Buy Supreme Industries Ltd : Long term growth outlook remains intact - ICICI Direct
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Buy Supreme Industries Ltd For Target Rs.2450
Long term growth outlook remains intact…
About the stock:
Supreme Industries (SIL) is India’s leading plastic processing company with a presence in four major segments including piping systems, packaging products, industrial products & consumer product category with revenue contribution of 63%,18%, 12% & 7%, respectively.
* Market leader in the PVC pipe industry with a value market share of 14%
* Robust balance sheet with RoE & RoCE of 24% & 27% (five year average), respectively, with stringent working capital policy
Q1FY22 Results:
Operating performance was a miss as revenues came in lower than expected.
* Reported revenue growth of 27% YoY to | 1342 crore (down ~36% QoQ) driven by higher realisation
* Gross margins up 704 bps YoY to 35.5%, drove EBITDA margins up 543 bps YoY to 16.5%
* PAT increased 4x YoY to | 170 crore on a favourable base and better margin
What should investors do?
Market share gains from unorganised market (35% of total industry) and improving product mix (value added products contributes ~40% in topline) would help drive revenue, PAT in FY21-23E.
* We change our recommendation from HOLD to BUY
Target Price and Valuation: We value SIL at | 2460 i.e.32x P/E FY23E EPS
Key triggers for future price performance:
* Government’s flagship ‘Nal Se Jal’ scheme (with an outlay of ~| 3 lakh crores over the next five years) is a big booster for domestic plastic piping industry over the long term
* Rising contribution of value added product in overall topline (increased from 35% in FY18 to ~40% in FY21) to keep EBITDA margin at elevated level
* Overall manufacturing capacity to grow at a CAGR of 7% to 8 lakh tonnes with an investment of ~| 850 crore in FY21-23E
* Model revenue CAGR of 12% led by piping segment revenue CAGR of 17%
Alternate Stock Idea: in the building material space, we also like Asian Paints
* Asian Paints is a market leader in the decorative paint segment having ~2.3x more dealers (~70,000) than the No.2 player. There are structural long term demand drivers of decorative paint such as reduced repainting cycle and ‘Housing for all, that makes it a long term growth story
* BUY with a target price of | 3665
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