Q2FY24 Review: Supreme Inds: Near term outlook strong, but valuations rich

31 Oct 2023 , 03:39 PM

Supreme industries (SI) reported yet another strong quarter with 23% volume growth driven by buoyant growth witnessed in the PVC piping segment. Growth was driven by strong demand from housing segment and also from government projects. CPVC volume growth however remained weak in H1, and is expected to recover in H2 with prices stabilising. Other segments performance was a mixed bag with strong margins in packaging business. SI broadly maintained its FY24 guidance, with PVC prices expected to stabilise at lower levels, which will offset higher volume growth expectations. Valuations at 48x FY25ii EPS are much higher than average, analysts of IIFL Capital Services retain REDUCE rating with Rs3,800 TP. 

Q2FY24 above estimates: 

SI reported a healthy volume growth of 23% YoY, driven by the piping/ packaging segment which witnessed 30%/ 12% YoY growth respectively. However, volume growth for the Industrial & Consumer segment was muted at 5% & flat YoY respectively. Volume growth for Consol Ebitda margins came in at 15.4% (up 840bps YoY/ 190bps QoQ) driven by improvement in Plastic segment margins (13.6% Ebit margins vs 11.9% QoQ). Packaging segment too saw significant improvement in profitability (13.6% Ebit margins from 7.9% QoQ) driven by export focus and improved product mix. 

FY24 guidance broadly unchanged: 

SI revised upwards its overall volume guidance to 23% (28% for Pipes), but mgmt expects lower realisation now for H2FY24 as PVC prices have been volatile, while the Ebitda margins assumptions are broadly maintained at 14-14.5% for the year. The healthy volume growth came on the back of strong housing demand and Nal se Jal scheme even as the CPVC segment reported a weak 1.2% volume growth for H1; expected to recover in H2 with reduction in CPVC prices. 

Retain estimates; REDUCE rating due to expensive valuations: 

SI’s balance sheet continues to remains healthy with reported net cash of Rs5.8bn. analysts of IIFL Capital Services retain their volume estimates for FY24/25 at 20/14% respectively, 18% PAT Cagr over FY23-25. Valuations however remain expensive at 48x FY25 EPS, meaningfully above the 5-year average multiple of 30x; retain REDUCE with a target price of Rs3,800.