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Century Plyboards' Q2FY18 results (Outperformer) - MDF/Laminates to lead growth from H2 onwards…

Q2FY18 Standalone Highlights

• Revenue came in at Rs4.7bn, registering a growth of just 2.6% yoy (vs our estimate of 5.8% yoy). Amongst segments, Plywood performed poorly (5.9% yoy decline) while Laminates surged on the back of new capacity additions (+21.9% yoy).
• Plywood volume plunged 6.4% yoy due to GST-revision apprehension in the channel. Commercial veneer fell 29.9% yoy while branded plywood volume fell 2%. Deco Ply volume shot up 27% yoy. Overall blended realisation was flat yoy, as commercial veneer realisation remained strong at 52% yoy while Ply realisation fell 10% yoy.
• Laminates volume surged 24.2% yoy (domestic vol. growth at 25%) as dealer restocking commenced post GST. Growth was supported by Prelam (162% yoy), Exteria (43% yoy) and Exports (22% yoy). Blended realisation (including exports) was broadly flat (-0.5% yoy in Q2).
• EBITDA was flat yoy at Rs740mn (beat of 4% due to lower than expected other expenses). Flattish performance is attributed to weak top-line performance and higher raw material costs yoy. Gross margins at 46.4% declined 160 bps yoy while EBITDA margin declined 80 bps yoy to 15.6% (IDFCe: 14.5%).
• Plywood margins have been weak in H1FY18 (13.4% versus 15.7% yoy) due to RM supply issues in Myanmar and Laos and in its Assam unit (which turned into losses in H1); this should reverse from H2.
• PAT fell 19% yoy to Rs401mn (2.6% miss) due to lower other income and higher tax rate (due to losses in tax-exempt Assam unit).

Key positives: Strong laminates volume growth; low other expenses.

Key negatives: 6.4% volume decline in Plywood.

Impact on financials: Cut FY18E/19E EPS by 10.3%/2.6%.

Valuation & view   

CPBI’s peak investments are behind it and we expect strong growth from H2FY18E onwards led by capacity expansion in laminates and its new MDF plant even as plywood segment outlook for the rest of the year is tepid. Earnings growth will bounce back strongly from FY19E (52% yoy in FY19E) onwards as MDF capacity utilisation ramps ups and plywood growth revives. This coupled with industry-leading return ratios (28.8% RoE in FY19E) deserves premium multiples, in our view. Maintain Outperformer with a revised price target of Rs303 (25x FY19E EPS).