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Strong earnings momentum…to continue

Supreme Industries Ltd (SIL) is India’s leading player in plastic products; the wide range of offering includes Plastic Piping system, Packaging, Industrial and Consumer products.

* Q4FY21 Revenue & PAT grew by 46% & 284% YoY respectively, led by higher operating profit and share of profit from associate.

* EBITDA margin improved by 530bps YoY to 24.5% led by better product mix and inventory gains (Rs.80-100cr) .

* With revival in construction activities and pick-up in consumption spending, overall demand scenario is expected to be strong.

* Investment in new capacities, focus on new products, expansion of distribution reach and market share gains will continue to drive growth.

* We upgrade of our EPS estimates by 18% & 20% for FY22 & FY23E, given sharper than expected earnings recovery.

* We remain constructive on SIL given its market share of 21%, RoE of ~26% (5yr avg.) & strong balance sheet position. Given upgrade in earnings estimates, we value SIL at P/E of 33x on FY23E with a target price of Rs2,424 and recommend to Accumulate.

Higher realization drives revenue...

SIL’s Q4FY21 revenue grew by 46% YoY, led by strong revenue across product segments, Plastic piping, industrial, Packaging and consumer segment grew by 44%, 84%, 49% &12% YoY respectively. Volume grew by 8% YoY led by packaging segment, Industrial and Consumer, which grew by 40%, 45% & 12% YoY. However, Piping segment volume declined by 2% YoY due fall in Agri demand on account of higher prices. Further, overall revenue growth was supported by 38% YoY improvement in realization led by higher RM prices and increase in value added products. SIL plans to spend Rs400cr in for putting up new plant to make piping system, packaging, injection moulded furniture and material handling products. Going ahead, revival in construction activities and improvement in consumer demand is expected to drive overall revenue growth. However, we may see some hiccups in revenue growth due to sudden resurgence of Covid-19. However, we upgrade our revenue estimates by 4.3% & 5.8% for FY22E & FY23E considering strong revenue growth supported by realization growth.

Margins expands...

SIL’s Q4FY21 EBITDA grew by 86% YoY and margins expanded by 530bps YoY to 24.5%. Significant increase in PVC prices led to Rs.80-Rs100cr inventory gain. While strong growth in value added products also supported margin expansion. Strong operating profit, lower tax and Rs.70cr share of profit from associate (Supreme Petro), PAT grew by 284% YoY to Rs.450cr. Considering increasing share of value added products and cost rationalization, we upgraded our EBITDA margin estimates by 110bps & 80bps to 17.0% & 17.0% for FY22E & FY23E. Consequently, our EPS estimates stand increased by 18% & 20% for FY22E & FY23E.

Valuations

We expect current earnings momentum to continue given pick-up in construction activities and improvement in consumer spending. Given strong balance sheet and earnings upgrade, we value SIL at P/E of 33x on FY23, with a target price of Rs.2,424 and recommend to Accumulate.

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