Supreme Industries Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Volume surged 53% on a weak base, but margin collapsed to 12.24%: The quarter was a story of two halves: robust demand across agriculture, housing and infrastructure drove exceptional volume, while a severe drop in polymer prices inflicted unavoidable inventory losses that crushed operating margin.
• Inventory losses will bleed into Q2: PVC prices fell another INR 20/kg after the quarter closed, and management explicitly warned that Q2 will also carry inventory losses, making the 15% full-year margin guidance a back-half recovery bet.
• The 15% full-year margin pledge is a bet on polymer prices bottoming: Management believes PVC prices are close to a floor and expects a seasonal demand uptick from September, which would allow restocking and margin recovery; if prices keep falling, the bet is off.
• Value-added products are the quiet growth engine: Even in a poor quarter, value-added revenue jumped from INR 515 crore to INR 760 crore YoY, and new systems like bath fittings, electrofusion fittings and composite cylinders are scaling fast.
• What to watch next quarter: Whether PVC prices actually stabilise by end-August as management expects, the pace of restocking in the channel, and whether Q2 margin lands close enough to keep the 15% full-year number credible.

Volume & Demand: The Real Economy Story

• 53% volume growth, but the base flatters: Last year's Q1 was disrupted by the COVID second wave, so the headline number overstates underlying momentum; even so, management called demand uniform and robust across agriculture, housing and infrastructure.
• Agriculture was the standout driver: The company gained share in the agriculture pipe segment after last year's demand was bridged by COVID disruptions; PVC demand for the industry rose 27% by volume, while Supreme grew 55%, implying material share gains.
• CPVC demand stayed robust: The category grew double-digits and the company increased market share, with management anticipating continued double-digit growth through the remaining three quarters.
• Channel inventory is bone-dry: Continuous price falls have scared dealers into hand-to-mouth buying or stocking out entirely; management sees this as pent-up demand that will convert into a "tremendous share of order" the moment the price trend reverses.
• The macro setup looks supportive: Management cited COVID behind us, a CapEx cycle starting, better exports, a good monsoon, strong food grain sowing, and inflation that has peaked out as reasons for demand optimism from September onward.

Taparia: "Now the COVID is behind, I don't think COVID is that much little and the CapEx cycle started. Exports are better. The monsoon is better, the food grain sowing is going in a big way. We anticipate that the inflation has now peaked out. The inflation is only going to come down going forward. So there is no reason to be pessimist for anything. Economy is in fine shape."

Margins: The Inventory Loss Overhang

• 12.24% operating margin is not the real run-rate: Management stated the margin would have been better than 12% without inventory losses, and an analyst's math suggested 15% was possible; management did not confirm the figure but agreed the drop was entirely inventory-driven.
• The mechanics are brutal and unavoidable: The company carries roughly 45 days of inventory to maintain its supply chain; when polymer prices drop severely, there is no way to avoid the loss, and management was candid that claiming otherwise would be misleading.
• Q2 will also carry inventory losses: PVC prices dropped a further INR 20/kg between 23 June and the call date, and management confirmed the loss will extend into the current quarter; the full extent will only be clear by October.
• The recovery thesis rests on a price bottom: Management believes PVC prices are close to a floor, with a marginal improvement possible from September when the demand season starts; polymer prices have fallen across PP, polyethylene and polystyrene too, which should help margins in certain products in H2.
• The 15% full-year margin guidance is a 200 bps haircut from normal: The company normally aims for 17% and typically delivers 16-16.5%; 15% is an explicit acknowledgement that inventory losses will drag the full-year number down, with recovery loaded into the second half.

Taparia: "When the prices are dropping such a severe drop and we say, we don't lose money than we are misleading. When we told you earlier that we keep around 45-day inventory to maintain our supply chain. Then we are supposed to suffer inventory loss and which we hope to recover also going forward."

PVC Price Cycle & Competitive Dynamics

• The price collapse has multiple drivers: PVC prices went sky-high, demand started shrinking, new capacity came online, freight rates fell from their peak, and China's economy slowed under COVID restrictions, creating a surplus that China exported aggressively into India.
• China became the swing factor: The anti-dumping duty on Chinese PVC imports expired on 2 February 2022, and China immediately became the largest source of PVC imports into India, dropping prices weekly in tandem with Southeast Asia and Japan.
• Management sees the cycle turning: Having observed polymer price cycles over many years, management's view is that when prices go too far down, they start going up; the call is that the bottom is near and the drop will be complete by end-August.
• Restocking is the trigger to watch: Once prices stabilise, the combination of depleted channel inventory and seasonal demand from September could drive a sharp restocking cycle, positioning the company well given its scale and dealer relationships.

Taparia: "We believe that now the prices in PVC is close to bottom. So coming from September onwards, the prices may marginally improve also and even demand season starts."

Value-Added Products & New Initiatives

• Value-added revenue jumped 48% YoY in a poor quarter: The business grew from INR 515 crore to INR 760 crore, demonstrating that the diversification strategy is gaining traction even when the core piping business faces margin headwinds.
• Bath fittings are scaling rapidly: The product range has been very well accepted, and management anticipates 100% growth in the business this year compared to last year.
• Electrofusion and compression moulded fittings are finding a home in Nal Se Jal: The government scheme has committed to nationwide implementation by 2024, and the company is selling good quantities every month into this channel.
• Five new product systems are launching: Two have already gone into production (electrofusion fittings and olefin fittings), with the remaining three to follow in the next 3-4 months; management expects most new products to cross INR 100 crore in revenue within a year of launch.
• Composite LPG cylinders are a quiet profit centre: The existing plant is running at full capacity, supplies against the Indian Oil Corporation Letter of Intent have commenced, and margins are expected to improve further from December-February onward; capacity doubles by November.
• Cross Laminated Film is fighting back against look-alike competition: Fierce competition from cheaper kilo-based products has hurt the business, but management is hearing many failure reports of those look-alike products and is shifting focus to higher-margin non-tarpaulin exports, now reaching 28 countries.

Taparia: "We are hearing many failure report of look-alike product. We remain more optimistic of our Cross Laminated Film business going forward."

Capacity Expansion & CapEx

• Three new piping locations are starting: The Guwahati unit commenced commercial production in Q1 and will start manufacturing in August across PVC pipe, polyethylene pipe, roto-moulded tanks, blow-moulded tanks and electrical conduit; Cuttack and Erode are likely to go into production by September-October 2022.
• Supreme Petrochem is adding 80,000 tons of capacity: The new plant will be operational from September, and while domestic demand was strong enough through June that the company could not meet it, July saw seasonal softening and a return to exports; management does not expect it will take two years to fill the new capacity.
• FY23 CapEx is INR 700 crore, fully internally funded: Piping system CapEx alone will run at INR 300 crore-plus annually for the next two years, and overall company CapEx from next year onward is expected to be not less than INR 500 crore.
• Industrial valves and conduit electrical systems are coming: Both will be in operation by November this year, adding new product categories to the portfolio.

Guidance & Commitments

Key Metrics