Century Plyboards (India) Limited (532548) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Century Plyboards (India) Limited Q3 FY '21 Results Conference Call hosted by Asian Market Securities Limited. [Operator Instructions] Please note, that this conference is being recorded. I now hand the conference over to Mr. Karan Bhatelia from Asian Markets Securities. Thank you. And over to you, sir.

Thank you, Ayesha. A very warm afternoon, ladies and gentlemen. We welcome you all to the Century Plyboards (India) Limited 3Q FY '21 Earnings Con Call hosted by Asian Markets Securities. From the management side, we have Mr. Sanjay Agarwal, Managing Director and CEO; Mr. Keshav Bhajanka, Executive Director; Ms. Nikita Bansal, Executive Director; and Abhishek Rathi, Deputy General Manager. I would request Sanjay sir to give his opening remarks.

Hi, Karan. Good afternoon, friends. I am Sanjay Agarwal, MD and CEO of the company. Along with Mr. Keshav Bhajanka, Executive Director; Ms. Nikita Bansal, Executive Director; Abhishek Rathi, DGM, Investor Relations, we all had joined together in welcoming you to the third quarter FY '21 results call of Century Plyboards (India) Limited. Clearly, it is seen that Indian economy is on right track and growth path post pandemic, a V-shaped recovery. With next year's budget announced by the government giving further boost to the economy, both infrastructure and real estate sector will see benefits of budget, resulting in growth of our company, being directly linked to the sector. Overall, there was a very healthy growth, both in top line and margins across all segments. I feel proud in announcing that our company has done ever highest in the month of December, and it will continue to perform even better. This quarter was highest in terms of turnover, highest in terms of margins and profit with practically 0 debt towards quarter end. Financially, all ratios improved considerably and working capital cycle reduced to 51 days. Again, the best in the history of CenturyPly. As I communicated in the last quarter call that I am happy to report degrowth on positive side as plywood has degrown lesser compared to other products in the Panel segment. This quarter, plywood has shown considerable improvement with alone plywood volumes jumping up by 17% year-on-year and 37% quarter-on-quarter and Panel segment as a whole grew 11% year-on-year and 33% quarter-on-quarter, which shows sign of growth in our largest segment. I am happy to announce the company has taken decision on expansion of Hoshiarpur MDF facility by adding another line with additional capacity of 400 cubic meters per day and involving a CapEx of around INR 200 crores. The sale will take less than a year to commence commercial production. Apart from this, company is also considering additional MDF facility in different geographies. With these remarks, I hand over to Abhishek to take you through key financial figures, post which we are open to your queries. Thank you.

Thank you, MD sir. Good afternoon, ladies and gentlemen. First of all, I would like to mention customary disclaimer that this con call is here to discuss company's historical numbers and future outlook. In no way this should be construed as invitation to invest in the company. Results for the quarter along with detailed analysis is already mailed to you and also listed on stock exchanges and company website. So just taking you through the macro. Our top line year-on-year has grown by 10% to INR 654.36 crores against INR 595.42 crores. EBITDA barring the exceptional item was at 18.8%. That was INR 123.03 crores against INR 95.54 crores in the similar quarter last year. Profit after tax was at INR 65.88 crores against INR 19.09 crores. All our segments performed exceptionally well with significant improvement in margin. As against debts, our treasury assets are more. So in practical terms, we are debt-free. The quarter under the review was exceptional in terms of working capital cycle which was reduced to 51 days and stock depleted due to higher demand. However, we expect the same to be in the range of 60 to 65 days in future. We continue to look at the future with optimism and better performance every quarter. With these words, I open this conference call for question and answers. Thank you.

[Operator Instructions] Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Achal Lohade from JM Financial.

Congratulations for the great earnings. My first question is with respect to this MDF. You have approved the brownfield. Just wanted to get some more color in terms of the profitability because I remember earlier indication that the profitability could be little lower for this compared to a greenfield somewhere else. So if you could touch upon that, what kind of margins can we see on the incremental capacity, sir?

This is Keshav Bhajanka here. You see there are 2 aspects to new capacity or to the capacity augmentation that we have taken place. The first is in terms of operational overhead. The operational overhead for this capacity will be far lower, the prime reason being that it is at the same location. The second is raw material costs. One raw material cost, which is the cost of timber, is likely to be slightly higher by about INR 0.25 per kg or INR 0.30 per kg. On account of the same, even though we do not see a drop, but erring on the side of caution, we believe that the EBITDA for the new project will be 3% lower than the current EBITDA margin for the MDF plant.

Understood. And with respect to the greenfield and others, if you could just give a thought process as to what time line, what kind of capacity would we look at? Will it be a switching capacity between particle board and MDF, and so on and so forth?

We are aggressively working on the greenfield project. We are focusing on the South at this point in time. I think the capacity, once we announce the same, once our decision is firmed up, which is likely to take place in the next few months itself, within the space of 18 months, we should be operational with the capacity. This is not going to be a fungible capacity. It is going to be a dedicated MDF plant of 700-plus cubic meters.

Understood. Understood. And just 1 more question. In terms of this ply growth -- in the entire, actually, quarter growth for all segments together how much is the extent of pent-up demand do you think? What is the momentum in terms of the new projects or new work which is being initiated by the customer or the channel partners, if you could talk about that?

Actually, definitely, there is a pent-up demand that we are serving. But I think we are also probably capturing some sort of market share also because, I think, ViroKill had an effect, the PBC that we had during Q2 and Q3 as well. We have seen more sales happening than regular market. So I think there is some sort of movement towards our brand. Other than this, new projects are definitely starting. I think there was a bit of start in Q3, but I think it is going to pick up from Q4 more. Given this new budget, et cetera, I think there is a lot of focus on infrastructure and real estate, et cetera. So I think going forward, we are expecting that this new project will grow.

The next question is from the line of Sneha Talreja from Edelweiss Securities.

Congratulations on great set of numbers, sir. Just a couple of questions from my end. Plywood segment, I mean, an extension to the previous question, it has seen a phenomenal growth. Since you highlighted the growth has only started coming back, what's your outlook now over the next 2 to 3 years for specifically for Plywood segment in case you can highlight that?

So you see, I think this is just the start. Having said that, I do not want to be overly bullish on the same. We will definitely be delivering on double-digit plus growth for the foreseeable future. Having said that, there are a lot of initiatives that we have done that are now beginning to come to fruition. So initiatives such as the change in the go-to-market have now helped us, and I think that this is going to be a continuous boost to our growth going forward.

Sir, can we easily expect double-digit like 15% to 20% sort of volume growth continuing, given that all the structural changes that you've been making in the channel and this retail-based scheme is working well for you now?

So -- yes, again, we are very bullish on the future. But as I said before, we are committing double-digit plus growth. But definitely, the aspiration would be to do higher numbers.

Sure, sir. My second question is regarding laminates. We have not seen much of the volume growth since you had highlighted there are troubles with the container availability issues in the export market. Despite that, we have seen a phenomenal margin improvement. What are the reasons for the same? And are these margins sustainable or is there any one-off related to lower raw material cost benefit of something that we got during the quarter?

I think, yes, the margins are slightly on the higher side. But definitely, 17% to 18% margins in laminates looks sustainable now. And there have been a few fundamental changes that we have done with regard to our package structure, with regards to our discounting structure and with regards to our budget that have helped us. Alongside this, there have been cost-cutting initiatives that we have taken aggressively over the course of the lockdown. I think all of these have contributed to the margin expansion. Yes, there were certain undercurrent raw material price that we got in this quarter, was perhaps amongst the lowest that we've had in the past 2, 2.5 years. So I do believe that there might be a slight correction, but we'll definitely be looking at a 17% to 18% EBITDA margin in laminates going forward.

That was helpful. Sir, last question, which is a clarification to something that you pointed out in the previous question. What is the margin that you're looking at for the new plant for the MDF division, you said?

You see, the difference between the existing capacity and the new capacity in MDF, like I said, is twofold. One is lower operational costs because it is in the same infrastructure of the current capacity. The second is the change in raw material prices. As compared to the current price of wood, we are looking at a INR 0.25 to INR 0.30 per increase in the cost of wood per kg. So I would estimate that whatever MDF margins we are earning currently, because even these have been volatile today at 25% plus, the margin from the new plant will be about 3% lower.

Which is your greenfield plant or this applies even to the brownfield expansion that you're doing?

We are talking about the brownfield expansion right now in Hoshiarpur.

The next question is from the line of Karan Bhatelia from Asian Markets Securities.

Sir, just to focusing on the plywood, if I adjust the exceptional items, the margins have came in at a good 15% plus during the quarter. So what could be the reasons attributed? And what sustainable margins are we looking forward?

Okay. So you see, for us, Plywood is a very large segment, and we had certain costs which are actually fixed. So because of the volume gain, it is a bit but natural that the extra gain, extra profit you see, extra EBITDA you see is only because of that extra volume. If we can sustain the volumes, I hope we will be able to sustain the profitability or the EBITDA also. But I also think that because of those 2 months which were 0 practically, and if I divide that volume into next, so it makes it that we should get a good 8 months where actually these 2 months can be divided actually. So I believe that next few months, at least, yes, we should be able to maintain this EBITDA. And after that, it should go down to the original one. That is what I believe. Yes. But the volumes are going to go up. And if we can maintain the volumes up, then this EBITDA will actually stay. There is no 2 things about it. And we have taken too many, you can say, efforts in the market, whether it is go-to-market or whether it is advertising, into our capacities also, we are gearing up all our capacities. Presently, our plants are unable to meet the demand we have actually. So we are very bullish on the demand right now for at least, I can say, next 7 to 8 months, yes, absolutely, we are very positive.

The next question is from the line of Praveen Sahay from Edelweiss Financial Services.

Very congratulations on a very strong set of numbers.

Thank you.

The first question, sir, related to your Plywood and there is some slight deterioration in the realization on overall Plywood segment. So is that of due for product mix changes or something else?

It's a product mix change, actually, because the Prime plywood growth is there, but the growth in the Sainik plywood, et cetera, is much more and that is why the overall realization, you will see a little downtrend on a per NA basis if you see or per square meter basis if you see. That is actually the fact and which is -- actually will keep on happening in future also.

So any contribution of economic segment over this business?

I could not understand you.

So the high -- premium-end plywood and the economy...

Yes, yes. That is what I told. PVC -- our main item is the premium item, which is we call it essentially Prime and that has also grown actually in this quarter. But the growth of the economy segment is much higher. That is why per square meter we will be adjusting a little lesser.

Can you quantify that contribution of economy segment, Plywood?

Nikita, can you?

Yes. So in terms of value, it's around 28%.

Okay. Okay. The next question related to the Laminate. As, sir, you had highlighted that 17%, 18% of margin going to be a normal, so this indication is after considering some inflation in the raw material prices?

Yes, definitely. We have already taken a price increase of close to 7% in Laminate, and this is to account for the raw material price changes. And if raw material prices change further -- raw material cost change further, our prices will change further.

Okay. Okay. Great. And sir, one more thing about your statement you had made in the presentation that your strategy, one of the strategy -- new strategy you have started to monitor and help sales team that's OLJ to ODJ. Can you more elaborate on that? What exactly that you're going to a dealer and giving an order to them?

Unfortunately, this is something that we've been working on for quite some time. And until we drive it to full completion, I don't think it will be right to share further detail, but we will definitely keep you updated.

Okay. Okay. And any number or quantify the contribution of ViroKill right now in the business?

ViroKill is added product characteristic. ViroKill is available in 100% of Century Club Prime and 100% of Century Laminate. It is not actually a separate product category. It is an attribute. As such to quantify, it becomes very difficult.

Okay. Okay. And as you are going for expansion in the MDF, so do we expect the debt level to go up from here?

I think our free cash flow generation is quite strong. So I don't expect that to spike much going forward. There can be a slight change in the timing of cash flow versus cash generation. But I don't think going forward, there's going to be any substantial debt on the books.

And lastly, sir, on the working capital because you had managed very well and from normal level now it has reduced significantly. As the business is opening across the vertical, your major 3 verticals are giving a very good growth now. So this 50 days of working capital is expected to stay over here or expected to increase?

No, it is going to increase. You see this quarter, the demand was exceptional. It was far beyond what we had projected. If you remember from our last call, we had said that we would hope the demand remains or rather returns to normal. But in this quarter, it has moved far beyond normal. So I think that this 50-day working capital cycle is an exception, it is an aberration because stock got depleted quite rapidly. Going forward, I think long-term, we will be looking at a 60- to 65-day working capital cycle.

The next question is from the line of Pranav Mehta from Equirus Securities.

Congratulations on very good set of numbers. Sir, just wanted to understand on your particle board expansion. So has it been postponed or are you going ahead with the same?

We are not going ahead with any particle board expansion at the moment. But what we have done particle board compensated with some more machinery so that from our existing capacity of 180 cubic meter per day to we are growing up to 250 cubic meter. That has already been now installed, and we should see the result in the coming quarter.

Okay. Sir, my next question was related to your appointment of BCG. So how is that going to impact your strategic thinking going forward?

Right now, BCG has been appointed only for cost control. So it is not impacting any of our strategies at the moment.

Okay. Right. And sir, you said you have taken price hike in Laminate. So for other segments, as well, have you taken any price hike because raw material inflation has been a problem?

Yes. We have taken a price rise of 2% in the whole Panel division, and we have taken about 10% price rise in the MDF divisions.

And sir in Laminate...

And about 8% to 10% in the particle board division also. Yes.

Okay. Okay. And sir, in laminates, are you seeing more traction in exports or domestic is picking up better for you?

The exports during the initial phase of the lockdown was doing extremely well compared to domestic. But now domestic demand has recovered as well. So I would say that exports is going to continue on a growth trajectory, as will domestic.

Okay. And sir, my last question is on the competitive intensity. So how are you seeing things on both the Plywood side as well as Laminate side from the unorganized side?

We see a lot of times, people come up with this notion that there's going to be a radical change in the business because of lockdown or because of other factors and the unorganized sector will die out. I think once bitten twice shy. So what we have seen after demonetization, after GST, after the rollout of E-Way Bill and now after lockdown is the ingenuity of the Indian entrepreneurs cannot be challenged. So the unorganized sector has revived. I think, yes, we have taken some market share away because of the innovation that we have done. But the destruction in the unorganized sector has not been substantial in any which way.

Okay. And sir, just one last question. On this, Myanmar, will you see any problem on the face veneer supply because of that political situation that has developed in Myanmar?

No, our factory is still operational.

Factory is operational and we have started our new factory in Gabon also for face veneer. So if in case there is a problem, but I don't think there will be any problem as far as Myanmar is concerned because even earlier there was this military regime and now also, again, they have military regime. So I don't think it's going to make much of a difference. And this new factory in Gabon is going to suffice for whatever shortage we had and we were buying from outside. So now we will not have to buy some outside.

The next question is from the line of Nehal Shah from ICICI Securities.

Congratulations, sir, for a very good set of numbers.

Thank you, Nehal.

Thank you, Nehal.

Sir, on the MDF side, our margins have now moved on to almost 27%. Now with the kind of price hikes the industry has seen and as Century has also taken a price increase of 10%, do you think there's further scope for margin expansion to come in?

Nehal, I think you are much more expert on the industry than us because you are studying all the manufacturers across the country now. But yes, what you are saying is true. The margins should improve in MDF in the coming time, and should improve quite well actually for some time.

Right. Sir, if we go back to the last up cycle in MDF, margins actually went up to almost 30%, 32% kind of levels. At that point in time, obviously, green panel was there. Is the current situation good enough to see margins moving there or there are chances of excess capacity coming in probably, say, 1 year, 1.5 years later and margins are likely to again move downwards.

See, there is only one plant which is going to start in South, which is 600 cubic meter per day. At the present, demand cycle and our plants which we have announced today will be coming after 1 year. So -- and the kind of growth it has, so I don't think that at least for a year or so, this -- bettings will stay like this only. That is what we guess. And whether it should be stay for 2 years because any other guy planning the new units will not be able to start production less than 24 months, buying the land and getting the machinery and putting it into, huge. So I think for 2 years, products should have a good horizon.

Great. And sir, where is the demand for MDF coming in? Is it more from the OEM segment which is what we are hearing or is it from the renovation retail demand?

See, this is the main thing, actually. What you have touched is a very, very important thing. You see in India, till some time back, it was only the OEM. And today also, I can say more than 85% is OEMs. But plywood shops have started keeping MDF. If supposed yesterday if 100 pieces of plywood were being used, today maybe 90 pieces of plywood are being used and maybe 10 pieces of MDF is being used. So it is slowly making inroads. And then there is a product which we call premium MDF, which is actually that has [indiscernible] that is really catching the fancy of people. And for the first time in last 20 years, I have got calls from dealers who were requesting me to intervene so that they can get distributorship or dealership of that product. So this is a thing which we have actually forgotten in last 15, 20 years.

Sir, this virtually completes with the Marine Ply?

Will be the Marine Ply, yes -- with the Marine Ply, yes. And -- but maybe not the Marine Ply of Century Plywood because Marine Ply of Century Plywood is very expensive. So it actually competes with the second grade Marine Plywood, actually.

Sure, tier 2 Marine Ply.

Yes.

Sure. And sir, as far as metros are concerned, have they recovered back to their full potential or that's still -- there's still some way to go in starting this quarter?

Actually, all metros have recovered, and our last metro we covered was Bombay and now Bombay is in growth. So I would say that the whole India is performing well for us.

Great. And sir, last thing, any color on the [ CBD ] or the antidumping duty on the thin MDF? Anything like -- anything are we hearing from the government side?

Nothing till now. Nothing till now.

The next question is from the line of Prashant Kutty from Sundaram Mutual Fund.

Congrats on a very good set of numbers. Sir, couple of clarifications, sorry, if I -- if this is repetitive. I believe the reason as to why the plywood margin Y-o-Y is down is because of Sainik segment doing well. Is that right to assume?

No, no, it's not down. You may be saying per capita per square meter if you are saying is the different thing. Per square meter realization may be down. But then total it's really, really up.

Yes, I am a little confused because year-on-year, the margins are up. It is quarter-on-quarter 15.1% EBITDA versus 13.1% EBITDA in September and 15.1% versus 12.4% EBITDA in December.

Okay. This is -- you're referring to the Plywood. I was just referring to the entire Plywood and Allied Product segment.

I'm talking about the entire Plywood and Allied Product segment. There's an exceptional item. So I think that if you are considering, I'm not sure.

Okay. Okay. Sure. Sure. My apologies.

There's an exceptional item actually. There was some kind of a duty release we had in Guwahati unit, which has been now -- we have lost the case in Supreme Court. So certain money has to be paid back to the government. So that is a long -- after many years, we have to refund it. So that may be really showing some data little difference here. Otherwise, for this quarter, the percentage has improved, the total has improved.

Sorry, just one bit on the particle expanding within the plywood part. Well, I wanted to ask you, in terms of the premium segment, that was probably even pre-COVID was maybe struggling a bit. Have we seen revival across the board when you're talking as far as the Plywood segment is concerned, has the premium segment also kind of come back to growth rate? And how confident are we on that part of the business, if you could just throw some light on that?

Yes. So actually, the premium segment has actually grown for us. But like MD said, the Sainik segment has grown more than the premium segment. That's because the market is larger in the Sainik segment. In the economy segment, the market is larger. And it's a new product that we've come up with in the last 2.5 years. So definitely, growth is there. I think there will come a point where we will start selling as much economy brand as much as we do of the premium brand. So -- but that does not mean that the premium brand is not growing. Premium brand is growing in double digits.

Okay. It's growing in double digits?

Yes.

Okay. And is this one of the reasons as to why we are probably more confident that we probably can actually now go ahead and to double-digit growth rate in plywood because the premium has kind of come back to growth?

Yes, very much. That is our reason for confidence. And we are also actually doing too many things that we feel that are going to need to grow. So there are too many places that we're trying to plug-in the gaps. And this is the year for change. So we are not leaving any stone unturned to actually deliver that.

And...

I would...

Yes, sorry, sir, please.

I would like to add one more point. See, the per capita consumption of wood panel products in India is still 1/10 that of China. So we have a long way to go across all product categories.

Sure. Sure. Sure. Just one more clarification I would actually ask on the plywood part which is there. You said premium is growing in double digits. I also want to ask you, have we -- have you also rightsized our overall incentive structures and all as far as plywood is concerned because I just want to ask you that there seems to -- is there any element of pent-up demand over here which we have to take into consideration or is it just because you feel this is more structural in nature?

See, for 2 months, there was no sale. Even if I consider that as a pent-up demand, if that is also to be serviced by us, it should take us more than 8 to 9 months to service that demand itself. And this demand has come up, say, from -- you can say, from November onwards actually. So November, December, when we go up to -- actually, even if we say pent-up demand, up to June, I think, the pent-up demand will be there. And I believe that from real estate sector, what I hear from my clients and from the market, whatever I read on magazines and newspapers, the real estate sector, the finished goods sale is really, really, very good, especially in all the metros what I see. So if that is good, then we are not far behind.

Okay. Sure. Sure. One last question from my end, sir...

One thing to add.

Yes, sure, sir.

Sorry, you see, for us, when you look at plywood, it is one product which actually does not depend on the construction process. It depends on handover. Once somebody buys a house and starts making into a home, that is when plywood demand starts. So I think considering the way in which demand has taken off with regards to people taking possession and starting of doing houses, it bodes very well for us going forward.

Sure, sure, sure. Good. Great. One last bit from my end, on the MDF part, so the capacity which you're adding up the existing brownfield, that should be up and running by when? What's the target on your mind?

By Q4 next year.

Q4...

12 months from now.

12 months from now. Okay. Okay. And in regard to the South facility that you're talking about, that you said is still on. So that will actually now come up much later, right, or is that you will actually start action over there as well?

24 months from now.

The next question is from the line of Girish Choudhary from Spark Capital Advisors Private Limited.

I must say great all-round performance during the quarter. Just following up on the previous participant question on the commissioning of the capacity, which is less than a year. So just to get a sense of how confident are you in achieving this time line? Have you placed any orders for the equipment? And also if you can give some details on the make of the...

We have already placed the order for 2 of the machinery. And for the third, should be placed within the course of the next 7 to 8 days. I think we are 99% confident that we'll get the plant operational by next year. We have already commissioned India's fastest MDF plant, which was a greenfield project, in 16 months. So I think a brownfield in 12 months, when we have the change, should not be very difficult.

Okay. Okay. And my next question is on the Gabon unit which was recently commissioned. Again, here can you throw some light on how this plant will benefit the overall sourcing requirements for the company? And also the cost relative to the current sourcing norms.

You see the main objective of the Gabon plant is raw material security. Today, in terms of Okoume, the challenge that we see in getting the quality of Okoume that Century Plywood requires becomes a big issue because we only buy the top brass of Okoume, the category A, or A-grade or B-grade, as we call it. And the lower grades aren't very useful to us because it does not go well our plywood. So the Gabon plant will help us to actually source the right raw material that is required for our products, and that will be the biggest advantage. Yes, there will be a slight reduction in cost because we will be manufacturing there. Quantifying that right now will be a little difficult.

Okay. Okay. Lastly, on the proposal to acquire the Century Infotech, I just wanted to get some sense here in terms of any reason for acquiring the stake? And who are the remaining shareholders in the company?

So the Century Infotech was our subsidiary. I mean, we were holding 60.06% of the shares and remaining 39.94% was with our partners. So we are making it as a wholly-owned subsidiary. These companies are mainly developed for interior designing through e-platforms. So now we are making it our own subsidiary, 100%.

Any outflow which you can share?

Outflow, it will be insignificant. I'll give you the number maybe later.