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

Ladies and gentlemen, good day, and welcome to the Q2 FY '22 Earnings Conference Call of Century Plyboards India Limited, hosted by InCred Equities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rahul Agarwal from InCred Equities. Thank you, and over to you, sir.

Thank you, Stephen. Good afternoon, ladies and gentlemen. We welcome you all to the second quarter fiscal '22 earnings call of Century Plyboards India Limited. We have with us the senior management of the company led by Mr. Sajjan Bhajanka, Chairman; Mr. Sanjay Agarwal, Managing Director and CEO; Mr. Keshav Bhajanka, Executive Director; Ms. Nikita Bansal, Executive Director; Mr. Arun Kumar Julasaria, the Chief Financial Officer; and Mr. Nehal Shah, the CSO and Head of Investor Relations. We thank the management for giving us the opportunity to hold this call. I now hand over the call to the management team for the initial remarks, post which we will get into the Q&A session. Over to you, sir.

Ladies and gentlemen, this is Arun Julasaria, CFO of the company. I welcome you on behalf of Century Ply. First of all, I would like to mention customary disclaimer that this con call is just to discuss some historical numbers and future outlook. In no way this should be construed as an invitation to invest in the company. Results for the quarter along with detailed analysis has already been mailed to you and also updated on stock exchange and company websites. So I'm just taking you through the macros. We had the best ever quarter in terms of top line and margins. All our product segments, barring CFS division, did significantly well. Our top line Y-o-Y for current quarter has grown up by 55% to INR 808.29 crores against INR 519.82 crores. EBITDA margin was 20.7%, amounting to INR 167.56 crores against INR 87.9 crores last year. Profit after tax is at INR 103.08 crores against INR 51.44 crores. Our balance sheet net worth rose to INR 1,377.79 crores. All return ratios and working capital cycle are highly favorable. We continue to look at the future with optimism and better performance every quarter. The best ever results would be possible because of vision of our Chairman. Our Chairman, Shri Sajjan Bhajanka, is also on the call, and he will share his vision with all of you. My new colleague, Mr. Nehal Shah, who has been ex ICICI Securities, who will now onwards look after Investor Relations, is also on the call. And after Chairman's speech, he will share the road map of the company for future. Post that we'll open the forum for discussion. Thank you.

Dear friends, all the investors, all the well-wishers, all the participants, I wish you in advance very, very happy Diwali. And I am really delighted to share all-time best results of the company with you. As already explained by Mr. Julasaria some numbers, or all the numbers, they are much better. And particularly in these testing times, we are still recovering from the second wave of COVID, so the things are very well and we foresee a much brighter future. So not going in details and numbers, I will come to our broader vision with you and what is our feel of the scenario in plywood and other panel industries. In Century Plywood, we are consistently augmenting our capacity, and we are working our best to debottleneck all the existing plants. So almost in comparison to last years, we have increased our operating capacity to almost 50%. So now we are operating at almost the full capacity -- or declared full capacity, whereas we were operating at 70% earlier. And with the addition of a lot of new sectors and the particle board and anything and in all these pairs, we are operating at more than 100% capacity. In the particle board, our capacity was 180 cubic meters per day. So now we are operating at 300 cubic meters per day by modifying the systems. Similarly, in all the plant factories, we have introduced new equipments, some automation. So with that, we are able to increase the capacity. And there are many new initiatives in the company, like you are aware that we have employed Vector for supply chain and other efficiencies. Similarly, BCG is there. They are helping us in fine tuning our processes and wherever we have the chance to augment our profitability, productivity. So we are getting sufficient help from them. MDF also we are operating at more than 100% capacity. And most of the profitable centers are particularly the products where value-added products we are increasing and our pre-laminated products were augmented to a big scale. And we are contemplating to establish one of the largest ply factory in the country in Punjab. We have a license for that and one of the largest license in the country. And I am very much optimistic about the future. And why I'm so optimistic, I will share some background of that with you. Friends, you all are aware that with the introduction of particle board and MDF in the European market, America, so the plywood share was substantially declined. There was a time when 100% panel was from plywood segment. Then with the introduction of MDF and particle board, plywood share was reduced to 25% in total panel products. But the weather, the humidity, and the local situations in America and Europe are quite different than India. So if India, we can take any inference, it could be from China. And in China, last 5, 6 years, the plywood growth was very healthy. Plywood has grown at the rate of almost 259% in 5 years, and now China's utilized capacity is more than 200 million cubic meters per annum, wherein our capacity or our production in India is only 10 million cubic meters. And similarly, particle board, also China's production is around 35 million cubic meters. MDF, China's production is around 55 million cubic meters, whereas our production is hovering around 1.5 to 2 million cubic meters. So whatever today China is there, I foresee that in next 10 years and by that time we shall surpass the population of China and by that time our middle income group would expand substantially. So with that housing, you're already passing through a boom phase. And in another 10 years, housing activities will multiply manifold in the country. And this would be era so panel products would be very much in demand. So even if we reach 25% of what in the present China is. So against 200 million cubic meters, even if we produce 25% of that, after 10 years from now, it would be 50 million cubic meters. So from 10 million cubic meters to 50 million cubic meters in the next 10 years, we can imagine, I'm sure it will by far surpass that quantity, 50 million cubic meters. But even at that this thing, there is very, very bright scope for expansion of plywood or this thing and particularly at Century Plyboard, we are very bullish. We don't foresee that plywood would either reduce or pave the way for MDF and particle board. Yes, MDF and particle board would grow. But plywood would continue to lead all the panel products. And similarly, MDF and particle board also, we should reach minimum 10 million cubic meters capacity from 1.5 million to 2 million now in another 5 to 6 years. So with this, we are very much optimistic, we are foreseeing a great future for Indian panel industry and particularly for Century Plyboard being the leader and being present at many locations in the country, South, West, North, East, and in certain areas, we have multiple areas. So we are fully utilizing the opportunities, and we are sure that we shall give good appreciation to all our investors. And we are very, very conscious of skill upgradation of all the people, to hire talent, to retain talent. We have created a center of excellence in the company under the guidance of BCG, Boston Consultancy Group. And we have a division, Container Freight Station, that now we are hiving off to a subsidiary because it is a little unrelated business, and in logistics also, there are opportunities, but it is not our core sector. So maybe we shall align with some like-minded people or some little players in this thing. So for that, we have to facilitate that facility, we are hiving off our CFS division into a subsidiary. So friends, almost I've shared my broader vision. And if you have any particular query, maybe in the course of discussion, I shall attend to it. And I hand over to Nehal Shah. Nehal, as Mr. Julasaria already explained, has joined us recently and he's Chief Strategy Officer and at the same time he's in charge of the Investor Relationship. Thank you. Nehal, you can take over.

Hello, friends. I would first like to wish you all in advance a very happy Diwali and a happy New Year. Now as discussed in the last call, we have come out with a 5-year road map, wherein we expect our revenues to cross INR 5,000 crores by FY '26 end. Now this implies a 19% revenue CAGR over the next 5 years. That's from FY '21 to FY '26. The road map slides are incorporated in the corporate presentation, which we have just released today. Now within our portfolio, we expect our MDF segment to grow the fastest, which is in excess of 25% over the next 5 years, while we expect the growth in plywood, laminate, and particle board to be in teens over the next 5 years. Our INR 5,000 crore revenue assumption by FY '26 would be driven by following: Number one, double-digit growth CAGR by the wood panel industry over the next 5 years, which would be basically driven by low base of last 5 years, where the industry growth remained marginal. Expected higher growth in occupation of premises driven by liquidation of existing inventories in the residential real estate sector, and higher growth in excess of 15% in MDF and particle board categories. Two, aggressive CapEx initiatives to be largely met through internal accruals. We strongly believe that large addressable market plus CPIL's robust operating cash flow would represent a strong reinvestment opportunity for Century. We are likely to initiate a very aggressive CapEx of INR 1,230 crores over the next 5 years as compared to INR 1,140 crores of gross block created over the past 35 years since inception. This would be a mix of brownfield and greenfield expansion across product segments over the next 5 years. The likely CapEx breakup would be as follows: MDF INR 850 crores; plywood INR 160 crores; laminates INR 150 crores; and particle board INR 70 crores. Three, the market share gains in Plywood segment would be driven by the recent out-of-box initiatives like ILP; SFA; hiring of Vector consultants, BCG for improving efficiencies, et cetera; aggressive A&P spends, which is likely to sustain, if not accelerate it; sustained working capital and input cost pressure faced by the unorganized and the regional players would also help us gain market share gains. Four, the market share gains in the more organized segment like MDF and Laminate segment. This would be again driven by recent out-of-box initiatives and creation of additional capacities over the next few years. All in all, we expect ROC to scale higher over the next 5 years driven by sustained working capital discipline, reinvesting capital in higher ROC generating segments, and sustenance of lean balance sheet despite aggressive CapEx over the next 5 years. I will now open the floor for Q&A. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Praveen Sahay from Edelweiss Financial.

Thank you so much for sharing good presentation and having a 5-year plan. So the first question on the 5-year plan only, that the gross block, as you had said that INR 1,230-odd crores for the next 5 years and largely from the MDF. So as I understand that MDF has a low ROC as compared of other businesses. So do you believe that is ROC to sustain at the higher level or will reduce with a larger MDF CapEx?

Nehal here. Yes, on the MDF side, in fact if you look at the ROC, the ROCs are much stronger at this point in time. The ROCs are closer to 30%, 35% at this point. And with every price hike, this is getting more and more sustainable. Having said that, with the likely capacity addition over the next couple of years, we'll have to wait and see how the ROCs get impacted. But we are fairly certain of having at least 20%, 25% ROCs over the longer term. So that's what we believe. Yes.

Okay. Great. And the next question is related to the quarter performance, especially from the plywood division. So there also, if I look at especially on the realization side, it has backed to the, you can say or even the higher than that of a pre-COVID level. So do you believe from here is there further room for improvement in the realization of the plywood division? Hello, am I audible?

No, there was an echo. I think that was one of the phones which were not muted. But actually, in the previous calls also, we said that the market where we can actually grow lies at the range of INR 80 to INR 100, and we have brought Sainik 710 as a product. So going forward, and since the last 2, 3 years, our concentration has been in Sainik. And because of that, our sales is growing much, much faster in the Sainik category as compared to the premium category. Having said that, premium category is also growing, but the growth in Sainik has to be larger because the market space is more. Because of this, going forward also, average realization in panels will be lower because Sainik sells at a lower value. So I don't think I can say that we will maintain these. But I think because of our strategy itself, there might be a bit of degrowth. But overall, there will be a growth in revenue, there will be a growth in PAT and there will be a growth in... Yes.

And while Sainik might have a lower realization, it also has a lower cost. This will have no meaningful impact on margins. We are likely to sustain margins. However, having said that, overall average realizations after the price hikes, et cetera, et cetera because of the higher contribution of Sainik, which may not move up sequentially going forward.

Okay. Okay. Got it. And...

These were Nikita and Keshav.

Yes, yes. That I know. Thank you for that. So secondly, on the MDF, that's a higher realization for a couple of quarters like the first quarter and the second quarter we had already seen. So can you also -- because also Nehal had said that these numbers to sustain and the ROC profile because of that will also sustain way forward. Because a lot of fluctuations we have seen in the past, especially in the MDF realization, so how you are seeing this realization actually to sustain at this level?

This is Sanjay. So MDF is a product which is actually growing in the country now. And we have seen in the past, as and when there is a new capacity that comes into the market, and as the overall market is not too large, even a small capacity of 600, 800 cubic meters per day makes a small change in the market prices. In the last 2, 3 months, you have seen that the cost of raw material, especially melamine and urea and all these things, have gone up. And we have passed on the costs, but then it takes -- there is some lag. You will see that we have always tried -- by increasing the prices, we have always tried to sustain our EBITDA, which we have been successful, if you look at a longer perspective. In some small periods of time, you can see that, yes, it is tougher. But we have always come back. Right now, the EBITDAs are, I think, very nice. We have taken a price rise in the last quarter. We have taken the price rise in Q1. Again, we will be taking some price rises in the third quarter, Q3 also. So I don't see any problem or any real downside. This will happen as an when a new capacity comes for some time, which we all should be prepared.

And any impact on the imports? Because import has also reduced significantly. So will that come back? Is there any thought process on that?

You see the import of MDF might come back, maybe in a year, maybe in 2 years' time. But the industry is also really becoming very efficient and capable. I think by the time the imports start, we will be more capable, because our capacities will be higher. And all these things is doing one more thing, actually, the plantation, which was actually slowing down a little bit in the whole country, that plantation is also now everywhere across the country, people will start planting a lot of trees. The farmers now see that, yes, there is a possibility of getting a good price. So in coming few years' time, the total coverage under plantation in India will grow multifold when people like us are doing whatever possible. And that plantation will actually bring in more capability to India to fight imports.

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

Congratulations on a great set of numbers. Sir, just 2 questions from my end. Firstly, if I look at volume growth, it has been phenomenal, especially since last 2 quarters. What are the attributes that you would like to give it? So one thing could be there is a significant amount of shift that at least we are hearing on the standard front from unorganized to organized as the demand picks up? Or would you actually give it to some amount of pent-up demand also in system? Or do you think that this kind of volume growth is more or less sustainable?

Yes. One part I will take up. Like, there was this organized, unorganized, pre-GST, post-GST. So earlier, in the industry, while giving better valuation, the GST sector was prematurely discounted, because ground reality did not change. Although GST was introduced, but even like clandestine removal and other things were continued. But during the last 3, 4 years, things have changed substantially with the introduction of the e-way bill, with the forward integration, with backward integration with a value chain created. So now people are compelled to comply with GST. Nobody wants to buy without GST. Nobody wants to sell without GST. So as I said earlier, out of the 3,300 units in plywood industry, earlier 2,500 were totally exempt, they were not paying any tax; 700 were partially paying tax; only 100 were fully taxable. So now the situation is totally opposite, all 3,300 units, they are tax paying. There is no exemption. So with that, at that time our usage of GST or the taxage reduced from 30% plus to 18%. And for the unorganized industry, it has increased from 0% to almost 10%. So that 30% get narrowed down to less than 10%. So this is a positive factor in our ever. And obviously, there is migration from Unorganized to organized. This is one part. And obviously, the people, their paying capacity is increasing. They want to go for quality product. So our ViroKill or this fire safe. So they are catching attention of the people. And now, Sanjay or Nikita, you can take up.

Yes. I will just add that the things that we are doing in the last 1 year, one of our success has been the TVC advertisement of ViroKill as well as the Firewall. And now we're also advertising on Sainik 710 on regional news and Hindi news. So I think that has been one of the factors of success. Other than this, we are continuously changing our go-to market that we keep talking about. We are using various consultants to help us look at various ways we can increase sales. So because of those endeavors, I feel they result in this. And also, there has been a pent-up demand. Q2 has definitely seen a pent-up demand, which was created because of the Q1 COVID second wave. But there is growth because real estate is reviving again. So going forward, we see that these growth patterns are there to sustain and it is an opportunity for a company like us to grab it and increase our market share.

Nikita, that was helpful. Can you also give us a breakup for Sainik itself, that how has the share moved up, because you have been saying that the segment is driving up the growth. Just want to understand where was it last year versus where is it now? .

So if I say last year, it was around 28% to 29% of the ply sale. Last quarter, it has been about 33% of the ply sale. But you need to realize this is in terms of value and Sainik is at a lower value.

Right. In volume terms, it would have been even much higher.

Yes, little higher.

Got that. My second question was related to margins. This quarter, we have seen phenomenal margins across the segment, whether it be plywood or laminate. Is there any one-off element with regard to lower cost of inventory? Or you think that the kind of precautions and kind of cost saving measures that you've taken after BCG and all is leading to such kind of margins? Or is there any one-off element?

I think it's a threefold answer as per me, and I think Keshav can add after me. I think one is definitely BCG helped us really lower our costs and that has helped us with MDF, et cetera, primarily in MDF, to improve our margins there. But also, in case of the laminates or plywood, we were manufacturing throughout Q1. Because of that, we were manufacturing at a cost which was much lower and there has been a raw material increase in Q2, and we took a price increase also in Q2, because of which I think we were able to give a better margin. I'm not sure that whether this is a sustainable margin. But we will -- like say, in case of plywood, like we've always said, we'll be between 13% to 15%. That is a sustainable margin, but I don't think we are going to grow from what we are showing today.

In the case of laminates, I'd like to add that, yes, raw material costs did favor us substantially because of the decision to continue production during the semi-lockdown phase of quarter 1. Going forward, again, like Nikita said for plywood and laminate, we have been targeting sustainable EBITDA margins of 15% to 17%. And I think we'll definitely be able to deliver along those lines.

Got that, Keshav. In that case, are we able to pass on the entire cost increase which has been taken in Q2? I mean, Q1, definitely, we had some amount of inventory which we used in Q2. But beyond this, is everything -- I mean, the raw material cost increase is passed on or could we see some marginal pressure in the coming quarters because of some delay in passing on the cost or needing to phase out pricing.

The situation with regards to raw materials was quite precarious. As you are aware, the prices of melamine were changing on a twice a week basis. So yes, we have been able to pass on the cost increase until a point in time, and we are looking at further cost increases over the course of this quarter. So I think that maybe over the course of the next couple of months, we'll definitely be able to pass on the entire raw material cost increase to the market.

The next question is from the line of Achal Lohade from JM Financial.

Congratulations for the fabulous performance. Now my first question pertains to plywood business. If I look at our first half volumes and compare that with first half FY '20, I see it's fairly stable on a 2-year stage. So what I wanted to check is, in terms of the volumes, have you seen the kind of volume that you've delivered in the second quarter sustaining going forward in this quarter? What I'm trying to imply is, is there a substantial element of pent-up pitch played out in this quarter and which you think could normalize and we could look at a more normal growth in kind of a number what Nehal had articulated?

See, we are right now in a very growing market. Definitely, there was a factor of -- so we grew from Q4 to Q2 at about 10%. So if you compare two full quarters, we've grown at 10%. Definitely, it is not possible to sustain a 10% growth quarter-on-quarter. But there will be growth from Q2 numbers as well going forward. So I don't think the reason for that is pent-up demand. It's just the effort that we are putting is going to result in growth.

And with respect to the capacity addition, if you could just highlight what capacity is coming in when, which segment?

Sorry, I couldn't understand. Could you repeat?

In terms of the capacity addition, which product capacity is getting added when, for laminate, plywood...

I think Nehal will explain this -- Nehal will take this up.

Yes. So as we said, the CapEx and the expansion would be on these lines. In the Plywood segment, as the Chairman already indicated, we will be pushing forward for a large plywood capacity in Hoshiarpur. So that's one in plywood. Besides that we'll also see capacity increasing because of debottlenecking across our plants, which are 6 plants. So this is with respect to ply. Secondly, with respect to laminates, we have already added one line last year, which will help us grow in this year, and we're also planning to come out with a couple of more lines going forward. So this will arrest the growth factor over the next 2 to 3 years. And that largely, we expect it to be a greenfield one. And within MDF, as you are aware, the Hoshiarpur brownfield expansion is going to come through by July 2022. And the South India CapEx, as we said, there has been a delay of 6 months, and we expect it to commission in H2 of FY '24.

What about particle board?

So particle board, again, we are planning for an expansion. But it's too early days to discuss at this point in time.

I'd like to add one point. In particle board, substantial efforts have been taken to debottleneck and augment our current production capacity, and that will start to give the drill from the current quarter onwards.

The next question is from the line of Venkat Samala from Tata AMC.

So my first question is just an extension to the previous participant's question. So if you could just give some color in terms of quantum; in next 1 to 2 years, what capacity in which segment will we be adding? In terms of turnover or capacity terms also that should do.

Sorry, you want to know the capacity that would be added, segment wise?

Yes. Segment wise, in the next 1 to 2 years.

Yes. Nehal here. So as we discussed, the MDF capacity expansion will come into play in July 2022. So this will add 132,000 CBM to the existing 198,000 CBM. In FY '23, we are looking at getting the Hoshiarpur plywood plant on stream. So these are two facilities which are likely to come on stream by FY '23.

Sure. And what will be the capacity for the Hoshiarpur plywood expansion?

So initially, it will be 50,000 square meters per day. And within a year, which is '22, the 100,000 square meters per day.

Sorry, sorry, your voice is not audible. I could not get that number. .

Initially, it will be 50,000 square meters per day. And within a year, we shall augment it to 100,000 square meters per day.

Okay. Okay. Okay.

That would be almost 20% addition to our existing capacity.

Understood, understood. And which part of FY '23 will we be expecting this to come on stream? .

H2 of FY '23.

Okay. Okay. Okay. Sure, sure. And from the current capacity with whatever capacity improvement additions that you are planning, what is the max turnover that we can expect?

So we're planning to add another 60,000 cubic meters from the existing plants over the next couple of years through debottlenecking. So that should add another INR 250 crores to INR 300 crores in the kitty.

Understood. Understood. Sure, sure. And my next question is, if I just look at the 5-year road map, you're planning to spend about INR 1,200-odd crores, right? And then the incremental revenue, if I just look at the current quarterly run rate, if I extrapolate for the annual run rate, would be around INR 3,200 crore, right? So INR 1,200 crores CapEx spend will lead to another INR 1,800-odd crores, if I just sort of take the difference, INR 5,000 minus INR 3,200 crore. Am I looking at it the right way? Asset turns of about 1.5.

That INR 5,000 crores is not necessarily 100% capacity utilization. We have done a phasing and based on that. So if you look at 100% capacity utilization, the figures would actually be even higher.

Okay, okay, okay. So this INR 1,200 crores, what would be the effective asset turn for this?

The asset turns will definitely be in excess of 2, because the CapEx is in between product categories. As you know, in plywood and laminate, the asset turnover is normally close to 4x. But as in MDF, we should be getting an asset turn of over 1.5x and similar or higher in particle board.

[Operator Instructions] The Next question is from the line of Priyam Khimawat from Infinity Alternatives.

Congratulations for a great set of results. Just in terms of MDF, I wanted to understand what is the current OEM and retail mix in our North plant?

Yes, yes, please repeat the question.

So what is the current OEM and retail mix?

So you see, as far as our particle board and MDF is concerned, in particle board, most of it is going to OEM. And in MDF, whether it goes directly to OEM or it goes via retailers, but more than 75% of the orders are procured by us from OEMs. This is the strategy we have adopted in last about, you can say, about 1 to 2 years' time, because OEMs are our main and final consumer, so we must have direct access to them. So we are reaching out in -- you can say, our planning is that more than 70% should go directly to the OEMs. In case of grade, yes, we go through some local dealer or a retailer that is there.

Okay. And this quarter, if I look at our MDF capacity utilization, it'll be around 42,000 CBM cumulatively. So it appears to be on the lower side at an 85% capacity utilization. So is it because we've taken a shutdown of the plants or something like that? .

You see, MDF is always seasonal. During the monsoon season, there is a slightly subdued demand. So you will see demand or the total production capacity utilization, et cetera, being higher during Q3 and Q4.

Okay. And can you help us with the breakup of the INR 850 crore MDF CapEx, which we are planning to do. Is it like INR 300 crores for the Hoshiarpur expansion and INR 550 crores for the remaining one? Is that understanding correct?

No, it is INR 250 crores for the Hoshiarpur expansion and INR 600 crores for the South expansion, which currently is a ballpark figure that we've worked out on. The exact number might be slightly higher or slightly lower.

[Operator Instructions] The next question is from the line of Udit from YES Securities.

Congratulations for a good set of numbers. Sir, on our product mix with plywood, etc. So can you just help that how will the revenue mix of our plywood, MDF, and laminates generate the INR 5,000 crore revenue that we're expecting, what kind of split do we see, like plywood to be 55%, or kind of?

So if we look at the next 5-year projection, what we're doing in terms of our road map, we expect MDF to grow substantially higher, which I said, in excess of 25% over the next 5 years. Except for that, the other parts, we expect them to grow in teens. So the plywood percentage obviously will come down to some degree, while MDF proportion will increase. I think that's the only thing which will change, and the others largely should remain constant.

Okay. And just last one industry point on the MDF. So do we see this market to remain organized or we are seeing some cheaper kind of -- except for import, some cheaper quality via some Chinese manufacturing or something happening North on the ground, or this can be fairly large, you will need to organize in the incoming decades?

Sorry, you will have to repeat the question, please.

Since MDF currently that is controlled by -- it is largely an organized place. So do we see some kind of cheaper material coming in for MDF as well going forward?

I think I had answered this question a little while back that the imports, yes, it's a reality, but I don't see any reason of imports in next 1 to 2 years' time because of China's own consumption, number one; number two, I do not see a reason because of the logistic costs being very high. And in the meantime, internally, our capacities are going larger and larger, and we are going to become more and more efficient. And the fourth point is, because of the internal growth of plantation, I expect the availability of timber will now become bigger and bigger in times to come, and that will see to it that our cost of timber does not go up. So I do not see a big threat. But yes, from time to time, even a new capacity within the country, or even imports from other countries will affect for some time. Even earlier, I don't think China was a big threat to India. Chinese material was not coming much to India. Most of the material coming was from, I think, either Vietnam or Malaysia, those are the countries. But I don't see in near terms, about a year or 2, I don't see any problem. And now there is a substantial change in the pricing pattern. So already the Chinese, Vietnamese, and other products, their cost and their selling prices are increased. And now India is very much competitive. Now Green in the last quarter has substantially increased their export. And similarly, M-Seal also is contemplating to export in big numbers. So as and when they increase their production, they will also resort to export. So earlier even with the antidumping and other things, we were less competitive to the imports, but now it is not the case. And particularly, the North India market, which is landlocked. So the import would be very, very costly. So it can hardly compete with the domestic production. So chances of a substantial import in the country is not feasible in the near future.

Just one clarification. While talking about plywood earlier, I guess the speaker mentioned about the sustainable EBITDA margin of 15% to 17%. This is in the plywood division. Is that understanding correct?

No. That was in the laminate division of 15% to 17%. For plywood, it's between 13% to 15%.

The next question is from the line of Rahul Agarwal from InCred Equities.

Congratulations for a great set of numbers. So I had 3 questions. Firstly, on the 5-year plan, you obviously mentioned in terms of what CapEx you want to do and how would that basically help in getting more revenues. I'm sure at that scale there would be a lot of operating leverage benefit. You mentioned that laminates and plywood have a certain range of long-term sustainable margins. But overall, at a company level, would you guide for any margin targets or any EBITDA targets you have 5 years out, broadly speaking, because at that scale, I'm pretty sure the company would make much more money, right?

You see, our objective from day 1 has always been to deliver better and better returns and to scale up our margin. However, having said that, we have seen what a difficult time we have passed through in the last year or 1.5 years. So I would say that we have always targeted sustainable EBITDA margins of 13% to 15% in ply, 15% to 17% in laminates, 20% plus in particle board, and 25% plus in MDF. And going forward, we will try to maintain similar EBITDA margins. That is the target. But of course, all our effort is always to improve our margins as and when possible.

Got it. Okay. Secondly, on the laminate realization, there is a very sharp jump up of 11% Q-on-Q. Is that sustainable? And that is obviously primarily led by price hikes, but is that the number to look at going forward?

No. There was a change in product mix that took place between export and domestic between Q1 and Q2. And the laminate realization that we are seeing now, we should look at similar realizations, perhaps a little higher going forward, but this sort of a jump will not be witnessed.

Got it. And what was the export domestic mix for the quarter?

The exact number, Nehal or the team can get back to you later. I don't have the numbers on me.

Sure. And lastly, on this particle board capacity utilization. You alluded to some debottlenecking happening. And obviously, the production levels are looking much higher than what capacity you have. But could you elaborate a bit on this? Essentially, what kind of production we should look for, for particle board this year? And what capacity increase actually happened? That's my last question.

We have augmented our production capacity from 180 cubic meters per day to 250 cubic meters per day. And I think going forward, we will be able to maintain 250 cubic meters per day.

Actually, we have installed one more dryer. Earlier what we had seen, we had enough pressing capacity, but our drying capacity was less. So we installed one more dryer. So now in the same place, where earlier we were imagining that our capacity was 180 cubic meters. And now like we are going for like large size only. So we are avoiding small size, small thicknesses. So that's where we can get better productivity, is in manufacture of 9 mm or 18 mm, our productivity is better in 18 mm. So that we are doing, mix and match and other things. And with another dryer and another builder so now almost optimum capacity we have reached. So actually, last month, almost we had manufactured to the tune of 300 cubic meters because there one day we shut down every week. So for 25 good days, we have achieved 6,800 plus.

The next question is from the line of Rupesh Tatiya from Intelsense Capital.

My first question is, can you please give an update on the countervailing duty or petition that industry has signed for MDF. I'm asking about MDF.

Sorry, you were not audible.

Sir, can you hear me?

Yes.

Yes, sir. My question is, the industry has given the petition or countervailing duty, CVD, for MDF. So I just wanted to know if there is any update on that.

No. So far, the industry is not successful in getting any of this in protection or countervailing duty or anything. So far, all the earlier petitions have been turned down.

Okay. Okay. So application is rejected, right?

Yes.

Okay. And then, sir, you said that when our new MDF capacity comes, the realizations take a hit for a few months. So I just wanted to know from you that what are the capacities coming on line over the next 2 years. And particularly, there are like 2 unlisted players. So if we should know anything about their capacity expansion plans, that will be very helpful. Again, this in MDF. Balaji and Shirdi, particularly, if you know what are their expansion plans, if you can help us with that.

Yes. So what we hear from public domain, the capacity addition probably is likely to be driven by a couple of companies. One is Green Ply, which is putting up a plant in Western India. That's likely to come in the next 1.5 years. And Action also, we're hearing, they are likely to get up for another capacity expansion also through a greenfield one. So that probably might come in, say, FY '23 or FY '24. So these are the ones where we are aware that there's likely to be capacity expansion in MDF. Besides the one that we are putting.

Yes. So actually, is it North or South?

North, north, yes.

The next question is from the line of [ Deval Shah from PhillipCapital ].

Thanks for the opportunity. So my question is, since we are running at full capacity. So from now, let's say, until next half of FY '23, what will drive our growth?

As far as plywood is concerned, we are already augmenting our capacities within every plant, wherever there is a debottlenecking possible, that is happening, like our Chennai plant, which was producing 30,000 per day, now it's producing 40,000. And in next 3 months, we should be reaching about 50,000 per day. So similar small debottleneckings are happening. And I think our Punjab plant or other bigger capacities will be on within next 1 year time or so. And then you see there is a period of, you will see that the Q2 and Q3, so there are times this October, November kinds of month when actually the sales will go down a little bit, to inform actually some stock levels we increased within the company, and it helps out to take care in the future. So I don't see immediately any problem. But yes, if we do not expand our new plant capacity, yes, that would have been a problem. But decision has already been taken, the licenses are in our hand, and I believe that yes, our capacity will be on. I think Sajjan can comment more on this item.

I agree with Sanjay. Because the capacities and anything are meaningless unless there is demand. So the main thing in our favor is the robust demand. And particularly our marketing team is very, very active, and they are very innovative. So whatever marketing strategy we are adopting, advertising and other things, all are helping us, and all are successful. So that is a thing in our advantage. So maybe we'll continue, in this thing, better productivity and good marketing. So combining these 3 things will give us a boost.

Okay. And sir, when you are guiding for this INR 1,250 crores kind of a prepay. So I wanted to know, sir, is current real estate prices something different which you're looking at compared to the past prices which we have seen?

The real estate prices are not that much material to us because the maximum expansion or the growth will come not in the prime real estate. It would come in the peripheries, in the like big cities in the second suburbs. So whatever wherever the capacity comes, wherever the houses are delivered, they will need furnishing. So our role comes after the building is constructed, it is handed over. So earlier, a lot of inventory was there. But the last 1.5 year or during the COVID period, a lot of inventories have been diluted. And once it goes to the real user, then our role comes. So if that is fair, we see a very good demand and very encouraging situation.

Also just to add to what Chairman Sir said. If you look at the Liases Foras report, which got released a few days back, you look at the month's inventories of residential real estate in major cities, they have started to decline, and the decline has been pretty big. So the decline is 15% Q-on-Q and 39% Y-o-Y to 48 months in the last quarter. So that clearly says that the occupation of premises is on the surge, and clearly, wood panels would thrive on the increasing rate of occupation of premises.

Okay. Okay. Got that one. And sir, lastly, this INR 1,250 crores, how we are looking to fund it?

So that's largely through internal accruals. So if you look at the cash flow generation what we have last year, we had almost like INR 360 crores. So over the next 5 years, if you do the math, we don't believe that we would be needed to raise even a single rupee of debt. So even if you adjust for working capital requirements, I think we should be good enough to spend the incremental CapEx as well as the working environment through our internal accruals.

Yes. Mostly, it would be internal accrual.

The next question is from the line of Sonaal Kohli from Bowhead.

Congratulations on your results and on...

Sir, can you please speak through the handset, please.

Am I audible?

Yes, you're audible. Yes, please go ahead.

Sir, what I wanted to know was, is there any reason for you to expect that going forward, the margins in plywood would be lower than in the recent period? And if so, what would be this on account of?

So I think I answered this previously that we're looking at 13% to 15% EBITDA margins to be maintained going forward.

Yes. So that is what was the starting point of my question. What are the reasons for which you would expect your margins to be lower than what it is currently?

You see, we have seen one quarter of higher margins. However, if you look at our underlying basis, the first quarter was substantially low. Plywood being the largest segment, there have been fluctuations. We have seen that our target margins between 13% to 15% EBITDA is something that we can sustainably achieve. So when we are giving guidance, we want to make sure that we deliver on the commitment. Hence, the commitment that we are looking at is 13% to 15% EBITDA margin sustainable. Over the course of some quarters, would it be higher? Definitely, it can.

Sir, was there any one-off because Q1 was obviously not a normal quarter for you or for anybody else. So that can't be the benchmark for any analysis. Was any one-off in Q1, or if there's an elongated real estate cycle, why can't these margins be maintained or bettered?

No, definitely, there was. Like we have mentioned already in Q1, we took the decision to continue production at one of the most challenging times possible. Having said that, in Q1, that resulted in much lower cost raw materials being consumed. And once the price increases were being passed on in Q2, we got the benefit of the same.

So sir, is it fair to expect that in Q3 and Q4, your margins would be lower than what they're currently, in spite of some operating revenue?

13% to 15%. Definitely, we are looking at 13% to 15%. And that is what we are targeting. However, if performance on the sales front continues as it is now, it might be slightly higher.

Understood. Sir, this is more coming from a longer-term experience, right? This is not based on any other assessment, but seeing our own long-term trajectory. So if the real estate cycle is different than what is today, there's no reason specific for you to expect margins to collapse or fall from current levels?

You're correct.

The next question is from the line of Aasim Bharde from DAM Capital Advisors.

I just wanted to understand how product pricing would move in an environment of falling input prices. Will we and the rest of the industry cut prices 1:1 as iron prices fall? Or would we be able to hold on to some of the hikes we have taken?

Okay. Generally, you could maintain with our price level once it has been increased. So generally, it is sustained at that level. Very seldom we have to reduce the price. I do not remember having done that. Maybe only time I remember when the GST was reduced from 28% to 18%. That time, we had passed on the benefit and it was statutorily required also. But otherwise, we have seen, because during the COVID, the prices of raw materials were at all-time low. But during that time, we have not reduced the price. So during the third quarter last year of this thing, so happy profit margins were due to that because of the raw material prices reduced that time and we have not reduced our sales price. And generally, we've not seen in the industry. It is a one-way traffic. So hopefully, the prices of the raw material starts going down, it will add to our profit.

So safe to assume that in the margin ranges that you're talking about, 13% to 15% in ply and 15% to 17% in laminates, you should perhaps fall more on the higher side of the range over the next 5 years that you are planning, right?

It will be our attempt. That will always be our attempt again.

Okay. And one clarification. So in the CapEx numbers you mentioned in the opening remarks, the Punjab plant. So does that include the Punjab plywood and the Andhra MDF as well as the brownfield MDF work that you're doing in the North? Or are these fresh investments?

All of those are included.

The next question is a follow-up from the line of Venkat Samala from Tata AMC.

So just a big picture question. I think you've partly answered it as well. So if you look at last 3 to 5 years, I understand that things have been very sluggish and things look very good now. But even if I look at the gross block as well, you're looking to sort of double it in the next 5 years, right, compared to what you've done in the last 3 decades or so. So apart from the positive real estate cycle that you've spoken about, anything which has given you that sort of confidence or comfort to double down on the CapEx for the sustainable top line growth for the next 4, 5 years?

Yes, yes. So basically, the panel sector is largely dependent on the real estate, on the housing. And we do not foresee any reason that housing momentum, which has been picked up, would die down in near future. Rather it helps to surmount. I foresee in the next 5, 6 years, I think our own availability of raw material or the produced product in the country may not be sufficient to meet our demand from the housing sector. So I foresee, in near future, or 5 to 10 years, there would be a very healthy growth of Indian panel industry. Only this thing I am foreseeing the problem could be from raw material side. Maybe plantation would not be able to cope up with the demand of the plywood, MDF, and particle board industry. But because there are many things, government policies, land availability, other things, people diverting from cash crop to agroforestry. So these things are there. But I think central government is aware. They are trying their best to divert some land, even if 5% land is diverted from cash crop to plantation, then it will take care of almost 10x requirement from now, if 5% land is diverted, and that will solve the government's problem of surplus cash crop, which is rotting in the godowns. Government of India is not able to consume it, there is no export market to that. So that way, if government little bit initiate and do some policy decisions, so that can pave the way. China has done similarly in '93, '94, I remember. Those were our initial days. At that time, when the housing boom started in China, around that period, then from all over the world, all the panel products, steel, everything was moving towards China. India, at that time priced increased in India by more than 25%, 30% within a few months due to the Chinese demand. And I'm foreseeing that scenario for India in the next 5 to 10 years.

Right, right, right. So then, I mean, even if I just look at the company's historical numbers. So then you seem to be seeing conditions for growth for the company in place, the kind of which we had seen in the early last decade, right? Is that the right way to look at it?

Yes. Yes. I feel that at the right time, we are at the right place. So we have many opportunities in front of us.

Understood. Understood. Sure. And one last question. On the MDF margin side, do you think the current margins, like 34%, 35%, that is sustainable in the near term?

We can benchmark the prices either with the imported price, which is due to container nonavailability due to the disruption in the international movement of the commodities and cargo. At the moment it is not at all competitive. The import in India has drastically reduced. Then second thing which will govern would be Indian demand and supply. Suppose your demand is not picking up and the capacity is augmented in the country, so there could be some pressures on the prices. But at the moment, and the trajectory we foresee for housing growth and other things, I do not foresee -- there could be a temporary mismatch. Suppose you have 2 plants commissioned together, and overnight demand, that is demand cannot be created in the market. So there could be 2, 3, 4 months gap. And at that time, there could be some pressure on the prices. But this will go hand to hand, it is demand and supply.

So I mean, most of the plants that we hear about would be getting commissioned in FY '23, right? So near term in H2 FY '22, do you think the current 34%, 35% is sustainable?

But there is another question also, that is now India is competitive in exporting the MDF also. So if there is surplus in the country, export would come to the rescue. So that way, taking interest in market, Indian market, and then by and large, Indian quality is very good. It is appreciated in exports also. There are no bad comments or remarks. So that's why, it is well accepted, Indian quality. So with that, now it is not only our domestic market, international market vis-a-vis domestic market, demand and supply. So it becomes a larger platform. So there only local things cannot make a big change.

Okay. Okay. Okay. Sure, sure. And last question, sir, from my side. There were some news articles floating some time back about INR 1,000-odd crores investment for a plant in Andhra. So just wanted to understand, if you could give more color as to if you can confirm if the quantum that is specified in the news article, is that correct?

No. We have now been looking at the first phase of any capacity, and the planning is always for the future. So for the South, we can do the expansion in 3 phases, depending on how the demand and supply position works out to. So what you are referring to is all 3 phases together, which is any project report, when you give a future estimate, then you give in phase 1, and this includes all 3 phases. As of now, we are only looking at close to INR 600 crores CapEx.

The next question is a follow-up from the line of Rahul Agarwal from InCred Equities.

Just one question on the cash flow for first half. It looks like the inventory was pretty high as of September end, and hence, the operating cash flow was pretty low. Any specific reason or any clarification would you like to give?

Yes. So it's largely because of the inflationary environment, which has led to the higher inventory. And if you look at our working capital, our working capital still remains very, very strict at 60 days. It's only because of higher sales and the inflationary environment that the cash flow has got impacted, and which has got impacted, if you look at most of the companies, it's got impacted. Stephen, you can end the call, please. Thanks.

As there are no further questions, I would now like to hand the conference over to Mr. Rahul Agarwal for closing comments. Over to you, sir.

So thank you all participants for attending the call, and we thank the management of Century Plyboard to give us this opportunity to host this call this quarter. Happy Diwali and a prosperous New Year ahead to everybody at Century Plyboard, and I'll hand over to the management for their closing remarks. Thank you.

So we thank all the participants and for organizing this conference so successfully. So we compliment Rahul and team and each company, and I wish all the participants a very, very happy and prosperous Diwali. Thank you very much.

Ladies and gentlemen, on behalf of InCred Equities, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.