Supreme Industries Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Inventory losses crushed earnings: Operating profit fell 53% YoY as a ₹55/kg (38%) PVC price crash forced inventory write-downs estimated at 8–10% of quarterly sales.
• Volume engine undamaged: Plastic piping volume grew 9% YoY despite the price chaos, and management guides to 25%+ piping volume growth for the full year on affordable prices and strong agri tailwinds.
• The price crash is a demand catalyst: PVC resin has fallen from ₹140 to ₹79/kg, making pipes dramatically more affordable just as reservoir levels and crop conditions set up what management calls a "super" agri season.
• Margin recovery is the FY23 bet: Full-year EBITDA margin is guided to 12–12.5%, implying a sharp H2 rebound once inventory losses stop and volume leverage kicks in.
• What to watch next quarter: Whether channel restocking actually begins post-festivals, the pace of new capacity ramp-up (65% utilization targeted within one year), and any further PVC price decline beyond the ₹70/kg floor management sees.

The PVC Price Shock: What Happened and Why

• The raw material collapse: PVC resin prices fell ₹55/kg (38%) from ₹140 in April to ₹79 by end-September, with the sharpest decline concentrated from mid-June onward. This was the dominant driver of Q2's earnings destruction.
• Global root cause: The price crash was driven by two US-specific factors: a sharp drop in housing construction demand (80% of US PVC goes into pipes, profiles, and cables) as the Fed raised rates, and a surge in caustic soda prices that let US producers obtain chlorine at negative cost, making PVC at very low cost and dumping excess supply into world markets.
• Inventory loss mechanics: Management estimates inventory losses at 8–10% of Q2 sales (on a base of roughly ₹2,000 Cr), with the majority hitting Q2 because the gap between cost and selling price widened sufficiently to force inventory markdowns to market price. H1 total inventory loss was ₹200–250 Cr.
• The pass-through was immediate: Management stated prices were dropped immediately and the entire benefit of the raw material decline was passed to the market. Realization fell less than resin prices only because plastic pipe systems include polyethylene, LLDPE, polypropylene, and CPVC, not just PVC.
• PVC price floor in sight: After a ₹61/kg decline from peak, management sees limited room for further drops: worst case another ₹9/kg to ₹70 in November or mid-December, but "not much room now to drop."

Taparia: "After INR 61 drop, I can't say it's cannot become weak it has already gone from INR 140 to INR 79... The worst case earlier it was INR 70, so worst case it may drop by further INR 9 also in month of November, mid-December, not much room now to drop."

Volume Growth: The Counter-Narrative

• Plastic piping volume held up: Q2 volume grew 9% YoY despite the severe PVC price decline, with demand coming mainly from housing and infrastructure rather than agriculture, which is seasonally weak in July–September.
• Full-year piping guidance raised aggressively: Management expects to sell ~3,40,000 tonnes of plastic piping systems in FY23, up from 2,73,000 tonnes last year, implying 25%+ volume growth. The steep fall in PVC prices makes the system very affordable and is expected to drive large volume growth in H2.
• Company-wide volume target: Total company volume is guided to ~470,000 tonnes for FY23, implying ~20% growth over FY22's 394,000 tonnes. H1 delivered 220,725 tonnes, so H2 needs ~250,000 tonnes.
• Industrial products momentum: Volume grew 19% YoY and value grew 32% YoY, with business conditions improving and demand expected to further strengthen in home appliances and white goods. Composite LPG cylinders are running at full capacity, primarily for Indian Oil Corporation.
• Packaging mixed but growing: Segment volume grew 3% YoY and value grew 18% YoY, helped by improved product mix and export growth in Performance Packaging Film to the Middle East, Africa, and Europe. Cross Laminated Film expects 10% volume growth for the full year with improved profitability.
• Consumer products the weak spot: Volume degrew 8% YoY as furniture demand weakened in the July–September quarter and falling PP prices triggered distributor destocking. Management expects the PP price correction to ultimately improve full-year volume and profit as affordability improves.

Taparia: "Agri demand is going to super this year."

Agri and Housing: The Demand Setup for H2

• Agri demand drivers aligned: Management cites three reasons for an exceptionally strong agri season: most state dams are full, pipe prices have become very affordable after the PVC crash, and crop conditions are extremely good. April–May farmer demand was already robust versus last year when COVID's second wave hit rural areas.
• Housing demand broad-based: Both rural and urban housing demand is expected to be robust, with management noting simply "they all required house." Construction activity is a key pipe demand driver alongside agriculture.
• Affordability unlocks lower segments: Falling polymer prices make products more accessible to lower-income segments, and management expects consumers to prefer quality branded products when prices are lower. Furniture demand prospects are seen improving for the same reason.
• Channel restocking still pending: Festivals (Dussehra, Diwali, Chhath) have now concluded, and management expects inventory building to begin "in a business sense," with visibility on channel restocking likely by end-November or January.

Margins: The Damage and the Recovery Path

• Q2 margin collapse: Operating profit fell 53% YoY and H1 fell 20% YoY, entirely due to inventory losses from sharp polymer price declines, primarily PVC but also partly LDPE and PP.
• Packaging margins at multiyear low: Margins in the packaging segment hit a multiyear low in Q2 because of substantial price erosion in LDPE and a component of inventory loss. Going forward, management expects packaging margins of 15–17%, down from the prior 18–20% range, because market compression is increasing and past price erosion cannot be fully restored.
• Full-year EBITDA guided to 12–12.5%: This implies a sharp H2 recovery from the inventory-loss-hit H1, driven by volume leverage and the cessation of write-downs. Revenue for FY23 is guided to ~₹9,000 Cr.
• Steady-state margin target deferred: When asked about the earlier 15–15.5% steady-state EBITDA margin target mentioned in April, management responded "first let us work over this year," declining to commit to a timeline for FY24.
• Other costs reflect volume and mix: QoQ increases in other expenses (₹16 Cr, driven by freight on door-delivery orders and advertising) and power & fuel (₹9 Cr, driven by 14% higher production volume) are operational rather than structural concerns.

Somani: "So it should be between 15% to 17%, which ultimately the market compression is increasing. So whatever price erosion has taken place in the past, you cannot restore everything back to the normal level."

Capacity Expansion and New Initiatives

• Three greenfield plants underway: New plants at Cuttack (expected by end-December), Erode (end-November), and a third location started from July, all expected fully operational by December 2022. Total FY23 capacity addition of 80,000 tonnes comes through these greenfield projects plus brownfield expansions, with sales benefit of 30,000 tonnes expected this year.
• Utilization target: Management expects to achieve 65% utilization on new capacities, with efforts to reach that level within one year, and indicated it could be possible.
• Composite LPG cylinder capacity doubling: Work progressing well, likely operational by December 2022. Existing capacity is fully utilized, primarily for Indian Oil Corporation, and the company has been unable to participate in orders from other customers due to the constraint.
• New piping systems launched: Olefins fittings and PEX Piping System introduced in the Plastic Piping division and well received. Further new systems to be launched during Q3 FY23. These are value-added products that support the mix shift.
• Cross Laminated Film exports: Made breakthroughs in three new export markets and introduced many new made-up products. Performance improved with increased penetration of value-added fabricated products.
• Bath division gaining traction: Business picking up very well with 230 varieties of bath fitting range, with more varieties being added. Sales figures were not disclosed.
• Biofloc product dropped: Only 11 pieces were sold during soft launch; management felt the product was not adding value to the customer.
• Capex: FY23 plan of ~₹700 Cr (including ₹280 Cr carry forward) progressing with a little delay; H2 cash outflow expected at ~₹250 Cr; entirely funded from internal accruals.

Competitive Dynamics and Market Share

• Copy products under pressure: Competitors who previously sold on a meter or feet basis are now selling on a kilo basis at ₹140–150 per kilo, which management interprets as a sign they are "exposed" and under financial stress.
• Market share gains expected: Management anticipates market share increase this year, noting the company expects ~13% volume growth versus 2019–20, which is "far better than the growth in the country."
• Value-added mix growing: The share of value-added products is expected to grow in both percentage and absolute terms, supported by new launches like PEX and olefin systems, as well as fabricated Cross Laminated Film products.
• US PVC dumping dynamics: US producers, benefiting from negative-cost chlorine due to high caustic soda prices, have become the world's lowest-cost PVC suppliers and are selling excess production into global markets, driving prices down far more than expected.

Taparia: "So today, the lowest cost supplier is USA and because of them only the price has dropped much more than what was expected earlier."

Guidance & Commitments

Key Metrics