Q1FY24 Review: Building material: Mixed bag

21 Aug 2023 , 10:24 AM

Building Materials sector reported a mixed bag, with Pipes witnessing strong demand revival, while Wood panel continued to face headwinds. Reduction in input costs like natural gas, PVC, etc., has largely improved the margin outlook for Tiles and Pipes. On the other hand, higher supply of MDF and Particle board and rising timber prices weigh on margins for the Wood panel segment. Medium-term demand outlook is strong, driven by strong real estate demand also reflected in strong capacity additions planned by IIFL coverage universe across segments. Analysts at IIFL Capital Services have cut their earnings estimates for Wood panel companies, while marginally upgrading estimates for Tiles and Ceramics companies; and retained CPBI as their top pick on medium-term outlook and valuations.

Ceramics – Demand still weak, but margins healthy

Ceramic companies reported a modest 7.5-8% volume growth YoY, and down 11-12% QoQ. FY23 volume growth for KJC/SOMC was 10-11%, and for FY24, have guided to 13-15%/double-digit growth respectively. This implies that the momentum needs to pick up in H2. Demand remains soft; the Morbi industry continues to be oversupplied, although exports for Q1FY24 increased 23% YoY. Gross margins and EBITDA margins have improved marginally on a sequential basis, with reduction in fuel costs, partly offset by higher discounts/price cuts. Sanitary/Bathware continues to do better than the Tiles industry; the increased competition coming in from ASTRA/PRINCPIP is largely focused on the B2B segment.

Pipes – Strong volume growth and outlook

For PVC/CPVC Pipe companies, volume growth was strong with SI/ASTRA reporting ~36/31% YoY growth. Volume growth for FY23 was at 28.5% and 18.7% respectively (weak base, esp. for SI). While SI and ASTRA were guiding to ~15% volume growth for FY24, SI has upped its guidance to >20% and ASTRA is likely to revise it upwards in Q2. Demand remains strong across Plumbing, Infrastructure and Agriculture sectors, with ‘Nal se Jal’ orders also flowing in. EBITDA/kg was lower YoY, partly due to inventory losses, and will now move closer to LT average levels. CPVC prices declined QoQ; the outlook remains mixed with some downside protection to prices due to import duties. Dealer inventory levels are low-to-normal, according to the companies.

Wood panel – Muted quarter

Volume growth was largely weak across all the key segments of Plywood, Laminates, MDF and Particle Board. Plywood demand has been negatively impacted by weak demand and increasing timber costs, due to lower supply. Laminates segment saw exports being hit negatively, partly due to Biparjoy cyclone impacting port operations; although domestic demand was robust. In the MDF segment, increasing domestic capacity and imports are keeping realizations and margins muted, while demand remains strong. Companies believe that margins and imports for MDF have bottomed out largely. Particle Bard segment is also impacted by rising imports, leading to lower margins for CPBI. 

Valuations not cheap; remain selective

Analysts at IIFL Capital Services expect FY24 to be overall better than FY23, especially for Tiles and Pipes players. Within the Wood panel space, MDF/PB will continue to face pressure on pricing and margins, given the increasing competitive intensity from imports and domestic supply. They have marginally upgraded earnings for Tiles and Ceramic companies, while downgraded estimates across Wood panel companies, on margin-related concerns. Valuations are not cheap (at or above 1SD); IIFL re-iterated  CPBI as their top pick at 30x FY25 EPS.