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Margins to revive from H2FY23

Result Synopsis

Supreme Industries Ltd (SI) reported decent volume growth of 9%YoY & 3%QoQ (2? year volume CAGR 9%) wherein Pipe division (71% of volumes) registered 9%YoY growth & remained flattish as compared to Q1FY23. During the quarter, Plastic pipe’s margins contracted sharply from 15%/11% in Q2FY22/Q1FY23 to 2% in Q2FY23 owing to steep fall in PVC prices, which degrew by Rs55/Kg in Q2FY23 (PVC contributes ~80% of pipe biz). Other segments registered steady performance in terms of topline & margins.

Management expects strong demand from Plumbing & agricultural segment in H2FY23 & hence company has guided for 20%YoY volume growth in FY23 wherein pipe division should grow by 25%. Additionally, with polymer prices likely to bottom? out, management believes margins to come in at 12?12.5% for FY23. We reckon demand to be buoyant in H2FY23 & we expect overall volume growth of 16%CAGR over FY22?FY24E wherein pipe’s volumes are likely to report 18% growth. Overall, we expect revenue growth of 10% over FY22?FY23E. Though PVC prices could fall by Rs6?8/Kg in coming months, we do not foresee any steep correction in prices from hereon & hence margins are likely to come in at 11.7%/14.5% in FY23E/FY24E. We continue to value the company at P/E(x) of 30x on FY24E EPS of Rs81 (revised downwards by 7%), arriving at a target price of Rs2,429 & assign an ADD rating to the stock.

Result Highlights

* Revenue: Company reported revenue of Rs20.87Bn (Vs our est of Rs19.80Bn)reporting a growth of 8%YoY & degrowth of 5.4%QoQ.  

* Volumes: Total sales volumes stood at 111,803Te (5% better than our estimates), reporting a growth of 9%YoY & 3%QoQ. (2?year Vol CAGR stood at 9%).

 * EBITDA: Operating margins came in at 7.1% (Vs our est of 10.4%) as compared to 16.1%/12.2% in Q2FY22/Q1FY23 respectively. Absolute EBITDA stood at Rs1.47Bn (Our est. Rs2.06Bn) reporting a 53%YoY & 45%QoQ decline

* PAT: Net profit stood at Rs820Mn (Vs our es of Rs1.63Bn) reporting a steel fall of 64%YoY & 62%QoQ. PAT margins came in at 3.9% as compared to 11.9%/9.7% in Q2FY22/Q1FY23 respectively

Segmental Revenue: (i) Pipes (62% revenue) reported revenue of Rs12.95Bn (est. 12.51Bn), a growth of 2%YoY & sequential decline of 12%. (ii)Packaging biz’s topline(15%of revenue) stood at Rs3.28Bn (our estimate of Rs3.23Bn) reporting a 18%YoY growth & remained flattish QoQ , (iii) Industrial’s revenue grew by 32%YoY & 11%QoQ to Rs3.35Bn, (iv)Consumer segment’s sales grew by 17%QoQ & remained flat YoY to Rs1.12Bn.

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