Century Plyboards to benefit from steady wood panel demand; cost inflation key

Demand trends in the wood panel market have been steady so far in Q2FY23 (July-September). According to ICICI Securities Ltd., recent interaction with dealers and companies in the industry indicates that continuous momentum in the residential market and higher spending on home improvement, after the pandemic, are keeping demand robust. This bodes well for Century Plyboards (India) Ltd.

"Plywood market has continued seeing higher demand for mass market brands like Sainik due to inflationary environment which may continue in the near term," said the ICICI report dated 9 September.

The report added that demand in the MDF segment, too, remained steady due to increased acceptance of readymade furniture.

"We believe demand should improve for wood panel market post the festival period as underlying drivers continue to remain favourable," it said. So, the broking house forecasts the company to see a revenue CAGR of 19.5% over FY22-24 on the back of expansion in MDF segment. CAGR is compound annual growth rate.

Meanwhile, the company has not taken any price increases this quarter but will get the full benefit of price increase of ~2-7% in plywood and ~3-4% in laminate taken in Q1FY23, said the report. "Plywood margins may see some pressure in near term (but still be better than the low base of Q1FY23) due to higher demand for mass products (which have lower margins) whereas MDF margins will decline ~120 basis points year-on-year to 30.5% in FY23 on account of higher raw material cost," added the report. One basis point is 0.01%.

So far this calendar year, the stock has risen around 14%, beating sector index Nifty500, which is up 3% in the same duration. The stock has seen a sharp rally of nearly 22% in the past three months, notes ICICI Securities.

The broking house is of the view that Century Plyboards has strong growth prospects, high return ratios and healthy balance sheet. It believes that the company will be a major beneficiary of the uptick in housing demand and higher spending on home improvement post the pandemic. That said, there are some risks that investors should be aware of. These are: a slowdown in housing demand and continuous higher input prices, which may adversely affect demand / profitability, it cautioned.