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Weak quarter, after a while

Century Plyboards’ (Century) 3QFY24 print was weaker than our expectation, as Revenue/EBITDA was 4%/27% below JMFe. Weak consumer demand has been seen across key building and home improvement products such as Tiles, Plywood, Appliances and House wires. Ply volume grew 3% YoY/-1% QoQ to 90k cbm in 3QFY24 (+9% 4-year CAGR; +4%/ +10% on YoY/4-year CAGR respectively for 9MFY24). Century’s MDF /Laminates segment volume grew 15%/16% YoY (+3%/-7% QoQ) respectively led by capacity addition in MDF and product launches in laminates (Sainik Laminates). The management is hopeful on BIS implementation to restrict imports of MDF and improve profitability. Timber prices remained high; however, that was offset by softening in key chemical prices, leading to gross margin expanding by 70bps YoY (-130bps QoQ to 46.1%). One-time expenses such as – 1) dealer meet expense of INR 70mn (once in 2 years) and 2) engagement of Mckinsey for advising the company on boosting sales of premium products (amount not disclosed) led to a sharp decline in EBITDA 18% YoY (-24% QoQ, 27% below JMFe). We note that Century has been outperforming peers in plywood with its 12% CAGR in volume vs. Greenply’s 4% over FY19- 23. We cut our FY25-26 estimates by 8% and 2% respectively and maintain BUY with a revised Mar’25 TP of INR 880, basis 32xMar’25EPS (earlier INR900). Lower-than-expected ply/MDF volume is a key risk.

3QFY24 summary: Revenue grew 7% YoY (+12%, 4-year CAGR; 4% below JMFe) largely due to modest revenue growth in the plywood segment of 6% YoY (-5% QoQ, +12% 4- year CAGR). MDF segment revenue grew 13% YoY (+18% 4-year CAGR, 1% above JMFe). Laminates grew 8% YoY (+10% 4-year CAGR) while particle board revenue declined 4% YoY (+10% 4 years CAGR, in line with JMFe). Gross margin expanded 70bps YoY (-130bps QoQ) to 46.1% as higher timber prices were marginally offset by softening in key chemicals. Higher other expenses on account of higher spend towards A&P and dealer meet (INR 70mn) led to EBITDA margin contracting by 330bps YoY to 11.3% (-270bps QoQ, 350bps below JMFe). EBITDA declined 18% YoY (-24% QoQ, +3% 4-year CAGR, 27% below JMFe) to INR 1.1bn. Adj. PAT declined 25% YoY/29% QoQ (+5%, 4-year CAGR) to INR 628mn (33% below JMFe).

Ply performance weak (volume grew 3% YoY), challenging near-term outlook: Plywood revenue grew 6% YoY (+12% 4-year CAGR, 5% below JMFe) driven by 3% YoY growth in volume/realisation (+9%/+3% 4-year CAGR). Higher other expenses of ~INR 70mn due to the company’s exclusive dealer meet (Royal Club dealer meet), and engagement of Mckinsey for advice on boosting sales of prime products led to EBITDA decline of 16% YoY (-32% QoQ, +5% 4-year CAGR) as margin contracted 250bps YoY (-390bps QoQ, 380bps above JMFe) to 9.7%. Timber prices remained elevated in 3QFY24 and are expected to remain high for a few more quarters.

MDF imports hurt Century’s volume/realisation, likely to see some relief from BIS implementation: MDF revenue grew 13% YoY (+18% 4-year CAGR; 8% below JMFe) as volume rose 15% YoY (+4% 4-year CAGR, 3% QoQ, 12% below JMFe) while realisation declined 2% YoY/ -4% QoQ (+10% 4-year CAGR). Higher timber prices led to EBITDA margin contracting 340bps YoY/840 bps QoQ to 19.2% as cost inflation was not passed on. Nonetheless, the company is set to improve the segment profitability through a higher mix of value-added/ premium products to 40% (current 34%). According to the management, BIS implementation in MDF will substantially reduce imports and benefit domestic producers both in terms of volume and profitability. The company’s greenfield expansion in South India is on the fast track and is expected to be commissioned in FY24.

Laminates seeing steady volume, margins to recover from here on: Laminate revenue grew 8% YoY (+10% 4-year CAGR, 1% above JMFe) led by volume growth of 16% YoY (+5% 4-year CAGR) while realisation declined 6% YoY (+8% QoQ, +5%, 4-year CAGR, 7% above JMFe). Laminates EBITDA margin contracted 330bps YoY (+40bps QoQ, 40bps below JMFe) to 11.6% on account of higher employee cost for creating a new team for the newly launched Sainik Laminate, which is expected to take some time to ramp up. The company’s 1st phase of greenfield expansion in laminates commenced operations during the quarter.

Particle boards’ performance continues to be impacted by high imports; hopeful on BIS implementation: Particle board revenue declined 4% YoY (-4% QoQ, +10% 4-year CAGR, in line with JMFe) on account of lower realisation (-19% YoY/ -4% QoQ, 2% below JMFe) as competitive intensity remained high due to higher imports. Volume grew 16% YoY (-7% QoQ, +5% 4-year CAGR). Higher raw material cost led to EBITDA margin contracting 470bps YoY to 15.7%. The management highlighted that BIS implementation in particle board will substantially reduce imports and benefit domestic producers both in terms of volume and profitability. The company’s greenfield particle board manufacturing unit in Tamil Nadu is expected to be commissioned by 4QFY25.

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