PL Stock Report: Supreme Industries (SI IN) - Q1FY24 Result Update - Robust volume growth amid margin adjustment - Downgrade to 'HOLD'

Supreme Industries (SI IN) - Praveen Sahay - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: HOLD | CMP: Rs3,382 | TP: Rs3,377

Q1FY24 Result Update - Robust volume growth amid margin adjustment

We upward revise our FY24/25E earnings estimates by 3.5%/4.4% and downgrade to ‘Hold’ rating from Accumulate post recent run up in stock (~22%) and arrive at TP of Rs 3377 (earlier Rs3245), based on 36x FY25E core EPS plus 25% discount to Supreme Petrochem’s stake. Supreme Industries (SI) delivered robust volume growth of 36.4% ahead of expectations, mainly led by growth in Plastic pipe segment (up 47.7% YoY on higher base) while EBITDA/kg declined to Rs 21.6/kg (vs. Rs32.6 QoQ and Rs24.7 YoY). Volume growth was driven by agri, plumbing and infra segments, whereas agri contributed more (due seasonality) and strong traction in infra from ‘Nal se Jal’ project in the quarter. SI has increased its volume growth guidance to 20%+ (23-25% in pipe segment) and maintained EBITDA margin of 14%+ for FY24.

We continue to believe SI is well placed to capture demand across its segments given 1) capacity expansion in different geographies, 2) new product expansion e.g. expanding in PVC window & doors manufacturing and adding 4 piping systems namely (i) PP multilayer silent pipe (ii) Gas Piping (iii) PE/AL/PE piping and (iv) PPR pipe, 3) wide pan India distributors n/w of 4500 channel partners, with 1443 distributors for pipe business; additional 100 in FY24, and 4) cash surplus of Rs9.5bn for funding expansion plans. We estimate FY23-25E Revenue/EBITDA/PAT CAGR of 15.0%/22.3%/20.6%, with volume CAGR of 16.1% and EBITDA margin improvement of 170bps. Downgrade to ‘Hold’ rating.

Revenues grew by 7.4%, Adj. PAT up by 24.6%: Sales grew 7.4% YoY to ~Rs23.7bn (PLe: Rs22.1bn) with volume growth of 36.4% YoY and realization decline by 20.9% YoY. Pipe segment revenue up by 11.1% YoY to Rs16.3bn, packaging revenue down by 0.9% YoY to Rs3.2bn, industrial revenue down 1.2% YoY to Rs3bn, consumer segment grew by 9.3% YoY to Rs1.1bn. EBITDA grew by 19.6% YoY to Rs3.2bn (PLe: Rs3.5bn). EBITDA margin was at 13.6% (PLe: 15.8%). EBITDA per Kg declined by 12.3% YoY to Rs 21.6/Kg, due to inventory loss and annual incentive. In Pipe/Consumer/Packaging, EBIT margins expanded by 140bps/540bps/80bps YoY to 11.9%/16.9%/7.9%. Industrial EBIT margins contracted by 230bps YoY to 6.3%. PAT stood to Rs1.9bn (+24.6%YoY; PLe Rs2.5bn).). The turnover from VAP stood at Rs7.56bn in Q1FY24.

Con call highlights: 1) Mgmt has guided for 20%+ vol. growth along with EBITDA margin of 14% in FY24, mainly with good demand from real estate and infra sectors, 2) Plastic Pipe/Industrial Product/Packing Product is expected to grow 24%/10%/10% in volume terms in FY24, 3) A sales revenue of Rs110bn is targeted for FY24, 5) Vol. growth in Plastic Pipe/Packing/Industrial/Consumer Product in Q1FY24 has been 14%/5%/4%/15%, 5) PVC prices fell by Rs5/kg to Rs8/kg in Q1FY24 and Polypropylene prices fell by Rs13/kg, 6) A capex of Rs7.5bn will be done in FY24, which will be completely funded through internal accruals, 7) Plans to commission a new plant with capex of Rs1.6bn near Kanpur which will manufacture PVC doors & windows and will be delivering an additional turnover of Rs3.5bn to the company, 8) A greenfield facility to produce valves; will start operations by end of FY24 in MP with a capacity of 7.5lakh tonne, 9) There were total of 232 showrooms as of June’23, 10) An inventory loss of Rs400mn was incurred in Q1FY24.

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