ICICI Direct's research report on Supreme Industries
After posting ~27% YoY revenue drop in Q1FY21, Supreme Industries (SIL) saw a strong demand recovery at the start of Q2FY21. Despite intermediary lockdowns and concerns over low discretionary expenditure, the piping segment saw ~98% demand recovery in May-August 2020. Demand was largely driven by housing & infrastructure projects in non-metro regions. Also, dealers have started building inventory in anticipation of a reversal in raw material prices (HDPE, LDPE prices were up 24%, 16%, respectively, from lows in April 2020). We believe saving in other costs in addition to better gross margins (due to inventory gains, rising proportion of value added products) would help drive EBITDA margin in FY21E-23E. Further, SIL will continue its Rs 350 crore of capex plans in FY21 to augment capacity of the piping & packaging business. This would help it to gain market share in the long run. Considering the improved performance, we tweak our earnings estimate for FY21E, FY22E and introduce FY23E financials with revenue, earning CAGR of 10%, 16%, respectively, in FY20-23E.
Outlook
Supreme Industries’ sharp business recovery post easing of lockdown restrictions depicts its strong supply chain networks and deep rural penetration. We change our rating from HOLD to BUY and value the company at 35xFY22E earnings with a revised target price of Rs 1650/share.
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