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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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