Supreme Industries - Moving from strength to strength - ICICI Securities

We expect Supreme Industries (SIL) to gain considerable traction in revenues / earnings in the near to medium term driven by: 1) impressive volume traction in - a) plastic piping segment on the back of likely accelerated PVC/CPVC pipe industry consolidation post Covid and expected decentralisation of the company's manufacturing footprint, and b) packaging product segment driven by easing competitive intensity in SILPAULIN division in particular; and 2) scaling up of EBITDA margins led by superior product mix, intensified focus on the VAP portfolio, cost rationalisation and operating leverage. Healthy balance sheet, expected improvement in asset turns, incremental capex in higher-RoCE generating segments and likely traction in earnings is likely to drive considerable improvement in overall RoCEs to >26% in FY22E/FY23E. Maintain BUY.

- Rolling over valuation to Sep'22E. Considering the faster than expected recovery in overall volumes in the near to medium term and higher realisations driven by sharp spurt in polymer prices, we increase our revenue and PAT estimates by 15.1%/6.8% and 48.2%/10.1% respectively for FY21E/FY22E. We now expect revenues and core PAT to exhibit 11.5% and 6.7% CAGR over FY21E-FY22E respectively. While rolling forward estimates to FY23E, we maintain our BUY rating on the stock with a revised SoTP-based target price of Rs1,920 (earlier: Rs1,690) valuing it at 35x Sep'22E core earnings.

- Volume growth at an inflection point. SIL is likely to report muted 6.5%/7.3% volume/revenue CAGRs over FY17-FY20. The muted growth is largely attributable to single-digit volume growth (8.5% CAGR) in the plastic piping segment and flat to negative volume CAGR in other segments. With growth likely to accelerate in the: 1) plastic piping (driven by likely accelerated industry consolidation post Covid and expected decentralisation of the company's manufacturing footprint), 2) packaging product segment (driven by easing competitive intensity in SILPAULIN in particular), and 3) industrial and consumer segments (driven by pent-up demand and lower base), we expect SIL's volumes to be at an inflection point; we estimate volumes to grow at ~11% CAGR over the next two years.

- EBITDA margin to improve on the back multiple levers. We expect SIL's EBITDA margin to improve in the 16-17.5% range driven by: a) increasing share of VAP revenues led by likely scaling up of CPVC pipe and SILPAULIN segments (with cross-plastic film project likely to commence production next year); b) further decentralisation of its manufacturing footprint (with plastic piping greenfield projects in Telangana and Odisha going into production next year); c) superior product mix (plastic piping and packaging product segment to contribute over 80% of overall revenues by FY23E); d) recent fixed-cost rationalisation; and e) operating leverage.

- RoCEs to cross 26% by FY23E. Healthy balance sheet driven by strict working capital management and high FCF generation, expected improvement in asset turns with recent capex projects going into production over the next 2-3 quarters, incremental capex in higher-RoCE generating segments, and likely traction in earnings is expected to drive overall RoCEs to >26% in FY23E. This we believe would lead to further rerating in the stock going forward.

Shares of SUPREME INDUSTRIES LTD. was last trading in BSE at Rs.1672.2 as compared to the previous close of Rs. 1697.85. The total number of shares traded during the day was 3167 in over 575 trades.

The stock hit an intraday high of Rs. 1718.35 and intraday low of 1656.05. The net turnover during the day was Rs. 5341425.

Source : Equity Bulls

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