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Beat on all counts

Supreme Industries (SIL) reported an impressive beat on all counts: a) 10% volume growth; b) 21.8% (all-time high) EBITDA margin (+570bps YoY) driven by high inventory gains in the plastic piping segment, superior product mix and operating leverage; and c) 112% YoY growth in core PAT at Rs2.6bn (I-Sec: Rs2.13bn) led by strong operational performance and lower interest costs. With SIL sustaining its capex drive (setting up of new greenfield plants), expanding its product range (focus on tanks, DWC pipes, plumbing valves, and PEX pipes) and increasing its reach by expanding the distribution network into tehsils/small districts – we expect SIL to gain sizeable market share and improve its margins structurally over the next 2-3 years. Maintain BUY.

* Valuation and outlook: Factoring-in the impressive Q3FY21 performance, we increase our revenue and PAT estimates by 1.4%/2.4%/2.3% and 13.7%/4.7%/4.0% for FY21E/FY22E/FY23E respectively. We now expect the company to report revenue and core PAT CAGRs of 12.8% and 19.3% respectively over FY20-FY23E. We maintain our BUY rating on the stock with a revised SoTP-based target price of Rs2,005 (earlier: Rs1,920), valuing the core business at 35x FY22E earnings. Key risks: Sudden fall in PVC resin prices and Slowdown in plumbing pipes demand.

* Revenues grew 34.3% YoY to Rs18.4bn (I-Sec: Rs17.9bn): SIL reported 34.3% YoY growth in revenues to Rs18.4bn led by 10.1% / 22% YoY increase in volumes / realisations respectively. Driven by sharp rise in polymer prices and higher growth traction in plumbing pipes, consumer appliances and material handling products, SIL reported volume growth of 9% / 2.4% / 32.4% / 10.9% YoY in its plastic piping / packaging / industrial /consumer product segments respectively. VAP revenues grew by a strong 33.5% YoY. With sustained capex drive, traction in recently launched niche products and expected increase in its manufacturing footprint, we expect SIL to report 12.8% revenue CAGR over FY20-FY23E.

* EBIDTA margin surprises positively at an all-time high of 21.8% (I-Sec: 19.2%): SIL reported a beat in EBITDA margin at 21.8% (I-Sec: 19.2%), up 570bps YoY and 320bps QoQ. The beat was largely driven by inventory gains of Rs0.8bn in its plastic piping segment, higher growth of VAPs, and operating leverage. Going forward, we expect SIL’s overall EBITDA margin to improve structurally over the next 2-3 years driven by expected increase in the share of VAPs in its plastic piping (tanks, bath fittings, plumbing valves, CPVC pipe systems, etc.) and packaging product segments (higher growth traction, particularly in SILPAULIN), sustained cost control measures and likely expansion in its manufacturing footprint over the next two years.

* Core PAT rises 111.5% YoY to Rs2.6bn (I-Sec: Rs2.13bn): Better than expected operational performance led to a beat in core PAT at Rs2.6bn (I-Sec: Rs2.13bn). Consolidated PAT was up 153% YoY to Rs3.1bn (I-Sec: Rs2.4bn). Going forward, we expect SIL to report core PAT CAGR of 19.3% over FY20-FY23E

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