Century Plyboards (India) Limited (532548) Earnings Call Transcript

Welcome to CenturyPly's 4Q FY '20 Earnings Call. We have with us the management of CenturyPly today for their comments. Over to you, sir, for your opening comments.

Yes. Good afternoon, friends. I am Sanjay Agarwal, MD and CEO of the company. Keshav Bhajanka, Executive Director; Nikita Bansal, Executive Director; Mr. Arun Julasaria, CFO of the company, have joined me in welcoming you to the fourth quarter and annual results call for CenturyPly. The year, as you all know, has ended with a turmoil and since entire world has got affected by pandemic, I'm sure you all have got bored hearing all this, but yes, that's the fact. Although we have done satisfactory well in tough times, but still considerable amount of loss in sales and margins have happened. We expect current situation to get better after Q2. Frankly, we expect that Q3, we should be returning to quite near to the normal. Although we have resumed our operations and sales have started picking up but getting back to normal level rather seems really challenging because we can see that situations are changing. Guwahati is closed. Chennai is now closed. Bombay is still opening closing, opening closing. Overall, the year was satisfactory -- last year was satisfactory in terms of financial performance. The sales, of course, did not grow much. And then we were affected by the last 15 days, which is the most important time for sales annually. But there is a silver lining, EBITDA, barring impairment loss showed tremendous improvement. Net profit remains flat. Our debts reduced considerably. And we could have been debt-free by first half of current fiscal, but due to current situation, it seems that it will take some more time. Financial ratios were favorable and working capital cycle showed very good improvement as debtors base improved and inventory level had considerably reduced in our plants. In plywood, we achieved highest monthly sales in immediate preceding quarter and expected slight growth in Q4. But of course, right now, we have a very easy way out because of the COVID we took a beating. Laminate did well in the year gone and very good improvement in margins have happened as promised by Keshav in last year vis-à-vis the year last. MDF segment also performed significantly well with 19% jump in revenue from preceding year and EBITDA at almost 25%. Particle board has reached optimum capacity utilization and revenue grew marginally. As informed earlier, also, we are at optimum capacity utilization and need new capacity enhancement for both MDF and particle board. Most of the homework is done, but in the present situation, it is impossible to take a final decision. Our CFS division is under pressure due to competition and as well as because of COVID, the import and export have been very, very adversely affected. And thus, it affects the CFS division most. Now I will hand over to CFO, Mr. Arun Julasaria, who will take you with key financial data for current quarter post which we are open for question and answers session. Thank you.

Good afternoon, I'm Arun Julasaria, CFO of the company. First of all, I will like to speak the customary disclaimer that this call leads us to discuss company's historical numbers and forward-looking ideas. In no way it should be construed as an invitation to invest in the company. We have already mailed you a detailed presentation showing analysis of segment wise numbers. I hope you all have received the same. So I'll not discuss numbers in too much detail, and I'll take you through only key figures. As you are aware that our Laos subsidiaries, business of Laos subsidiaries was closed down for the whole year, so we have taken impairment there. So our share of impairment was INR 45.63 crore, which we have recognized as business loss in stand alone accounts, and that has been taken in plywood segment. So the EBITDA margin of plywood segments are considerably low because of this impairment loss. Bearing this impairment loss overall financial results for the whole year are satisfactory. Revenue stood at INR 2,282 crore against INR 2,263 crore last year almost flattish with slight improvement. As you are aware that country was locked down due to COVID-19 in later part of the March month. And these 2 weeks were quite crucial for us because the dealers tend to pick -- buy maximum in these 2 weeks for availing maximum trade discounts. Our sales team also tried to push maximum -- to earn maximum incentive, which is based on their sales performance. So these 2 weeks are quite crucial, and we estimate that we lost around INR 90 crore revenue because of this lockdown. And accordingly, also lost our bottom line to that extent. EBITDA margins considerably improved from 13.5% to 15.6% without considering this impairment loss. Profit after tax was almost flattish. On foreign exchange front, we did not have significant loss. As on March 31, 2020, USD 10 million were hedged at INR 75.68 but as on date, all our exposure is open. Regarding tax credit, we are still following old system because we have got MAT credit. So till that MAT credit is fully utilized, we shall like to remain in old system, although we will keep on reviewing this as and when we think fit. On balance sheet front, company net worth for first time crossed INR 1,000 crores. Debts have substantially come down from INR 468 crore to INR 188 crore despite liquidity crunch, working capital cycle reduced from 86 to 67 days. The term loan taken for our Punjab unit, MDF unit was fully prepaid. Plywood as such have done well, but EBITDA margins for plywood are bit lower compared to last year. Laminates have done exceedingly well. And EBITDA margin has improved from 8.8% to 13.5%. In case of MDF, we have now reached optimum capacity. EBITDA margins have also reached to 24.7%. While planning the project, we thought of 25% EBITDA margin, so we have achieved those 25% EBITDA margins. And now for further growth in MDF and particle board, we need new capacities. We had a plan to set a plant in U.P. but for the time being that project is kept in abeyance. It's -- we informed you in the last call that our license for MDF and particle board unit in U.P. was challenged in green bench. So green bench have, for the time being, have quashed all the licenses issued by U.P. government. So as on date, technically, we do not have license, but as per Supreme Court directions in earlier decisions, if any industry is backed on agro-forestry timber, it doesn't require licensing. So U.P. government will have to notify alternate system, and they can bypass this licensing requirement. And we expect positive developments, and we shall have the necessary permission without license to set up that plant in U.P. But considering the COVID situation, we have kept project in abeyance for the time being, we shall take call at right time. Like MDF and particle board also, we have reached a optimum capacity and optimum EBITDA margins of 24.3%. Here again, we need capacity, which I discussed for U.P. plant. In case of logistic business, although there was bit degrowth due to competition, but we could maintain our EBITDA margins. With this, I'll conclude my discussion on numbers. For any number related query, you can call us separately or you can ask question here also. But I request as the promoters are on this call, you confine your questions to qualitative aspects only and number related queries can be separately referred to us. With this, I invite questions from you all, please.

[Operator Instructions] Our first question is from the line of [ Subrata Sarkar ] from Mount Intra Finance.

Sir, just one simple question, like, sir, recently, has India imposed this -- like there is additional import duty on MDF? And if so, how will it impact us?

I don't think till now there has been any duty -- additional duty has been decided.

On MDF, there was country-specific antidumping duty. It was even before this COVID situation arose and that's continuing. That's continuing. That is country-specific and thickness-specific.

Yes sir. So we -- is there an extension on that sir?

No that is continuing.

That's continuing. The is still valid.

There is no new development. That's continuing.

Okay. It is valid till what period, sir?

Till it is withdrawn.

Okay. There is no specific time period?

Okay.

Our next question is from the line of Madhav Marda from Fidelity Investments.

I just wanted to get a picture from you on the MDF industry in India. If you could just help us with the industry level capacity utilization in the domestic market? And also, with the INR depreciating, I would assume that makes us stronger versus imports. And of course, margins have recovered very well in the industry in the last 1 year compared to FY '19. So do you think that 24%, 25% margins are here to stay, like for the next 2 to 3 years?

See, I will first speak about the future a little bit because the present drive in the present situation you have seen government has identified furniture as a very thrust segment for Indian exports becoming reliant on furniture and becoming a force in the export market. Furniture is one of them. So if that happens or if that materializes in next 1, 1.5 year or 2 years also, so the market for particle board and MDF is going to really grow a lot. Even if it doesn't certify too much, but still, it will give a lot of support to MDF and particle board industry because all the ready-made furniture is made of only particle board and MDF. The capacity today is approximately 1,800,000 cubic meter [Foreign Language] so around 4,500, 5,000 CBM per day. And you see that capacity is still -- our capacity is fully utilized, practically, we are there at 90%, but -- because Green had come up with 1 plant in South, but I believe that because of their exports, now this -- they are doing quite well as far as -- they have improved their situation. But exactly, I don't have the numbers at the moment. And AXON also has put up a plant. So even -- I think they are also having some spare capacity. But in times to come, it is very, very clear that because of the government's thrust and now people putting in -- the government putting in some more duty, import duty, some kind of a protection on all the thicknesses. Right now, it's not there in all the thicknesses. So the import will go down further and local players will have much more flexibility to play within India. So the coming times are good.

And against the 18 lakh CBM capacity, how much is the demand right now in India for MDF.

We -- [Foreign Language] okay. So actually, I don't have the data right now in my hand. So there is no point in giving you [Foreign Language] data, there is no point in giving you that. Of course, I can calculate and give it to you.

I can just take you from you offline later. But I think my question then would be sir, that the margin for MDF has come back in FY '20 like what has driven the improvement in margins? And do you think like this is sustainable for the next 2 to 3 years?

You see, as a manufacturer, I always believe that it is sustainable. I don't see that in present situation, the prices of raw material will go up. I don't see financing costs going up. I only see that imports can go down. I only see that the industry will have to go and do better because of the focus on furniture. So there are all the positive signs that, yes, we will be able to maintain somewhere near this or maybe improve a little bit. But nobody knew COVID will happen?

Yes. No, of course. No, my question was just given more longer-term because for the good improvement.

So we are quite hopeful. We are very, very hopeful, and that's why we are talking that we are looking at putting up one more plant actually.

Got it. Sir, just last question on MDF. Our biggest customers for MDF would be like -- who would be our biggest customer, and it's obviously more of a B2B business, right versus B2C?

It is all B2B business, most of it. But yes, MDF has started getting into B2C also. Particle board is still mostly B2B. We have all India -- throughout India, we are in touch, we call them OEM, original equipment manufacturers. So all these converters who convert from these panels to finished readymade furniture, so we are in touch with all of them. Even Godrej, you all know that is a big manufacturer or there is a space where you all must have heard these names. So all of them are doing quite well. Because we are in touch with them, so they are our customers. We usually give sale directly to few of them, most of them, they go through some kind of a distributor locally.

We'll take our next question from the line of Ashish Poddar from Anand Rathi.

Yes. I just want to understand your sense on what the kind of recoveries we have seen after easing of lockdown. So it is almost 2 months now when we have seen this. So what is your sense about the demand pattern in the last 2 months? And is there a case that whatever demand we are seeing currently is coming from the existing projects and in absence of new project announcement, perhaps in the coming quarters, you will face more distress than whatever numbers we are talking about currently?

Very good question. So you see April was actually a wash out, I think, for everybody. There cannot be any discussion. May, we have done about 30%. And that is what I had expected a little lesser than what we did actually, but then we achieved 30%. This month, we are looking at 50%. So I think we will be able to cross 50%. Now for some industries, we read in newspaper that some industries are reaching at 70%, 75% for paints and all that we have heard. But the situation of the market, I don't think is ready for reaching 70% or 80%. Yes, we can produce. But selling it in the market, maybe a little more logistical issues are there, people are unable to go in the market, Bombay, Chennai we all know about Delhi, we all know about situations everywhere. So you cannot really force people to go and work. So that is the first part of it. The second part of you that there can be a demand reduction because of no new projects are being awarded? Yes, that is our apprehension, too, very frankly. We believe that till June, even in July, the old projects will be supporting us, some part of August, maybe -- but sometime in August, maybe we will -- we may face. But you must be hearing in newspapers also, you must have read that some of the workers are now returning back. We expected that the workers or the contractors will not return back. But then we already see that, yes, they have already started coming back. If you live in a city and we go out today in Bombay or Kolkata [Foreign Language] you see the traveling time has come back to the normal original half-an-hour, 1 hour, 1.5 hour time, so everybody is already on the road. So we are actually dying to go back. We are even now -- the threat also, the fear also in the mind is not that much now. It has reduced to a great extent, actually. Even I'm ready today, whether I believe that I might have passed through COVID and I have already developed immunity, that is my conviction in my mind. But actually, that is what has to happen. If I am not effected, I know I will be affected. Nothing can now stop it and we will have to just cross it. So [Foreign Language] and we will learn to live with it. So yes, what you said is a little right? Yes, there is a possibility. I cannot deny it.

We'll take our next question from the line of Jignesh Kamani from GMO.

Just wanted to talk about 3 division, particle board, plywood and MDF. As per your estimate, which will revive first and which will revive last? And second thing, if you think about the end-use wise, breakup between the residential and commercial use, how is the breakup between plywood and MDF?

Very good. See, I think or rather what we see in the markets also, I think MDF and particle board will revise faster because the involvement of the contractors is a little lesser there. So it is possible to still run the OEMs by small factories and actually produce the finished goods and sell them, and the customer can just buy and use it. So we believe there are no -- if you ask me the second question, I have no reply. Whether there is a data or there is a study, no, there is nothing. And the second question is…

If you think about end-use wise, like plywood and MDF, how much percentage goes to residential usage and how much go to commercial usage?

So we believe that most of these plywood is going into residential only. Yes, plywood, there is a plywood, which we call it a commercial plywood. That plywood is used in office commercial things because commercial furnishing requires change very fast. Maybe in 10 years time or 8 years' time, you want to change the furniture. And that's why actually people can go for a commercial-grade plywood. And that is much cheaper and it can be still compared in some way with MDF. Otherwise, MDF is cheaper, so MDF is used mostly in commercial. But yes, now it is because of the readymade furnitures, the readymade furnitures use only MDF and particle board.

But I believe commercial is mostly using particle board, right?

Using particle board and MDF also, yes.

Okay. So from the particle board, MDF consumption, safe to assume 50% to 60% going to commercial and only 30% to 40% going to residential use?

Yes. Actually, [Foreign Language] residential [Foreign Language] you see, you have to still do some cleaning, you have to use a wet cloth. And in peoples mind, also there is an issue that it may open up, it may delaminate, particle board is a very light product. So that is the reason, the particle board is used lesser in residential, but all the readymade furniture is particle board and MDF only. So if you want a cheaper readymade product, then that will be made of particle board, if you can afford a little higher in, you can go for an MDF product.

And my last question, have you seen that people are down-trading now because of the income level has gone down and replacing plywood with MDF.

This is a question in many people's mind, but then in Indian conditions, see, as far as Century product is considered, the user of Century plywood is the top strata of people seriously. So for them, actually, it is making no difference neither it was today or it will be tomorrow.

But if we take to -- from Sainik to MDF.

Yes, yes, yes. Sainik to MDF and all that. So that is okay, that we are also ready, and there are many, many people who are now coming up who were not using furniture yesterday, now people have started using the furniture. Till yesterday, he was just buying some cot and putting some civil customer to make even sales and all that, but now he is going for furniture because he wants -- he has earned some money and he wants to progress in the social ladder. So there are many, many new people coming into plywood also. So this is okay. This will -- so in other countries, actually, you see the transformation from plywood to MDF are so quick. In India, neither it will be quick nor it will be anywhere near the percentage which it has happened in other countries. It cannot happen.

Our next question is from the line of Dhruv Jain from AMBIT Capital.

Just one question from my side. Sir, over the last 2 or 3 months, have you seen the trend of consolidation playing out considering plywood industry has a lot of unorganized players. So due to cash flow issues, have some of them gone out?

You see, because of the GST earlier, people used to create too many small, small factories, the smaller guys, they used to create too many factories to save more of excise duty. After GST, this one change has happened, that they have consolidated among themselves, they are not dividing 1 factory's production into 2 or 3 small, small names and these things. Otherwise, there is nothing much worth in our industry to consolidate. What do we consolidate, tell me? Is there anything I can buy, those small factories are just too small. You cannot really buy them. To put up that extra capacity in my existing factories will be much cheaper, much faster, much more quality oriented. What we can do is we have developed this Sainik plywood or all these small brand 1 or 2, they can be outsourced with quality control and branded separately and sold. So that is happening, that is taking its own sweet time to grow. But I think that's it. There cannot be much of consolidation in our industry actually.

Our next question is from the line of Nehal Shah from ICICI Securities.

Congratulations, sir. Congratulations for indeed, very good cash flow management. That, I think, is a very, very good silver lining what we've seen in the numbers. Sir, my question would not be rather on volumes, on sales volumes because that's beyond our control, and we don't know as to how the situation would pan out. But my question would more be on the cost side, which is actually under our control, right, more under our control. So what are we actually doing or proposing to do as far as cost-saving initiatives are concerned? And which are the areas of operations are we looking to control costs.

I think let Keshav take this.

I think we have been able to take substantial savings in our costs overall. I think over the course of 2 months, we have saved over INR 10 crores a month with regards to our total cost. And I think that for the immediate future, we should see a saving. What we have done is we have reduced salaries. At the same time, we are committed that we will be paying back a certain percentage of the deduction in case the company comes back into profit, which I'm sure it will. So as such, I think that there is going to be a reduction in the cost for now. But once we come back into profit, it is actually a deferment more than out in out cost reduction. And there are certain areas where we are working very hard to reduce costs. And one of those areas, the directors remuneration has been made zero, employee costs have been reduced to a certain extent, and other costs also rent, et cetera, we are renegotiating. So I think we are more cost light company at the moment.

And what about E&P sales?

I think that we will take a call on as and when time progresses, as and when the market develops, we will be taking a call on that. As of now, in the first quarter, the cost has reduced substantially. But going forward, we'll be taking a call month by month.

So basically, it will depend on how the volumes are resurfacing post the first quarter.

It will depend on a couple of things. It will depend on the visibility that we have for the market. It will also depend on the sort of brand proposition that we'll be forwarding. So I think as time progresses, we'll be able to give you a clearer picture.

Our next question is from the line of Susmit Patodia from Motilal Oswal Asset Management.

I hope everyone is fine and safe. So sir, my first question is, if you could tell us a little bit more detail about this impact of China, assuming, as you know, right now, most of the goods are not allowed to enter from China or being evacuated from the port. So how does this impact both our plywood -- we understand the furniture part, but does it have any impact on the plywood business?

You see, in terms of plywood, we never substantially import into India from China. So I don't think there's going to be a big impact. Yes, in the case of MDF and particle board, more than the anti-China sentiment or something of that sort. I think the issue is that the rupee has depreciated to INR 75, and I think that has increased the cost of imports substantially. So I think that plays into our hands.

Got it. So it's an indirect benefit that would then lead to the higher consumption of MDF.

Definitely, because imports -- because the cost goes up by close to 10%.

And I just wanted to know, let's say, for some reason, we don't get the go ahead in U.P. How much would there be a hit for the -- for any investment that we would have done there?

There is 0 hit as of now, so thankfully. Our investment has nothing -- we got -- we have one person, a senior person who is employed, but that again is the miniscule expense? Other than that…

So no ordering of plant and machinery nothing, nothing has been done.

No. Since the license was put on hold, since it was challenged in the NGT, we took a conscious decision to defer the placement of the order of plant and machinery and purchase of land. Everything is identified, but as of now, no order has been placed.

Got it. And last question, Keshav for you is, if you could give us a little more detail about the sales transformation program that you were doing, where are we in that journey now?

Could you just repeat that, sorry, your voice broke. About the…

So Keshav, the sales transformation journey that you were spearheading. I just wanted to know where are we in the journey and how much is left to cover the entire country.

So it's very, very funny to say this, but I think COVID was a blessing because we have been trying to roll out an SFA pan India, a sales force automation app over the course of the past 2 years. And during the 2 months of lockdown, since there wasn't too much physical work that we could do, we got behind it and we're able to roll out the entire SFA app pan India. So initially, there are a lot of teething issues, but I think this is one of the most significant changes that we have brought about with regards to how the sales team operates in the market. And the benefits of this, I mean, I think there will be a very clear and immediate benefit. Maybe we won't be able to see in terms of volumes because of the current scenario, but it is -- I would say it was a big change in the way we have been operating. And it's going to help us long-term in a very, very considerable way.

So SFA we too -- is now fully implemented across the country now?

SFA for us is implemented pan-India. With the exception of maybe 1 or 2 locations, where there is no work that is happening right now. So in certain geographies, smaller geography, maybe there's a issue, but otherwise, it is rolled out pan India.

Our next question is from the line of Achal Lohade from JM Financial.

First, I wanted to check if the capacity -- new capacity in U.P. does not go ahead. Do we have any alternate site in mind? So why I am asking is because if we have already reached the optimum utilization then and given the time lines for greenfield expansion, wouldn't it be like wise to also look at alternate site? And if we have planned anything on that?

So that's a very interesting question because there are 2 parts to it. As you know, we have been able to set up our capacity faster than anybody else in the industry. We started in Hoshiarpur in 16 months from the day that we broke ground. Our new capacity, we are planning to set up even quicker than what we set up Hoshiarpur in because now we are more knowledgeable and now we're in a better position to execute the MDF project, that being our first and this being second. Having said that, the Supreme Court of India, which is the foremost authority has already given an order -- a comprehensive order that states that MDF does not require license. Right now, it is caught up in the bureaucracy. We are working very hard to get the registration process done. But technically, I do not need a license to set up an MDF unit. We have a plan B, of course, in Hoshiarpur, we have created this space for an additional line. We did this when we established the first line, thinking that we'll double our capacity. But considering the raw material cost benefit that Uttar Pradesh is likely to provide, our preference is still U.P. Of course, we do have the backup. As of now, we are not even thinking about the backup because the cost advantage is very significant in Uttar Pradesh. And I'm sure that within the next 3 months, we'll be able to give you positive news on this front.

Got it. Second, when you kind of elaborated on the cost reduction, I couldn't hear it clearly. You said you could save INR 10 crores for 2 months. Is that -- I heard right.

INR 10 crores per month.

INR 10 crores per month and that…

Over the course of 2 months. So INR 20 crores over the course of 2 months.

Okay. And that includes the salaries part of it, right?

Yes. Yes. A substantial part of that is from salaries. There has been other cost reductions also. Our interest cost has reduced considerably compared to last year and so on and so forth. But a substantial part of the saving has come from salaries.

Understood. Would it be possible to give us what is the monthly fixed cost, salary and the other office overhead, factory overheads, et cetera?

I think our CFO would be better placed to give you this information. Arun, if you could just pass on this information?

Yes. Can you please repeat your question?

Just trying to understand the cost, fixed versus variable. So what would be our fixed cost run rate on a monthly basis, broadly? Would that be like INR 30 crores, INR 40 crores a month?

Our fixed cost fees is around INR 30 crores a month. Without reduction it is around INR 30 crores a month.

And post reduction it is about INR 20 crores?

So with reduction it is about INR 22 crores.

Understood. That's very helpful, sir. And just last question, if I may. In terms of the plywood front, you've indicated that the consolidation is not really that material given the small-scale in the unorganized fashion. But is it fair to say that some of these unorganized will go out of the business in this FY '21, and they may not revive permanently? Or you think it could be that they could go out of the market temporarily, but they will again come back.

Once bitten twice shy, that statement, I think, in this regard, holds very true because a lot of times in the past, we have felt that this change was likely predictive. So when demonetization happened, I think all of us, myself and you thought that this change would take place, when GST was implemented, again, all of us thought this change will take place. So I think we really need to watch and see how things pan out. It's a very difficult thought -- it's a very difficult question to answer right now. But yes, there should be some consolidation. We'll wait and we'll comment on this as time progresses.

That's great. Just last question, if I may, with respect to the mix. Could you please help us with the premium volume of laminates 4042 FY '20, premium plywood?