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Century Plyboards' Q2FY20 results (Outperformer) - Laminates/MDF cover for sluggish Plywood performance…

Q2FY20 Result Highlights

• Revenue grew 4.4% yoy to ~Rs5.9bn (in-line). EBITDA growth of 25% yoy to ~Rs928m beat expectations by 10% due to healthy margin improvement in MDF, PB and Laminates. Operating profit beat and higher other income led to net income beat of 19% (Rs521m; +37.9% yoy).
• Plywood: Weaker than expected with vol. decline of 3.9% yoy (commercial veneer fell ~40% yoy; core plywood fell ~1%), while revenue/EBITDA fell 1.8% yoy (margins flat yoy at 15.5%).
• Laminates: Volume/revenue was up ~22% yoy on account of ramp-up in new production lines (realisation flat yoy). EBITDA doubled to ~Rs195m due to utilization improvement and benign input costs.
• Particle Board: Volume fell ~17.5% yoy, but revenue declined ~8.6% yoy as higher value prelam PB volumes were flat yoy. EBITDA grew ~44.1% yoy due to better product mix and full capacity utilization.
• MDF: Pricing pressures appear firmly behind for now (realisation up 3%/5% yoy/qoq). Both prelam and plain MDF volumes grew in Q2 (overall vol. growth at 23.1% yoy). Better pricing (price hikes taken in mid-June) and operating leverage led to EBITDA surging ~5x yoy.

Key positives: MDF/Laminates performance.

Key negatives: Plywood volume performance weak.

Impact on financials: 14%/12% upgrade in FY20E/21E EPS due to better segment profitability.

Valuation & view   

Strong performance in laminates/MDF was tempered to some extent by sluggish plywood performance, but margin expansion yoy across segments (barring plywood) in H1 is quite impressive.  Although lower chemical/adhesive prices have played their part, operating leverage driven benefits in Laminates/MDF/PB would lead to better operating performance in FY20E despite a relatively muted top-line performance. Weak trends in plywood performance and the near-term outlook on real estate/consumption sentiment keeps our valuation multiple confidence capped for now (18x target multiple). However, despite the uptick in stock prices in Q2, there still is a healthy upside from current levels given the strong operating performance now expected in FY20E. Maintain Outperformer (TP Rs197). CPBI is an integrated wood panel company with exposure to laminates, MDF, Particle Board along with Plywood and hence a better story in our view as it is not dependent on anyone segment. Our financials do not factor in the ~Rs4-4.5bn capex for Sitarpur unit (MDF/PB) as plans haven’t been finalized yet and the unit won’t contribute to revenue before FY22E.