Supreme Industries rating: Buy; Elements for re-rating falling into place

We upgrade Supreme Industries (SIL) to Buy driven by (i) faster-than-expected recovery post Covid-19 led lockdown—mere 3.4%/3.7% volume/ value decline in Jul and Aug’20; (ii) higher (double-digit) growth expectations post FY21 in its core segments – plastic piping and SILAPULIN; (iii) likely improvement in asset turns over the next 2-3 years with huge capex over FY20-FY21 going into production next year; (iv) reducing dependence on commodity-led industrial and consumer product segments; (v) higher Ebitda margin trajectory driven by increasing share of VAP revenues, further decentralisation of plants, superior product mix and operating leverage; and (vi) fast improving RoCEs led by strong traction in profitability and higher fixed asset turns.

Upgrade to BUY with a TP of Rs 1,640: Considering faster-than-expected recovery and improving visibility in its core segments, we revise our revenue and PAT estimates upwards by 8.9%/5.7% and 24.9%/11.7%, respectively for FY21e/FY22e. We now expect the company’s revenue and core PAT to exhibit a 6.9% and 15.7% CAGR over FY20-FY22, respectively. We upgrade SI to Buy with a TP of Rs 1,640 (Rs 1,135 earlier) valuing it at 35x FY22e core earnings.

Volume growth at an inflection point: SIL is likely to report a muted 3.9%/4.6% volume/revenue CAGR over FY17-FY21. With growth likely to accelerate in its plastic piping (driven by likely accelerated industry consolidation post Covid-19 and expected decentralisation of its manufacturing footprint) and packaging product segment (driven by easing competitive intensity in its SILPAULIN segment in particular), we expect SIL’s volumes to be at an inflection point and register double-digit volume growth CAGR over the next 2-3 years post FY21e.

Ebitda margins to improve led by multiple levers: We expect SIL’s Ebitda margins to improve in 15.5-16.5% range driven by (i) increasing share of VAP revenues led by likely scaling up of its CPVC pipes and SILPAULIN segment; (ii) further decentralisation of its manufacturing footprint (with plastic piping projects in Telangana and Orissa going into production next year); (iii) superior product mix (plastic piping and packaging product segment to contribute over 80% of overall revenues by FY22e); (iv) recent fixed cost rationalisation; and (v) operating leverage.

RoCEs to cross 25%+ by FY22E: Healthy balance sheet (driven by strict working capital management and high FCF generation), expected improvement in its asset turns, incremental capex in higher RoCE generating (plastic piping and cross plastic film) segments and likely traction in earnings is expected to drive its overall RoCEs to 26.6% in FY22e and ~30% in FY23e. This, we believe, would lead to further rerating of the stock going forward.