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Sluggish demand keeps performance underpressure, contraction in margins was higher Vs est; downgrade to NEUTRAL!

Result Synopsis

Supreme Industries Ltd (SI), reported muted performance for Q3FY25. Revenue grew by mere 2.5%YoY while margins contracted to 9-quarter low at 12.3%. Plastic pipe segment’s volumes grew by 4%YoY Vs our est of 7% growth. However, major miss on revenue was on account of steep fall in ASP of pipes on sequential basis which came in at Rs132/Kg Vs Rs141 in Q2FY25 respectively. Consequently, margins for pipes stood at Rs10.9/Kg (9-quarter low) on EBIT basis Vs Rs17.4/Rs14.7 in Q3FY24/Q2FY25 respectively. Overall, tepid demand across infra and project segment coupled with no major stocking in dealer-network due to confusion over implementation of BIS weighed on volume trajectory. Incrementally, volume-push strategy and minor element of inventory loss dented operating margins.

Guidance

Management revised their guidance downwards for FY25E; for pipes company expects volume growth of 15-16% Vs 16-18% earlier and overall volume growth of 12% Vs previous guidance of 14-15%. For FY25E, management expects to generate turnover of Rs110Bn. Going by management’s expectation, company needs to grow plastic pipe volumes by ~34%YoY and overall volumes by ~24%YoY in Q4FY25E and report a topline growth of ~20%YoY to achieve the targeted revenue for FY25E.

Our View

Given the current demand scenario and post factoring an improvement in Q4FY25E owing to channel restocking and pick-up in infra spends from few states, we do not believe that the said guidance can be achieved. We have revised our volume growth expectation from 14% for FY25E to 8% and further reduced our EBIT/Kg est to Rs14 for pipes (~10.5% margins). Also, we don’t expect any major improvement in other segments as well. Overall, we have revised our EPS downwards by 17%/12%/16% for FY25E/FY26E/FY27E respectively. Owing to lower growth and headwinds on margin front, we have re-valued the company at P/E(x) of 40x on FY27E standalone EPS, arriving at target price of Rs4,235 (including Rs206/share contribution from Supreme Petrochem). Hence, we have downgraded the stock to NEUTRAL.

Result Highlights

* Overall volumes came in at 162,733Te (in-line with our est), a growth of 3%YoY & 18%QoQ (2-year CAGR stood at 8%). In a recent interview, based on management’s guidance to end the year with a 12%YoY overall volume growth, the ask rate for Q4FY25E is 24%YoY over Q4FY24.

* Revenue stood at Rs25.1Bn (5% below estimates & 8% below consensus), a growth of 2.5%YoY & 10%QoQ.

* EBITDA margins came in at 12.3% (est of 14.3% & consensus est of 14.6%) Vs 15.5%/14.0% in Q3FY24/Q2FY25 respectively. Absolute EBITDA stood at Rs3.09Bn, an 18.5%YoY & 3%QoQ degrowth.

* Net profit stood at Rs1.80Bn, a decline of 27%YoY & 18%QoQ.

Segmental Highlights for Q3FY25:

* Plastic Pipes (78% of total volumes & 67% of revenue): Volumes stood at 126,515Te, growth of 4%YoY & 24%QoQ (2-year CAGR stood at 10%). ASP came in at Rs132 Vs Rs135/Rs141 in Q3FY24/Q2FY25 respectively. In recent interview, management guided 15-16%YoY growth rate for FY25E for plastic pipes. To achieve this company’s plastic pipes volumes has to grow by ~31-34%YoY in Q4FY25E. Revenue remained flattish YoY & increased by 16%QoQ to Rs16.65Bn. EBIT/Kg came in at Rs10.9 Vs Rs17.4/Rs14.7 in Q3FY24/Q2FY25 respectively.

* Industrials: Volumes stood at 15,472Te, a decline of 5%YoY & a growth of 2%QoQ (2-year CAGR stood at 2%). ASP came in at Rs215 Vs Rs205/Rs217 in Q3FY24/Q2FY25 respectively. Revenue stood at Rs3.32Bn, flattish on a both YoY & QoQ basis. EBIT/Kg stood at Rs17.6 as compared to Rs18.3/Rs18.5 in Q3FY24/Q2FY25 respectively.

* Packaging: Volumes stood at 16,281Te, a 9%YoY growth & 2%QoQ degrowth (2-year CAGR stood at 6%). ASP came in at Rs245 Vs Rs236/Rs241 in Q3FY24/Q2FY25 respectively. Revenue increased by 13%YoY and remained flat on sequential basis to Rs3.98Bn. EBIT/kg stood at Rs27.1 Vs Rs31/Rs24.7 in Q3FY24/Q2FY25 respectively.

* Consumer: Volumes degrew by 7%YoY & improved by 8%QoQ to 4,465Te (2-year CAGR stood at -5%). ASP came in at Rs238 Vs Rs234/Rs251 in Q3FY24/Q2FY25 respectively. Revenue declined by 5%YoY & increased by 2%QoQ to Rs1.06Bn. EBIT/Kg came in at Rs37.9 Vs Rs40.8/Rs41.1 in Q3FY24/Q2FY25 respectively.

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