The stock of the country’s largest plastic pipe maker Supreme Industries has shed 22 per cent since its highs in October.
The September quarter results were below expectations as the volatility in polyvinyl chloride (PVC) resin prices led to a major destocking across the trade channel.
PVC resin saw a 19 per cent rise during the June quarter, which was followed by a 17 per cent fall in July and August.
Given the near-term outlook, the company revised its guidance for volume growth of plastic pipes to 16-18 per cent from 25 per cent.
The management cited volatility in PVC resin prices, lower spending on infrastructure by the governments, and extended monsoon as reasons for the lower guidance.
Total volume in Q2 was flat over the year-ago quarter at 138 kilo tonnes (kt) while it declined 21 per cent on a sequential basis.
Operating profit was down 10 per cent Y-o-Y and 18 per cent Q-o-Q.
The company reported an inventory loss of Rs 35-40 crore.
The rise in ocean freight due to the Red Sea crisis restricted the operating profit margin to 14 per cent, down 139 basis points Y-o-Y.
The Q2 performance missed the Street estimates by up to 14 per cent.
While overall volume growth was lower due to the plastic pipe segment, the decrease in operating profit per kg to Rs 14.7 (down 24.5 per cent Y-o-Y) was on account of inventory loss in the pipe segment.
Plastic pipe realisation corrected by 4.1 per cent Y-o-Y due to fluctuations in PVC resin prices, changes in product mix, and competitive pricing.
While Prabhudas Lilladher Research has revised its earnings estimates downward by 16 per cent over the FY24-27 period, they continue to maintain a positive view.
This is on account of capacity expansion in different geographies, new product expansion, pan-India distributors and a cash surplus of Rs 674 crore for funding expansion plans, say Praveen Sahay and Rahul Shah of the brokerage.
Systematix Research, too, has cut its earnings estimates by up to 11 per cent over FY24-27 after a weak September quarter show.
However, Ashish Poddar and Mahek Shah of the brokerage believe the company can sustain its strong free cash flows of Rs 700 crore annually and return on capital employed of 34 per cent in FY27, despite higher capital expenditure.
After investing Rs 700 crore in FY24, the company is committing another Rs 1,500 crore capex, including carry forward capex of Rs 500 crore and Rs 1,000 crore cash outflow in FY25.
While the current capacity of 950kt is roughly split into 730kt for pipes, 90kt each for industrial, and packaging, and 23kt for the consumer segment, it is planning to reach 1,050kt in FY25, mainly led by pipes (835kt).
The brokerage has a ‘hold’ rating on the stock, given the rich valuations of 40 times FY27 estimated price to earnings.
While Antique Research has cut its estimates post-Q2, it has a ‘buy’ rating on the stock as it expects Supreme to deliver a volume growth of 13-14 per cent over FY24- FY27.
This is expected to be driven by a conducive PVC price environment and a strong demand outlook from the plumbing, agriculture, and infrastructure segments.
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