Supreme Industries Ltd For Target Rs. 3,800 By Elara Capital Ltd
Hopes high for a robust Q4
Supreme Industries (SI IN) is likely to miss its FY25 volume growth guidance, but stability in PVC prices could support channel restocking and drive better growth in Q4. We believe, achieving 20% volume growth guidance in plastic pipes in Q4FY25 may be challenging. So, we downgrade SI to Reduce from Accumulate, given the sharp earnings cut and subdued visibility on near-term volume growth. Thus, we also lower our TP to INR 3,800 from INR 5,090, as we assign a P/E of 35x (40x earlier) FY27E EPS.
Lower channel inventory amid volatility in PVC prices hits performance: Q3 net sales grew 2.5% YoY to INR 25.1bn, 5% below our estimates. The plastics piping segment saw a 1.3% rise in value and 3.7% in volume, against expectations of 5% volume growth. Adverse PVC resin price impacted the performance of plastic piping, as it led to destocking in the entire distribution pipeline. Also, muted infra demand and extended winter rainfall in South and East India hit performance. While demand in infra and agri segments was muted, it was better for the housing segment, which led to stronger growth in the CPVC segment, up 20% YoY. Other segments showed mixed results – Industrial, Packaging, and Consumer Products posted a value growth of flat, 12.5%, and -5.3%, respectively, led by success of cross-laminated film products, which boosted packaging
SI lagging its volume growth guidance: The management had initially projected 16-18% volume growth in the plastic piping segment in FY25, driven by strong H2 demand. However, due to weak Q3, SI achieved only 8% growth in 9MFY25. Despite this, it is confident to achieve ~30% growth in Q4, aiming for 15-16% volume growth in FY25. This optimism stems from expected recovery in housing and agriculture sectors, stable PVC prices prompting channel stocking, and higher infra demand in Q4. Additionally, the usual strong performance by the packaging segment in H2 and a revival in industrial components support SI’s target of 12% overall volume growth in FY25. To meet future demand, SI is expanding its plastic piping capacity to 9,00,000MTPA by FY25 from 7,39,000MTPA in FY24, anticipating strong medium-term growth as the market revives.
FY25 margin guidance at 13.5-14%: Q3 EBITDA margin declined 320bps YoY to 12.3%, lower than 15% estimated due to negative operating leverage, lower sales realization and inventory loss. The management expects FY25 EBITDA margin at 13.5-14%, below the previously guided range of 14.5-15.25%.
Downgrade to Reduce with TP pared to INR 3,800: We cut FY25E/26E/27E earnings estimates by 21%/17%/18% due to lower-than-expected revenue growth and margin. We downgrade SI to Reduce from Accumulate given muted volume growth and headwinds in margins (should pare P/E multiple).
We also lower our TP to INR 3,800 (from INR 5,090) based on 35x (40x earlier) FY27EPS due to slower volume growth and lower margin. Key upside risk to our recommendation is a sharp increase in PVC prices.
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SEBI Registration number is INH000000933
