Supreme Industries' Q2FY20 results (Outperformer) - Pipes outshine weak performance in other segments

Q2FY20 result highlights

• Cons. rev. came in at ~Rs12.7bn (3.8% yoy fall; 4% miss). Volume at ~93.5k MT grew 12.4% yoy (6% beat), while realisations fell ~7.9% yoy to ~Rs136/kg (9% miss), due to weak polymer realisations (ex PVC).
• Although pipes outperformed (both revenue/margins), weak performance in other categories, mainly on account of weak polymer realisations and one-off expenses (~Rs140m) in the industrial segment dragged EBITDA margins lower by ~280 bps yoy to 13.6% (still ahead of IDFCe: 11.9%). EBITDA, consequently, fell ~20.4% yoy to ~Rs1.7bn (9% beat due to stronger than expected pipe margins).
• PBT fell ~28.5% yoy to ~Rs1.1bn. Tax write-backs taken in Q2 (due to new tax rate) led to PAT growth of ~30.1% yoy to ~Rs1.4bn (33% beat).
• Pipes Performance (60% of rev): Volumes up +19.8% yoy at ~67.8k MT (8% beat), while revenue grew +18.8% yoy to ~Rs8.1bn (6% beat). Strong non-agri sales and inventory gains led to ~340 bps yoy improvement in EBITDA margins to 16.4%.
• Packaging rev. fell 4.7% yoy (weak cons. sales/high competition), Ind. rev. fell 33.5% yoy (weak client sales); consumer rev. was flat yoy.
• FY20E Guidance: Volume growth revised to 10-12% (vs 8-10% earlier). Value growth assumed slightly lower than volume given bearish polymer prices for FY20E. 13-14% EBITDA margins expected.

Key positives: Another blow out quarter for pipes.

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

Impact on financials: FY20E/21E EBITDA cut by 6% each.

Valuations & view

Pipes performance continued to be superlative during Q2, this time contributed by higher margin segments like plumbing and infrastructure. Agri-related sales should pick-up over H2 as monsoons subside and SI’s increasing confidence in DWC also suggests that pipes growth would remain robust for FY20E and this should continue into FY21E as well. However, weakness in packaging/industrial segments remains concerning. Weak polymer realisations too would affect growth for the non-pipes segments for the rest of the year. Nevertheless, we believe SI’s focused approach towards profitable growth should keep them in good stead during these challenging times. Maintain Outperformer with a SOTP target price of Rs1,191 (28.6x implied FY21E P/E) and we would advise  to build positions during stock price weakness.