Q1FY24 Review: Supreme Inds: Strong outlook on volume growth

31 Jul 2023 , 12:26 PM

Supreme Industries (SI) reported a strong volume growth of 36% YoY in Q1FY24 driven by a pickup in demand for PVC pipes from the Agriculture and Infrastructure sectors. Polymer prices declined, leading to inventory losses and lower margins. Surprisingly, CPVC sales declined YoY due to one-off events that have now been addressed. Mgmt remains bullish on volume outlook for FY24; given the momentum across Housing, Agriculture and Infra segments. Analysts of IIFL Capital Services upgrade their volume assumptions, and earnings by ~6% for FY24/25. However, valuations are rich at ~36x FY25 EPS (vs ~30x 5yr avg). Retain ADD with upgraded TP of Rs3,500. 

Strong volume growth in Q1FY24: 

SI reported a volume growth of 36% YoY, driven by the Piping segment that witnessed a 48% YoY growth in volumes. Mgmt shared that YoY base was low, due to weak agriculture and infrastructure demand, which has now picked up. Within the Infra segment, SI is now executing orders under the Nal Se Jal scheme along with the Maharashtra govt order. Housing segment demand continues to be good; but SI’s CPVC volumes decrease 12% YoY, due to the sales of some counterfeit products leading to loss of volume. The issue has now been addressed by the management. SI is also entering a new segment of PVC windows and doors, will be ramped up gradually. 

Margins impacted by inventory losses, product mix: 

During the quarter, the Ebitda/kg (consol. level) declined 12% YoY, driven by: 1) Inventory losses of Rs400mn (~Rs2.7/kg), due to the decline in polymer prices. 2) Higher share of Agri and Infra, which yield lower margins. Going forward, mgmt expects a modest pickup in prices, and retained its FY24 Ebitda margin guidance of 14%. The channel inventory remains at normal levels. Performance of Supreme Petrochem (SI’s associate) was also negatively impacted by inventory losses. Storage Tanks business is yielding healthy profits, although no data was shared. 

Healthy outlook but valuations expensive; ADD: 

Analysts of IIFL Capital Services upgrade their volume estimates for FY24/25, considering the strong volume offtake especially in Agri and Infra sectors. They revise their earnings upwards by ~6% for FY24/25; expect SI to deliver ~18% Cagr over FY23-25. However, valuations remain expensive at 36x FY25 EPS, retain ADD.