One of best plays on building material industry with bright prospects; ‘Buy’ maintained.
We hosted investor meet of Supreme Industries. Management reiterated target volume growth at 10-12%, implying value growth of 12-15% (FY19). Focus remains on value growth, profitability and not to chase volumes unless supported by strong RoCE. Key investor concern was whether company’s ability to grow is challenged due to emphasis on maintaining high RoCE.
Management maintained inherent demand drivers are intact: Booming affordable housing, rising farm incomes, shift from unorganised to organised. Given wide product range with continuous new product additions, expansive distribution network, pan-India manufacturing, and higher exports share, Supreme is poised to achieve 12-15% value growth target without compromising on return ratios.
Our view: Buying at CMP implies IRR of 12%, which suggests Supreme would be able to post 12% revenue CAGR over
FY18-28, sustain margin at 16%, maintain its current capital intensity. We maintain our estimates which bake in 14-15% revenue growth with 15-16% margin over FY18-21.
Supreme is one of the best plays on the building material industry with excellent track record. Over next 3-year time horizon, we believe it will deliver consistent topline growth (14-15% p.a.), sustain margin trajectory (15-16%), maintain strong RoCE focus (25%+), generate strong FCF with negligible debt, and pay 40-50% dividend. We expect FY19/20e EPS of `39/46.