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Healthy volume revival

SIL’s volumes grew by a healthy 51% YoY (+31% QoQ) while realisation declined 21% YoY (-10% QoQ). Decline in QoQ price realization was led by plastic piping system. We believe this could possibly be because of higher contribution of agri pipes during the quarter. Healthy volume revival is in-line to what we had indicated in our last channel check note – lower PVC/PP/LDPE prices will create a conducive environment for growth. EBITDA margins improved sequentially from 7% to 13% on account of lower inventory losses during 3Q. Inventory losses stood at Rs2.3bn in 1HFY23. Management has guided for a strong 25% volume growth for FY23 led by plastic piping division – expected to grow by 35%. We believe that EBITDA margins will continue to improve sequentially. We largely maintain our earnings estimates. We maintain our Buy rating on the stock with TP of Rs2838, valuing at 30x 1HFY25.

Sequential margin improvement with stabilization in PVC prices

Supreme Industries registered atleast a decadal low EBITDA margins at 7% in 2Q. It registered an inventory loss of Rs2.3bn for 1HFY23 – shaving off 8-10% of the margins. Significant portion of inventory losses were clocked in 2QFY23. Inventory losses in 3Q, though less, shaved off ~2% of EBITDA margins. Prices of polymers – PVC, PP, and LDPE - registered a sharp decline of 28-46% since start of FY23. PVC resin prices (~80% of RM for Supreme) registered sharpest decline among all the polymers at 45% or Rs66/kg since the start of FY23 till November before recovering by Rs15/kg in December. Management expects PVC prices to remain range bound. As a result, margins will continue to expand going ahead. Margin guidance for FY23/24 stands at 12.5/15.5% respectively

Demand revival expected across all the product segments

Lower and stable PVC prices have led to sharp volume uptick. Supreme registered a healthy YoY volume growth of 51/36% for 3Q/9MFY23. With the current polymer prices, management has guided volume growth of 25% for the company with 35% growth in plastic piping division for FY23. The guidance is better than the one provided post 2Q results. Two new capacities – Assam and TN have commenced While Odisha will go into production by Feb’22. Brownfield expansion and new range of products are running smoothly. Apart from this new products - PEX Piping System and Olefin fittings are getting encouraging feedback. Within packaging – Cross Laminated Films business is expected to touch volumes of last year (earlier guidance of +10% volume growth). Within Industrial, Supreme has received LoI of Rs450mn (addition to earlier orders of Rs760mn). Consumer Furniture segment has grown its sales/volumes by 13/8% respectively and expect to perform better. Supreme is augmenting its capacities taking total capacity to ~815ktn

Valuations remain attractive

We expect Supreme’s sales, EBITDA and PAT to grow at CAGR of 11/10/9% respectively over FY22-25E. We largely maintain our earnings estimates. We maintain our Buy rating on the stock with TP of Rs2838, valuing at 30x 1HFY25.

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