Supreme Industries' Q4FY19 results (Outperformer) - Polymer price fall impacts Q4 profitability

Q4FY19 result highlights

• Cons. revenue at ~Rs15.3b (+4.1% yoy) was in-line with our expectations, although total volume at ~114k (+10.4% yoy) was 4% lower than estimates.
• Sharp fall in polymer prices in March (~12-15% decline across categories) led to inventory losses during the quarter. Consequently, SI’s gross margin declined ~490 bps yoy to 30.7%. This and higher other expenses led to EBITDA falling 29.6% yoy to ~Rs2.0bn (20% miss). EBITDA margin shrank ~630 bps yoy to 13.2% (IDFCe: 16.3%).
• Higher than expected finance costs (+15% yoy; 25% beat) and lower other income (-17% yoy; 50% miss) led to adjusted net income coming in at ~Rs1.1bn (-37% yoy), sharply below expectations.
• Pipes Performance (60% of rev): Volumes up +15% yoy at ~83.5k MT (6% miss), while revenue grew +14% yoy to ~Rs9.4bn (in-line). Inventory losses due to sharp fall in PVC prices led to EBITDA falling ~16% yoy to ~Rs1.2bn (-26% miss).
• FY20E Guidance: Revenue of ~Rs61.0-62.5bn (implied ~12% yoy growth in plastic product revenue) with EBITDA margin range of 13.5-15% (accounting for volatility in input price/forex and product mix).

Key positives: Packaging margins have possibly bottomed out.

Key negatives: Weak EBITDA margins across segments

Impact on financials: FY20E/21E earnings estimates cut by 10%/9%

Valuations & view

We believe SI’s margin weakness, especially in high competitive segments like packaging and consumer, have bottomed out. Although input price volatility and the consequent inventory loss was sharper than expected in Q4, we believe this should iron out over the coming quarters, thus reducing unpredictability of margins. Future outlook remains healthy across SI’s product segments and initiatives taken in terms of new product launches should hold the company in good stead. While earnings was weak over the last two years (FY17-19 negative CAGR of ~5.5%), we believe the stage is set for an improvement from current levels (FY19-21E CAGR of 20.0%). We continue to appreciate SI’s razor-sharp focus on profitable growth and its strong track record. Maintain Outperformer with a revised SOTP target price of Rs1,240 (30x FY21E core earnings + 30% discount on SI’s Supreme Petrochem holding; 28.7x implied FY21E P/E).