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Edited Transcript of CENTURYPLY.NSE earnings conference call or presentation 11-Nov-19 10:00am GMT

Q2 2020 Century Plyboards (India) Ltd Earnings Call

Kolkata Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Century Plyboards (India) Ltd earnings conference call or presentation Monday, November 11, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Arun Kumar Julasaria

Century Plyboards (India) Limited - CFO

* Keshav Bhajanka

Century Plyboards (India) Limited - Executive Director

* Nikita Bansal

Century Plyboards (India) Limited - Executive Director

* Sajjan Bhajanka

Century Plyboards (India) Limited - Chairman of the Board & MD

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Conference Call Participants

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* Abhay Agarwal

Piper Serica Advisors Pvt. Ltd. - Founder & Fund Manager

* Achal Lohade

JM Financial Institutional Securities Limited, Research Division - VP

* Ashish Kumar;Infinity Alternatives;Analyst

* Chetan Gindodia;AlfAccurate Advisors;Analyst

* Gaurav Agrawal;Bowhead Investment;Analyst

* Manoj Bahety

Carnelian Asset Management LLP - Co-Founder

* Nehal Shah

ICICI Securities Limited, Research Division - VP of Research of Midcaps

* Prashant Tiwari

SBICAP Securities Ltd., Research Division - Research Analyst

* Rajesh Kothari

AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director

* Sneha Talreja

Edelweiss Securities Ltd., Research Division - Research Analyst

* Sonali Salgaonkar

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Century Plyboards Limited Q2 FY '20 Earnings Conference Call hosted by SBICAP Securities Ltd. (Operator Instructions).

Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Prashant Tiwari from SBICAP Securities. Thank you and over to you, sir.

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Prashant Tiwari, SBICAP Securities Ltd., Research Division - Research Analyst [2]

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Hello, everybody. First, we would like to thank CenturyPly management to let us host this call for them. From the management today, we have Mr. Sajjan Bhajanka, Chairman; Mr. Keshav Bhajanka, Executive Director; and Mr. Arun Julasaria, CFO. I would now ask Mr. Sajjan to please take the call forward. Sajjanji, please.

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [3]

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Thank you, Prashant. Good afternoon, friends. I'm Sajjan Bhajanka, Chairman of the company. I'm accompanied by Keshav Bhajanka, Executive Director; Nikita Bansal, Executive Director; and Mr. Arun Julasaria, our CFO. We welcome you all to second quarter results call of CenturyPly. We have grown [extensive] strength despite not very good economic scenario, which all of you are aware of. Our revenues and margins have improved significantly, and this performance is shown in quarter 2 numbers.

Plywood segment is still under pressure, and we are seeing a flattish performance here. We have full faith in this segment. Our ILP program launched in 3 of the branches have some fantastic improvement in the plywood numbers, however, they're yet to be implemented across the country. Secondly, real estate sector growth is anticipated in times to come, which will help in growing business of this kind substantially. Introduction of GST, particularly the implementation of the GST and corrective reforms will certainly deliver robust growth in time to come.

In laminates division, we have seen exceptional growth as well as significant improvement in margins. This quarter was the best-performing quarter for laminate division, and we expect much robust performance in this division in quarters to come. Our new venture of MDF and particle board have reached the optimum and best capacity utilization. The result is, we are achieving desired per plan and very good operational margins, both the divisions are performing well.

Recently, companies working from some new-age PBC products. PBC as a raw material is picking up very fast in building material category, for example, PBC boards, WPC boards, PBC laminates and many more products. We have already introduced PBC boards in the market and getting very good response. We plan to expand our presence and portfolio in this category. The company is also contemplating to establish manufacturing facilities in these new-age panel products, once the desired expense levels are achieved. These are products of future, and would increasingly contribute to our top line.

CFS division has faced issues to a new competition. And it will take a year or 2 to absorb the capacity, which is newly introduced and the performance to come back to normal.

The GDP of West Bengal is one of the best in India due to its lower base, and it will certainly reflect in our CFS division. On ForEx front, our ForEx exposure was hedged as on 30/9/2019, and we will take suitable measures in future to counter ForEx risk as and when needed.

Now I hand over to our CFO, Mr. Arun Julasaria, to take you with key financial data for current quarter, post which we are open to questions-and-answer session. Thank you

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Arun Kumar Julasaria, Century Plyboards (India) Limited - CFO [4]

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Good afternoon, ladies and gentlemen. This is Arun Julasaria, CFO of the company. First of all, I will like to mention customary disclaimer that this con call is just to discuss company's historical numbers and future outlook. In no way, this should be construed as invitation to invest in the company. Results for the quarter along with detailed analysis is already mailed to you and also posted on stock exchanges and company websites. So I'll not take much of your time and take you through only basic numbers and macros.

Comparing year-on-year results, our net revenue, including other operating income for the quarter is increased by 4% from INR 564 crores to INR 589 crores. Blended EBITDA margins increased significantly from 13.3% to 17.2%. With PBT level, company made a profit of INR 73.49 crores, which is higher by 52% last year in the same period. Profit after tax increased from INR 37.8 crores to INR 52.15 crores, showing the growth of 38%. Quarter-on-quarter, total revenue increased by 3% from INR 573.7 crores INR 589.3 crores. Our EBITDA margins improved from 16.3% to 17.2%. Profit after tax increased from INR 48.14 crores to INR 52.14 crores, showing increase of 8%. On tax front, as we are having credit for net credit, so we are continuing with the old system of normal tax.

Now coming to segments. Plywood segment both on year-on-year and quarter-on-quarter basis, remained almost flat, however, EBITDA margins showed big improvement to 15.5%. In laminate segment, there was volume growth of 22% year-on-year basis. And there was significant improvement in EBITDA margins, which now stood at 14.5% compared to 8% in Q2 last year and 10.5% in Q1 this year. MDF plant is operating optimally and revenue for the period was INR 77.69 crores which is up by 27% year-on-year. EBITDA margins are also at 22.3%. In October month, our MDF plant has made a record production, particle board plant has shown good performance although there was slight reduction in revenue, y-o-y basis. The revenue for the quarter was INR 26.19 crores. EBITDA margins improved significantly to 29.7%. All the issuance company has shown improvements and working capital was stable. On debt side, you're not taking major CapEx, company is still very low geared with long-term debt equity ratio of nearly 0.11 [or F2] accepted by our bankers.

With these words, I open this conference call for questions and answers. If promoters of the company are on call, I'll request you to focus more on quality questions. Queries related to numbers et cetera can always be mailed to myself or Mr. Rathi separately.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We take the first question from the line of Sonali Salgaonkar from Jefferies.

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Sonali Salgaonkar, Jefferies LLC, Research Division - Equity Analyst [2]

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Sir, my question is pertaining more so to the industry. So just wanted to understand how is the demand dynamics right now? Particularly, also, in tandem with the capacity of the supply both in MDF and plywood? And your comments on the competitive scenario?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [3]

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Demand for both the products, MDF and plywood is growing steadily in the country. We have to go a long way to reach the levels of the developed world and developing world. I'll give a synopsis. In India, now our combined production of MDF and particle board is around 2 million to 2.2 million cubic meter per annum, 1 million each, and plywood's production is around 10 million cubic meters. Whereas China's production, plywood sees 200 million cubic meters, and MDF sees around 50 million cubic meter and particle boards each around 35 million cubic meter. So there is no comparison. Although we are competing in the population.

So I think, there will be a robust growth in both the segments, MDF and particle board and with the popularity of the ready-made furnitures. Because these -- both the products are just abundantly used in the ready-made furnitures. And MDF has started replacing thinner plywood as well like 3mm and 4mm plywood, now more and more people have started using MDF instead of plywood. So -- but overall plywood is also growing because in China we have seen when we compare these all 3 products, so in China, the growth of plywood was the highest in last 10 years. Although there was healthy growth in MDF and particle board.

So in India, also, we expect the same pattern, and it is little different than Europe. In Europe, MDF and particle board substantially replaced plywood. So plywood -- the ratio of plywood in that particular panel product substantially declined, and it is dominated by MDF and particle board. But in China, it is not so, plywood is also growing steadily. And in India, we hope the same pattern would be followed. So I think, yes...

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Sonali Salgaonkar, Jefferies LLC, Research Division - Equity Analyst [4]

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Sir, and if I may ask, which segment exactly are you expecting majority of the demand to come in, for example, the premium or the mass segment? Because as we understand over the past few quarters, you have been citing that higher the proportion of demand that you have seen is particularly emanating from the mass premium segment?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [5]

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I'm talking as a whole, like organized and unorganized altogether. So obviously, due to GST and others, there is some migration from unorganized to organized. So there may be little better growth in organized sector. And as far as particle board and MDF, it is mostly in organized sector only. Particle board, yes, there are various levels, some small units are also there. But by and large, these products are likely to grow. And for near future, the growth in particle board and MDF is likely to be little more than the growth in plywood.

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Sonali Salgaonkar, Jefferies LLC, Research Division - Equity Analyst [6]

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Got it. Sir, my last question is pertaining to the exports, and do we see realizations bottoming out there?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [7]

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Beg your pardon, it is about our which product?

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Sonali Salgaonkar, Jefferies LLC, Research Division - Equity Analyst [8]

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Export. Export.

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [9]

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Export.

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Keshav Bhajanka, Century Plyboards (India) Limited - Executive Director [10]

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This is Keshav here. We only export laminate. So MDF and particle board, we have not exported. We have just done a trial shipment to Sri Lanka, that too very recently just to see the viability of exports. In laminate, export is healthy and I think it should be growing at about 15% year-on-year.

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Operator [11]

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We take the next question from the line of Achal Lohade from JM Financial.

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Achal Lohade, JM Financial Institutional Securities Limited, Research Division - VP [12]

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Sir, just wanted to check with respect to the -- you said in the comment that MDF and ply is growing steadily. However, if I see our ply has been under pressure for a while, for last 2, 3 quarters now while MDF has also seen a double-digit decline in this quarter. Just wanted to understand what is happening on these 2 at the company level, sir?

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Keshav Bhajanka, Century Plyboards (India) Limited - Executive Director [13]

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As regards to MDF, I don't think there's any decline. I think you're looking at it quarter-on-quarter whereas for MDF, the second quarter is always poor. You see what happens is, during the monsoon season, MDF being a product that is very, very susceptible to water and that is not transported in the fully packed form especially from the dealers to the retailers, the product category as a whole experiences a decrease. So in MDF, we are growing steadily, and we will continue to do so. Also I think what the Chairman was referring to was the long-term prospect of plywood. Of course, the actions that the government has taken, there's a lot of short-term gain in the system and that is being felt by all product categories including plywood. The only reason that MDF as a whole continues to grow is because of substitution of plywood. The lower end of our plywood is being substituted by MDF. As such MDF, as a category, is increasing in size. But as for plywood, even though there is no growth in the market, it has been able to maintain our numbers. And going forward, I'm sure that as the growth rise, then we shall be able to take the maximum advantage.

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Achal Lohade, JM Financial Institutional Securities Limited, Research Division - VP [14]

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Got it. Thanks for that explanation, Keshav. In terms of the margins, if I look at -- gross margins have seen a modest correction from first quarter to second quarter, while the EBITDA margins have improved. Could you clarify if there are any cost reductions or anything of those there?

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Keshav Bhajanka, Century Plyboards (India) Limited - Executive Director [15]

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Which segment are you talking about?

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Achal Lohade, JM Financial Institutional Securities Limited, Research Division - VP [16]

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I'm looking at ply segment where -- sorry, I was looking at MDF segment where gross margins have declined from 38.6% to 38.2% while the EBITDA margins have improved from -- sorry, my bad. Actually -- okay, I'll come back in the queue.

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Operator [17]

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The next question is from the line of Sneha Talreja from Edelweiss.

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Sneha Talreja, Edelweiss Securities Ltd., Research Division - Research Analyst [18]

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Sir, it is more first pertaining to Plywood segment. Sir, we have seen certain quarters now that we are seeing flattish growth, or maybe I don't know not as strong growth in the plywood segment. When do you see that a revival in the [banking] take place in this particular segment since you are seeing very strong growth in other categories like laminates or MDF for particle board?

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Keshav Bhajanka, Century Plyboards (India) Limited - Executive Director [19]

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You see, the MDF demand, the plywood demand, rather, in countries such as China is significantly higher than the demand for plywood in India. As such this gives us great confidence that with similar population going forward, the demand for plywood is going to increase substantially. As we already mentioned in China, MDF and particle board both have grown over the course of the past decade, but plywood has actually grown faster. So India as well -- once we see the economic growth [abating], once we see sentiment improving, I'm sure that our plywood segment will be growing both in the medium term and in the long term.

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Sneha Talreja, Edelweiss Securities Ltd., Research Division - Research Analyst [20]

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Sure, sir. Sir, secondly coming to the MDF segments, since you have been stating that you've operated at the optimum utilization rate. Have you finalized any of your CapEx plan on both MDF as well as particle board segment?

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Keshav Bhajanka, Century Plyboards (India) Limited - Executive Director [21]

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We are aggressively working on the same. We have already gotten a license in Utter Pradesh and we're exploring our option. We have not taken a final call yet, but I'm sure that very soon you will be hearing this from us.

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Sneha Talreja, Edelweiss Securities Ltd., Research Division - Research Analyst [22]

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Sure, sir. Sir, last question may be from the laminate segment. This particular quarter, we have seen a strong increase in margins. Can you highlight the reasons? And can you even highlight whether these margins are sustainable, or no? And what are you are seeing for this, and what is your future guidance for this particular segment? Where do we see the margins stabilizing?

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Keshav Bhajanka, Century Plyboards (India) Limited - Executive Director [23]

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Definitely. In laminate, last year was a transition. We had a very difficult year because, one, we had entered with a new capacity, and secondly, the price of phenol, which is a major constituent in the total raw material cost for laminate, had shot up drastically on account of crude oil increasing and other factors. Now the prices of phenol have stabilized, and we have been able to pass on the entire increase that was there earlier to the market. As such, margins in laminate are likely to stand far higher than last year. We are looking at 12%-plus margins for the entire year. And I'm more than confident that we'll achieve the same.

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Sneha Talreja, Edelweiss Securities Ltd., Research Division - Research Analyst [24]

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Sir, that really helped. Sir, just last one question if I may just squeeze in. Sir, you -- earlier in your opening remarks you mentioned a lot about the PBC board segment, and you introduced it in the market and -- are you contemplating some kind of a manufacturing capacity there?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [25]

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Yes. We are now working on expanding our sales in the market and for manufacturing to start, we need reasonable capacity. So once we reached that sold capacity at the sales level, which would sustain because we cannot start with very small capacity in manufacturing, so it has to be moderate and adequate. And once we are sure of the figures that we can sell at least 50%, 60% of the product in first year then we shall go for that.

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Sneha Talreja, Edelweiss Securities Ltd., Research Division - Research Analyst [26]

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Sir, any tentative figures that what is the kind of capacity that if you will be looking at, what is the minimum capacity that you need to put up and what will be the kind of CapEx that you'll be looking at that particular capacity?

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Keshav Bhajanka, Century Plyboards (India) Limited - Executive Director [27]

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It is not a very capital-intensive product. So to set up a new capacity, I think the total cost would be under INR 20 crores. Having said that, we are looking at a turnover of close to INR 70 crores to INR 80 crores. Once we are in touching distance of the same or once our AOP is designed towards INR 80 crores, I'm sure then we can set up the manufacturing capacity. It is a very small project, I think, it could be implemented within 6 to 7 months.

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Operator [28]

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Next question is from the line of Chetan Gindodia from AlfAccurate.

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Chetan Gindodia;AlfAccurate Advisors;Analyst, [29]

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Sir, Gabon unit is likely to come in this -- by the end of this year. So what kind of cost saving are we envisaging from this Gabon unit that can come in our raw material cost?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [30]

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Gabon, we are likely to produce Okoume veneer. So it is replacing the Gurjan veneer, which comes from Myanmar and other sources. So yearly, it is around 30% cheaper than Gurjan veneer. But in case of CenturyPly, for our premium products, we still use Gurjan veneer only. And we have started using for the other products, which are fetching lower sales price, the Okoume veneer. So there would be saving because, in gross segments, we shall replace Gurjan with Okoume. So there would be around 30% saving.

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Operator [31]

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

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Nehal Shah, ICICI Securities Limited, Research Division - VP of Research of Midcaps [32]

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Sir, in your opening remarks you said, you have introduced ILP program in 3 of your branches, which has seen a great effect coming in. So can you just elaborate on that program?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [33]

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I'll ask Keshav to elaborate it.

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Keshav Bhajanka, Century Plyboards (India) Limited - Executive Director [34]

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So Nehal, the ILP program, as you are well aware, was tried out in 2 pilot markets, Lucknow and Mumbai. In both these markets, over the course of the first 6 month, we have had in excess of 10% value growth, which is substantially higher than in other branches across India and substantially higher than our overall Plywood segment. So I think we are reasonably confident that the program now has found its feet. And I'm sure that within the first half of next year -- the first half of next calendar year, we'll be rolling it out to at least 4 to 5 of new branches. But I think going forward next year, we should see the true benefit of ILP.

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Nehal Shah, ICICI Securities Limited, Research Division - VP of Research of Midcaps [35]

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So is this the same thing as Theory of Constraints?

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Keshav Bhajanka, Century Plyboards (India) Limited - Executive Director [36]

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Sorry, could you come again?

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Nehal Shah, ICICI Securities Limited, Research Division - VP of Research of Midcaps [37]

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Is it the same thing as Theory of Constraints?

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Keshav Bhajanka, Century Plyboards (India) Limited - Executive Director [38]

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Yes. It is a form of the implementation of Theory of Constraints.

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Nehal Shah, ICICI Securities Limited, Research Division - VP of Research of Midcaps [39]

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Alright. And the last thing now, what are we doing as far as Laos is concerned? Are we taking any decision to take a write-off, or we are still in -- contemplating to put up a final -- or a plywood plant there and export it to India?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [40]

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Very recently, there are some developments in Laos. Government of Laos had allowed us to export veneers, which are lying there. And at the same time, government is asking us to start the plywood unit there. And then, like, as we explained to the government that without veneer export, plywood is not viable because the raw material is mostly the Gurjan timber there. It is a costly raw material. And in plywood, it's 90% is around core veneer, 10% is face veneer. And Gurjan gives us around 60% face veneer, 40% core veneer.

So if we convert the entire timber into 90% core and 10% face to utilize the entire this thing, then it will not be a economically viable. And if the government allows us to export the surplus face veneer, like we sell manufacture plywood there, we shall utilize the entire core in manufacturing plywood and then the recreate face in manufacturing plywood, then the surplus phase we have to export. So that we are trying to impress upon the government. And they just advised us that first you start manufacturing plywood, you start that unit, and then you come with your problem to us. So there is this development, and with this, we are now just analyzing the situation. And in the meanwhile, we are also looking after to have somebody more resourceful in Laos. So maybe we may change our existing partner or include a new partner to make it more reliable. So we are just -- we are weighing all the options. So maybe we'll get call very soon.

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Nehal Shah, ICICI Securities Limited, Research Division - VP of Research of Midcaps [41]

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All right. Sir, my last question is on commercial veneer volumes. Now we have now started hitting a freight rate of almost like 3,000 CBM per quarter, from around 5,000 to 6,000. So what according to you would be a normalized volume once the Gabon unit starts?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [42]

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Yes. Definitely. Because essentially in the past, our practice was to manufacture service and quantity of veneer. The quality veneer, the higher-quality veneer, we used in our own plants. And the secondary, the next qualities that we used to sell to the market in Punjab and Haryana and where all type of manufacturers are there. So -- but in last almost 20 years, we have been dominating the veneer market in India. But now with the change of circumstances -- but one thing I would like to tell you, that veneer was never contributing to our bottom line. It was giving us hefty distinct turnover but yearly, veneer was never very profitable item. Only the units we had in other areas, other things, they were exceeding our raw material requirement.

So basically, it was for the raw material security. And then it was cutting our cost also. Our cost of the face veneer that was being reduced by our old units. So this thing will happen when the Laos would start production, partly the materials we shall use in our factory for manufacturing plywood and partly we shall sell in the market. And maybe as other people are doing in Gabon -- I'm talking about the Okoume and Gabon. So the other people, they are exporting also in European markets and even the China, Taiwan, in that market. So whatever would be profitable at that time, we shall decide. But still, it may take another 3 months to commission the plant.

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Nehal Shah, ICICI Securities Limited, Research Division - VP of Research of Midcaps [43]

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And sir, what will be your capacity there?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [44]

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We are putting up 5 lands. So again, the capacity should be around 2,000 cubic meter of timber and 1,500 cubic meter of veneer there.

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Nehal Shah, ICICI Securities Limited, Research Division - VP of Research of Midcaps [45]

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This is per month?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [46]

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Yes, yes. It will be per month.

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Nehal Shah, ICICI Securities Limited, Research Division - VP of Research of Midcaps [47]

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Per month. So sir, finally, so what kind of commercial volumes sales are we looking at, say, in FY '20? The external sales, which has now declined to almost 3,000 CBM.

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [48]

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But there is one good thing like Burma is picking up. So the Gurjan timber price in Burma, in comparison to last year, it has reduced to less than 50%. Last year, around this time, we were buying timber in the auction for $1,200 or plus, which is now below $600. So that way, it's been becoming viable again. And we are -- we have procured a lot of timber in recent auctions, and we are augmenting our peeling capacity in Myanmar. So that -- Nehal, hello?

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Nehal Shah, ICICI Securities Limited, Research Division - VP of Research of Midcaps [49]

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Yes, sir. I'm there.

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [50]

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And so there, I think, the things will pick up from Myanmar, and once -- still at the moment, we are not working about the figures and other things. So maybe -- it will be depending on the market scenario. Now it is not very good for Gabon, I would say, or Okoume. There is absolutely oversupply. And people, they are reducing their -- like production, and some of the units have already closed down in Gabon. So seeing the situation, our is not for the selling in the market, our is mainly for our own requirement of face veneer. So up to that we shall, I think, operate. And seeing if there is margin in trading or selling it or exporting it, that will take like a decision later on. And Keshav wants to add something to this.

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Keshav Bhajanka, Century Plyboards (India) Limited - Executive Director [51]

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Nehal, as you are seeing, the figures for commercial veneer have been declining for us year-on-year and today, they're at a very minuscule level. Now going forward, the company's revision is that our primary focus is going to be on sourcing commercial veneer for our own plywood. Because as you know, the prices have fluctuated a lot over the course of the past year. The cost of timber has fluctuated a lot, and the dynamics in the market have completely changed. So whether it is Gabon, whether it is Myanmar, our focus is going to be first towards ensuring raw material security for ourselves, and whatever excess we are generating because we are only buying the top-grade veneer, will be sold into the market. But otherwise, this segment today is a very material segment of our entire balance sheet and, I think, it will continue so even in the years going forward.

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Operator [52]

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Next question is from the line of Abhay Agarwal from Piper Serica, PMS.

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Abhay Agarwal, Piper Serica Advisors Pvt. Ltd. - Founder & Fund Manager [53]

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My question is -- so I just want to -- you said that the cheap ply is getting replaced by MDF. So is it possible for some of these cheap supply -- cheap ply suppliers in the market to look at importing MDF from Asian countries, or other countries where there is a surplus of MDF? That is my number 1 question, sir. And second question is that is the distribution chain for MDF different from ply?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [54]

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Yes. Keshav, Keshav will tell.

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Keshav Bhajanka, Century Plyboards (India) Limited - Executive Director [55]

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So there are number of people, who are already importing MDF into India. As you know, there's a supply glut for MDF in the world over. But in North India, saving rate for us is the huge cost of transportation for MDF. MDF has a very low value per ton product. As that the transportation cost for MDF is substantial from coastal areas to the north. As such, we are not affected substantially with north by import. But definitely in coastal areas of the country, imports have had the effect and that is pretty obvious looking at situation of the market as well. So in case of MDF, as you ask, there is a huge influx of imports.

With regards to distribution channel, in MDF, there is 1 big difference. Even in MDF, there are large dealers, there are distributors but these people are supplying to OEMs. Whereas in the case of plywood, the demand is most skewed towards individual homeowners or the final, which is the final manufacturers of the furniture themselves. Whereas in the case of MDF, material is being sold to smaller OEMs or larger OEMs who are using this to manufacture ready-made furniture. So that is the difference between the distribution of both, but both are heavily reliant on distributors and dealers. The effect of distributors and dealers for MDF and plywood are separate.

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Operator [56]

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We take the next question from the line of the Gaurav Agrawal from Bowhead Investment.

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Gaurav Agrawal;Bowhead Investment;Analyst, [57]

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Sir, on the MDF side, we have seen very good -- the margins in the last 2 quarters like 22%, 23%. So is there any one-off element to these margins? Or is there any particular cost now related to marketing or sales, which is yet to be accounted, maybe in Q3, or the quarters coming? So which may pull down your margins on a yearly basis? So if you can give me your EBITDA margin guidance for FY '20? And is there any sort of elements also in the current margins?

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Keshav Bhajanka, Century Plyboards (India) Limited - Executive Director [58]

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Definitely. You see what has happened is, over the course of past few months, the cost of our raw materials has reduced. Glue in particular has reduced substantially. The cost of glue that we were purchasing last year and the cost of glue that we're purchasing today, there's almost a 20% reduction. So that has helped in our EBITDA margin. Alongside that, operational leverage has benefited us. Going forward, I don't think there's going to be any major change in terms of the EBITDA margin. Yes, we are planning for certain increase in marketing expenditure, but that, I think, is going to be limited to maybe 1-odd percent.

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Gaurav Agrawal;Bowhead Investment;Analyst, [59]

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Okay, okay. And sir, in this quarter, you have seen a very big high other income like INR 8 crores, INR 9 crores this kind of income. So what exactly has led to that sharp movement?

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Keshav Bhajanka, Century Plyboards (India) Limited - Executive Director [60]

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I think our CFO would take that up.

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Arun Kumar Julasaria, Century Plyboards (India) Limited - CFO [61]

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Yes. Of course. The other income?

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Gaurav Agrawal;Bowhead Investment;Analyst, [62]

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Yes, Arun. Other income.

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Arun Kumar Julasaria, Century Plyboards (India) Limited - CFO [63]

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Yes. In fact, major part of that is coming from sale of part of our corporate building into our system but some is tax rebate.

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Gaurav Agrawal;Bowhead Investment;Analyst, [64]

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Okay. And sir, if you can give me your yearly guidance of various segments and margins?

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Arun Kumar Julasaria, Century Plyboards (India) Limited - CFO [65]

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Yearly guidance? Keshav will give you.

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Keshav Bhajanka, Century Plyboards (India) Limited - Executive Director [66]

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Okay. So for this year, if you look at plywood, I think we'd be looking at a growth of about 6-odd percent in the second half of the year. And we'd be looking at 2% to 3% growth for the entire financial year. We are going to try to maintain EBITDA at 14% plus. In the business of laminate, we are looking at 15%-plus growth and a 12%-plus EBITDA margins for the remainder -- for the whole of this year. MDF, we are going to maintain 20%-plus growth and 20%-plus EBITDA margins. Particle board, we are looking at a 10% growth and maintaining 25%-plus EBITDA margin.

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Operator [67]

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(Operator Instructions) Next question is from the line of [Abhishek Joshi from CGSCMB].

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Unidentified Analyst, [68]

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Sir, I wanted to ask what is the difference between the margin of prelam MDF and plain MDF.

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [69]

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Prelam MDF is a value-added product and like -- there is hardly any difference in the volume because the prelamination is very, very thin. So after result, the prelaminating, the volume remains the same. So with the same volume, there is around 30% higher sales price, whereas our additional cost of laminating it, it is much lesser than that. So prelaminated boards -- the more we are able to sale prelaminated board, that improves our margin.

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Unidentified Analyst, [70]

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Sir, so what is -- so at what rate can we see prelam MDF increasing, going into the future?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [71]

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Like particle board, our target is to go for the 100% prelaminated. And we are already up to the 70% levels, 70% of the sale is prelaminated. And MDF, there are various uses. So the MDF is used for the handicrafts and the MDF is used for the inner use in the furniture and even for the partitions, for ceilings. And like the thinner MDF is being used as the replacement of the plywood. So there, it is not required to be prelaminated. So I think moving on, maybe 25% to 30%, the share would be of the prelaminated.

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Unidentified Analyst, [72]

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Sir, so what is your view on share between the plywood segment right now at the MDF for furniture in Indian market? What proportion is it?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [73]

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It is like MDF as a whole, it is hardly 10% of the plywood at the moment. So with that -- and gradually, it is finding more and more uses because cost-wise, it is being sold at almost 50% of the plywood. And it is very steady product. So gradually -- earlier, it was sold only for OEMs, but now, gradually it has started being sold from the regular plywood source also. And recently, I had been to markets, so there some demand came. And for the -- through a contractor and a carpenter. And he asked, if we need the Century MDF? I was very happy that in MDF also, now they have started mentioning brand. So if this situation improves and like plywood, if MDF also people insist on quality and the brand, so for the branded player, that will be a very good situation.

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Unidentified Analyst, [74]

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Sir, so as you are saying that the proportion of MDF is increasing right now in comparison to plywood. So is it that MDF may cannibalize a plywood market, or is there enough space in the market for the growth of both plywood segment and MDF, together?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [75]

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Our per capita panel consumption is very, very, very less. It is less than 2 square meters per person, per annum. And whereas the same thing in China is almost 20, 30x of India. So that -- it has to grow, it has to grow. We cannot lag behind so much. So both MDF would grow, particle board would grow and ply would grow. And the base is very low for MDF and particle board, so these 2 products would grow faster. These 2 products because the base is only 1 million cubic meter each, whereas plywood's base is 10 million cubic meter plus. So as in the low base for MDF and particle board, the growth is likely to be little hefty in these 2 segments.

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Unidentified Analyst, [76]

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So there is no scenario where the MDF and particle board growth cannibalizes the growth of the plywood segment or hinders the growth of plywood?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [77]

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Partly in certain segments, it may cannibalize; for the thinner plywood, it may cannibalize. But again, there are certain usage, which warrants only plywood. It cannot be replaced by MDF or particle board. And more for the tailor-made furnitures through the carpenters, still there preference is plywood. The way plywood is having a bigger impact resistance and bigger maneuverability, like screw holding capacity, other things, cutting, fixing. These are -- there are well-established methods for carpentry and furniture making -- tailor-made furniture making with plywood. So MDF and particle board would penetrate firstly the ready-made furniture industry, and then through some extent maybe. Particularly, the MDF may replace thinner plywood in times to come.

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Unidentified Analyst, [78]

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Sir, another question. You were saying that there is kind of a supply glut of MDF in northern India then why are we delaying our decision so much to establish a newer MDF capacity in northern India? Even though, sir...

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [79]

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I think there is no supply glut -- because the imports are open, if there is scarcity in the market, there always can be materials, imported materials could enter the market. But taking the license, acquiring the land, and then starting manufacturing capacity, it takes time, and we don't want to move ahead hastily. We took the license, we. Are negotiating with the plant supplier. We have our -- 1 team is working in U.P., they have find out many good plots of the land. So land, we want to acquire where the connectivity is good, where the underground water is available because MDF particle board consumes lot of water and MDF particularly. And then the availability of electricity nearby. So these are the factors, taking into account, we are searching the land. And -- but we are almost sure, we are going ahead with that. And here, we are planning to have a unit. It is a new concept that we are contemplating to utilize. It's making particle board and MDF in the same land. There would be a little bit higher cost of that plant, but that will give us flexibility for both the products. We can make MDF, particle board, and then going ahead, in future, as per the demand in particular segment, we can adjust our manufacturing.

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Unidentified Analyst, [80]

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Sir, my last question is in mid-ply segment, how much is outsourced and how much we are manufacturing of our own right now?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [81]

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Nikita will take this question.

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Nikita Bansal, Century Plyboards (India) Limited - Executive Director [82]

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We are actually outsourcing approximately 9 out of 15, so about 65%. And -- so we have 2 brands, which is Sainik MR and Sainik [PS]. So Sainik PS completely and completely in-house and Sainik MR, we outsource at least 90% of it.

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Operator [83]

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Next question is from the line of Rajesh Kothari from [AlfA] Advisors.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [84]

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My question is with reference to the Gabon plant. Can you please tell us the total requirements and size, when are we going to start it? Because you mentioned that it would start somewhere in this quarter or next quarter? And how the ramp-up is going to happen? And therefore because of this, what kind of total cost savings you are looking for?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [85]

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We shall be starting production in Gabon early in the next quarter, that is quarter 4.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [86]

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So you'd be -- you mean the January itself, or it's going to be end of quarter?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [87]

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No. It -- maybe it's February or early March.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [88]

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Okay, February or -- okay. And you mentioned about capacity, 2,000 cubic meter and 5,500 cubic meter of veneer on per month basis.

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [89]

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1,500 of veneer.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [90]

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Sorry. So 1,500 cubic meter of veneer per month. So from April onwards, what will be the capacity utilization you are looking for?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [91]

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There are 2 aspect of this. One is our own requirement. So that will be limited to our own requirement of face veneer for -- like, suppose whatever we manufacture, 50% is the prime grade, 50% is the lower grade. So we shall manufacture only that much which gives -- fulfills our requirement of prime-grade face veneer. And then the next 50% of the lower grade we shall sell in the market. But if the market conditions are good, you can make profit in selling even prime grade also in market, so in that case, we shall produce more. But at the moment, the present condition of the market is not really congenial to that. Now people like mostly lot of traders have entered this field and they have spoilt face veneer market. So presently, we were getting benefit of that. Presently, we are getting Okoume veneer from market at a very lower cost. But when we shall be manufacturing ourselves, that time we have to adjust as per the total availabiity and as per our own requirement.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [92]

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So totally on a yearly basis, what are our total requirements?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [93]

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Yearly, we manufacture around 150,000 square meter of plywood. So our daily requirement of face is around 150,000 square meters. And for this, 1.5 lakhs square meters of face veneer, it is partly divided into Gurjan and partly into the Okoume. So it will depend on that when in February or March, what is the situation, accordingly we shall organize our product mix.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [94]

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Oh I see. So basically if let's assume the current market condition as it is where it is basis, and at the same time you mentioned that Burma timber price have also started reducing in terms of...

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [95]

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Yes, yes.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [96]

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So one should assume the gross margins for your plywood segment post the plant commencement, let's assume from April?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [97]

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Yes. You'll see that we look it from that angle that veneer is our -- a must raw material, face veneer. And at the moment, there are only 2 spaces approved in the country, one is Okoume, one is Gurjan. Gurjan is well accepted by the market, everybody prefers Gurjan to the Okoume. So for our prime products, until Gurjan is available, we shall not go for Okoume. So that will continue, and even in the veneer market also, people -- now as the Gurjan prices are coming down, they are, again, resorting back to the Gurjan. And Okoume, yes, it is much cheaper.

So for thinner plywood, for cheaper plywood, people will go for where plywood is sold as a commodity, they will go for Okoume; and for the thicker, for the blockboard, for other purpose, people would still prefer Gurjan. So that is the situation. And as far as we are concerned, our prime concern is our own face veneer requirement. So that in any condition we have to meet. And when we have to both the availability of Okoume and Gurjan then, depending on our own requirement and potential in market, we shall decide our total quantum of production. If market is good, we'll produce more, meet our requirement and sell in the market or otherwise we'll concentrate in meeting our own requirement.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [98]

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Yes. So I was talking about that, that let's assume that you meet your own requirement right now, even assuming that industry conditions basically allows you to do on your own rather than sell it in the market because traders are also very active in that market. In that case (inaudible) Gurjan, then what how much you think cost savings can happen because of that?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [99]

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In any case, our own manufacture, our veneers, when we manufacture as per our requirement, so definitely that would be cheaper. But now present at the moment, people are selling Okoume veneer at a loss. In that situation, maybe. If people are selling at loss and we can buy it, but this situation cannot continue for very long. Because in veneer industry, the other variables are very, very less. It is directly related to the raw material costs. So if -- like the timber is the only component in veneer and the -- if it is not making profit, so people, they can stop manufacturing any time. So there is sometimes scenario that there was more production because a lot of new people took entry into veneer manufacturing in Gabon. So I think this is a very short-time situation, and the long-term scenario would be decent, reasonable margin in manufacturing and goodage also. And then we shall -- and for us, it is very important that we shall have right kind and quality of raw material for our own manufacture.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [100]

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My second question is...

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Operator [101]

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Mr. Kothari, I'm so sorry to interrupt but may I please request you to reach on the question queue for your follow up as we have people waiting for their turn.

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Rajesh Kothari, AlfAccurate Advisors Pvt. Ltd - Founder, MD & Director [102]

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Okay, I had only one question. Anyways, no problem.

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Operator [103]

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Next question is from the line of Manoj Bahety from Carnelian Asset Management.

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Manoj Bahety, Carnelian Asset Management LLP - Co-Founder [104]

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Just want to take our discussion on Laos forward. You mentioned that you have to start plywood unit there and thereafter the decision will be taken whether the face veneer from Laos will be allowed to be exported. And if that is so, are we putting some more CapEx in Laos because the earlier CapEx itself as of now I don't think that there is a certainty on that. So if you can give some more color and details on this, please?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [105]

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No. We are not planning to put any more CapEx there. We have already established players in it. It is already existing there. And we have sufficient veneer capacity, so no more CapEx is required. Only decision we have to take, should we -- because you're even mobilizing people, technical people from India and then local labors and to start production. So it also is a lot of effort and some working capital may be required for that. But again, we have to look into the margins.

Suppose if we start manufacturing, if it is not profitable, then there's no purpose. Because when we closed down the operation there in Laos, that time, the operation of manufacturing plywood. But until veneer was allowed to be exported, we were earning money there. And it was very good, giving us very good quality of veneer, and we were selling in the market also. So that was a very good situation. But after that, when we had to manufacture plywood, so for almost 6, 7 months, we produced a lot of plywood there. And in the plywood operation, we lost money. Because the labor is very costly in Laos, (foreign language) -- costly from there, Laos is a landlocked country. And then again, cheaper core were not available that time, so manufacturing plywood using 100% Gurjan. So the raw material cost was higher and, again, (foreign language) plywood we had ample capacity in India.

So that way, to move the lever, technical people there in Laos, paying them extra money anchoring -- so that time, it was not viable. And now the same question is there, unless there is a security of veneer export, maybe this will not be viable for us. So we are taking that division, we are negotiating with the government. If they can assure us that partly, they will allow veneer, say, we manufacture 1,000 cubic meter of plywood. So with that, if they allow, equivalent to plywood, 1,000 cubic meter of veneer we shall allow you, then it will make sense. Then it will be very, very profitable.

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Manoj Bahety, Carnelian Asset Management LLP - Co-Founder [106]

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Okay, and the government is, like, willing to at least negotiate and talk on this? They don't want that this unit will shut down and you go out from the country? (inaudible) getting from there?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [107]

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They are not happy that all the units have closed down, they not -- only our units, all the units in Laos, even some Vietnamese people, they have put a plant there. And so all, without exception, all the ply units, all the veneer units in Laos closed down. So they want that some activities would start, but at the same time, they are willing to allow timber also because Laos is a developing country, and they have a lot of hydel power (foreign language) potential. And so lot of hydel power plants are coming up there. And for those plants, they have to clear a lot of land otherwise it would be submerged within the reservoirs of hydel plant. So that timber they want to give, they want to consume.

And then for transporting the power, they have to lay lot of power lines and for that also they have to clear forest. And again new roads are being constructed in Laos. So for the infrastructure and the all things, they have to clear a lot of land. And thereby, they have producing a lot of timber. So now the entire timber is being wasted. Because it is not only veneer, they are not allowing sawn timber also moving out from Laos. And there main thing is environmental. They see, like, Laos is a small country and the way timber cutting and the all where it started. So their government, they got little apprehensive then they shall leave their forest cover. So they have to balance in between. Because you keeping the forest totally idle will not be good, there should be sustainable growth even there is no cleaning of the forest. Then it would start decaying. So they have to keep a balance between that.

But again, that is their government situation, we are not in a position to dictate that. So we will go by whatever decision that government takes. If they see some money in starting operation, we'll go for that, and surely, for losing money, we shall never go.

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Manoj Bahety, Carnelian Asset Management LLP - Co-Founder [108]

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Okay. So -- and when they will take this decision, sir? Like 50 -- is it like first you will get a commitment from the government, like, 50% of equivalent veneer, if they allow you to...

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [109]

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No -- when this much critical situation is there, so there cannot be very straight answer to this. So there are -- we are trying our best. Our main -- we can revise the unit comfortably, that will be our aim. So whatever is required for that, some lobbying, other things, some change in the partner or -- these things, we are working on that. So if we get something positive, definitely we shall share with you.

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Manoj Bahety, Carnelian Asset Management LLP - Co-Founder [110]

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And my second question is on MDF since I think very soon we will be almost running at close to 85%, 90% kind of capacity utilization. And since it is like almost 1.5 years, 2 years it takes for new capacity to come up, so if you can give some color on that? Like how soon we can see the new CapEx announcement, and what will be the quantum of that whether there will be -- there can be some brownfield expansion before going to the greenfield expansion? So how will it unfold, sir?

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [111]

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Yes. Keshav is very closely working on this. So I would ask Keshav to explain.

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Keshav Bhajanka, Century Plyboards (India) Limited - Executive Director [112]

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You see the first MDF capacity when we set up the Vishalpur plant, we took 16 months despite a whole month delay in commissioning due to a problem with our -- due to problem that we could not get power due to a certain vested interest or due to a certain arbitration that took place there. So we are more than confident that between 12 to 15 months, we'd be able to execute any MDF project. Having said that, today, setting up a capacity in MDF is not a short-term decision. It is a very heavy CapEx decision. It is a decision that is there for decades to come not for years to come, so we have to very carefully plan the same. And as you know Uttar Pradesh has some of the cheapest timber in the country. So we are acting quite quickly on the Uttar Pradesh project, but we have not been able to finalize all the details. As soon as we do, we shall update you. One more point there I want to make is our current MDF capacity is -- what we are operating at is 85% to 90% of rated capacity. We can definitely stretch beyond our rated capacity. And I'm sure next year you would see us functioning at least at a 100% [plus] of our rated capacity. So we have that buffer as well.

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Manoj Bahety, Carnelian Asset Management LLP - Co-Founder [113]

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Sir, how much more can we go? And is there any chance of doing some brownfield expansion at the existing place?

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Keshav Bhajanka, Century Plyboards (India) Limited - Executive Director [114]

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No. And the reason behind the saying is, again, it is a very happy, a very high CapEx decision. And secondly, in Hoshiarpur, the availability of timber is suitable for our unit but expanding beyond this mainly can increase in timber cost for our existing unit as well. So Hoshiarpur, there will be no brownfield expansion as of now, until the timber availability improves. And sorry, the second part was?

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Operator [115]

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In queue, the next question is from the line of Ashish Kumar from Infinity Alternatives.

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Ashish Kumar;Infinity Alternatives;Analyst, [116]

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Congratulations on a great set of numbers, especially on MDF and laminate side. Just wanted to understand on the working capital side, the number of days has come down significantly in the 6 months. Do you think this is sustainable, or is there a possibility of an improvement going forward?

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Keshav Bhajanka, Century Plyboards (India) Limited - Executive Director [117]

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You see the working capital cycle in particle board and MDF is far lesser than that in the case of plywood or laminate. Plywood and laminates have a very high turnover to fixed asset ratio but are working capital intensive, whereas MDF and particle board are the opposite. They have a very high fixed asset to turnover ratio, but they are very working capital light. So the working capital cycle you are seeing now is sustainable. And as the contribution of MDF and particle board to our overall turnover increases, I think the cycle show shall go -- shall further reduce.

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Ashish Kumar;Infinity Alternatives;Analyst, [118]

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So in, let's say, in next 12,18 months as your capacity -- we can see days which are better than what we saw in the last up cycle, which was 60, 62 days? Is that...

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Keshav Bhajanka, Century Plyboards (India) Limited - Executive Director [119]

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Definitely, definitely.

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Operator [120]

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Thank you. Ladies and gentlemen, that was the last question. I would now like to hand the conference to management for closing comments. Over to you all, members of the management.

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [121]

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Thank you very much. We have tried our best to honestly answer all your queries. And about the numbers and these things, if you have any further query, you can always ask Abhishek Rathi or Mr. Julasaria. They will assist you. And we shall try our best to improve the working of the company and take it further to newer height. So thank you very much for participating today, and sparing your valuable time.

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Operator [122]

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Thank you. On behalf of SBICAP Securities Ltd., we conclude today's conference. Thank you for joining. You may disconnect your lines.

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [123]

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I thank SBI Capital for organizing today's conference, and thanks, everybody.

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Operator [124]

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Thank you.

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Sajjan Bhajanka, Century Plyboards (India) Limited - Chairman of the Board & MD [125]

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Thank you.