Downgrade to Neutral Supreme Industries Ltd for the Target Rs 3,690 by Motilal Oswal Financial Services Ltd
Weak volume in 1Q, likely to revive 2Q onward Volume/revenue/EBITDA miss our estimates by 6-15%
* Supreme Industries (SI) reported a 14% YoY decline in overall volume in 1QFY27, whereas its revenue/EBITDA/PAT increased by 4%/25%/39% YoY.
* Lower-than-expected volume led to a miss in operating results. However, a higher share of JV profits (INR731m, up 1.9x YoY) led to a beat in PAT.
* Volume in the agri segment was severely impacted by falling PVC prices, which led to channel inventories falling much below the normal levels.
* Healthy EBITDA margin of 14.6% was driven by a lower mix of low-margin pipe volume and a 22% YoY increase in value-added products.
Key highlights from the management commentary
* Management expects a strong revival from 2Q onward, driven by stable PVC prices, removal of customs duty exemption w.e.f. 16th July and MIP implementation for suspension grade PVC resin.
* Management maintained its FY27 volume growth guidance at 15%+ in piping system and 12%+ in the remaining segments. This is despite a 14% YoY dip in overall volume reported in 1Q.
* EBITDA margin is expected to remain around 14-14.5% (vs. 14.6% in 1Q).
* A capex of INR10b in FY27 will be majorly used for new greenfield plants in Bihar, Jammu and MP (Malanpur). These plants are expected to be completed in phases over the next two years. The company has already ordered machinery worth INR5b in 1Q. SI is also looking to acquire land parcels in Puducherry and Erode to set up additional capacities in future.
* Composite cylinders business is seeing improved traction. It is now supplying to all three major OMCs, after adding BPCL last year. LPG cylinders capacity stands at ~1m units and is operating at ~35% utilization.
* SI has also commenced supplying cascades for CNG applications and continues to expand its presence in international markets.
Valuation and view
* After a 14% YoY dip in 1Q volume, we model ~6% YoY growth in FY27 against management guidance of 15%, which we believe is too optimistic.
* We increase our FY27 earnings estimate by 16%, aided by better than earlier expected margins (in line with management guidance) and JV profit share following a strong performance in 1Q. Supreme Petro (JV) is into polymer business and earnings are too volatile and unpredictable.
* However, we keep our estimates unchanged for FY28 and expect ~11% YoY growth in overall volume.
* Overall, we expect a CAGR of 12%/15%/17% in revenue/EBITDA/APAT over FY26-28, with a ~9% volume CAGR, 14.5-15% EBITDA margin, strong FCF and return ratios.
* Our TP remains unchanged at INR3,690, based on 36x FY28E P/E. We downgrade our rating to Neutral due to a low upside potential.
* Higher-than-expected volume growth is the key upside risk to our call.
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