid-single digit volume growth while laminates will post double-digit volume growth on low base.

EBITDA margin to contract slightly

For Q4FY24E, we expect a gross margin expansion of 80bp YoY, dragged by a margin decline of 120bp in wood panel due to inflationary pressures. EBITDA margin is likely to decline by 40bp YoY, due to higher fixed cost in wood panel on account of new capacity and lower realization in plumbing, negatively affecting operational leverage. EBITDA margin of paints and tiles would expand in the range of 40-60bp YoY, due to stable input prices. We expect our coverage universe to post EBITDA growth of 3.5% YoY at a five-year CAGR of 14.8%. Tiles and paint companies are likely to drive EBITDA margin, followed by plastic pipes and wood panel.

Our preferred picks are Century Plyboards and Astral. We retain our negative view on the paints sector, due to potential disruption caused by the entry of a major firm, adversely affecting existing participants.

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