ICICI Direct is bullish on Supreme Industries has recommended buy rating on the stock with a target price of Rs 1150 in its research report dated January 28, 2019.
ICICI Direct's research report on Supreme Industries
Supreme Industries’ Q3FY19 topline growth of ~10% was largely driven by ~7% increase in realisation while volume growth at 4% was largely hit by industrial product categories. On the segment front, packaging and industrial category performances were hit by cross laminated products and divestment of automotive business in Q3FY18 that hit the volume growth of these businesses. However, the company witnessed good demand traction in the piping category (revenue up ~19% YoY) from the government’s affordable housing segment Gross margin declined ~260 bps YoY on account of inventory losses due to a decline in polymer prices (barring PVC, other polymer prices such as PE, PP and polystyrene declined 14-16%). On the segment front, packaging segment recorded a sharp decline in EBITDA margin (by 730 bps YoY) mainly due to a share decline in profitability of the company’s cross laminated product categories. As a result, EBITDA margin at company level declined 302 bps YoY in Q3FY19. The share of value added products in total sales declined from 38% to 40% during Q3FY19. Though the management has reiterated volume growth of ~10% in FY19E (that translates to ~20% volume growth during Q4FY19E) led by piping segment, lower raw material prices would benefit the company in coming quarters. We introduce FY21E estimate and model revenue, earnings CAGR of ~13%, ~11%, respectively, in FY18-21E.
Outlook
Though we believe SIL is a strong play in the PVC industry, short-term headwinds such as high raw material prices and rising competition may restrict any sharp movement in EBITDA margin. However, strong balance sheet with debt/equity 0.1x and higher return ratios RoE, RoCE at 23%, 28% reduce the short-term concern in the industrial and packaging segments. We roll over our valuation on FY21E and value the stock at 25xFY21E earnings with a revised target price of Rs 1150/share. We revise our recommendation on SIL from HOLD to BUY.
For all recommendations report, click here
Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Read More
