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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.

• SIL is currently trading at 1 year forward P/E of 48x which is significant premium valuation to its historical average of ~30x, which does not provide comfort.

• In Q1FY24, SIL's revenue grew modestly by 7% YoY, impacted by a 31% YoY drop in PVC prices.

• However, sales volume showed a robust YoY growth of 36%, driven by agri. Pipes sales.

• EBITDA exhibited strong growth, was up by 20% YoY, with EBITDA margins at 13.6%, led by ease in input prices.

• Despite this, flat net profit resulted from a 60% decline in share profit from an associate due to inventory loss.

• Going ahead, stable demand in the housing and agriculture sectors is expected to drive volume growth, with EBITDA margins likely to remain around 15%. PAT is projected to grow by 23% over FY23- FY25E.

• Despite positive outlook, given sharp run-up in stock prices and premium valuation, we value SIL at a P/E of 36x on FY25E EPS and maintain a SELL rating with a target price of Rs. 3,694.

Volume growth strong...

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. The industrial and packaging segments reported modest volumes of 5.5% & 4.0%, respectively. However, overall revenue growth was modest at 7.6% YoY, as PVC prices declined by 31% YoY impacting realisation. The blended realization for Q1 fell by 21% YoY. 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.

Ease in input cost 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%. PAT was flat YoY, as the share of profit from Supreme Petro, was down by 63% YoY, largely due to inventory losses. 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 growth. However, given the sharp rise in stock price and premium valuation (SIL is currently trading at a 1 year forward P/E of 48x), does not provide comfort. We value SIL at a P/E of 36x on FY25E EPS and maintain SELL rating with a target price of Rs. 3,694.

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