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Strong beat led by inventory gains

Supreme Industries (SIL) reported an all-time high EBITDA margin of 24.5% (I-Sec: 18.2%), up 540bps/270bps YoY/QoQ, largely driven by sharp inventory gains (Rs1bn in Q4FY21 and Rs2bn in FY21) on the back of steep increase in PVC prices. However, plastic piping volumes, which declined 1.7% YoY (due to sustained weakness in agriculture pipe segment and regional lockdowns post 20th Mar’21), were a key disappointment.

Management guidance of 17% EBITDA margin for FY22 (on the back of increasing mix of VAPs, cost efficiencies and operating leverage) however came as a positive surprise. Strong operating performance for the quarter led to steep rise in core PAT at Rs3.8bn (I-Sec: Rs2.28bn), up 245% YoY. Also, higher share of Supreme Petrochem profits led to sharp surge in SIL’s consolidated PAT at Rs4.5bn (I-Sec: Rs2.5bn), up 284% YoY. Downgrade to ADD due to the recent surge in stock price.

* Valuation and outlook:

Factoring-in the impressive Q4FY21 performance, we increase our PAT estimates by 25.9%/27.4% for FY22E/FY23E respectively. We now expect the company to report consolidated revenue and PAT CAGRs of 9.9% and 3.2% respectively over FY21-FY23E. We downgrade the stock to ADD (from Buy) with a revised SoTP-based target price of Rs2,400 (earlier: Rs2,005), valuing the core business at 35x FY23E earnings. Key risks: sharp fall in PVC resin prices, and slowdown in plumbing pipe demand.

* Revenues grew 45.7% YoY to Rs20.8bn (I-Sec: Rs19.7bn):

SIL reported 45.7% YoY growth in revenues to Rs20.8bn led by 7.8% / 37.7% YoY increase in volumes / realisation respectively. Company reported volume growth of -1.7% / 40.2% / 45.2% / 11.9% YoY in its plastic piping / packaging / industrial /consumer product segments respectively. VAP revenues grew 46.4% YoY. With sustained capex drive, traction in allied products and increase in its manufacturing footprint, we expect SIL to report 9.9% revenue CAGR over FY21-FY23E.

* EBIDTA margin surprises positively at 24.5% (I-Sec: 18.2%):

SIL reported a beat in EBITDA margin at 24.5% (I-Sec: 18.2%), up 540bps YoY and 270bps QoQ. The beat was largely driven by: a) inventory gains of Rs1bn in the plastic piping segment, b) higher growth of VAPs, and c) operating leverage. Going forward, we expect SIL’s overall EBITDA margin to improve structurally over the next 2-3 years driven by: 1) expected increase in the share of VAPs in its plastic piping (tanks, bath fittings, plumbing valves, CPVC pipe systems, etc.), 2) packaging product segments (higher growth traction, particularly in SILPAULIN), and 3) sustained cost control measures.

* Consolidated PAT rises 284% YoY to Rs4.5bn (I-Sec: Rs2.5bn):

Better than expected inventory gains led to a strong beat in core PAT at Rs3.8bn (I-Sec: Rs2.3bn). Increase in consolidated PAT was led by sharp improvement in profitability of Supreme Petrochem.

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