Century Plyboards (India) Ltd (CENTURYPLY) Q1 FY22 Earnings Concall Transcript

Century Plyboards (India) Ltd (NSE: CENTURYPLY) Q1 FY22 Earnings Concall dated Jul. 21, 2022

Corporate Participants:

Aasim Bharde — Investor Relations

Arun Kumar Julasaria — Chief Financial Officer

Sanjay Agarwal — Managing Director and Chief Executive Officer

Keshav Bhajanka — Executive Director

Nehal Shah — CSO & Head, Investor Relations

Analysts:

Rahul Agarwal — InCred Capital — Analyst

Praveen Sahay — Edelweiss Wealth — Analyst

Girish Choudhary — Spark Capital Advisors — Analyst

Achal Lohade — JM Financial — Analyst

Shrenik Bachhawat — LIC Mutual Fund — Analyst

Sneha Talreja — Edelweiss — Analyst

Jignesh Kanani — GMO — Analyst

Alisha Mahawla — Envision Capital — Analyst

Nikhil Agrawal — VT Capital — Analyst

Rajesh Kumar Ravi — HDFC Securities — Analyst

Rishab Bothra — Anand Rathi — Analyst

Aasim Bharde — DAM Capital — Analyst

Priyam Khimawat — ASK Investment Managers — Analyst

Kushagra Bhattar — Old Bridge Capital — Analyst

Hrishikesh Bhagat — Kotak Mutual Fund — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Century Plywood India Limited Q1 FY23 Earnings Conference Call hosted by DAM Capital Advisors Limited. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aasim Bharde from DAM Capital. Thank you, and over to you.

Aasim Bharde — Investor Relations

Thank you, Melissa. Good evening and on behalf of DAM Capital Advisors I welcome you all to Century Plyboards Q1 FY23 conference call. We have the senior management online with us here. At the onset, I would like to congratulate the team on an excellent Q1 performance and wish them continued success ahead. Now, I’ll hand over the floor to Mr. Arun Julasaria, CFO of the company. Over to you, sir.

Arun Kumar Julasaria — Chief Financial Officer

Thank you. Good afternoon, ladies and gentlemen, and welcome to Q1 conference call of Century Ply. First of all, I’d like to speak the customary disclaimer that this call is just to discuss Company’s historical numbers and forward-looking statements and in no way it should be construed as invitation to invest in the sales of the company. The results for the Q1 have already been put on company’s website, stock exchange website along with detailed analysis and also mailed separately. So, I will now spend more time in repeating those numbers, but I like to tell you that usually Q1 — Q4 of every year is target and best quarter, and the cash getting[phonetic] the effect of that is spill over to Q1 also.

But in our case this time Q1 is also equally best quarter compared to Q4 of last year. Turnover is almost same, negligibly down by only 1.5%. But if you compare it Y-o-Y, it is almost double or by 96.4%. This Q1 was a challenging quarter because raw material prices were on the higher side but we could — we could manage our profitability by higher volume. All our segments have done well. As usual, MDF has infact all its particles[phonetic]. In case of plywood, EBITA margins are down by almost 4.5% reasons for which will be explained by our MD in due course. With these words and not taking much time I open the house for question and answers.

Operator

Thank you. I’m sorry. Sir, please go ahead.

Sanjay Agarwal — Managing Director and Chief Executive Officer

Yeah, this is Sanjay Agarwal. I would like to make a little bit of [technical issue] before the question and answers are open. So thank you everyone for taking your valuable time out for attending the Q1 FY23 Century Plyboards Investor Conference Call. I am Sanjay Agarwal, Managing Director of Century Plyboards India Limited. I have alongside me Mr.Keshav Bhajanka, Executive Director; Mr. Arun Julasaria, CFO; and Mr. Nehal Shah, CSO & Head, Investor Relations. I presume that everyone would have gone through our numbers in detail.

Let me review some of the key highlights. After delivering record sales in Q2, Q3, and Q4 last year it gives me immense pleasure to share that we have achieved sales of INR878.35 crores in the first quarter usually which is the leanest quarter of the financial year which is just a tad lower than the Q4 FY22 sales. Our plywood and particle board segments have a new record 100% year-on-year growth, while laminate and MDF segment revenue grew 86% and 71% year-on-year respectively for the quarter. Despite the cost pressures in coal, cement, plywood, and laminate we have been able to mitigate a large part of our gross margin pressure by taking corresponding price increases and also through operating leverage. Our overall gross margins were down nearly 150 bps quarter-on-quarter to 34.1% in Q1 FY23.

Driven by recent price hikes and/or a superior product mix our Laminate MDF and particle board segments reported gross margin improvement in Q1. However, our core plywood segment of gross margin contraction of 3.70 bps quarter on quarter. Ddespite the overall gross margin and our aggressive branding expense overall EBITDA margin of the quarter stood firm at 17.2% down nearly 140 bps quarter on quarter. While our plywood division reported 10.4% EBITDA margin in Q1 driven by aggressive brand spends, lag effect of resin price hikes and operating leverage we still maintain 13% to 15% EBITDA margin guidance for FY23.

This is likely to be driven by front-loading or advertisement and promotion expense in Q1 full absorption[phonetic] of price hikes taken in Q1 and expected operating leverage. While MDF and particle board segments reported record high margin of 35% and 36% respectively, the laminate EBITDA margins adjusted for expenses[phonetic] stood at impressive 16.4%. It may be noted that input cost inflation has softened a bit in last quarter. However craft paper and phenol prices have seen a further surge in a month-on-month basis. Timber prices continued to remain elevated, but the surge has settled down. Price increases taken in Q1 plywood 2%, premium plywood 3%, Sainik PR also 3%, and 7% in Sainik MR. Laminate 4% to 3% in 1 mm and 0.8 mm respectively. MDF, particleboard about 9%, 5% in [indecipherable]. Our MDF brownfield expansion at Hoshiarpur is as per schedule and is expected to come on stream by October 2022. Our South MDF capex has received all requisite approvals and the machinery has been ordered.

We expect the facility to come on stream by second half of FY 24. Our greenfield laminate manufacturing unit in Andhra would come up in two phases. The first phase is expected to become official in Q2[Phonetic] FY24. Our working capital is staying comfortable at 58 bps in Q1 FY 23, an improvement of about five days compared to last financial year. We remain a net cash positive company with net cash position of INR184 crores as on 30th June, 2022. Our Q1 FY23 ROC is still at a healthy 29.6%. With this I welcome you again all to this conference call and we open the conference to question and answers. Thank you.

Questions and Answers:

Operator

Thank you, ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions] Ladies and gentlemen, we will wait for a moment, while the question queue assembles. [Operator Instructions] We have the first question from the line of Rahul Agarwal from InCred Capital. Please go ahead.

Rahul Agarwal — InCred Capital — Analyst

Yeah, hi, good afternoon. Congratulations on a very good set of results, sir. Sir, two questions and one clarification. Firstly on the ply gross margins we still look depressed at 28% and you’ve already taken price hikes in 1Q. Would that be sufficient for us to go back on a normalized level.

Sanjay Agarwal — Managing Director and Chief Executive Officer

See the price hikes have been two reasons, one is the timber price hike. So that actually we have already factored in our price increase and because we took it a little later there is always a lag which increased by 2% to 3%. But again in that quarter, maybe even less than 1% on the whole. The whole effect will actually come in this quarter. So that is the first thing. Second price hike is because of phenol. So phenol, yes, we expect phenol to again come down very soon, because everything, all such products in the world are coming down, the prices are coming down, so that we have not taken. So we expect that due to leverage of our products and quantity and the price coming down, we will be able to take it forward and extend our original EBITDA of say 13% to 14%.

Rahul Agarwal — InCred Capital — Analyst

Got it. Sir, you also mentioned some upfronting of A&P spends for plywood, could you please quantify that, how much was that?

Sanjay Agarwal — Managing Director and Chief Executive Officer

That’s actually we had announced in the last quarter also that this year we are going very aggressive as far as the advertisement and promotion is concerned. So we have taken a very heavy budget and most of it, a large part of it has been spent on IPL, that’s why the first quarter, actually bore[phonetic] the biggest brunt as far as plywood advertisement and promotion is concerned. So that itself that one single item is actually costing 1.5% extra, over and above the normal spend actually. So we expect that all these things will normalize in times to come.

Rahul Agarwal — InCred Capital — Analyst

Got it sir. Second question was on MDF and particle board. Now obviously, the recorded operating margins was 35% plus and we all know that it will not sustain here going forward, it should come down, but what is going in their favor, what is going in their favor of these products today right now, like how long do you think this is sustainable?

Sanjay Agarwal — Managing Director and Chief Executive Officer

See, we have always maintained that our new margin for MDF and particle board will be around 25%. But yes, because of certain factors, the markets are good, imports are not at all there, new products and capacities are not coming up so fast. So all those sectors we see the markets are good. So we are reaping the harvest actually at the moment, and we expect this to continue for atleast a year and we really don’t know what will happen after a year. And the second thing we have done is actually the product mix also what we are doing about 70% of the particle board was being sold at pre-lam. Now we have decided to increase this pre-lam to over 85% to 90%. So that is also making a little bit of a difference. In MDF you will see that [technical issue]. So that also affects the margin positively.

Rahul Agarwal — InCred Capital — Analyst

Got it sir. Got it. And lastly, one clarification on the container freight business I thought the lump sale was earlier in November 21 when it was announced it was about INR52 crores, the press release yesterday talks about INR33 crores. My sense is this lump sale is done to Century infra which is 100% subsidiary. So the pricing really doesn’t matter. But just wanted to understand why is the difference here?

Sanjay Agarwal — Managing Director and Chief Executive Officer

You see we have two concerns, there may be an impact of actually income tax. So keeping in that that is due we have consulted with all the income tax consultants and chartered accountants and our auditors, and this is what is the best thing to do. So otherwise, we will come into net of some income tax when it is going from one pocket to another pocket only of the same person.

Rahul Agarwal — InCred Capital — Analyst

Got it sir, got it, got it. I’ll come back in the queue. Thank you so much and wish you very best.

Sanjay Agarwal — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. We have the next question from the line of Praveen Sahay from Edelweiss Wealth. Please go ahead.

Sanjay Agarwal — Managing Director and Chief Executive Officer

Hi, Praveen.

Operator

Mr. Sahay, we are unable to hear you.

Praveen Sahay — Edelweiss Wealth — Analyst

Can you hear me?

Sanjay Agarwal — Managing Director and Chief Executive Officer

Yeah, Praveen. Hi.

Praveen Sahay — Edelweiss Wealth — Analyst

The first question is related to the utilization segment how much of that and like what [technical issue]

Sanjay Agarwal — Managing Director and Chief Executive Officer

Still your voice is not clear actually.

Praveen Sahay — Edelweiss Wealth — Analyst

Clear now.

Operator

Yes. Please go ahead.

Praveen Sahay — Edelweiss Wealth — Analyst

Yeah. So my question is related to the utilization across the segment, especially the plywood and MDF where we are in the utilization. Can you give some numbers.

Arun Kumar Julasaria — Chief Financial Officer

Yeah, hi Praveen. So capacity utilization in Q1 across product categories as under Plywood is 82% versus 84% QoQ, laminate 89% versus 97% QoQ, MDF is 98% versus 97% QoQ, and particle board is 120% versus 115% Q-o-Q.

Praveen Sahay — Edelweiss Wealth — Analyst

Okay, great, thank you for that. And the next question is as far said about the realization in the MDF pre-lam MDF so what’s the exactly the difference between the pre-lam MDF and the MDF realizations.

Sanjay Agarwal — Managing Director and Chief Executive Officer

Now, what is the difference in realization is not there in my hand right now actually, but the profitability is better.

Praveen Sahay — Edelweiss Wealth — Analyst

How much is that sir, sorry.

Sanjay Agarwal — Managing Director and Chief Executive Officer

Just a second. So the realization is plain MDF realization is INR31,000 per cubic meter and pre-lam MDF is INR44,000. But in MDF, pre-lam sales is only up to 20% in particle board is very high. Most of the particle board is sold at pre-lam actually.

Praveen Sahay — Edelweiss Wealth — Analyst

Okay. Okay. And the last question related to the raw material as you had said that the timber prices still continuing on the higher side. So do you expect price increase in this quarter as well, second quarter?

Sanjay Agarwal — Managing Director and Chief Executive Officer

See the price increase in the timber we have already passed them. This has been passed on and the effect has not come until now because there is always a lag in making up the mind and passing it on to the market, still there was a lag and after that, the timber prices are stable now which I spoke also in my speech, so I don’t think that immediately there will be an increase in timber prices. But historically, whenever there is a price increase in timber we have very successfully [technical issue] the whole timber industry whole plywood industry is affected. So it’s passed on, sooner or later, but maybe some lag, it will be passed on. If there is any another increase it will be passed on.

Praveen Sahay — Edelweiss Wealth — Analyst

Okay. Thank you sir. Thank you for taking my questions. All the best.

Operator

Thank you. We have the next question from the line of Girish Choudhary from Spark Capital Advisors. Please go ahead.

Girish Choudhary — Spark Capital Advisors — Analyst

Hi, sir. Thanks for taking my questions.

Rahul Agarwal — InCred Capital — Analyst

Hi Girish

Girish Choudhary — Spark Capital Advisors — Analyst

Firstly you did share the reason for higher A&P spend, but that would be helpful if you can share the [technical issue] this quarter versus last year.

Rahul Agarwal — InCred Capital — Analyst

Hello. Can you — can you please repeat the question.

Girish Choudhary — Spark Capital Advisors — Analyst

Yeah, is this clear now.

Sanjay Agarwal — Managing Director and Chief Executive Officer

Yeah, better.

Girish Choudhary — Spark Capital Advisors — Analyst

Okay. So I was just wanting to know the exact quantum of A&P spend this quarter versus last quarter?

Arun Kumar Julasaria — Chief Financial Officer

This I would not like to disclose the exact quantum. However, as the MD has already stated, there was a front-loading of A&P spend that took place in Q1 compared to the rest of the year.

Girish Choudhary — Spark Capital Advisors — Analyst

And secondly, any thoughts on setting up our increasing particle board capacity?

Sanjay Agarwal — Managing Director and Chief Executive Officer

Particle board capacity you see we have yet to take a final decision on because we took a decision that we will be going in for multi-daylight [indecipherable] and then they’re again our mind is just too confused that whether this would go for a continuous line. So, still the debate is on, technically and commercially both the debate is on. I hope we’ll be able to decide within next one and 1.5 month but the decision of expansion is sure. The area is decided. But of course the decision is not made. And these decisions actually very long term, you see putting up a plant that will be affecting this company for next 50 years, so there no point in — no problem in taking another two months or three months in picking for this year.

Girish Choudhary — Spark Capital Advisors — Analyst

Thank you, sir.

Sanjay Agarwal — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. We have the next question from the line of Mr. Achal from JM Financial. Please go ahead.

Achal Lohade — JM Financial — Analyst

Thank you for the opportunity. Congratulations for the great numbers.

Sanjay Agarwal — Managing Director and Chief Executive Officer

Thank you.

Achal Lohade — JM Financial — Analyst

What I wanted to check was in terms of mix is there any change in the mix QoQ in the plywood business in terms of the premium and Sainik and Sainik MR.

Sanjay Agarwal — Managing Director and Chief Executive Officer

This is what happened. April was normal, June was normal. May I think whole country all the products were little affected, even plywood was affected in every way. But the numbers came back in the month of June and again in July seems to be normal. So yes, it was effective in May. But yes, they are back on track.

Achal Lohade — JM Financial — Analyst

Right. But specifically in case of plywood is growth in the non-premium higher than the premiums segment in terms of the volume growth.

Sanjay Agarwal — Managing Director and Chief Executive Officer

You see generally you have seen that the premium segment growth is lower, non-premium segment growth is quite high and that is actually our decision and clarity of the market that the belly of the market is there, we have to, we will be able to grow the top and while we already filled in by two or three people and none of us are going to relent our market share to anybody else. So the growth there is certainly lower and the non-premium segment is growing faster and better.

Achal Lohade — JM Financial — Analyst

Is it possible to share in terms of the mix, how was it for the quarter?

Sanjay Agarwal — Managing Director and Chief Executive Officer

Numbers right now, it’s a little difficult. I think you can connect with Nehal later on maybe.

Achal Lohade — JM Financial — Analyst

Sure. My second question was with respect to timber price. Can you help us in terms of what is the extent of increase on a Y-o-Y basis for the plywood.

Sanjay Agarwal — Managing Director and Chief Executive Officer

The core prices went up by about 5% and, which is about 50% or 52% of our plywood cost. So about the price increase was actually the cost in PRC about 2% to 2.5% and that is what exactly and is more than that only we have passed [technical issue].

Achal Lohade — JM Financial — Analyst

The core timber price is up 5% Y-o-Y for first quarter FY22.

Sanjay Agarwal — Managing Director and Chief Executive Officer

4%.

Achal Lohade — JM Financial — Analyst

Okay. But what about Y-o-Y, sir. How much would that be up.

Arun Kumar Julasaria — Chief Financial Officer

Y-o-Y we will get back to you shortly. Definitely higher or you connect with Nehal and you will get the data.

Achal Lohade — JM Financial — Analyst

Got it. And just a question on the MDF industry obviously at this point in time, things look great. But if you could help us in terms of what is the because we sense that the container freight rates have come down imports are going up. So can you help us in terms of what is the landed price for import.

Sanjay Agarwal — Managing Director and Chief Executive Officer

See the freight in what rate for MDF particle board has gone down to $22 to $23 about three years back. After that right now, it is not less than $100 still. So there is no chance of any import a little bit here and there. People may still try and do but there is no chance of any import at the moment, especially particle board, it’s absolutely zero and for MDF still there is no chance, and especially for the North India. So it’s absolutely impossible because once you import and then you now carry forward to the north, it’s an impossible task and impossible actually and we believe that in times to come we are becoming very efficient. We are becoming larger in our quantities whether I expect India to export MDF in two years’ time by making some profit not because that we have to just capacities but by making some profit we will be able to export and they have been previously.

Achal Lohade — JM Financial — Analyst

Right. Understood. And just another question with respect to you know that capacity can you help us understand, is there any capacity addition even in the smaller unorganized players segment as well.

Sanjay Agarwal — Managing Director and Chief Executive Officer

This is always one or another, but I don’t have the data at this moment. You see there is always I think one small manufacturer comes every one year or 1.5 year one small manufacturer comes up so maybe 200 cubeic meter a day, some large plants, like our plant in South and our 400 cubic meter capacity more than Exxon is also I think is funding the capacities. But none of these capacities that view and next year. So we expect the market to grow by 20% every year in India. So,yes, whenever a new capacity comes thereby limiting the fight in the market, but it’s not going to be a big deal, because 20% growth in a particular segment is a huge growth actually. So if the present total sale is 5,000 cubic meter you are already grown in the year by 1000 cubic meters per day. In next two years’ time I think the market will be ready to explore all the expansions.

Achal Lohade — JM Financial — Analyst

Understood. That’s very helpful. I will come back in the queue, sir. Thank you.

Sanjay Agarwal — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. We have the next question from the line of Shrenik Bachhawat from LIC Mutual Fund. Please go ahead.

Shrenik Bachhawat — LIC Mutual Fund — Analyst

Hi, sir. Thanks a lot. So my first question is regarding the demand scenario, sir. Where are we seeing the demand — strong demand from India. It is the metros or Tier 2 and below cities.

Sanjay Agarwal — Managing Director and Chief Executive Officer

Actually we really don’t know what happens any company of our size has really done quite well within the metros, so our expansion and our growth mostly comes from Tier 2 and Tier 3, but it’s really the Tier 2 and Tier 3 growing more than the metro that I don’t think I will be able to answer that question. But yes, as far as our company is concerned, we are growing much more in the Tier 2 and Tier 3 at the moment, and that is where we are putting in our expansions or new areas, new towns, new people being hired out there. New dealers being appointed out there, all those growth inputs are happening in Tier 2 and Tier 3.

Shrenik Bachhawat — LIC Mutual Fund — Analyst

Sure sir. And my second question, sir. Could you throw some light on how is the unorganized ply sector performing as of now, and the strong volume that we have delivered? Is it the result of market share gains from the unorganized players or the industry is growing at this pace?

Sanjay Agarwal — Managing Director and Chief Executive Officer

Again as you know I have always told that we do not have any reliable steady or reliable data. But if you see, if we have achieved a INR1400 crore plywood and if you say that we are still at INR20,000 crore market then actually it’s a 7%. So certainly our market share has grown and this market share mostly is growing in the non-trivial segment and you can the middle segment of semi. The premium segment is growing from whatever, I mean you were selling I think we have grown in last two or three years, we have grown about 30% in that segment also, but bigger gains even in terms of the new dealer appointments everything is happening more in the nonpremium segment.

Shrenik Bachhawat — LIC Mutual Fund — Analyst

And sir, in the client laminate segment, we delivered very strong volume growth of around 10% to 12% on three-year CAGR basis. So can we take that as an assumption for the next three years for the client laminate segment that we can grow at 10% CAGR for the next three years?

Sanjay Agarwal — Managing Director and Chief Executive Officer

Laminate, we are putting up a plant in South. We have two expenses coming up one after another in two phases. And as far as plywood is concerned, actually, we believe that we can grow faster, we can grow more but maybe some mistakes on our part is picking it, that is how we feel, but yes, we still not an organized industry, it’s not like cement or it’s not like tiles where we get people who really know the businesses where we are actually learning and growing and deciding new innovative IVR of selling and marketing and succeeding. So I believe that, yes, we have good possibility.

Shrenik Bachhawat — LIC Mutual Fund — Analyst

Thank you so much.

Operator

Thank you. We have the next question from the line of Sneha Talreja from Edelweiss. Please go ahead.

Sneha Talreja — Edelweiss — Analyst

Thanks a lot for opportunity and congratulations, sir, on great set of numbers. Sir, while you mentioned that the industry scenario is of course not known and how much input will be there and how many capacities will be added in the MDF segment over the next two years. Just want to understand your vision, what is your target this particular time when you’re coming up with such a big capacity in MDF division both brownfield as well as greenfield, any target utilization that you set yourself for first year or second year or third year operation or over the period of two to three years that you would like to mention?

Sanjay Agarwal — Managing Director and Chief Executive Officer

Keshav?

Keshav Bhajanka — Executive Director

Let’s say so. So going forward, if you look at the past, we have been the fastest to utilize our capacities within the MDF or particle board space and I think that trend is likely to continue in the near future. Once our capacities commence, our target is that within the first three years we will reach 100% capacity utilization. So I think the breakup of that staggering event could be slightly basically when the plant comes online, but yes, within the first three years, we should be able to reach 100% capacity utilization.

Sneha Talreja — Edelweiss — Analyst

That’s similar to what you did in the past.

Keshav Bhajanka — Executive Director

Yes.

Sneha Talreja — Edelweiss — Analyst

And that’s while maintaining a 25% last part in guidance at this point of time.

Keshav Bhajanka — Executive Director

Yes.

Sneha Talreja — Edelweiss — Analyst

Okay. Understood Keshav. Also just wanted to understand the amount of price hikes that you have specifically taken only in Q1 FY23 with regards to all the segments in case someone can help.

Sanjay Agarwal — Managing Director and Chief Executive Officer

Price rise, actually, I spoke about the price rise let me — I can repeat it. In Q1, we have taken plywood 2% in premium, 3% in Sainik PF and 7% in Sainik MR, Laminate we took 4% in 1 mm, 3% in 0.8 mm. MDF bill particle board 9% so two different, one thing for 5%, another is 4%.

Operator

We have the next question from the line of Jignesh Kanani from GMO.

Jignesh Kanani — GMO — Analyst

Actually, plywood, we took around 3%, 3.5% price hike in the fourth quarter, I think out of 8% pricing we take out of — in the entire year. And on the top you said that we would come 2.5%, 3% in the first quarter, maybe 1% maybe full impact of that. So almost 4% is price hike in the last 6 months. Despite that, our gross margin Q-o-Q has deteriorated by close to around 190 basis points. So product mix has deteriorated a lot in favor of economic segment or anything other which can probably impact the gross margin?

Sanjay Agarwal — Managing Director and Chief Executive Officer

No, I explained, I think a little bit earlier, that 1.5% is actually because of price hike.

Jignesh Kanani — GMO — Analyst

But I’m saying in the fourth quarter, we had to in 3.5% price hike —

Sanjay Agarwal — Managing Director and Chief Executive Officer

Nehal will explain this.

Nehal Shah — CSO & Head, Investor Relations

Yes. So sorry, Yes. So gross margins, yes, you’re right, that has come down, but that’s because of a couple of reasons. One is the lag effect of price increase. And second is, as MD said, in the month of May because of the slowness in the market, the mix was high towards the non-premium segment and which is what has driven gross margins down. But as we said, June has come back to normalcy, and so we expect the gross margin also to recover subsequently.

Jignesh Kanani — GMO — Analyst

So you do not want to expect that product mix will continue to remain more towards the economic segment and hence, which will impact the gross margin structurally?

Nehal Shah — CSO & Head, Investor Relations

Sorry, can you repeat?

Jignesh Kanani — GMO — Analyst

So you do not expect that product mix will continue to remain more in favor of the economic segment as the growth is more coming from that and which can structurally impact the gross margin?

Sanjay Agarwal — Managing Director and Chief Executive Officer

You see the premium segment is not growing as fast as a non-premium segment and that has been the thing I think we have been telling from the very beginning. This is the belly of the market where actually about 40% of the market live actually. So I don’t think — yes, overall, if you can say that it will come down, but then you see our — what we have told always that we will be trading between 3% to — 13% to 14%, 13%, 15% total EBITDA margin that can have been seen, so.

Jignesh Kanani — GMO — Analyst

So what I’m saying is the downside bridge to this margin band is more and more see plywood growth is coming from the economic segment?

Sanjay Agarwal — Managing Director and Chief Executive Officer

But with that, you have to understand that by the better utilization of our machinery, our cost, everything is 50% or 55% or 60% is the cost of raw material. The rest of it is actually overhead. The more we sell actually the — we will have more leverage as far as our profits are concerned. If you can grow more in premium, you don’t need an accountant to tell us that, yes, we will get better profits but then to grow in that segment is not that much possible. Yes. The more important is that we don’t go down in that segment. So for that, we have taken all our — the incentive, increments there are lots applied if you don’t sell the premium segment, automatically, the supply of non-premium segment gets stopped to that branch. Automatically, these people have to take care of it that they have no choice.

Jignesh Kanani — GMO — Analyst

Secondly, on particle board. I think in MDF share, you mentioned that at least for 1 year margin, you may remain elevated then once the new capacity come margin might taper up to 25% kind of band. Have the demand supply scenario in particle board? Because I think no new capacity is coming as per our knowledge in the particle board. So to what level the margin can remain at a limited level?

Sanjay Agarwal — Managing Director and Chief Executive Officer

You see particle board, small, small plants of the 100, 150 cubic meter keep on coming mostly in — either in North India or in Madras so some of them are based upon the sugarcane also. We are the one — we are very seriously contemplating putting up either a conte role manufacturing unit for maybe about 800 cubic meters a day or maybe another plant for 400 cubic meters a day, but we have not taken any decision till now. Presently, yes, the demand is good. That’s why in Q1, we have been able to increase the prices to about 9%, which is actually a formidable, unthinkable kind of price rise within the quarter actually. So I don’t see that there will be — even going ahead, I tell you to import particle board because it is a cheaper product. The freight costs are much higher in percentage — and I don’t think the freight cost will go down to those $20, $25 in next 2, 3 years also? So I don’t think particle board will be imported anymore in India.

Jignesh Kanani — GMO — Analyst

So then margin will remain elevated 35% plus for the entire year, but maybe slightly more than —

Sanjay Agarwal — Managing Director and Chief Executive Officer

I cannot say that — I cannot say that. I will still maintain that we will do everything to manage the 25%. Everything else is actually we are reaping from harvest and let’s enjoy it. Yes. And we have done some small, small things I told that pre-lam we are increasing the pre-lam things in the market, and we are also looking at selling most of it near our plant. So we are discouraging the sales away from our plants. So that is also increasing a little bit of profit. So all those things are going on continuously.

Operator

We have the next question from the line of Alisha Mahawla from Envision Capital.

Alisha Mahawla — Envision Capital — Analyst

Sir, my question was with respect to particle board in the capacity. So you mentioned that you’re already at about 120% capacity utilization. You’re also — you also believe that the margins will continue to sit at elevated level. There is no large capacity coming. The only I think other organized players will probably be getting capacity 2 to 3 years down the line. But yet we’re not adding capacity in this segment. Can you please elaborate on the same? And it was part of the plan we choked out when we said that we want to double our revenues in about 5 years?

Keshav Bhajanka — Executive Director

We have just mentioned that we are definitely going to go for expansion. It is just coming to a decision as to what unit we want to set up, whether continuous press or a multiplied press and you see these investments are not there for a year or 2 years. We sweat our assets for the next 20, 30 years. So I think another couple of months, you will definitely see a decision coming in the particle board segment as well.

Alisha Mahawla — Envision Capital — Analyst

And this will be a greenfield or a brownfield or that is what yet to be decided?

Keshav Bhajanka — Executive Director

We will update you as and when we come to a final decision.

Alisha Mahawla — Envision Capital — Analyst

And there’s also some capacity expansion for the plywood that has been planned?

Keshav Bhajanka — Executive Director

Yes. That has more to do with the debottlenecking exercise. So as we said on the last call, our capacity now stands at 300,000 CBM. And this year, we — with the kind of debottlenecking exercise we are going through, this capacity would increase to 330,000. So straight away, we will have — will add another 10% to the existing capacity, plus we are utilizing almost our utilization levels are at 85%. So we have enough capacity for the next 2 years to service the market.

Alisha Mahawla — Envision Capital — Analyst

Sure. And just one last clarification again, based on the capacity utilization, it seems like any volume growth in this year will largely only be in the particle board — sorry, in the ply or the laminate space because the other 2 segments currently seems to be almost completely utilized.

Sanjay Agarwal — Managing Director and Chief Executive Officer

No, no, MDF, we are putting up that plant of 350 cubic meters, which will be online from September end or in October of this year. So I think we’ll be able to utilize the capacity for last 4 months, at least for this year. So that will certainly give us some extra in MDF.

Operator

We have the next question from the line of Nikhil Agrawal from VT Capital.

Nikhil Agrawal — VT Capital — Analyst

Sir, just a couple of questions. Like, are you facing any kind of timber availability issues for plywood and MDF?

Sanjay Agarwal — Managing Director and Chief Executive Officer

There is no timber availability issue at all. Yes, in last quarter, some of the prices of timber in North India, not in South India, North India increased a little bit which we have passed on. Right now, the prices are stable, even in North India or South India, both they are stable.

Nikhil Agrawal — VT Capital — Analyst

Okay. Good. And sir, like have timber prices for plywood increase or is it for MDF as well?

Sanjay Agarwal — Managing Director and Chief Executive Officer

You see our — it has increased for both — because these are related in 1 area in Northern zone, the prices have increased. So it has increased for MDF as well as plywood. In Southern India, for our particle board and plywood it has not increased.

Nikhil Agrawal — VT Capital — Analyst

Okay, sir. And so — but we haven’t taken any price hikes in the MDF segment. Any reason for that, like because the timber prices have increased, but we haven’t taken any price hikes in MDF.

Sanjay Agarwal — Managing Director and Chief Executive Officer

See, the region being maybe that these are — for MDF, actually, this is not a very good season. That is number 1 reason. So the decision for MDF to start even 2 months later. So before that to actually get into the market and try to fight it out is not so good. And I think we have compensated that increase by other ways of by increasing pre-lam, by increasing our capacity utilization, by lowering our cost — other cost. So I think that — and that is reflecting in our profit margins also. So we felt that it is not required to increase the prices of MDF, you see. See, the costlier you make that has been — MDF has been taking away the market share from lower segment plywood. Lower segment plywood become cheaper than MDF then again, MDF will be replaced by plywood.

Nikhil Agrawal — VT Capital — Analyst

Sir, and just one clarification. Sir, have you — has your plywood capex been delayed or anything? The plywood plant, which is coming in Punjab?

Sanjay Agarwal — Managing Director and Chief Executive Officer

You see in India, today, everybody in the world is talking about China plus 1 query, but India is still unable to take the full advantage. The biggest issue in India is to get plant. There are many, many multinationals, I think, want to come to India, and they want to put up plants, manufacturing capabilities. But — and we are also even being — we are in Hoshiarpur, we already have a plant for our another plant, we are trying very hard to get the land. Buys, already, we have paid advances and we have got that money back because we couldn’t take the deal through. The same thing you’ll have seen in our Andhra MDF plant also. The delay was only because of land, once we have got the land, we are moving very fast. The material orders have been finalized. Now the contractors have been finalized. All those things are moving quite fast that people are coming in. So the land in India is a huge thing. It is not in our control. I see one single piece of land, you have to buy from 40, 50, 60 different owners. It’s a huge.

Nikhil Agrawal — VT Capital — Analyst

Okay. So have you procured the land as of now or is it still in the —

Sanjay Agarwal — Managing Director and Chief Executive Officer

No. Still in the process. And that’s why what we have done is actually supposed to suffer, we have increased our capabilities a little bit, a little bit in all our plants. We have debottlenecked the things and that’s how we have increased our capacity in our existing plant by 10%.

Operator

We have the next question from the line of Rajesh Kumar Ravi from HDFC Securities.

Rajesh Kumar Ravi — HDFC Securities — Analyst

Yes. Sir, my question pertains to first on the laminate. Where is your capacity expansion coming up for you?

Keshav Bhajanka — Executive Director

We have a capacity expansion that is coming up in South India. It is going to be four test expansion in 2 phases. Phase 1 will be 2 hot presses and Phase 2 will be 2 hot presses.

Rajesh Kumar Ravi — HDFC Securities — Analyst

Okay. And location? Where in South? Is it finalized?

Keshav Bhajanka — Executive Director

It is going to be alongside our MDF unit in the same compound, which is in the Gopavaram District, Gopavaram region of Kadapa District in Andhra Pradesh.

Rajesh Kumar Ravi — HDFC Securities — Analyst

So among the bigger capacities, you would be one of the — maybe the only one with big capacities in South? Is that understanding right?

Keshav Bhajanka — Executive Director

No, there are other players who have capacities in the South. But yes, we are coming up with a big capacity in the south.

Rajesh Kumar Ravi — HDFC Securities — Analyst

Yes. I mean somewhat bigger capacity perspective, okay. And sir, on the particle board, could you let us know what capacities are coming up in India in the next 1, 2 years by other players in the market?

Keshav Bhajanka — Executive Director

See, there are a lot of small capacities that are coming from unorganized players. It is very difficult to quantify it because those decisions are very sporadic and that they buy secondhand plants, et cetera. But yes, there are 2 players who are planning to come up with continuous presses, one being Merino Industries and second being Greenlam Industries. So these 2 are trying to come with continuous presses over the course of the next year to 2 years.

Rajesh Kumar Ravi — HDFC Securities — Analyst

Okay. And what would be our — Merino, what is the capacity they’re adding, sir?

Keshav Bhajanka — Executive Director

I’m not sure.

Rajesh Kumar Ravi — HDFC Securities — Analyst

Okay. And in the laminate business, again, the margin this quarter and with the price hikes that we have taken, do you expect margins to remain strong so as we have seen in Q1?

Keshav Bhajanka — Executive Director

I think laminates margins are going to be looking similar to or perhaps slightly higher than what they were in Q1.

Operator

We have the next question from the line of Rishab Bothra from Anand Rathi.

Rishab Bothra — Anand Rathi — Analyst

Basically 2 questions, 1 on the raw material side and the other on growth side. In raw materials, whom do we compete in terms of acquiring raw material? And how is the process like? Is it building? Is it international size given?

Sanjay Agarwal — Managing Director and Chief Executive Officer

Which product are you talking, is it MDF or is it plywood?

Rishab Bothra — Anand Rathi — Analyst

I mean the log side, I mean the —

Sanjay Agarwal — Managing Director and Chief Executive Officer

Yes. But for MDF, if we are talking about MDF, then we are fighting with paper manufacturers actively. People like ITC or Bhadrachalam, all those people who manufacture this stuff. So because the raw material is same and probably —

Rishab Bothra — Anand Rathi — Analyst

Same belt? They focus on the same belt, same region?

Sanjay Agarwal — Managing Director and Chief Executive Officer

Because there are paper industries in North and there are paper industries in South. So the people in South procure from the South plantations and the North procure from the North plantations. And if you are talking of plywood, then we are competing only with other plywood manufacturers only because it require bigger girth, bigger diameter of the timber, which is — which happens in maybe about 6 years or 6 to 7 years, and it becomes costlier. So no other industry will be — that say price but plywood can.

Rishab Bothra — Anand Rathi — Analyst

Okay. And how is the pricing derivement international pricing or auction pricing, how is it?

Sanjay Agarwal — Managing Director and Chief Executive Officer

International pricing, actually, we have practically no competition because no logs are coming from anywhere in India now. Neither India is exporting anywhere except some decorative statues. So the decorative statues are not produced in India, except some teak. So there is no competition, so there is no knowledge also. No need or no knowledge.

Rishab Bothra — Anand Rathi — Analyst

And in terms of procurement in polymer slightly premium product. So are these specialized personal required to visit those forest or how is it? And how is the —

Sanjay Agarwal — Managing Director and Chief Executive Officer

We have our buyer, people who understand this subject very well. So they keep on trading to Europe or America or South of America and — we know who are the suppliers for which state is. So we keep regularly in touch and we make maybe 2 or 3 visits in a year to procure. So go personally, the buyer goes there, he personally passed his consignment, he notes around all the details and then it is imported.

Rishab Bothra — Anand Rathi — Analyst

And sir, on the wood side, can you elaborate on the end who are buying our product, let’s say, architect, contractor or is it home buyers or is it institutional buyers?

Sanjay Agarwal — Managing Director and Chief Executive Officer

Which product are you talking again, different products are bought by different people? If plywood you are talking so plywood is bought by the consumer. Mostly by consumer and some for big projects like Parliament — Indian Parliament is being done. So that plywood will be bought by a big contractor. If you are talking of MDF, MDF is bought by mostly original equipment OEMs, we call them OEMs like Godrej or — there are thousands of them in the country now. So they are the people who buy particle board and MDF.

Rishab Bothra — Anand Rathi — Analyst

So our online retail furniture also your customer type of Urban Ladder or the IKEA?

Sanjay Agarwal — Managing Director and Chief Executive Officer

They are big customers of ours.

Rishab Bothra — Anand Rathi — Analyst

Okay. So if some next quarter onward, if you could highlight what proportion of your sales is value-added and how much is this institutional buyers in different segments? I mean you can club it under one row item — that is — that would be helpful.

Keshav Bhajanka — Executive Director

It is actually a business secret. So that data we would not want to discuss.

Operator

We have the next question from the line of Aasim Bharde.

Aasim Bharde — DAM Capital — Analyst

Just one question from my side. Given the Q1 performance, would you want to update your volume expectations for FY ’23 across segments compared to what we had said in Q4?

Sanjay Agarwal — Managing Director and Chief Executive Officer

I think we maintain the same. I think Nehal can repeat it. Yes.

Nehal Shah — CSO & Head, Investor Relations

Yes. So we would reiterate our guidance, which you gave the call last time. So our endeavor is to grow by 20% plus for the company as a whole. For plywood, we expect 15% volume growth and 20% value growth. For laminate would be 15% volume and value. For MDF would be 20% plus volume and value. And for particle board would be 10% volume and 20% value. Having said that, yes, we have grown by 94% in the first quarter. So technically, that means we would grow by almost 7%, but our endeavor would still be to grow in double digits for the rest of the 3 quarters.

Aasim Bharde — DAM Capital — Analyst

I think the 9-month volume expectation would be flattish across segments, if you just maintain your Q4 volume growth? That’s — that’s what the question.

Keshav Bhajanka — Executive Director

Exactly. So that is what I said because we have grown so well in first quarter, our endeavor is to grow by double digits going forward over the next 9 months.

Operator

[Operator Instructions] We have the next question from the line of Priyam Khimawat from ASK Investment Managers.

Priyam Khimawat — ASK Investment Managers — Analyst

Two questions from my end. So firstly, on MDF, you alluded that despite the fall in container freight prices, imports are still not feasible and things look good for the next 2 years. But just hypothetically, if you were to take an import start coming in, will it impact the margins to the extent it did in last cycle or because of our various initiatives, like increasing share of pre-lam, et cetera, the impact would not be that much. Because when I look at some volume data, we sold around 20,000 CBM of pre-lam on an annual basis in FY ’19 and ’20. But now in just 1 quarter, we have sold around 10,000 CBM. So just wanted to understand this from your end.

Sanjay Agarwal — Managing Director and Chief Executive Officer

You see, there is no chance of any import. Why I say because the cost of import, the only logistic cost is USD100 which is very, very high with INR8,000, you only in terms of per CBM is only the import cost. But if you say that, yes, if it is imported, if it is imported, it will start impacting the MDF prices 2 things. If it is imported, that means it’s feasible, that means it is coming at a price which is lower than the — our prices. So the moment that happens, yes, our prices will have to go down a little bit to adjust.

Priyam Khimawat — ASK Investment Managers — Analyst

Okay. So even higher in MDF is impacted in a similar manner if imports start coming?

Sanjay Agarwal — Managing Director and Chief Executive Officer

Very frankly, no. Because the imports are of only plain MDF and premium MDF is only because they are very specific, somebody 100 pieces, somebody wants 50 pieces of a particular color. But what happens, there are people who are only laminator. So they can fill in there. So once the plain MDF starts coming in, it is going to impact everything. But I don’t see at all any possibility in near future, at least in this 1 year time, rather more as far as logistic costs are concerned, the sitting across the world the way it has changed. I don’t think it will settle down in less than next 2 to 3 years because the number of ships required to fill in the requirement is huge and those ships to really be made and put into service is a long-term task. It’s not a small 1 year or 2 years.

Priyam Khimawat — ASK Investment Managers — Analyst

Fair enough, sir. And for a brownfield of 400 CBM in North, we had earlier highlighted that margins might be slightly lower because we’ll have to procure timber at higher levels due to some shortages. Any update on the same?

Sanjay Agarwal — Managing Director and Chief Executive Officer

See, again, look, we expect the moment we go for a higher volume there may be any business should expect this but the way the markets are, maybe we should not — maybe we will not have to compromise with our prices, but you don’t know how the market reacts at that time. Even if it reacts maybe 1% or 2% here and there are already — whatever we want to achieve is 25%, and you are already at 35%. So I don’t think that is a need to worry.

Priyam Khimawat — ASK Investment Managers — Analyst

My question was not in terms of selling price. It was more in terms of cost in terms of what we procure our timber.

Sanjay Agarwal — Managing Director and Chief Executive Officer

Yes. But the moment — you see the more the chances are actually because of the 300 CBM, there is a huge timber market. So that will not increase the prices of timber too much. In fact, it can impact the prices in the market of our finished product. Temporarily, I believe that, that is always usually a temporary thing when a new capacity comes in, the other players are also little doubtful. They want to secure their dealers and their share in the market. So everybody reacts a little bit by 1%, 0.5%, 2% here and there. But it settles down in 3 months to 6 months’ time, it settles down and it’s okay.

Operator

We have the next question from the line of Kushagra from Old Bridge Capital.

Kushagra Bhattar — Old Bridge Capital — Analyst

Just one question. So basically, related to your imports, if you remove the container freight cost, which has increased a lot, how competitive would be the prices of domestic players versus let’s say import prices? And a related question is, you also made a remark that the Indian players are becoming more and more efficient, right? I just wanted to pick your thoughts on where is the better efficiency coming from? Because some of the largest players out there are basically 2x, 3x size in terms of MDF capacity is right there, right? So isn’t the economies of scale better for outside players versus Indian players.

Sanjay Agarwal — Managing Director and Chief Executive Officer

Yes. Yes. That is not a wrong thing at all. But then you see yesterday’s manufacturer like green who was manufacturing maybe 500, 600 cubic meters or more. Today, we have a 1,000 cubic meter plant and if he might expand into another so he will be 2,000 cubic meter producer from 600 cubic meter is not it. Then because of these market conditions now, with cost of interest, with cost of operations, everything is now going to go down or has already gone down. So all these things are going to help us and the prices, the prices are not going to be the prices like earlier prices. The prices are higher in the market. So at that time maybe the imports were at $220 to $230 today, is not available at even $300 FOB. That’s why I believe that both the sides will be becoming more efficient because our size is increasing. We are understanding the business much, much, much better. And I believe that the prices in the international market will not go down to that level. So both sides, we are going to have advantage.

Kushagra Bhattar — Old Bridge Capital — Analyst

Got it. And if we adjust for the container freight cost, what would be the difference between the prices?

Sanjay Agarwal — Managing Director and Chief Executive Officer

I think container freight costs right now, I don’t have the numbers, but — at that time, say 3 years back, it used to be just USD25 per cubic meter. And I think Keshav has some idea, Keshav can you please —

Keshav Bhajanka — Executive Director

I think if you remove container freight then the cost of production for us would be very similar to international players. So we are definitely very competitive.

Operator

Ladies and gentlemen, due to time constraints, we will take one last question from the line of Hrishikesh Bhagat from Kotak Mutual Fund.

Hrishikesh Bhagat — Kotak Mutual Fund — Analyst

Congratulations on the great performance.

Sanjay Agarwal — Managing Director and Chief Executive Officer

Thank you.

Hrishikesh Bhagat — Kotak Mutual Fund — Analyst

So a few questions. Firstly, on the laminate capacity expansion, what will be the time line of this expansion that you highlighted?

Keshav Bhajanka — Executive Director

So in laminate, there are 2 expansions that are taking place. The 1 press that we’re adding in Kolkata, which would commence within the course of the next 2 quarters. So that is going to be a capacity expansion of 14% to 15%. Regarding the South capacity, we are expecting products to commence production by Q2 of next financial year.

Hrishikesh Bhagat — Kotak Mutual Fund — Analyst

Second question is on the — has there been any price correction undertaken post the recent commodity cost correction in any of the product category?

Sanjay Agarwal — Managing Director and Chief Executive Officer

What do you mean by correction? Lowering of the price?

Hrishikesh Bhagat — Kotak Mutual Fund — Analyst

Yes.

Sanjay Agarwal — Managing Director and Chief Executive Officer

We have increased prices in most of our items, except MDF. MDF we have not increased, it is stable. All other products we have taken in plywood, we have taken 2%, 3% and 7% for different products. In laminate also, we have taken 3% to 4%. In particle board, we have taken 9%.

Hrishikesh Bhagat — Kotak Mutual Fund — Analyst

Okay.

Sanjay Agarwal — Managing Director and Chief Executive Officer

Yes, there is no lowering down until now. All these things will keep happening. And sometime in future, we will have to reduce the price at some time.

Hrishikesh Bhagat — Kotak Mutual Fund — Analyst

The other last question on the margin side. I think not taking a — I don’t know the exact margin, but what I wanted to understand is that on the current margin — current quarter margin. If I have to look at it from the point of view of nonrecurring expenditure when is the nonrecurring from the point of view, probably 1 or 2 years’ point of view. It will be largely the ad spends which are above normal? And is there a payment for consultancy BCG engagement that we used to do in this current quarter numbers?

Sanjay Agarwal — Managing Director and Chief Executive Officer

Right now, BCG, we are doing — most payment is from the decorative portion the laminate side is at most of the presence. We may engage in BCG in future for our things also, but then that will be again when they come. So when they come at that time, maybe there is some impact on the bottom line. But then we have seen and we are very, very convinced with the results. So that’s a long-term gain only.

Hrishikesh Bhagat — Kotak Mutual Fund — Analyst

Sure. It’s not a question about whether you’re gaining any benefit or not. I understand you have gained the benefit, but just wanted to understand from the point of the normalized margins.

Keshav Bhajanka — Executive Director

So Hrishikesh, just to end this conversation, you can safely assume INR11 crores to INR12 crores which was spent on behalf of additional brand spend and BCG, which adds up almost 1.5% of the total revenue which we posted in Q1.

Hrishikesh Bhagat — Kotak Mutual Fund — Analyst

Okay. So this is not — I’m talking more from 1 or 2 years’ perspective as and when BCG engagement ends and probably this A&P spend normally. So you have these levers internally from marketing point of view?

Keshav Bhajanka — Executive Director

Yes. Absolutely.

Hrishikesh Bhagat — Kotak Mutual Fund — Analyst

Assuming this inflationary environment sustains.

Keshav Bhajanka — Executive Director

Right.

Operator

Ladies and gentlemen, that was the last question and we will now close the question queue. I would like to hand the floor back to the management for closing comments. Please go ahead.

Sanjay Agarwal — Managing Director and Chief Executive Officer

Thank you. Thank you, ladies and gentlemen, for your questions and attending our Q1 call. We assure you that the management will be trying its best to do better and better in times to come. Thank you. See you during our next call after 3 months.

Operator

[Operator Closing Remarks]