Revival in realty, industrial segment to support Supreme Industries' stock

Strong demand for plastic pipes, higher value-add mix drive earnings upgrade

Shares of India’s largest plastic pipe maker, Supreme Industries rallied more than 3 per cent intraday on Wednesday after delivering better than expected results in the October to December (Q3) period. The stock ended the trading session with gains of around 2.7 per cent in an overall weak market. 

The company’s revenues in the third quarter jumped close to 35 per cent to Rs 1,844 crore as compared to street expectation of Rs 1,554 crore. This was mainly driven by a healthy 10 per cent growth in volumes on the back of strong demand from the housing segment and was supported by a revival in real estate demand.

India’s housing market struggling with muted sales, liquidity crisis and a series of regulatory changes in recent years has witnessed a sharp rebound in the last couple of quarters. As per Anarock, housing sales in Q4CY20 rose 72% QoQ to 50,900 units compared with 29,520 units in the previous quarter. This was aided by a combination of factors such as pent-up demand, lowest mortgage rates in a decade, price rationalisation by developers, stamp duty cuts among others.

While the company refrained from giving any forward guidance it does expect Q4FY21 to be better than last year on the back of the fillip provided by the housing market. “The company expects strong demand in the plastic piping segment from the housing market. As per management, demand for the company’s housing products has revived in metro cities. The demand for furniture and material handling products were also higher as compared to the previous year,” said Kotak Securities. 

The sharp surge in polyvinyl chloride (PVC) prices impacted demand from the agriculture sector, according to the management. PVC prices moved up by 25 per cent y-o-y during Q3FY21 due to supply concerns. However, the company does not expect prices to stay at such elevated levels and expect some softness from March onwards. With a strong rural economy boosted by ample rainfall and higher rabi sowing, analysts at Edelweiss Securities expect demand for piping products from the agricultural segment to see a steady improvement.

With such strong growth triggers, the company has decided to go ahead with its expansion plans. Along with a carry forward investment commitment of Rs 182 crore (from FY20), the company plans to invest around Rs 400 this year. The said investment is mostly in its existing plants where additional construction activities are going on at seven sites. The company is also setting up three new plants at Orissa, Tamil Nadu and Assam. Together, this would increase its total manufacturing capacity by 10 per cent as of 2022.

The company as part of its strategy has been focused on scaling up its portfolio of high margin value-added products. In Q3, revenue from the value-added category rose more than 30 per cent to Rs 758 crore. Subsequently, its share in the company’s consolidated revenues has increased to 42 per cent from roughly 36 in as of March 2018. The company further plans to increase revenue contribution from valued-added product categories by widening the distribution network and launching new products.

In this context, analysts have upped their forward estimates and target prices. Jefferies raised its EPS to estimate by 11 to 12 per cent over FY22 to FY24 while increasing their 12-month price target to Rs 2,360 per share from Rs 2,120 earlier. “Over FY20-24, the company’s sales and net profit could register 12-20 per cent annually (CAGR), driven by sturdy industry opportunity, value-added mix, new launches, cost control and higher op-leverage,” said the brokerage.