Supreme Industries Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Volume recovery, margin hit from inventory losses: Plastic piping volumes surged 82% YoY in Q3, but falling PVC prices through November caused inventory losses that depressed piping margins to 13.49%, roughly 2% below normal.
• PVC price cycle is turning favorable: PVC resin prices dropped 45% from April to November, then recovered ₹15/kg since December, triggering dealer restocking and setting up inventory gains for Q4.
• FY23 volume growth guided to 25%+: Management expects piping volume growth in excess of 35% for the full year, with overall company volume growth anticipated around 25%, supported by strong demand from agriculture, housing, and infrastructure.
• Capacity expansion underway with three new plants: Greenfield plants at Erode, Cuttack, and Guwahati have commenced production, adding 90,000 tons of capacity, with plastic piping capacity reaching 610,000 MT by year-end FY23.
• What to watch next quarter: Whether Q4 delivers the promised inventory gains and 10%+ piping volume growth, the trajectory of PVC prices as China reopens post-Lunar New Year, and any update on the new plant location to be disclosed in April.

Plastic Piping: Volume Surge Meets Inventory Drag

• 82% YoY volume growth in Q3 came off a low base because of massive de-stocking in Q3 FY22; 9M volume growth of 48% was described as very encouraging.
• Inventory losses compressed margins: PVC resin prices fell ₹66/kg (45%) from April to November, so the first two months of Q3 incurred losses; December saw some profit recovery as PVC prices began rising and dealers restocked. Piping margin landed at 13.49%, roughly 2% below normal.
• Dealer restocking began in December, with the full season starting in February; management says demand remains very strong and dealers may increase inventory only to service customers.
• Agricultural demand was quite robust in December, and product selling prices are 20% lower than last January, making pipes very affordable to farmers.
• CPVC volume grew 32% in the first 9 months of FY23, driven by plumbing and housing requirements; management sees no demand downside and expects CPVC supply constraints to ease this year.
• Market share gain implied: Company grew 30-35% versus country growth of 21%, attributed to introduction of several new product varieties.

Taparia: "Q3 in first two months we lost money only, in the last month we recovered money. In Q3 our plastic piping margin was 13.49%. we believe it was definitely 2% Lower."

PVC Price Cycle & Margin Outlook

• Unprecedented price swing: PVC resin rose from \$700 to \$2,100 (Apr/May 2020 to Oct 2021), then collapsed to \$650 as plants ran below capacity; management calls this a normal trade cycle.
• Prices now recovering: PVC dropped ₹66/kg from April to November, then recovered ₹15/kg since December; PP, LDPE, and PVC all witnessed an upward trend after reaching bottom.
• Rangebound expectation: Management expects PVC prices to stay rangebound, moving \$40-50 up or down, with limited upside given the global economy and limited downside due to cost support.
• Inventory gains expected in Q4 from import consignments that are on the way; management stated "not only behind we will get some inventory gain."
• Normalized margin target of 15-16% if PVC prices remain where they are and raw materials do not fluctuate too much; small polymer price volatility of ₹3-4/kg does not make much difference.
• China reopening post-Lunar New Year on 30th of the month may harden polymer prices as demand opens up; PVC prices may go up a little, not much. India imports 60% of its PVC requirement, and China is a welcome supplier.

Taparia: "We believe the prices will be rangebound, 40/50 Dollars up and minus we cannot say but we don't see much upside also with the whole economy not in great shape and not but downside also due to cost post."

Capacity Expansion & New Plants

• Three greenfield plants commissioned: Erode (Tamil Nadu) began commercial production in December 2022; Cuttack (Odisha) went into production in January 2023 with some delay; Guwahati (Assam) has also gone into commercial production.
• 90,000 tons of capacity being added through these greenfield plants plus brownfield expansions, with the maximum increase in the plastic piping division; piping capacity reaching 610,000 MT by year-end FY23.
• New capacity utilization expected to reach 60%+ in 12-18 months, with 65% as the normal achievable level; utilization cannot exceed ~70% due to the number of SKUs and product line changes.
• Composite LPG Cylinder line doubling capacity is completed and under trial runs; existing line runs at full capacity primarily for Indian Oil Corporation.
• A new plant in a new location will be conveyed in April.
• Capex plan of ~₹700 Crores for FY23 (including ₹280 Crores carry forward) is progressing with a little delay; some commitments will spill into next year; entire capex funded from internal accruals.

Other Divisions: Mixed Performance, Selective Optimism

• Cross laminated film competition: Rivals offered look-alike products of inferior quality that do not perform compared to Supreme's product; they are now selling in kilograms because the market recognized the quality gap.
• Performance Packaging Film division is working on special structure films and entering new export territories with better realization and profitability; expansion of 12,000-ton capacity under evaluation, no decision yet.
• New product launches: Cable shield conduit system launched in January 2023; Olefins fittings and PEX Piping System introduced with encouraging market response; industrial valve and cable launched this month only.

Taparia: "There are so many look alike products, there in the market, selling at 30-40% lower than our price, with no quality but our sales will come back now."

Demand Environment & Growth Drivers

• Demand coming from all three segments: agriculture, housing, and infrastructure; rural economy demand was quite robust in December.
• Country entered a growth path this year after continuous degrowth in FY20-21 and FY21-22.
• Affordability tailwind: Product selling prices are 20% lower than last January, making pipes very affordable to farmers.
• Geographic expansion opportunity: Out of 6,000 talukas in the country, there are many where Supreme's product is not found; need to expand geographically to make products more accessible.
• Distributor network stood at 1,319 pipe distributors as of December 2022 end; no limit kept on expansion, with many more products to be added through the network (plastic piping, furniture, tarpaulin, material handling).
• 15% volume growth expected over the next 5 years, across infrastructure, agricultural, and housing segments.

Taparia: "There are 6,000 talukas in the country. Every state there are many talukas where our product is not found."

Guidance & Commitments

Key Metrics