Supreme Industries (SIL) continued to report disappointing numbers with volatile raw material price triggered inventory loss denting Q1FY20 profitability.
Supreme Industries (SIL) continued to report disappointing numbers with volatile raw material price triggered inventory loss denting Q1FY20 profitability. Despite 22% y-o-y volume growth in pipes (led by pick up in agri pipes), disappointing Ebitda margin (-220 bps y-o-y) led to PAT coming 16% below estimate. Though the management is confident of 8-10% revenue growth with 13.5-14.5% Ebitda margin in FY20, we expect margin pressure given high competitive intensity in pipes and industrials. Maintain ‘reduce’ with Rs 923 target price.
Key positives: (1) volume of pipes segment surged 22% primarily led by jump in demand from agri pipes; (2) management expects margin to pick up as Q1FY20 margin was primarily affected by inventory losses and higher share of low-margin agri pipes portfolio; and 3) SIL maintained guidance of 80-10% revenue growth with 13.5-14.5% Ebitda margin. Key negatives: (1) inventory loss and margin pressure across segments dented overall Ebitda margin 220 bps y-o-y to 11.6%; (2) packaging film business faced significant margin pressure led by volatile raw material prices; and 3) APAT at Rs 871 million (down 12%) is below our and consensus estimates.
SIL faced sustained margin pressure in Q1FY20 and we expect it to continue owing to competitive intensity. Though pipe volumes picked up in Q1FY20, we envisage pressure from new entrants and existing regional players. We expect weak demand in the industrial segment led by the current demand slowdown. But the margin of the packaging segment is likely to improve, after a weak Q1FY20, as raw material prices have now stabilised. Though SIL continues to maintain leadership in plastics & plastic products and enjoys strong return ratios, we believe rising competition is a near-term concern and poses margin risk. In Q1FY20, the overall volume grew 13.6% y-o-y.