Supreme Industries' Q1FY20 results (Outperformer) - Pipes shine; inventory losses impacts profitability

Q1FY20 result highlights

• Cons. rev. came in at ~Rs14.4bn (+6.8% yoy; 2% miss). Volume at ~113k MT grew 13.5% yoy (in-line), while blended realisations fell ~4% yoy to ~Rs127/kg (2% miss), mainly on account of higher agri-pipe sales.
• Weakness in polymer prices (excl. PVC) and higher contribution of agri pipes dragged overall gross margins lower by ~130 bps yoy to 30.2%. Inventory losses booked under Packaging and Industrial segments led to EBITDA margin compression of ~220 bps yoy to 11.6% (IDFCe: 12.9%). Consequently, EBITDA fell 9.9% yoy to ~Rs1.67bn. Adjusted for Ind-AS 116, EBITDA stood at ~Rs1.65bn (13% miss).
• Despite the Ind-AS 116 impact, lower finance costs (partly negated by lower other income) meant that APAT decline was just 10.1% yoy (Rs871m, 10% miss), despite weak EBITDA performance.
• Pipes Performance (60% of rev): Volumes up +22.4% yoy at ~85.2k MT (6% beat), while revenue grew +20.1% yoy to ~Rs9bn (6% beat). Higher sales of agri pipes and partial inventory loss (majorly taken in Q4) meant that EBITDA margins came off ~180 bps yoy 11.3%.
• Packaging rev. fell 5.6% yoy, Industrial rev. fell 17.5% (Auto sector and sale of a JV from Q2FY19 onwards impact); consumer rev. fell 2.6%.
• FY20E Guidance: Confident of earlier guidance of 12-15% value growth (on 8-10% volume growth) with EBITDA margin range of 13.5-14.5% (vs 13.5-15% given in Q4) – assuming stable polymer prices.

Key positives: Blow out quarter for pipes volume/revenue.

Key negatives: Weakness across non-pipes segments, inventory losses.

Impact on financials: FY20E/21E earnings estimates cut by 8% each.

Valuations & view

Although non-pipes businesses disappointed in Q1, we were enthused by the strong performance by SI’s pipes business. With polymer prices expected to stabilize at current levels, and bulk of the annual agri pipe sales concluded in Q1, the focus should resume on improved realisations through higher value-added product sales across segments, which in-turn should set the stage for profitable growth over the forthcoming quarters. Pipes outlook continues to remain bright, while the expectations of reduced pain on the packaging side (through new products), should also help the company over the mid-term. Maintain Outperformer with a revised SOTP target price of Rs1,145 (30x FY21E core earnings + 30% discount on SI’s Supreme Petrochem holding; 28.6x implied FY21E P/E).