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A year marked by extreme RM price volatility

We analyzed the recently published Annual Report of Supreme Industries for FY22. Our key inferences from the annual report are – extreme volatility in raw material prices have impacted demand across product categories, capital expenditures continue to remain strong as demand outlook for FY23 remains healthy, product segments such as water tanks and LPG composite cylinders are showing improved traction and counterfeit products continue to pose a challenge to the branded players.

Piping System demand impacted on account of vagaries of PVC prices

PVC prices historically have remained stable before the pandemic hit in 2020. PVC prices started inclining during the fag end of CY20 before hitting peak in Oct’21. PVC resin prices more than doubled during this time frame. Over Nov’21 – Feb’22 PVC resin prices declined sharply by ~20-25% leading to demand destruction. Volatile PVC resin prices and COVID led lockdowns have not been conducive for pipes (especially agri) demand. As a result, this segment registered decline of 7% in volumes for FY22. However, FY23 demand outlook is strong on account of GoI led projects – AMRUT, Jal Jeevan Mission, Affordable Housing, Smart Cities and overall uptick in real estate demand.

Strong demand for Industrial Product segment

Within Industrial Product both the Industrial Components and Material Handling segments registered strong growth of 24% and 32% respectively. Industrial Component segment growth was led by consumer durable segment. Outlook for washing machines, refrigerators and ACs is strong for FY23. PLI scheme for consumer durables and automotive segment is expected for benefit this segment. Material Handling, second sub segment of Industrials, also registered 32% growth in sales led by 15% growth in volumes. Demand was led by uptick in dairy, e-commerce and soft drink and beverages.

Decline in cross laminated segment hurts Packaging segment

Within Packaging segment – cross laminated business declined by 18% in volumes in FY22. Peak season of April - June'21 was impacted due to second wave of COVID in India and hence sales were down by 24% in 1QFY22. Performance Packaging and Protective Packaging, the other two sub segments of Packaging, registered healthy volume growth of 22/7% and sales growth of 49/30% respectively.

Healthy capex to continue in FY23

Supreme Industries incurred capex of Rs2.6bn in FY22. The management has guided to commit capex of Rs7bn in FY23 including carry forward commitment of Rs2.8bn for the three new upcoming facilities in Assam (Guwahati), Odisha (Cuttack) and Tamil Nadu (Erode). Assam facility is expected to commence shortly while other two are expected to start production by Aug-Sept’22. The company is also expected to double its LPG composite cylinder capacity to 1mn pieces per year

Valuations

Supreme Industries, despite being the market leader in plastic pipes segment, is trading at significant discount to its historic multiples. We currently have a Buy rating. We value the business at 30x FY24E with target price of Rs2,853.

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