Industrial segment remains a drag...
Supreme Industries Q4FY20 revenue (down ~8% YoY) was hit by packaging and industrial segments (together contributes ~30% of topline) with revenue de-growth of ~22% in each segment during Q4FY20, much lower than our estimate of 7% YoY. However, core business performance i.e. piping segment remained satisfactory with almost flat revenue YoY (up 17% QoQ) despite lockdown in March 2020. On the profitability front, EBITDA margin moved up ~590 bps YoY (303 bps QoQ) due to a sharp increase in gross margin (up ~1000 bps YoY, 545 bps QoQ) reflecting benefit of benign raw material prices and change in product mix. We believe the FY21E performance is likely to be impacted by less spending in construction and infra related works owing to Covid-19 pandemic. However, a slow recovery in demand of core business would drive the performance from FY22E onwards. We cut our revenue and earnings estimate by ~15%, ~29% for FY21E and ~20%, 16% for FY22E, respectively. Considering a slow recovery in demand of piping business and challenging condition for industrial product categories, we downgrade the rating from BUY to HOLD.
Lockdown, weak macro condition drags topline
Supreme’s packaging, industrial business performance in FY20 (down 8%, 24% YoY in FY20E, respectively) was impacted by low pricing in cross laminated films products, slowdown in the automotive industry. However, the strong performance of piping business in H1FY20 helped the company to clock segment revenue growth of 9% in FY20 and helped mitigate poor show of industrial segments, to some extent. We believe low construction and infra spending coupled with slow demand recovery of industrial products categories would weigh on volume growth in FY20-22E (we model volume CAGR of ~4% for FY20-22E lower than 10 year’s average of ~7%).
Favourable mix, benign raw material aids margin expansion
EBITDA margins rose ~590 bps YoY to ~19% in Q4FY20 (FY20: +110 bps YoY at 15.1%) mainly due to ~1000 bps YoY rise in gross margin in Q4FY20 (FY20: +300 bps YoY). This was largely due to a sharp increase in revenue contribution of value added product category from ~37% in Q4FY19 to ~40% in Q4FY20 (from 35% in FY19 to 38% in FY20). We believe such high gross margin of Q4FY20 is one-off event. It would normalise, going forward. Hence, we model 150 bps contraction in EBITDA margin for FY21E owing to low operating leverage, recovery in the same from FY22E onwards.
Valuation & Outlook
We believe a delay in construction activities and recovery in industrial products demand would lead to a slow recovery for Supreme in the coming period. Though we maintain our positive stance on the stock, we revise our rating from BUY to HOLD considering its present valuation at 35x FY21E, 24x FY22E. We maintain our target price at | 1040/share.
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