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Century Plyboards' Q1FY20 results (Outperformer) - Diversification paying off…

Q1FY20 Result Highlights

• Revenue grew ~7% yoy to ~Rs5.7bn (in-line). EBITDA growth of ~7% yoy to ~Rs926m was a robust 30% beat on est. due to better profitability in MDF, Laminates, and PB. Operating profit beat led to net income beat of 35% (Rs481m; +6.1% yoy).
• Plywood: The segment was weak with vol. decline of ~2% yoy (commercial veneer led decline – down 33% yoy) while revenue fell ~1% yoy. EBITDA fell ~16% yoy due to RM pressure and negative operating leverage but came in better than expected.
• Laminates: Volume/realisation was up ~7%/10% yoy respectively while revenue grew ~17% yoy. Capacity ramp-up continued during Q1. EBITDA grew ~30% yoy due to operating leverage benefits.
• Particle Board: Strong capacity ramp-up led growth continued into Q1. Volume/revenue grew 35%/37% yoy, while EBITDA grew ~41% yoy. Capacity utilisation at ~100% in Q1.
• MDF: Pricing pressures have started to abate (realisation down 5% yoy, but up 4% qoq) – CPBI took price hikes in mid-June. Volume grew ~39% yoy (utilization at ~84%), while revenue grew ~32%. Segment EBITDA jumped ~2.4x yoy.

Key positives: MDF/Laminates performance.

Key negatives: Plywood volume performance weak.

Impact on financials: 2%/1% cut in FY20E/21E EPS.

Valuation & view   

CPBI has started the year on a very strong wicket, despite the weakness in Plywood performance as other segments powered on far stronger than expected. Improving GST implementation/surveillance should improve the level-playing field and eventually tilt it in favour of organized plywood players like CPBI as they get ready for a future consumption uptick. MDF performance was a pleasant surprise, especially on the realisation front (qoq improvement), and could be an indicator that pricing has finally bottomed out (at least in North India), although we would wait for a couple of quarters before getting convinced of this trend. However, the near-term outlook on real estate and weak consumption sentiment makes us cut our target multiple to 18x (vs 20x earlier). Nevertheless, valuations remain supportive (13.3x FY21E EPS). Maintain OP (TP Rs176). 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.