Plywood demand to see gradual recovery; higher RM prices to impact margins slightly: CPBI posted plywood volume/revenue declines of 2%/12% due to slower-than-expected restocking at the dealer level. With the E-way bill implementation pushed back to Apr’18 and exemption limits raised for SSIs, market shift from unorganized to branded plywood would take more time. Accordingly, we cut plywood volume/revenue CAGR to 10%/12% (vs. 14%/17% earlier) over FY17-FY20E. During the quarter, the company saw a slight increase in prices of raw materials like imported face veneer. Moreover, commercial veneer trading also fell by 30% yoy due to supply shortage, both from both Myanmar and Laos. Though CPBI has shifted some of its sourcing to Solomon Islands, we expect it to face pricing pressure on sourcing of face veneer at least for the next 2-3 quarters.
Laminates to continue to do well on favourable GST rates, capacity addition: Laminate volumes grew 10% yoy and revenues 18% yoy. Due to a lower GST rate for laminates, organized players have passed on the benefit to consumers, resulting in demand slowly shifting from the unorganized to the organized sector. Additionally, the company is expanding its laminate capacity by 50%, which is likely to be completed by FY18. All these factors give us confidence that CPBI would strongly ramp up its laminates volumes going forward; we thus build in a volume/revenue CAGR of 20%/22% over FY17-FY20E.
MDF to start contributing from 2HFY18; particle board unit running at full capacity: CPBI’s MDF plant has started commercial production from late Sep’17. Management expects to generate Rs 1.8bn in FY18 revenues but we expect revenues of Rs 1.2bn with EBITDAM of 25% as the company’s MDF products will take time to gain market acceptability. We build in volume/revenue CAGR of 50%/53% over FY18E-FY21E.
Key risks: Slower demand pick-up, pricing war in MDF and any adverse environmental regulations/bans related to raw material supply in plywood are key downside risks.
Maintain LONG with a Mar’19 TP of Rs 329 (Sep’18 TP of Rs 333 earlier) based on a 28x PE on TTM EPS of Rs 11.8.
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