Q3FY23 Building Material: Muted quarter; near-term uncertainty around demand and margins

Building Materials sector (excluding PVC pipes segment) was negatively impacted by weak domestic demand and elevated input costs. While reduction in shipping freight costs is being seen as a positive for the Ceramics industry, it has negatively impacted realisations and margins for MDF/Particle Board. PVC pipe companies saw strong pent-up demand, especially from the Agriculture segment.

Ceramics – Weak demand; Morbi supply driving discounts in domestic markets:

Ceramic companies reported weak volume growth QoQ, flat-to-marginal growth YoY. Morbi’s exports so far, have been weaker than expectations (Rs150-160bn expected in FY23 vs Rs170- 180bn earlier), leading to higher supply in the domestic markets. Gross margins and Ebitda margins were a mixed bag on a QoQ basis – while KJC reported a marginal improvement, SOMC witnessed a decline. Overall, fuel costs were down sequentially, due to a combination of lower natural gas prices and switch to Biofuels usage in spray drying.

Pipes – Pent-up demand, low base drives volume growth; margins to improve in Q4:

Volumes growth was strong for PVC Pipe companies with Finolex/SI/Apollo/Prince/ASTRA reporting – 92%/51%/44%/35%/30% YoY growth respectively; 12-50% QoQ growth. Ebitda/kg improved sharply QoQ despite some inventory losses in Q3FY23; however, with PVC prices declining 43% from peak, they are 30-60% off their highs. PVC prices have started increasing again.

Agri demand has picked up sharply, aided by affordability and pent-up demand in Q3. Dealer restocking has started and reached near normal levels — between 75-100% of normal, according to the companies.

Woodpanel — Near-term headwinds:

Plywood volume growth for CPBI/MTLM was muted, reported volume growth of 6.2%/2.6% YoY respectively. Ebitda margins were under pressure, due to sharp increase in Timber prices, which are expected to remain elevated. Laminates segment faced demand headwinds in domestic markets due to higher competition from unorganised segment. MDF & Particle Board were impacted by higher imports as freight costs have declined, leading to lower realisations/higher discounts/lower margins.

Near-term uncertainty across demand, margins; CPBI remains analysts of IIFL Securities top pick:

Demand outlook remains mixed with Pipes and MDF witnessing continued strong demand, while Tiles is weak. Margins will improve gradually for Tiles/Pipes and will remain under pressure for Woodpanel companies. Working capital days increased, but remain healthy; most companies are constrained on capacity given the strong performance over FY21/22, and have rolled out meaningful capex guidance.