Revival in real estate to support rally in Supreme Industries stock
Strong demand for plastic pipes, higher value-add mix drive earnings upgrade
Shares of Supreme Industries, India’s largest plastic pipe maker, are up more than 3 per cent over the last two consecutive sessions in a weak market after delivering better than expected results in the October to December (Q3) period.
The company’s revenues in the third quarter jumped about 35 per cent to ~1,844 crore against Street expectations of ~1,554 crore. This was driven mainly by a healthy 10 per cent growth in volumes on the back of strong demand in housing and was supported by revival in real estate demand.
India’s housing market, struggling with muted sales, a liquidity crisis, and regulatory changes in recent years, has witnessed a sharp rebound in the last couple of quarters. According to Anarock, housing sales in Octoberdecember rose 72 per cent sequentially to 50,900 units compared with 29,520 units in the previous quarter. This was aided by factors such as pent-up demand, lowest mortgage rates in a decade, price rationalisation by developers, and stamp duty cuts.
While the company refrained from giving any forward guidance, it expects January-march 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 on demand from the housing market. (According to the) management, demand for the company’s housing products has revived in metro cities.
The demand for furniture and material handling products was also high compared to the previous year,” said Kotak Securities.
The sharp surge in polyvinyl chloride (PVC) prices affected demand from the agriculture sector, according to the management. PVC prices moved up by 25 per cent y-o-y during Octoberdecember due to supply concern. However, the company does not expect prices to stay at such elevated levels and anticipates some softness from March onwards. With a strong rural economy boosted by ample rain 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 expansion plans. Along with a carried forward investment commitment of ~182 crore (from FY20), the company plans to invest around ~400 crore this year. The investment is mostly in plants where additional construction is going on at seven sites. The company is also setting up three plants, one each in Odisha, Tamil Nadu, and Assam. Together, this would increase its manufacturing capacity by 10 per cent in 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 ~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 is planning to increase revenue from valued-added products by widening the distribution network and launching new stuff.
Analysts have upped their forward estimates and target prices. Jefferies raised its earnings per share estimate by 11-12 per cent over FY22 to FY24 while increasing its 12-month price target to ~2,360 per share from ~2,120 earlier.
“Over FY20-24, the company’s sales and net profit could register 12-20 per cent compound annual growth, driven by sturdy industry opportunity, valueadded mix, new launches, cost control and higher operating leverage,” said the brokerage.