Growth Through Diversification - Century Plyboards

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It is an industry dominated by unorganised players that command an almost 78 per cent market share. But still there are certain players who have been surviving through these tough times. That's right, we are talking here about the plywood industry, where the unorganised players are making a killing due to huge tax advantages they benefit from. Century Plyboards India (CPIL) is one such organized player, which has survived through an era when the cost difference between the organised and unorganised players was almost 30 per cent. Here Sanjay Agarwal, Dy. MD, CPIL, reasons, "The industry is dominated by the unorganised sector and this has been the scenario over the past few years. Actually due to a heavy tax structure the industry slowly stepped into the unorganised sector and now the organised sector has been struggling at a bare minimum level of 22 per cent market share."

But the scenario is now changing with some excise duty cuts and VAT being implemented so that the cost net difference has reduced. Says Agarwal: "The cost difference has now reduced to 12-14 per cent and we expect the market share of organised players to be 40 per cent in the next one year." But  this is not the reason why we are doing an analysis of the company. There are certain other factors which guided us to carry this out. The first reason is that the company's business is not only restricted to  plywood and laminated boards but also assimilates other divisions like cement and ferro alloys where the company has expansion plans. Secondly, it has also recently added some new ventures like logistics and CFS to its portfolio.

Investors must be interested in knowing whether this makes the company a buy at current levels. As stated many a times we feel it is the valuation which makes the company good or bad and on the valuation front we feel that this company is fully priced. At the current market price of Rs 39.50 the scrip is trading at 7.87x of its FY08 earnings, which is much higher than the 4.26x of Greenply Industries and 4.82x of Archidply. Even the EV/EBITDA of 6.57x seems to be on the higher side as compared to 3.82x of Greenply.

Plywood – Laminates
Currently the company has a plywood capacity of 1,04,000 CBM per annum (based on the notional area of 4 mm ply of 1 sq mts) and a laminates capacity of 24,00,000 sheets (8x4) per annum. While plywood contributes 42 per cent to the topline, laminates contribute 10.50 per cent. The EBITDA contribution is 23 per cent and 4 per cent respectively. Here the company is quite bullish on the plywood and laminates business. Agarwal states, "We are quite bullish on the ply and laminates business. Since 2004 India has witnessed a boom in the real estate sector and therefore there will be a demand for the ply for the next two years." As a result the company is adding 20,000 CBM capacity at its Guwahati plant over the next two months.[PAGE BREAK]

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The capex for the same is expected at Rs 25 crore wherein Rs 17 crore will be financed through debt and Rs 8 crore will be through internal accruals. The company is also planning to add another 50,000 CBM capacity at Hoshiarpur in Punjab. But no time frame and expected capex has been announced by the company. CPIL has also planned for the expansion of 1,20,000 CBM for the medium density fiber boards with a capex of Rs 200 crore in the next two years. But again no comments have been made on how it will be financed or the commencement of the project.

Although the company is bullish on the plywood business, we are not. There are reasons for the same. The first reason is that there has been not much growth in realisation. Even Agarwal admits to this, saying, "Realisation has not increased in absolute terms and whatever increase we have seen is just due to increase in the cost structure." He further adds, "We are trying to pass on the cost to our customers, but that has a lag effect." But here the depreciating rupee has become a problem for the company. As it imports 60 per cent of the raw material, the rising rupee will only impact the margins in time to come.

With transportation forming six per cent of the total cost, the rising transportation cost is an area of concern. According to the management, "We are planning to reduce the transportation cost from 6 to 2.50 per cent."

Ferro Alloys
Currently the company has a ferro alloy capacity of 20x2 MVA which is around 10,680 MT per annum. Here the company also has a 13.50 MW power plant with bio mass as its feed stock. With steel being in a boom stage till last year, this segment also witnessed a good growth. But this segment only contributes 6 per cent to the topline. Here too the company has huge expansion plans to increase the capacity by four times of its current level by adding 20x3 MV ovens along with a 68 MW captive power plant. The total capex is expected at Rs 350 crore mainly financed through debt. But again it's a long-term plan and is expected to get completed in 2010-11. Here we are of the opinion that the short-term outlook for steel is not good and the impact the expansion will only come in 2011.

Cement
CPIL has a subsidiary company called Cement Manufacturing Company having a capacity of 1.06 million tonnes per annum where it has a 70.48 per cent stake and the rest is held by an individual investor.[PAGE BREAK]

The company has a plant in the North East region of India. The company is running on EBITDA margins of almost 35 per cent. The same can be seen from the fact that the per bag realisation has been around Rs 195-200 which is higher than the other players in the western and southern sectors.

Keeping this demand situation in mind, the company is planning to add 3 million tonne capacity by 2010 and take the full capacity to 4 million tonnes per annum. It is also planning for an 8 MW bamboo and coal-based power plant. "The current cost for power is Rs 3.50 per unit from the electricity board and our own generation is at Rs 10 per unit. However, with the plant we run at our ferro alloys factory the cost will be reduced to Rs 1.75 per unit," says Agarwal. The total capex is estimated at Rs 1,400 crore and will be financed through debt. The company is even looking for a P/E investment for the same. But looking at the current situation we feel it will be difficult for the company to raise capital by any means, ultimately resulting in a delay of the project.

New Ventures
The company is planning to invest in container freight stations to tap the growth potential in the rising containerisation business. It has already acquired 1,00,000 sq mts of land on lease from the Kolkata Port Trust and the business will be operational soon. But we feel that with established players already in the fray, it will be difficult for the company to make its mark. But surely this holds a good amount of value which the company may unlock in the future.

Financials
The consolidated financial performance of the company has been good in the past with a continuous rise in the topline as well as bottomline for the last six years. Even in FY08 the company showed good growth. But considering the above factors we feel that for FY09, although the topline is expected to grow significantly, the bottomline is expected to grow marginally. There is margin pressure too in Q1FY08. Hence we expect the company to post a consolidated topline of Rs 1,326 crore and bottomline of Rs 123 crore as compared to Rs 1,001.45 crore and Rs 111.67 crore in FY08. With this the CMP discounts its FY09 earnings by 6.90x, showing a little appreciation from its current level. But we feel that there is a good amount of value hidden in all the segments which may be unlocked by the company in the future. But we also feel it will take some time before it can give appreciation to the investors.