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Volume beat expectation…..premium valuation a concern

Supreme Industries Ltd. (SIL) is India’s leading player in plastic products; the company’s wide range of offerings include plastic piping systems, packaging, industrial and consumer products. • In Q1FY24, sales volume experienced robust YoY growth of 36%, primarily driven by agri. pipes. However, revenue growth was modest at 7% YoY due to a decline in PVC prices. • EBITDA showed strong growth of 20% YoY, and EBITDA margins improved by 140bps YoY to 13.6%, supported by cost optimization. • Net profit remained flat due to a significant (60%) decline in share profit from an associate caused by inventory loss. • Stable demand from the housing and agriculture sectors is expected to continue driving volumes. • Softness in PVC prices is anticipated to maintain margins, with EBITDA margins expected to remain stable at around 15%. We expect PAT to grow by 23% over FY23-FY25E. • Despite positive prospects, the recent sharp uptick in stock price and premium valuation is a concern. We value SIL at a P/E of 31x (3- year avg.) on FY25E EPS and downgrade to a SELL with a target price of Rs. 3,181.

Sales volume healthy...

In SIL's Q1FY24, sales volume grew by a robust 36% YoY, led by Plastic piping and consumer, which grew by 48% & 15%, respectively. Healthy demand from housing and agricultural pipes aided volumes, which are expected to continue. The industrial and packaging segments reported modest volumes of 5.5% & 4.0%, respectively. However, overall revenue growth was modest at 7.6% YoY, was impacted by a fall in realization as PVC prices declined by 30% YoY. The blended realization for Q1 fell by 21% YoY. In terms of revenue, Plastic pipes and consumer segments witnessed growth of 11% & 9%, respectively. Whereas Industrial and packaging revenue declined by 1.2% & 0.9%, respectively. Given the steep decline in input prices, affordability has improved significantly, and management expects volume to grow by 15%-20% if polymer prices remain stable. Going ahead, we anticipate volume & revenue to grow by 15% & 13% CAGR over FY23–25E, respectively.

Margins to stabilize at ~15% during FY23-25E.

SIL’s Q1FY24 gross margins improved by 360bps YoY to 30.1% due to a sharp fall in raw material prices. EBITDA grew by 20% YoY, and EBITDA margin expanded by 140bps YoY to 13.6%. While the share of profit from Supreme Petro, was down by 63% YoY, largely due to inventory losses. Consequently, PAT was flat YoY. Management has guided the EBITDA margin to be in the range of 13-15%. We believe that the worst impact on margins is behind us, and we anticipate steady improvement in margins going forward, driven by higher volumes and stable raw material prices. We expect profitability to grow by a 23% CAGR over FY23-25E.

Valuations

Going ahead, tailwinds like stable infra & agri volumes and lower input prices will drive earnings. However, given the sharp rise in stock price and premium valuation (SIL is currently trading at a 1 year forward P/E of 40x), this does not provide comfort. We value SIL at a P/E of 31x (3-year avg.) on FY25E EPS and downgrade to SELL with a target price of Rs. 3,181.

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