Shares of Century Plyboards have lost nearly 41 percent of their investor wealth since hitting their record high of ₹749 apiece in March 2022. However, after this correction in the last one year, domestic brokerage house ICICI Securities now has a positive stance on the stock and sees it surging over 70 percent in the next 1 year.
The brokerage has maintained its ‘buy’ call on the stock with a target price of ₹758, indicating a potential upside of 71 percent from its current market price of ₹443, as on March 27, 2021.
"Century Ply faces near-term demand and margin headwinds due to an inflationary environment and increasing timber cost. However, we continue to like the firm for its strong growth prospects, high return ratios and healthy balance sheet and believe it will potentially be a major beneficiary of the uptick in housing demand and higher spending on home improvement post the pandemic," said the brokerage.
The stock has fallen 14 percent in 2023 YTD, down nearly 13 percent in March after a 2.5 percent decline in February. It was flat in Jan.
Century is a midcap wood panel firm that is primarily engaged in the manufacturing and sale of plywood, laminates, decorative veneers, medium-density fiberboards (MDF), pre-laminated boards, particle-board and flush doors, and providing container freight station (CFS) services.
The company has manufacturing facilities near Kolkata, Karnal, Guwahati, Hoshiarpur, Kandla and Chennai. Its container freight station is located near Kolkata port. The company operates through six segments: Plywood, Laminate, MDF, Particle Board, CFS Services and Others.
Its weak December quarter results have also contributed to the recent correction of the stock. In Q3FY23, it reported a 16 percent YoY decline in its standalone net profit at ₹81.36 crore versus ₹97.27 crore a year ago. Its revenue rose just 3 percent to ₹877 crore in the quarter under review as compared to ₹848 crore in the corresponding quarter of FY22.
"The Q3FY23 ended with quarterly revenue of ₹877 crore on a standalone basis, a de-growth of just 2.6 percent on QoQ basis despite being a seasonally weak quarter," Century Plyboards India chairman Sajjan Bhajanka said. he added that the upcoming greenfield MDF project in Andhra Pradesh is likely to be commissioned in the second half of FY24.
"We've been quite observant with the kind of reaction we received from our consumers. MDF products are well received by the Indians so far, and we are expecting a robust demand for MDF in the coming years," Bhajanka further stated.
Investment Rationale
Modest demand: As per the brokerage, the demand for plywood has improved QoQ in the March quarter (Q4FY23) till date with March being the decisive month for the quarter, however, the demand for laminates remains tepid and the company expects an improvement in this segment post the commissioning of new capacities from the second quarter of FY24 (September 2023 quarter). ICICI further noted that the MDF demand for the company remains steady in Q4 and is expected to improve from FY24 as it has commissioned brownfield capacities in Hoshiarpur (Punjab) but pointed out that the demand for wood panel products for organised players has been tepid due to the inflationary environment. The brokerage expects Century Ply to witness a revenue CAGR of 18 percent in FY22-24 enabled by its recently commissioned brownfield MDF expansion at Hoshiarpur, Punjab.
Blended margins to improve QoQ but remain subdued due to rising wood prices: The brokerage expects the firm's margins to improve QoQ due to operating leverage and a 2 percent price hike taken in the plywood segment which will help negate the increased cost of timber. However, the prices of timber have increased due to higher demand and lower availability which will thus likely keep margins subdued in the near term, it warned. The brokerage expects a blended margin decline of 110 bps to 16.5 percent over FY22-25E but it is likely to improve in the long term.
But one key negative for the company remains MDF’s near-term headwinds, which are likely to continue due to higher imports.
As per ICICI Securities' interaction with MDF dealers, demand has remained stable in Q4 to date though imports have further picked up as international prices continue to be $205-210/cubic meter (due to a significant slowdown in demand from the US and Europe). This may result in tepid growth for domestic players in the near term, cautioned the brokerage. MDF imports, which rose 214 percent to 20,445 MT during Jan’23 are closer to pre-covid levels and may remain high in the near term, it added.
The brokerage further noted that MDF prices have not yet been cut by any major domestic player like Greenpanel Industries, Action Tesa, and Century Plyboards in Q4FY23. The price gap between domestic market prices and import prices at the port is 25-30 percent and the brokerage estimates a 7 percent and 3 percent lower realisations for Century Ply in MDF for FY24E/FY25E due to increased domestic supply and rise in imports.
Valuations
Despite the near-term headwinds, ICICI Securities believes that Century Ply is a play on the growing interior infrastructure market in India. With its comprehensive product portfolio, strong brand and wide distribution reach, the company is well placed to capitalise on demand pick-up in the housing sector, it said.
The brokerage expects the company to witness revenue and PAT CAGR of 16.5 percent and 16.1 percent over FY22-FY25E with a strong balance sheet and impressive return ratios. It continues to like Century Ply for its comprehensive product portfolio, wide distribution and strong brand name.
However, a slowdown in housing demand and continuing higher input prices, which may adversely affect demand/profitability are key risks to its upside potential.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
