Weak operating performance...volume growth stable
Supreme Industries Ltd (SIL) is India’s leading player in plastic products; the wide range of offering includes Plastic Piping system, Packaging, Industrial and Consumer products .
* Q2FY20 Revenue de-grew by 3% YoY, but PAT grew by 30% YoY on account of corporate tax cut.
* EBITDA margins declined by 250bps YoY to 13.6% due to inventory loss & higher cost.
* We expect volume & revenue growth to pick-up in H2FY20, led by revival in demand for packaging and industrial segments.
* However, rising competition and demand headwinds is likely to keep margin under pressure in the near term.
* We remain positive on SIL given its market leadership position, diversified product profile and strong balance sheet. With corporate tax cuts, the earnings is likely to grow by 23% CAGR over FY19-21E.
* However, keeping in view of near term impact on realisation, revenue growth and the benefit of tax cut being priced-in, we value SIL at P/E of 24x on FY21E and maintain to “Reduce” with a target price of Rs1,082.
Revenue growth weak…
SIL’s Q2FY20 revenue de-grew by 3% YoY, led by de-growth in Packaging, Industrial and Consumer segment which de-grew by 5%, 34% and 10% YoY, respectively. While revenue from piping segment grew by robust 19% YoY. The overall revenue growth was impacted by lower realization on account of weak commodity prices and subdued performance from consumer & Industrial segment. The volume growth was at 12.4% YoY led by Plastic piping & Packaging segment which grew by 20% & 6% YoY respectively. Management has guided a volume growth 10%-12% for FY20E. We lower our revenue estimates by 4.5% & 6.5% for FY20 & FY21E to factor in the near term impact on revenue. We expect revenue to grow by 10% CAGR over FY19-21E.
PAT to grow by 23% CAGR over FY19-21E…
SIL’s Q2FY20 gross margins declined by 40bps YoY to 34.0% on account of inventory loss on account of fall in raw material cost and inventory loss. EBITDA margins declined by 250bps YoY to 13.6% due to cost. Operating margins from Packaging and Industrial witnessed sharp decline. Industrial margin was impacted by quality settlement claim and higher provision. Packaging margins impacted by higher incentive, dealer discount and inventory losses. But on account of tax cut, the consolidated PAT grew by 30% YoY to Rs140cr. Going ahead with stable raw materials prices, EBITDA margins is likely to improve. However, we lower our EBITDA margin estimates by 90bps & 60bps for FY20E & FY21E to factor in the impact on Q2 margin. Despite this we expect PAT to grow by healthy 23% CAGR over FY19-21E.
SIL plans to spend Rs400cr for expanding capacities of PVC Pipe System/HDPE Pipe System/CPVC. Also to enhance capacity in Protective Packaging Division and consumer segment respectively.
Given the near term demand headwinds, impact of lower realisation on revenue growth and tax cuts being priced-in we value SIL at P/E 24x on FY21E and maintain to “Reduce”, with a target price of Rs1082.
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