Geojit Financial Services has revised its rating on Supreme Industries Ltd. (SIL) to “Accumulate” with a target price of Rs4,895, following improved market conditions and favorable outlook for demand in H2FY25. Despite recent challenges, including weak volumes and margin pressures, SIL’s strong position in India’s plastic products sector and anticipated recovery in demand could make this stock a strategic hold for investors.

Market and Financial Overview

Revenue Decline Offset by Margin Improvement

Revenue fell by 2% YoY, attributed to weak volumes across segments and a notable 5% decline in the pipe business. Input price volatility and reduced government spending have adversely impacted performance.
Gross margins, however, improved by 100 bps YoY to 34.5%, due to lower PVC prices, though EBITDA margin declined by 140 bps to 14.0% due to higher employee costs.
Key Takeaway: Margin resilience amid revenue decline indicates potential for recovery in the coming quarters.

Segmental Insights and Outlook

1. Piping Systems Performance

The piping segment, SIL’s primary revenue driver, faced a 5% drop in realization and flat volumes due to destocking and lower government expenditure.
With stabilizing PVC prices and anticipated restocking, demand is expected to recover in H2FY25, particularly with contributions from the real estate and construction sectors.
2. New Products and Expansion

SIL is advancing its portfolio with innovations like Cross Plastic Film targeting export markets, expected to launch commercially in December 2024.
The new industrial and ball valve production facility at Malanpur, MP, has commenced operations, adding capacity and diversifying product lines.
3. Government Spending and Agri Demand

An increase in government spending, especially in H2FY25, coupled with growth in the agriculture and construction sectors, is projected to stimulate demand for SIL’s piping products.

Financial Forecast and Key Ratios

Growth Expectations

Geojit forecasts a 13.3% CAGR in volumes and a 13.6% CAGR in revenue from FY24-27E. Profitability is also anticipated to improve at a CAGR of 16%, suggesting sustainable growth potential.
Valuation and Multiples

SIL’s forward P/E ratio is projected at 46.0x for FY25, 38.4x for FY26, and 31.9x for FY27, indicating the stock is priced at a premium but justifiable given its growth trajectory and sector dominance.
Return on Equity (ROE) is estimated at 21.6% for FY25, growing marginally to 22.4% by FY27, reflecting steady profitability.

Growth Catalysts

1. Demand Rebound and Restocking

Channel restocking, especially as inventory levels normalize, is likely to drive growth, with PVC prices stabilizing and increasing affordability.
Increased demand from high-growth sectors such as construction and real estate provides additional tailwinds for SIL.
2. Strategic Product Diversification

New product launches, including the high-potential Cross Plastic Film, position SIL well for growth in the export market. The Malanpur facility’s contributions are expected to boost capacity and operational efficiency in the long term.
3. Resilient Balance Sheet

SIL’s strong financials, with a zero debt-to-equity ratio and favorable liquidity metrics, underscore the company’s resilience and provide a foundation for continued investments in capacity and product development.

Key Risks and Challenges

1. Margin Pressures from Rising Costs

While gross margins improved, the increase in employee and operational costs led to a reduction in EBITDA margins. The ability to control costs amidst potential demand fluctuations will be crucial.
2. Exposure to Government Spending and Agriculture Demand

Given SIL’s reliance on government infrastructure spending and agricultural demand, any slowdown in these sectors could impact volume growth projections and revenue targets.
3. Competitive Pressures in Plastic Products

As the sector remains competitive, particularly in the piping systems and industrial products segments, SIL’s market share growth may face challenges from emerging players and pricing pressures.

Investor Guidance and Target Levels

Investment Recommendation:

Accumulate: With a target price of Rs4,895, representing a 13% upside from the current market price of Rs4,334, investors are encouraged to accumulate SIL stock as it nears key support levels, driven by a solid balance sheet, robust product innovation, and projected demand recovery.
Key Levels to Monitor:

Support Level: Rs4,000 – A critical level that provides downside protection for investors amid market volatility.
Resistance Level: Rs5,000 – A potential profit-taking level, depending on market conditions and demand growth in the coming quarters.