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Robust sales volume ...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 Q2FY24, SIL's reported a revenue growth of 11% YoY, albeit impacted by a 6% YoY decline in PVC prices.

• However, sales volume showed a robust YoY growth of 23%, driven by strong Pipes sales.

• EBITDA exhibited strong growth, was better than expected, with margins at 15.4%, led by ease in input prices.

• Reported Net profit saw a significant threefold increase YoY, but at lower base and a substantial 30% YoY jump in share of profit from associate.

• 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 22% over FY23- FY25E.

• SIL is currently trading at 1 year forward P/E of 45x which is significant premium valuation to its historical average of ~31x, which is a concern.

• Despite positive outlook, given sharp run-up in stock prices and premium valuation, we value SIL at a P/E of 39x on FY25E EPS and maintain a SELL rating with a target price of Rs. 3,949.

Volume growth strong...

In SIL's Q2FY24, sales volume grew by a robust 23% YoY, led by Plastic piping and packaging, which grew by 30% & 12%, respectively. Healthy demand from housing and agricultural pipes aided volumes. The industrial reported modest volumes of 4.5%, while consumer segment volume was flat YoY. However, overall revenue grew by modest at 11% YoY, as PVC prices declined by 6% YoY impacting realization. The blended realization for Q2 fell by 10% YoY. Affordability has notably improved owing to the drop in input prices. Management has raised volume guidance from 15%- 20% to 23% if polymer prices remain stable. Looking ahead, we anticipate an 18% CAGR volume and 13% CAGR in revenue over FY23–25E, respectively.

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

SIL’s Q2FY24 gross margins improved by 1030bps YoY to 33.5% due to a sharp fall in raw material prices. EBITDA grew by 142% YoY, and EBITDA margin expanded by 840bps YoY to 15.4%, largely due lower base. Reported Net profit was up by 197% YoY increase in share of profit from Supreme Petro. Going ahead, driven by healthy volumes and stable raw material prices., we anticipate EBITDA margins to remain steady in the range of 15% over FY24-25E. We expect profitability to grow by a 23% CAGR over FY23-25E.

Valuations

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 45x), is a concern. We value SIL at a P/E of 39x on FY25E EPS and maintain SELL rating with a target price of Rs. 3,949.

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