Rationale

The revision in the outlook factors in the company's improved performance in the first half of FY2020, which is expected to sustain in the second half as well, leading to an improvement in profitability and healthy debt metrics and return indicators in FY2020. In H1 FY2020, CPIL's consolidated operating profit margin (OPM) improved by 150 bps to reach 15.2% on the back of improved capacity utilisation of the medium density fibre (MDF) plant coupled with subsiding of cost pressure and a significant increase in volume in the laminate division. The consolidated interest coverage and Total Debt/OPBDITA also improved to around 8.70 times and 1.28 times, respectively in H1 FY2020 compared to 6.70 times and 1.70 times, respectively in FY2019. ICRA also notes that the company is in the process of deleveraging by pre-paying its debt, given the healthy cash accruals, which is likely to further improve the debt coverage indicators, going forward. The ratings continue to derive comfort from CPIL's strong business risk profile, driven by its dominant position in the plywood industry having a large product portfolio with multiple brands positioned across the entire price spectrum. The product profile is further diversified with the commissioning of the MDF and particle board plants in the last 2-3 years. The manufacturing units are also strategically located in various regions of the country, which together with strong rawmaterial linkages further support the operating profile of the company. The ratings also incorporate CPIL's wide distribution network and its brand strength, which helped the company achieve a compounded annual growth rate (CAGR) of around 12% in the last five years despite strong competition from the unorganised sector. The ratings continue to consider more than three decades of experience of the promoters in the plywood and laminate industry. The above strengths are partially offset by the intense competition from a large number of unorganised and organised players in the plywood industry. ICRA also notes that the company's operations remain working capital intensive and it is exposed to fluctuations in exchange rates, given a sizeable import of raw materials and some amount of foreign currency debt in its books. The company, however, has mitigated the impact of forex fluctuations by hedging its exposure to an extent. ICRA also notes that CPIL has plans to undertake capital expenditure (capex) for setting up another MDF plant in Uttar Pradesh. However, it is at a very nascent stage as of now and the total capex and the funding pattern have not yet been finalised. While some amount of debt funding is likely, given the healthy cash accruals, ICRA does not foresee any significant deterioration in the capital structure and debt coverage indicators of the company, going forward.