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Maintain ADD on Supreme Industries - Demand recovery to make up for Q1 loss - HDFC Securities

Posted On: 2021-07-23 04:05:44 (Time Zone: UTC)

Mr. Rajesh Ravi, Institutional Research Analyst, HDFC Securities and Mr. Saurabh Dugar, Institutional Research Analyst, HDFC Securities

We maintain our ADD rating on Supreme Industries (SIL), keeping the target price unchanged at INR 2,320/share (SOTP based). In Q1FY22, the countrywide lockdown hit sales across all of the company's four segments, with the agri-pipes and plastic furniture segments witnessing a sharper impact than the others. Lower utilisation and inventory loss pulled profits down. Thus, consolidated volume/net sales/EBITDA/ APAT fell 36/36/56/62% QoQ respectively. Despite the Q1 loss, SIL expects to deliver growth in FY22E, as demand has been picking up late-June onwards.

Q1FY22 performance: SIL's total volume fell 22/36% YoY/QoQ, mainly hit by loss in agri-sales, which pulled down the pipes division by 36/37% YoY. SIL noted that agri volumes fell 60% YoY, the impact of which was moderated by a ~42% rise in CPVC volume (on a low base, though). The pandemic also hit the furniture business hard (down 64% QoQ and >50% down vs a normal Jun- quarter). Even the industrial and packaging segment suffered, leading to consolidated net sales falling by 36% QoQ (up 27% YoY on a low base). Lower sales led negative op-lev, and inventory loss amidst the fall in resin prices QoQ, drove down EBITDA/APAT by 56/62% QoQ (up 90/320% YoY) respectively. On a YoY basis, strong performance by SIL's associate company Supreme Petrochem accelerated the APAT surge.

Outlook: SIL guided that demand has picked up late-June onwards across all markets and, hence, it is hopeful of delivering growth in FY22 despite a bad start. PVC prices, which were reversing in Q1 and, hence, led to channel destocking, have stabilised. SIL is undertaking capacity expansion by 8% to 751K MT in FY22, through a Capex of INR 5.2bn. These can potentially add~ INR 9.5bn to its revenues (FY23 onwards). It is mainly expanding its pipes capacity to 550K MT (from 509K MT in FY21) and industrial product capacity to 80K MT (from 71K MT). We remain positive on the company's growth prospects, owing to healthy demand and margin outlook. Robust balance sheet and cash flow should support its accelerated Capex spend. We maintain our ADD rating on the stock while keeping the target price unchanged at INR 2,320/sh (SOTP based). We value the company at 19x its Jun'23E consolidated EBITDA and value its 30.8% holding in its associate Supreme Petrochem at a 30% discount to its current market cap.

Shares of SUPREME INDUSTRIES LTD. was last trading in BSE at Rs. 2098.05 as compared to the previous close of Rs. 2104. The total number of shares traded during the day was 8275 in over 1815 trades.

The stock hit an intraday high of Rs. 2144 and intraday low of 2075.5. The net turnover during the day was Rs. 17504774.

Source: Equity Bulls

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