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Supreme Industries 

Inventory losses compress margins further 

SIL’s volumes and realisation grew by 53% and 8% YoY respectively. However, volumes were still 4% below 1QFY20 level. Sales grew 64% while EBITDA and PAT grew by 21% and 25% respectively on account of low base of 1QFY22. EBITDA margins declined to 12.2% on account of change in product mix (higher sales of agri pipes) and inventory losses led by sharp drop in PVC  resin prices. PVC, PP and LDPE prices have declined between  13%  to  32%  YTD  with  PVC  registering  the  highest  fall  since  April’22. Management maintained volume growth guidance of 15 and EBITDA margins of 15% for FY23. Inventory losses are expected to extend in 2QFY23 and margins and demand are expected to be better in 2HFY23. We cut our EBITDA margin estimates by 100bps for FY23/24 while maintaining growth estimates and Buy rating on the stock with TP of Rs2,696, valuing at 30x FY24E.

Plastic Piping division to drive the growth  

Plastic  piping volumes grew  65% YoY  (10% above  our estimates,  72ktn)  however,  7% below 1QFY20 level. Price per kg remained flat on QoQ basis at Rs184/kg. The company is expected to continue aggressive expansion in piping system division. SIL’s new unit at Assam has commenced while the other two greenfield plants in Cuttack and Erode are expected  to  commence  by  Sept?Oct’22.  Supreme  has  further  bolstered  its  product portfolio by introducing PEX plain and PEX composite pipes (ideal for carrying hot water). SIL is receiving good response  for its Olefin  fittings and Electrofusion  fittings  for GOI’s ‘Nal Se Jal scheme’

Packaging segment continued to faced headwinds 

Packaging  segment which  contributed ~15%  to  the  total  sales  faced  headwinds  in  its cross laminated films business (sells under Silpaulin brand).  The segment continues to remain impacted by fierce competition from look?alike products. The thrust in FY23 will be on promoting non?tarpaulin products in export markets which offers  the company better pricing and margins. The Company has recently expanded its capacity to 30,000tn pa. Other two sub segments Protective Packaging and Performance Packaging registered good  demand  during  the  quarter  in  domestic  and  export  markets.  Within  Protective Packaging – consumer products, yoga mats, sport goods, kids puzzle and toys received good demand. In export markets such as Middle East, Africa and Europe, Performance Packaging received good response. With improving product mix and increasing customer base company expects its capacity to run at full utilization level and may have to look for expansion opportunities in near future.

Valuations remain attractive 

Supreme Industries, despite being the market leader in plastic pipes segment, is trading at significant discount to its historic multiples. We expect Supreme’s sales, EBITDA and PAT  to  grow  at  CAGR  of  10/9/9%  respectively  over  FY22?24E.  We  estimate  EBITDA margins to stabilize at an average of 15.5% for the next two years. We cut our EBITDA margin estimates by 100bps  for FY23/24 while maintaining growth estimates and Buy rating on the stock with TP of Rs2,696, valuing at 30x FY24E.

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