06-08-2024 02:46 PM | Source: Geojit Financial Services Ltd
Sell Supreme Industries Ltd For Target Rs.4,718 By Geojit Financial Services Ltd

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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.

*  In Q1FY25, revenue grew by 11% YoY, which was lower than our estimates by 5% on account of a fall in realization by 4.5%.

*  Overall sales volume grew by a robust 17.0% YoY, led by a 20.0% YoY increase in pipe volumes, owing to strong demand from real estate and construction, which is expected to sustain.

*  EBITDA margins stood at 14.7%, saw a 110bps YoY expansion and Net profit grew by 27% YoY but missed our estimates by 5%.

*  We remain optimistic, anticipating a 20.0% CAGR in PAT over FY24- 26E, supported by healthy EBITDA margins at 15.6%.

*  SIL’s long term looks healthy given robust volume growth momentum in pipes, likely market share gains, healthy margins, and a strong profitability.

*  However, SIL is trading at 1 Yr FWD P/E of 47x, which is expensive. So value SIL at a P/E of 39x on FY26E EPS, downgrade to SELL from Hold with a TP of Rs. 4,718.

Pipe volumes healthy… realization impacted

SIL's Q1FY25 revenue rose by ~11.3% YoY, driven by healthy volume growth, up 17% YoY. Piping segment volume surged by 20% YoY, while Industrial segment and packaging volume grew by a healthy 12% and 9% YoY, respectively. Whereas consumer volume declined by -7% YoY due to heightened competition. Despite robust volume growth, revenue was impacted by a 4.5% YoY decline in realization, primarily due to volatility in PVC prices. Management anticipates sustaining volume growth with improved affordability and strong demand from housing and agricultural sectors, aiming for 20% volume growth in FY25. SIL initiated brownfield expansions and plans to invest in new plants to meet demand, with a total capex of Rs.1,500cr planned for FY25. We anticipate a 16.0% CAGR in volume and a 19.6% CAGR in revenue from FY24–26E.

Anticipate margins to stabilize at ~15.6% during FY24-26E

In Q1FY25, SIL saw a healthy 20.4% YoY growth in EBITDA, with margins improved by 110bps YoY to 14.7%. Net profit grew by 27% YoY at Rs.273.4cr. The share of profit from Supreme Petro increased by 76% YoY. Going ahead, robust volume growth and favourable input prices are expected to support margins. EBITDA margins are projected to remain steady at ~15.6% over FY24-26E, with profitability anticipated to grow by a 21.3% CAGR over the same period.

.Other highlights..

Composite LPG cylinder division received LoI from IOC (Indian oil corporation Ltd) to supply of 2,31,035 nos. of cylinders during the year.

Polyethylene Gas piping system is expected to be launched by October 2024 from Gadegaon unit.

Valuations

SIL is trading at a 1 year forward P/E of 47x, which is 33% premium valuation to its long term average. We value SIL at a P/E of 39x on FY26E EPS and downgrade to SELL from BUY with a target price of Rs. 4,718

 

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