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Century Plyboards' Q3FY19 results (Outperformer) - Surprise decline in Plywood, but MDF picks up!

Q3FY19 Standalone Highlights

• Rev. at ~Rs5.8bn was up 13.5% yoy (2% miss), mainly propelled by MDF ramp-up (80% utilization in Q3). Plywood rev. was down 2.6% yoy (8% miss), while PB revenue was up 57.7% yoy (5% miss). Laminates revenue was up 28.6% yoy (5% beat) while MDF rev. was up 85% yoy/44% qoq (18% beat).
• Plywood volume was flat yoy (excl. veneer, volume grew 9% yoy), while blended realisation fell 2.1% yoy. Commercial veneer volumes fell 44.5% yoy (high base effect/shutdowns in Myanmar/Laos). Ply EBITDA margins fell ~200bps yoy to 12.1%.
• Laminates (excluding Prelam) volume grew 9.7% yoy while blended realisation improved ~17.4% yoy (better product mix). However, higher raw material prices (crude linked) led to Laminate EBITDA margins dropping 640 bps yoy to 9.0% (although it rose 100 bps qoq).
• Particle Board (incl. Prelam) volume grew ~62% yoy while realisation dropped marginally by 3% yoy. However, weak product mix meant that PB EBITDA margins dropped ~640 bps to 20.8%.
• MDF volume/revenue shot up 48.5%/44.0% qoq due to capacity ramp-up and srong sales efforts. Margins too have shot up ~10% points qoq to 15.9% as a result.
• Overall EBITDA fell 13.5% yoy to ~Rs759m (17% miss) due to weakness in Plywood/Laminate/PB margins. Cons. EBITDA margin fell ~410bps yoy to 13.1% (IDFCe: 15.5%). PAT, however, fell only 11.2% yoy to ~Rs414m due to higher other income (+57% beat) and lower interest expense (48% lower than est; includes ~Rs40m MTM gain).

Key positives: Strong MDF/Laminates performance.

Key negatives: Plywood segmen performance weak.

Impact on financials: Cut FY19E/20E EPS by 1%/9% each respectively.

Valuation & view   

Although plywood performance was surprisingly disappointing (led by commercial veneer), we were impressed by the performance of the MDF business. Although realisations have seen some shrinkage in Q3 (and possibly expected in Q4 as well), the company’s focus on volume-growth over pricing should keep capacity utilization high which in-turn would put a floor on overall margins. Delayed, albeit improving implementation of the eWay Bill should aid large organized players over the longer run, and given that CPBI’s major capex investments are now behind it, we believe that the company could very well be on the road to improve its return ratios from current levels. We maintain our OP rating with a revised TP of Rs222 (22.5x FY20E EPS).