Quarterly Update Report
Supreme Industries Ltd. | Quarterly Update
Supreme Industries Ltd.
28th July 2022
NEUTRAL
CMP Rs. 1,876
TARGET Rs. 1,941 (+3.5%)
Inventory losses to continue amid PVC price correction
As expected on a low base, Supreme Industries Ltd. (SIL) registered a solid Yo-Y volume growth of 53% in Q1FY23. The main driver of performance was
the Plastic Piping segment, which enjoyed its peak season after being
affected for two years. Revenue on a Y-o-Y basis grew by 64%, whereas
EBITDA only increased by 21% resulting in margin correction from 17% in
Q1FY22 to 12% in Q1FY23. This is because of inventory loss due to a sharp
fall in PVC prices since Dec’21. Inventory loss is further likely to continue in
the next quarter as well. Margin correction is expected to be seen across
peers.
Company Data
| MCAP (Rs. Mn) | 2,38,315 |
|---|---|
| O/S Shares (Mn) | 127 |
| 52w High/Low | 2,689/1,669 |
| Face Value (in Rs.) | 2 |
| Liquidity (3M) (Rs. Mn) |
110 |
PVC price fall expected in Q2FY23 as well leading to further inventory losses
PVC prices saw a steep correction of Rs. 46 per kg or 32% since the beginning
of the year. Even other raw materials like PP, LDPE, etc. have sharply corrected
during the same period. Management expects inventory losses to continue in
the next quarter and expects PVC prices to bottom out around the end of
August. This will further hit profitability for the company in Q2FY23.
Shareholding Pattern %
| Mar 22 | Dec 21 | Sep 21 | |
|---|---|---|---|
| Promoters | 48.85 | 48.85 | 48.85 |
| FIIs | 15.79 | 16.16 | 16.16 |
| DIIs | 19.70 | 19.65 | 19.70 |
| Non-Institutional | 15.67 | 15.34 | 15.29 |
Sharp correction in the contribution of value-added products
SIL disappointed this quarter with a sharp correction in the contribution of
Value-Added Products (VAP) to total sales. VAP from a 38%-40% range
materially came down to 34% during Q1FY23. This number will be key to
watch out for in the future as VAP has a crucial role to play in future growth.
Supreme vs Nifty
Source: Keynote Capitals Ltd.
Launch of new Value-Added Products during the quarter
SIL achieved a much-needed breakthrough in the composite LPG cylinders
(value-added product) business in FY22. During the quarter, SIL launched
some new value-added products like Electrofusion Fittings, PP Compression
Fittings, etc., which received an encouraging market response. According to
the management, these products have the potential to clock Rs. 100 cr. in
Revenue for SIL within a matter of a year. This indicates a move in the right
direction by the company
Key Financial Data
| (Rs mn) | FY22 | FY23E | FY24E |
|---|---|---|---|
| Revenue | 77,728 | 80,449 | 83,940 |
| EBITDA | 12,421 | 12,067 | 12,591 |
| Net Profit | 7,641 | 7,073 | 7,172 |
| Total Assets | 52,607 | 58,298 | 64,599 |
| ROCE (%) | 27% | 21% | 17% |
| ROE (%) | 28% | 21% | 17% |
Source: Company, Keynote Capitals Ltd.
View & Valuation
We maintain our view on Supreme Industries with a NEUTRAL rating and a
target price of Rs. 1,951 (28x FY23 revised earnings). PVC prices have seen a
steep fall since Dec’21 which has resulted in a sharp correction in EBITDA/per
kg for Supreme Industries Ltd. on account of inventory losses. These losses will
further continue in Q2FY23 as per the guidance given by the management
which will result in the normalization of both profitability levels and valuation
multiple.
Supreme Industries Ltd. | Quarterly Update
Q1FY23 Conference Call Takeaways
General Highlights
– Volume growth during the quarter was mainly on account of a low base in
the previous year’s same quarter due to COVID impact
– Prices of PVC have fallen further in July’22. Therefore, there will be further
inventory loss in Q2FY23
– SIL holds 30-45 days of inventory depending upon season and time. Fiveyear anti-dumping duty on China got over in Feb’22. Therefore, China has
again become competitive in selling PVC in India
Plastic Piping Business
– New unit at Guwahati has commenced commercial production. Units at
Cuttack & Erode are likely to go into production by Sep-Oct’22 which will
take the total piping capacity of the Company to ~5,90,000 MT
– Demand for PVC pipes in India grew by 27% in volume and increased by
55% for SIL. The company claims to have a 15% organized market share in
the plastic piping business
– SIL has increased market share in the CPVC business also. Claims to have a
20%+ market share
– Channel inventory is shallow due to fear of further fall in PVC prices.
Restocking will start as soon as there is an uptick in PVC prices.
Management expects the segment to clock a 10-12% volume growth in the long run
– Each newly introduced value-added product like electrofusion fittings and
olefin fittings can potentially become Rs. 100 cr in size within a year
Packaging Product Business
– Cross laminated film business is impacted by fierce competition from lookalike products
– Focus will be on exports and non-tarpaulin applications to bring back
margins. Products are now sold in 28 countries.
Industrial Product Business
– Business is improving gradually. Buoyant demand is expected from sectors
like washing machines, ACs, coolers, etc
Consumer Business
– Premium furniture continues to remain a focus area for SIL
Other Businesses
– LPG cylinder, a value-added product, is manufactured at full capacity.Augmented capacity will become operational by Nov’22
Supreme Industries Ltd. | Quarterly Update
Financial Statement Analysis
Long term PVC price (in USD/Ton) analysis
Supreme Industries Ltd. | Initiating Coverage Report
Financial Statement Analysis
Supreme Industries Ltd. | Quarterly Update Report
Valuations
5-Year Trailing PE – Supreme continues to look optically cheap due to abnormal earnings over the last 2
years. Actual multiple will be seen once the share of Supreme Petrochem and PVC prices normalize.
KEYNOTE Rating History
Supreme Industries Ltd. | Quarterly Update
Rating Methodology
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Supreme Industries Ltd. | Quarterly Update
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Supreme Industries Ltd. | Quarterly Update
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