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Stock Recommendation | CENTURY PLYBOARDS LTD – BUY – Target Price : 232
Publish date: FEBRUARY 07, 2019
Century Plyboard results were largely in line with our estimates. Growth in revenues was led by volume gains in all segments – plywood, laminates and MDF while realization was under pressure in plywood and MDF during the quarter. Healthy improvement was being witnessed in MDF plant volumes but realization further declined sequentially due to heightened competition and fight for market share. The volume gain in plywood segment was offset to some extent by volume decline and pricing pressure in commercial vineer. We believe that growth going ahead is likely to be led by volume gains in each segment while pricing may remain under pressure in order to reap market share gains in near term.
Revenue growth of 13.5% YoY was largely in line with our estimates but margins witnessed a decline due to pricing pressure as well as forex losses. This led to net profits coming marginally below our estimates.
At Rs 163, stock is currently trading at 20.2x/16x P/E and 12.5x/9.7x EV/EBITDA on FY19/20 estimates. We tweak our estimates to factor in slightly lower margins and lower depreciation charges. We continue to maintain our price target of Rs 232 based on 23x FY20 estimated earnings. We continue to maintain BUY recommendation on Century Plyboards as we believe that stock price is already factoring in the pricing pressure in MDF segment and with increase compliance towards e-way bill implementation, volumes in plywood and laminate are likely to witness improvement.
Revenue growth of 13.5% YoY was in line with our estimates. Growth in revenues was led by volume gains in all segments – plywood, laminates and MDF while realization was under pressure in plywood and MDF during the quarter. For Q3FY19, plywood volumes were up by 7% YoY but realization dropped by 6% YoY due to higher focus on mid-segment sales. Laminate volumes for Q3FY19 were up by 10% while realizations were up by 17% YoY. MDF volumes were up by 48% QoQ while realization is down by 3% QoQ.
Plywood division volumes have improved by 7% YoY and volume growth during the quarter was impacted by real estate slowdown. Management now expects volumes to grow by 10% for full year FY19 as against earlier guidance of 14-15% growth for full year FY19. With continued focus on mid-segment plywood, realizations were under pressure during the quarter. Commercial vineer volumes and realizations continued the sharp decline during this quarter too. Going ahead, company expects plywood volumes to grow by 10% for FY19 largely in the mid and lower segment category.
Laminate division volumes have shown healthy growth on yearly basis. Company expects volumes to grow going forward with incremental volumes from new expansion. Going ahead, we expect 15-20% growth in laminate volumes with commissioning of additional lines.
MDF - MDF plant had commenced commercial production from Q3FY18 and during Q3FY19 company sold 35560 CBM (up 55% QoQ) at an average realization of Rs 20740 per CBM. MDF realizations are continuously under pressure due to commissioning of capacities from various players. Company has mentioned that due to increased competition, market share gain is likely to come at the cost of pricing. Thus we believe that pricing pressure may continue to persist for few more quarters before prices get bottomed out. Going ahead, we expect the capacity utilization to move up while company has maintained the margin guidance of 15%.
We maintain our estimates and expect overall revenues to grow at a CAGR of 16.5% between FY18-20.
Operating margins declined to 13.1% for Q3FY19 as compared to 17.2% in Q3FY18. Margin decline in plywood division is led by higher focus towards mid-end plywood sales and steep fall in commercial vineer realization as commercial vineer supplies are coming from Soloman island which have lower realizations. Company is now setting up a timber peeling capacity in Gabon at an investment of Rs 300 mn. Cost of timber is also low from Gabon and yield is also much higher, thus it will help in reducing the costs going forward. Laminate division margins declined on yearly basis due to higher raw material cost such as melamine, phenol, paper which is not fully passed on despite 17% YoY improvement in laminate realization. Going forward, laminate margins should improve as per the management.
MDF margins declined YoY due to lower realization but improved sequentially led by higher operational efficiencies despite lower realization and stood at 16% during the quarter (vs 6% during Q2FY19). Also during the quarter, glue prices and electricity cost had come down along with reduced glue consumption. Company has also calibrated the timber consumption as per the actual (lower) requirements. Thus going forwards, margins are likely to improve for MDF. Realizations of the company for the quarter stood at Rs 21964 per CBM, down 6% YoY and 3% QoQ. Company expects margins to improve to 15% in the MDF segment led by improvement in capacity utilization. Forex losses on unhedged borrowings also impacted margins during the quarter. Out of the total forex loss of Rs 198.6 mn, Rs 95.2 mn is taken from EBITDA while Rs 103.4 mn is treated as borrowing cost.
We revise our estimates to factor in Q3FY19 performance and expect margins of 14.5%/15.5 % by FY19/20 respectively. (earlier assumption of 15.3%/15.7% by FY19/20 respectively)
Net profit performance was impacted by pressure on margins and forex losses. Tax rate is in line with management’s guidance. For the full year, company expects the tax rate to be around MAT ie 21-22%. Company has reduced its exposure to Rs 1.42 bn in various currencies including ECB, buyers credit, working capital and due to rupee depreciation during the quarter, forex loss stood at Rs 198.6 mn. Out of this, Rs 103.4 mn has been treated as borrowing cost while remaining Rs 95.2 mn is taken off from EBITDA. Company is continuously trying to reduce the exposure to reduce forex losses.
Company has also taken a board approval for setting up a capacity in particle board and MDF in UP. Currently, company would focus on setting up particle board unit only for a capacity of 400 CBM per day at an investment of Rs 1 bn and would plan for MDF later.
We tweak our estimates to factor in lower margins and expect net profits to grow at a CAGR of 20.5% between FY18-20.
At Rs 163, stock is currently trading at 20.2x/16x P/E and 12.5x/9.7x EV/EBITDA on FY19/20 estimates. We tweak our estimates to factor in slightly lower margins and lower depreciation charges. We continue to maintain our price target of Rs 232 based on 23x FY20 estimated earnings. We continue to maintain BUY recommendation on Century Plyboards as we believe that stock price is already factoring in the pricing pressure in MDF segment and with increase compliance towards e-way bill implementation, volumes in plywood and laminate are likely to witness improvement.
Century plyboards is a leading player in plywood and laminate segment. In order to cater to varied customer preferences, companies have widened their product portfolio with multiple products at various price points. Century ply has expanded its laminate capacity and has entered into MDF and particle board recently. Company is also engaged in the container freight station (CFS) at Kolkata Port and also ventured into the readymade furniture market in 2013.
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