SIL shocked positively in Q2FY21 with mere 2% y-o-y volume decline.
Supreme Industries’ (SIL) management’s outlook, for the duration of our current interaction, appeared more optimistic vis-a-vis earlier quarter. Key highlights: SIL has sharpened concentrate on marketplace share by sharing inventory gains with distributors, amongst other individuals Reduced competitive intensity in packaging is aiding the company’s margin Small players are facing numerous challenges, like availability of raw material and stretched working capital provided volatility in rates.
Factoring the robust development and outlook, we revise up F21/22/23E EPS 26%/13%/12% and the target to 36x (from 33x). Upgrade to ‘buy’ with revised TP of Rs 1,995. We think SIL is in a sweet spot to acquire more marketplace share from unorganised players.
SIL shocked positively in Q2FY21 with mere 2% y-o-y volume decline. Furthermore, in October and November, the organization sustained wholesome volume and worth development riding swift marketplace consolidation as unorganised players continue to face various challenges–unavailability of raw material and spike in working capital (cumulative 22% cost hike in Q3FY21, post 19% boost in Q2FY21), not to mention delays in pass-via by substantial organised players (3 weeks versus one particular week earlier). All of these have worsened the plight of smaller sized players.
The company’s margin expanded 500bps y-o-y in Q2FY21, led by operating efficiency, savings in other costs, inventory gains and larger share of worth-added solutions (up 9% y-o-y ). While SIL is passing on inventory gains partially to acquire marketplace share (more sustainable in nature), some of the expense savings and a increasing share of worth- added solutions are probably to sustain. Management is confident of larger margin sustaining in Q3FY21. It also highlighted that PVC rates are unlikely to fall just before February 15, which will continue to advantage substantial players.
We think SIL’s margin is trending up sharply provided waning competitive stress in the packaging small business and its robust positioning in plastic pipes.