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Century Plyboards' Q1FY19 results (Outperformer) - Plywood margin improvement countered by weakness in Laminates/MDF

Q1FY19 Standalone Highlights

• Rev. at ~Rs5.4bn was up 22.5% yoy (in-line), mainly propelled by MDF unit ramp-up. Plywood revenue was flat yoy (est. 4%), while MDF revenue grew 8% qoq (est. 16% qoq). Particle Board+Laminates revenue grew 21% yoy (vs 14% est).
• Plywood segment volume grew 1.2% yoy (vs. 4% est.); however, blended realisation fell by 1.4% yoy (vs. flat exp.) due to poor product mix. Volume growth was supported by strong growth in Branded Plywood (+7.7% yoy), Deco Ply was up 24% yoy while Commercial Veneer volume declined 42% yoy. Ply EBITDA margins were strong at  17.3% (+440 bps yoy) due to lower RM costs.
• Laminates volume grew 27.2% yoy (excluding Prelam which is now part of Particle Board). realisation was up 2% yoy. Laminate margins at 9.4% (-560 bps yoy) were weak due to high phenol/paper prices.
• Particle Board (including Prelam moved from Laminates) volume grew  5.5% yoy, while realisation improved 7.3% yoy. Margins improved to 26.6% (vs 4.7% yoy) due to ramp-up in capacity.
• MDF volume/revenue grew 8.8%/7.8% qoq.
• EBITDA was up 41.7% yoy at ~Rs865m (7% beat) due to better Plywood margins and better CFS revenue. EBITDA margin 220 bps yoy to 16.1%. However, PAT beat of ~Rs454m (+33.0% yoy; 43% beat) was driven by change in depreciation policy (SLM vs WDV earlier).

Key positives: Strong Plywood margins.

Key negatives: Weak Laminates/MDF margins.

Impact on financials: Cut FY19E/20E EBITDA by 10%/7%. Earnings upgraded by 2%/4% due to lower depreciation.

Valuation & view   

After a difficult FY18, Q1 has started on a decent note, mainly on improved plywood margins. CPBI’s MDF and PB units are ramping up well, although high competitive intensity in the MDF segment is worrisome (will take some time before the industry settles down). Given that major capex investments are behind, and the GST/eWay Bill issues settling down over the next 12 months, the advantage would shift to organized players in the industry over the longer run. Already, RM pressures on Plywood have eased as unorganized players demand has fallen. However, given the change in depreciation policy to a more aggressive SLM (vs WDV earlier), we cut our target multiple by 10%. We maintain OP with a revised PT of Rs306 (22.5x FY20E EPS).