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Century Plyboards - Compelling BUY; top pick in building materials - ICICI Securities

Posted On: 2020-07-07 21:52:49

In the recent rally on the bourses, majority of building material stocks seem priced-in and in some cases expensively valued. Century Plyboards (CPBI) however provides a rare combo of compelling valuations (14.4x FY22E earnings) amid sharp improvement in its fundamentals impressive strengthening of balance sheet in FY20 with sharply improved CFO and significant debt repayment. CPBI is also well positioned to witness a swift earnings recovery in FY22E driven by a) its best-in-class execution capabilities; b) expected faster recovery in categories like laminates, MDF and particle boards; c) cost cutting initiatives undertaken by the company and; d) rolling out of initiatives like ILP (influencer loyalty programme) and SFA (sales force automation) recently. Maintain BUY.

- Top pick in building materials space. While majority of BM stocks have rallied in the current run-up in the bourses and largely seem priced-in (PIDI, ASTRA, KJC, SOMC and GRLM having HOLD rating) and in some cases expensively valued (CRS, SIL and GNPL with REDUCE rating), CPBI offers an impressive investment proposition with 50%+ upside (highest upside in the space) amid superior cashflow management (witnessed in FY20) and likely earnings recovery in FY22E. Maintain BUY with a revised target price of Rs198 (22x FY22 earnings) vs Rs180 earlier.

- Strict working capital discipline and niche initiatives to enable CPBI to recover faster than competition in plywood segment. CPBI's plywood has failed to impress the street with the segment delivering -0.8% CAGR over the past three years. The performance is largely attributed to the decline in growth in its commercial veneer business which has seen a 37% fall in growth in the last three years. With the CV segment now largely confined to internal consumption and lower grades (of Okoume and Gurjan) for commercial sale, the pain in CV business is largely over. Also, with the company recently introducing ILP and SFA-led initiatives, this is likely to lead to a significant productivity improvement and aid volume traction over the next few years. Also, sound receivable management over its competitor (MTLM) would also allow CPBI to grow faster than the latter in the near term.

- Laminates and MDF segments likely to recover faster. Post Covid-19 crisis, we expect laminates to recover faster driven by opening up of export opportunities and market share gains in domestic space with few large/semi-organised players largely dealing with extended credit/aggressive pricing likely to get impacted in these testing times. With demand for modular furniture expected to increase post Covid-19 crisis, we expect its MDF segment to come back strongly in FY22E. Margins, too, are likely to remain firm in both these segments led by benign input costs (resin costs in particular) and initiation of cost cutting initiatives.

- Strict balance sheet discipline holds CPBI in good stead despite near-term capex initiatives. CPBI's balance sheet discipline amid stricter working capital management and significant debt repayment in FY20 would enable it to keep its debt under check despite its planned Sitapur (UP) greenfield project (currently on hold due to delay in grant of license). We expect its RoCEs (which surged 200bps in FY20 one of the few building material companies to report so) to remain firm in FY22E driven by higher profitability and stricter working capital discipline.

Shares of CENTURY PLYBOARDS (I) LTD. was last trading in BSE at Rs.130.55 as compared to the previous close of Rs. 126.55. The total number of shares traded during the day was 38222 in over 1001 trades.

The stock hit an intraday high of Rs. 132.6 and intraday low of 127.4. The net turnover during the day was Rs. 4979648.

Source: Equity Bulls

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