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Visit Note: Century Plyboards (Outperformer) - MDF overcapacity to ease out with a lag

We present key highlights of our visit to Century Plyboards India Ltd.’s (CPBI) recently set up medium density fibreboard (MDF) factory in Hoshiarpur district, Punjab.

Locational advantage: Hoshiarpur district in Punjab has ample timber supply (raw material) for MDF production. Moreover, state government’s thrust on creating a plywood hub here offers advantages like SGST refunds, cheap land and power cost (incl. electricity duty exemption).

Wide product portfolio, more being added: CPBI is the first in North India to provide MDF boards of 2.1-35mm thickness, as per plant officials. As a result, the company has quickly matched its sales volume with that of competitors despite entrenched incumbents in the market. CBPI has also set up an in-house pre-laminated boards unit and expects to add other value-added products like doors, etc.

North India MDF prices stabilize: CPBI believes current MDF prices have bottomed out, although the overcapacity situation in north India will take some time to sort out (~600 cbm/day capacity to be added soon). CPBI, Greenply and Action Tesa have agreed not to flood the market with MDF boards to protect pricing.

FY19E expectations: CPBI expects plywood to grow at ~10% (primarily volume-led) with margin of ~16% (RM issues sorted) in FY19E. Laminates should post faster growth at ~20% (but margins lower at 14-15% on high input costs) during the period. While particle board should grow by 10%+, MDF revenues should touch ~Rs3bn for the year with ~15% margins.

Valuation & View

We believe there is still some pain left in the MDF space, given the overcapacity situation and weakness in overall demand, although long-term drivers for MDF remain strong (competition against cheap plywood, rising adoption of readymade furniture). As a result, we have cut our FY19E/20E EBITDA estimates by 4%/6%, respectively. Over the medium-term, we remain constructive on CPBI, given its strong brand and key position in the organized space. We expect the organized segment to benefit from GST/eWay bill tailwinds. Easing raw material pressures too are a positive. We maintain our Outperformer rating on CPBI, with a revised target price of Rs285 (22.5x FY20E EPS). Recent stock price correction should be used as a chance to build positions in CPBI.