Supreme Industries’ (SIL) management’s outlook, during our recent interaction, appeared more positive vis-a-vis previous quarter. Key highlights: SIL has sharpened focus on market share by sharing inventory gains with distributors, among others; Reduced competitive intensity in packaging is aiding the company’s margin; Small players are facing multiple challenges, including availability of raw material and stretched working capital given volatility in prices.
Factoring the strong growth and outlook, we revise up F21/22/23E EPS 26%/13%/12% and the target to 36x (from 33x). Upgrade to ‘buy’ with revised TP of Rs 1,995. We believe SIL is in a sweet spot to gain additional market share from unorganised players.
SIL surprised positively in Q2FY21 with mere 2% y-o-y volume decline. Furthermore, in October and November, the company sustained healthy volume and value growth riding swift market consolidation as unorganised players continue to face numerous challenges–unavailability of raw material and spike in working capital (cumulative 22% price hike in Q3FY21, post 19% increase in Q2FY21), not to mention delays in pass-through by large organised players (three weeks versus one week earlier). All of these have worsened the plight of smaller players.
The company’s margin expanded 500bps y-o-y in Q2FY21, led by operating efficiency, savings in other expenses, inventory gains and higher share of value-added products (up 9% y-o-y ). While SIL is passing on inventory gains partially to gain market share (more sustainable in nature), some of the cost savings and a rising share of value- added products are likely to sustain. Management is confident of higher margin sustaining in Q3FY21. It also highlighted that PVC prices are unlikely to fall before February 15, which will continue to benefit large players.
We believe SIL’s margin is trending up sharply given waning competitive pressure in the packaging business and its strong positioning in plastic pipes.
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