Century Plyboards: Buy

Investors with a long-term view can buy the stock of Century Plyboards. The company holds a fourth of the organised plywood market in India. It has a large network (1,424 dealers and 13,000 retail outlets) across the country.

In the last year alone, the company expanded its plywood capacity by 17 per cent (to a total of 210,000 cbm) and doubled its laminates capacity to 4.8 million units.

The company, a competitor to Greenply, has been following aggressive marketing strategies to increase its market share. If real estate demand picks up with impending rate cuts, Century Plyboards should benefit. In the plywood space, though organised players have only about 30 per cent share of the market, their business should grow with increasing preference for branded home interiors among customers.

When the goods and services tax is implemented, there will also be a drop in the price differential between the products of organised and unorganised players, helping more customers shift to branded products.

The stock of Century Plyboards has seen a sharp re-rating in the last one year. At ₹162, the stock discounts its estimated earnings for 2015-16 by 20 times.

This is slightly expensive, given that its bigger peer, Greenply, trades at slightly lower valuation. However, given the promising home interiors market and the company’s aggressive expansion plans, earnings should grow, giving an upside to investors on the stock from the current price.

In the last three years, the company grew sales at a compounded annual rate of 14 per cent. This was helped not only by increase in dealer network and sales force, but also production capacity.

Strong sales growth Plywood accounts for about three-fourth of revenue while laminates contribute about 18 per cent. In the first half of 2014-15, Century Ply reported sales growth of 21 per cent, helped by strong volumes and also higher realisations.

The company reported about 16 per cent and 14 per cent volume growth in plywoods and laminates respectively, surpassing the industry’s single-digit growth — this was thanks to new capacities.

Century Ply also has a container freight station service business that operates at the Kolkata port. This segment accounts for 5 per cent of revenue and is profitable, giving about 28 per cent operating margins.

In April, Myanmar banned export of raw timber logs. With many Indian plywood makers relying on timber from Myanmar, the supply of timber was hit. For Century Ply however, there was no hitch. In June 2013, Century Ply commissioned a timber peeling and plywood unit in Myanmar (as a wholly-owned subsidiary). After the ban, the company started to import face veneer (processed timber) from the Myanmar subsidiary. The peeling unit in Myanmar helps Century Ply in two ways.

One, it assures steady supply, and two, it saves cost. As face veneer is less bulky compared to raw timber, the company saves on logistics expenses.

Margins improve

In the first half of 2014-15, the company reported a profit growth of over 200 per cent year-on-year, thanks to forex gains as against losses last year and reduced interest outgo. Operating margin expanded to 15 per cent from 8 per cent last year. With the rupee stabilising, margins may not stand this high in the coming quarters, but savings on the raw material will help.

COMMENT NOW