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Off-take drives growth, input costs hit margins, broader outlook intact; maintaining a Buy

Strong off-take drove Supreme’s Q1 good revenue growth. Blended realisations rose only by single digits. Input costs hit the gross margin, but economies of scale and a better product mix reduced the impact on operating margins. Revenue was up 64% y/y. Gross, EBITDA and PAT margins shrank 900bps, 435bps and 211bps y/y respectively to 26.5%, 12.2% and 9.7%. Revenue and earnings were 4% and 22% below ARe

Healthy demand drives volumes. Revenue grew 64% y/y to Rs22bn, as volumes were 53% higher y/y to 108,922 tonnes (15% lower q/q), and blended realisations improved 8% y/y to Rs.195,868 a tonne, up 1.7% q/q. Value-added product revenue was lower (35%) vs 39% in the previous quarter as well as in the corresponding previous-year quarter.

Plastic piping profitability hit, despite strong revenue momentum. Offtake was up 65% y/y; realisations, 6.7% y/y. This led to robust (76% y/y) revenue growth to Rs14.6bn. Volatility in pricing, however, of raw materials and finished goods (inventory loss) curtailed profitability. The EBIT margin was 648bps lower y/y to 10.6%.

Scalable and sustainable growth. Capex of Rs7bn (incl. Rs2.8bn carried forward) has been committed for projects in different segments funded entirely via internal accruals. Plastic piping volume growth would be ahead of the 15%+ guidance in FY23 (guidance retained). Management also spoke of more revenue from value-added products and of the operating margin coming at ~15%,

Valuation. The demand outlook is intact, but pricing is a challenge for the near term. We expect 7.6% and 8.5% revenue and earnings CAGRs respectively over FY22-24. We maintain a Buy rating, and cut our target price to Rs2,467 (from Rs2,546) based on 27.5x FY24e earnings (unchanged).

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