Q4FY23 Review: Healthy rebound in building material sector: IIFL Capital Services

Building Materials sector reported a healthy rebound, especially in margins, as input cost pressures have begun to ease. Reduction in gas costs/freight/RM and chemical prices have improved margins and the near-term outlook remains healthy. However, imports have gone up, and higher domestic capacity across Tiles, MDF, and Particleboard will offset some of these gains. Given near-to-medium-term headwinds, analysts of IIFL Capital Services have cut their earnings estimates for FY24-25 across Tiles/ Woodpanel/ Ceramic companies by 2-14%; reiterate CPBI as analysts of IIFL Capital Services top pick within the coverage universe.

Ceramics – declining fuel costs a respite: 

Ceramic companies reported a decent 8-10% volume growth, both on QoQ and YoY basis. For FY23, volume growth for KJC/SOMC was 11/10% respectively. For FY24, both KJC and SOMC have guided to 13-15%/mid-teens volume growth respectively. Demand continues to be soft, and Morbi industry remains oversupplied due to large-scale capacity additions in FY23. Exports will continue to grow at 20-25% YoY, bringing the demand-supply balance back over next 1-2 years. Gross margins and Ebitda margins have improved sequentially, as fuel prices have softened, driven by reduction in gas prices and also part use of biofuels/coal. Fuel costs likely to further soften in Q1FY24 — to be partly passed on to consumers and partly retained. Sanitary/Bathware continues to do well with margins faring better than the Tiles industry; although analysts of IIFL Capital Services see increased competition coming in from ASTRA and Tile players in FY24.

Pipes – Strong demand recovery: 

Volumes growth was strong for PVC Pipe companies with SI/ASTRA reporting ~15% YoY growth; volume growth for FY23 was at 28.5% and 18.7% respectively (weak base esp. for SI). For FY24, SI and ASTRA are guiding to 9-12% industry growth, while their own volume growth guidance is 15% for SI and 15-20% for ASTRA. Demand remains strong across agriculture and non-agriculture sectors. Ebitda/kg improved sharply QoQ for both SI and ASTRA; and was sharply above the LT average levels primarily due to strong demand and inventory gain (for SI). For FY23, Ebitda/kg declined YoY for SI and ASTRA on reversal of inventory gains. However, they continue to remain above the long-term average levels. Dealer level inventory currently at low to normal levels according to the companies.

Woodpanel – Mixed bag: 

Plywood volume growth for CPBI/MTLM was healthy/muted with volume growth of 12.4%/-0.6% YoY respectively.  Despite elevated Timber prices driven by improved product mix, Ebitda margins saw 250-380bps expansion. Laminates segment saw healthy demand tailwinds in domestic and export markets. MDF & Particleboard continue to be impacted by higher imports, leading to lower domestic demand/lower realisations/ lower margins. Woodpanel companies have guided for healthy double-digit volume growth in FY24 across segments (except Particleboard). CPBI has also revised its Particle board capex downwards.