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Delivers in line performance…

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

Q2FY22 Results: Reported an in line performance on revenue, PAT front in Q2FY22

* Reported revenue growth of 40% YoY to | 1342 crore driven by higher realisation. Volume were up 8% YoY

* Gross margins down 675 bps YoY to 31.5%, resulting in a decline in EBITDA margins by 250 bpd YoY to ~16%

* PAT increased 31% YoY to | 170 crore, tracking strong sales growth and increased profits from associate

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 maintain our BUY rating on the stock

Target Price and Valuation: We value SIL at | 2740 i.e.34x 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 16% led by piping segment revenue CAGR of 20%

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 | 3425

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