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In 3QFY24, the performance of building material companies under our coverage was muted. Demand was weak for wood panel and ceramic companies on account of slowdown in home improvement activity during Oct-Nov’23. The leading MDF player (Greenpanel) reported flat YoY volume growth due to higher imports and increased competition from domestic manufacturers while Century/ Greenply reported steady growth on a lower base. In plastic pipes, the plumbing segment reported robust growth; Astral and Supreme outperformed peers with robust volume growth of 15% and 17% YoY respectively whereas agri segment volume performance was subdued. Prince Pipes reported decline in volume (-2% YoY) as it struggled to recoup market share loss during its transition to ERP-based system in 1HFY24. Notwithstanding near-term pain, building material companies continue to be optimistic and have guided for demand recovery in FY25 on the back of tailwinds such as a) robust underlying demand in the real estate sector, b) steady tiles exports momentum (INR 15bn16bn per month), c) BIS implementation to limit MDF imports and d) distribution expansion in tier 2-3 cities. Century Ply, Greenpanel and Kajaria Ceramics are our preferred picks.

* Ceramics – weak performance continued in 3QFY24, decline in fuel cost led to improvement in margin: Tile demand remained subdued during the quarter as leading players (Kajaria and Somany) reported weak tiles volume growth (6% YoY for Kajaria, while Somany’s tiles volume declined 2% YoY). Bathware segment performance was also weak as Cera revenue declined 3% YoY (-4% QoQ). On the profitability front, fuel prices have remained favourable with a 4-28% year-on-year decline, (+11 to 12% QoQ). Operating margins of key ceramics players expanded 310-330bps YoY (contracted 10- 50bps QoQ). Our recent channel checks suggest that the demand scenario continued to be weak during Jan’24, though channel partners and companies are hopeful of demand recovering in the coming quarters. With the management’s focus on improving the mix in favour of value-added tiles, both Kajaria/ Somany are focusing on expanding capacity in GVT large slab tiles.

* Wood panels – muted demand; higher timber price continued to weigh on margins: Century’s ply volume performance was subdued at 4% YoY (-5% QoQ) while Greenply outperformed with volume growth of 11% YoY (-7% QoQ). Overall, demand for plywood remained weak on account of slowdown in home improvement activity during the festive season in Oct-Nov’23, though there was modest improvement in Dec’23. Plywood realisation remained firm QoQ (+2%/+1% YoY for Century and Greenply respectively). In laminates, Century reported strong volume growth of 16% YoY (on a lower base) while Greenlam’s volume growth moderated to 9% YoY (-6% QoQ), on account of lower exports (hit by challenges in the Red Sea). In MDF, Greenpanel’s MDF volume was flat YoY (-4% QoQ) on account of increased competitive intensity from imports as well as domestic manufacturers. Timber prices remained elevated, leading to margin contraction. Operating margin in the plywood segment for Century/ Greenply contracted 250/150bps YoY. Similarly, in MDF, higher RM costs coupled with lower absorption of costs led to EBITDA margin contraction in the range of 340-600bps YoY.

* Plastic pipes –mixed performance; Astral, Supreme outperformed peers: Leading plastic pipe companies (Supreme/ Astral) reported steady volume growth of 15%/17% YoY (13%/15% 4-year CAGR) while Prince/ Finolex and Apollo reported muted volume performance (-2%/-10%/+5% YoY respectively). Plumbing segment continued to report higher growth over Agri. Realisations across companies fell in the range of 7-11% YoY (- 10% to -7% QoQ), except for Finolex, for which it was +2% YoY on account of decline in PVC resin prices (-6% YoY/-7% QoQ). On the profitability front, adjusted EBITDA margin (adjusting for inventory loss) expanded 60-220bps across pipe companies but contracted 30bps YoY for Astral on account of a few one-off expenses (INR 110mn spent on 25th Anniversary celebrations).

* Maintain ratings: Weak performance during 3QFY24 of our building material coverage universe had led to post results EPS cut of 2-7% for FY25-26. We are hopeful on demand recovery in the coming quarter given the robust demand in the real estate sector. We maintain BUY ratings on Century Ply, Greenpanel Industries, Greenply Industries, Kajaria Ceramics, Somany Ceramics and Prince Pipes. HOLD stays on Cera Sanitaryware and Greenlam Industries on fair valuations.

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