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Strong performance led by higher realisations…

Supreme industries’ performance in Q4FY21 was much ahead of our estimates on the revenue & profitability fronts. Revenue growth at ~46% YoY to | 2084 crore was mainly driven by ~37% higher realisation. However, despite a lower base, overall volume growth at 8% YoY was lower than expected. The piping segment volume came in lower by 2% in Q4FY21 amid lower demand of agri pipes and change in product mix. The other three segments, packaging, industrial and consumer furniture sales was higher by 49%, 85% 30% YoY, respectively, in Q4FY21 on a favourable base and demand revival in selected product categories.

On the margin front, while inventory gains remained higher (by | 80-100 crore), significant saving in other costs (by ~650 bps YoY) led to 534 bps increase in EBITDA margin to 24.5%. Finally, PAT was up ~3.8x to | 450 crore YoY supported by ~10x jump in profit from Supreme Petrochem. The management believes while the near term demand would be negatively impacted by sporadic lockdowns, the cooling off of raw material prices and expectation of better monsoons would help drive demand of plastic pipes with restoration of business activities. Further, the company has guided for EBITDA margin of ~17% (~ 200 bps higher than its last five years average), going forward, and envisages capex of | 400 crore for FY22E.

Continues with capex plans despite Covid-19 related challenges

The company will continue to invest in capacity building despite Covid-19 related challenges. Supreme has earmarked a capex of | 400 crore to expand its current manufacturing capacity by 40,000 MT to 7,37,000 MT in FY22. The company may see some inorganic route for future growth opportunities (however RoCE should be at Supreme Industries level) considering its strong balance sheet condition. Supreme has a healthy cash balance of | 759 crore vs. borrowing of | 217 crore at the end of FY21.

Focus to keep EBITDA margin at 17% level

EBITDA margin at 24.5% during Q4 is one of the highest in the history of Supreme backed by inventory gains amid rise in PVC prices. We believe the inventory gains are limited till FY21 and EBITDA margin will peak out from its high with ease in PVC prices, going forward. The management has guided for EBITDA margin of ~17% (~200 bps higher than its last five years average) backed by an improved product mix. Valued added product contribution in topline has increased from ~36% in FY18 to ~40% in FY21.

Valuation & Outlook

We revise our PAT estimate upward by 30%, 25% for FY22E, FY23E, respectively, given the margin guidance and higher profitability from Supreme Petrochem. We believe the recent run up in prices discount all near term positives. Hence, we downgrade our rating from BUY to HOLD with a revised target price of | 2390 valuing at 33xFY23E (earlier TP of | 2010).

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