Supreme Industries' Q3FY20 results (Outperformer) - Margins surprise covers weak revenue performance…

Q3FY20 result highlights

• Rev. fell 3% yoy to ~Rs13.7bn (11% miss). Volume was flat yoy at ~101.4k MT (7% miss) while blended realisations fell ~4% yoy to ~Rs134/kg (4% miss) as polymer prices have been weak.
• Higher sales of value-added products (~42% of rev. vs ~38% yoy) and holding on to some of the price fall in polymers (instead of passing on entire benefit to clients) led to gross margin expansion of ~430 bps yoy to 35.3% (IDFCe: 31.8%). This led to EBITDA margin expansion of ~360 bps yoy to 16.1% (IDFCe: 12.7%).
• EBITDA grew ~26% yoy to ~Rs2.2bn (14% beat). PAT grew ~52% yoy to ~Rs1.2bn (9% beat).
• Pipes Performance (60% of rev): Disappointing performance due to extended monsoons, although SI alluded that demand has picked up since mid-November. Q3 volume grew ~1% yoy (est. 11%) while revenue was flat (est. 12%). Margins, however, expanded ~360 bps yoy due to better product mix (likely due to higher CPVC sales). Pipes EBITDA/kg grew ~28% yoy to ~Rs18.1 from ~Rs14.2 yoy.
• Other Segments: Packaging rev. flat yoy (competitive pressures haven’t abated), Industrial rev. fell ~21% yoy (consumer durable weakness, but expect pickup in Q4), Consumer rev. down 3% yoy.
• FY20E Guidance: 10-12% volume growth (maintained) with margins of 14-14.5% (vs 13-14% earlier).

Key positives: Margin improvement across segments

Key negatives: Pipes/Industrial revenue weakness

Impact on financials: FY20E/21E EBITDA up 5%/3%. Introduce FY22E.

Valuations & view

Margin improvement has been far sharper than anticipated in Q3 and SI’s improved guidance on the same for FY20E is encouraging and possibly a sign that margin pressures in Packaging and Industrial have bottomed out. Pipes performance was disappointing, but business has rebounded from mid-November and remains on track to grow at 13-15%. New capacity expansion on the value-added side, especially on pipes, should ensure higher margins in the medium-term and this is in-sync with the company’s focused approach towards profitable growth. Margin sustenance would remain a key monitorable in the near-term however. We roll-over our valuation to FY22E and increase our SOTP target price to Rs1,452 (28.6x implied FY22E P/E).