Supreme Industries Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Volume explodes, mix dilutes margins: Piping volumes surged 47% YoY, but the growth came disproportionately from lower-margin agri and infra segments, dragging EBIT/kg from ₹19 to ₹16.6.
• Inventory loss masks underlying strength: A ~₹40 crore polymer inventory loss (~₹3/kg) hit all segments; normalizing for this, piping EBIT/kg would have been ~₹24, suggesting the core business is healthier than reported margins imply.
• Guidance split: volumes up, revenue down: Volume growth guidance was raised to 20%+ (from 15%), but revenue guidance was cut to ₹11,000 crore (from ~₹11,500 crore) because polymer prices have fallen, a deflationary pass-through that does not reflect demand weakness.
• Counterfeit CPVC is a real, contained problem: CPVC volumes fell 12% as counterfeit producers in North and East India took share; legal actions have succeeded but business was lost during the process, and management is confident of recovery.
• What to watch next quarter: Whether the 48% QoQ volume surge in piping holds as agri seasonality fades, whether PVC price firming reverses the inventory loss cycle, and whether CPVC volumes begin to recover post legal enforcement.

Piping: The Volume-Mix Tradeoff

• Agri and infra drove the quarter: 47% YoY volume growth in pipes was powered by agriculture and government infrastructure programs, particularly Nal Se Jal, which started supplying properly only this year. The company was prepared with raw material and capacity to capture this demand.
• Mix shift punished margins: Agri and infra pipes are lower value-added products, so while volumes surged, realization per kg fell. Last year Q1 had a richer mix because those volumes were absent, making the YoY EBIT/kg decline look steeper than a normalized comparison would suggest.
• Nal Se Jal is material but hard to isolate: Management estimates ~₹100 crore revenue contribution in Q1, spanning pipe, electrofusion fittings, and compression molded fittings, but declined to break out exact volumes because multiple products are bundled in supply.
• East India is a bright spot: Three plants in Guwahati, Cuttack, and Kharagpur are driving growth, and the company claims to be the "very dominant player in Eastern India."
• Channel inventory is lean: Inventory in the channel is normal, possibly on the lower side as PVC prices have started moving up, which could pull forward restocking demand.

Somani: "This quarter, there was about inventory losses, which about Rs. 3 a Kg. So, Rs. 21 becomes Rs. 24 in your balance if you normalize conditions and with a more volume of agri and infra, the relation per Kg was lower in the first quarter which is definitely going to increase as we move ahead."

Inventory Loss & Polymer Price Cycle

• A ~₹40 crore headwind across all segments: Polymer prices fell ₹5-₹8 per kg during the quarter, with polypropylene dropping ₹13/kg. This created an inventory loss of ~₹3/kg across overall volumes, compressing margins in piping, packaging, and the Supreme Pet Chem associate.
• The cycle is turning: Management stated no further inventory loss is expected, and some gains may come as PVC prices have started firming up. International PVC prices have risen \$50-\$80 per ton, and the trend is described as "slightly bullish."
• Q4 had a one-time tailwind: Sequential margin comparison versus Q4 FY23 is distorted because Q4 benefited from annual supplier incentive schemes (~50 paisa/kg) that crystallize only in the last quarter, making the QoQ drop appear worse than underlying trends.
• Supreme Pet Chem took a hit: The associate's contribution dropped drastically in Q1 due to the same inventory loss, but that loss is now behind, and demand looks good for the remaining nine months.

Taparia: "Volatility will remain always in the polymers, but not volatile like 2021. Always 50,000 plus minus continues, but presentably, the trend is little bit bullish and the price of PVC internationally has gone up between 50 to 80 dollar per ton."

CPVC: Counterfeit Pressure & Legal Response

• 12% volume decline, confined to CPVC: While overall PVC piping grew 48% by volume, CPVC degrowth was concentrated in North and East Indian markets where counterfeit producers have taken share. The issue also affects competitors Ashirvad and Astral.
• Legal actions succeeded, but business was interrupted: The company filed cases, strengthened its legal department, and won, but during the enforcement process, business was lost. Management is confident it will recover the lost business now that legal actions are complete.
• CPVC prices are declining: Management noted CPVC prices have started going down and will be passed on to the channel when price drops occur, which could support a volume recovery.

New Initiatives: PVC Windows, Piping Systems, Valves

• PVC windows and doors is the big bet: A project at a newly acquired 32-acre site near Kanpur (U.P.) will produce PVC windows and doors with initial capacity of 10,000 tons per annum. At full capacity, this could add ~₹350 crore annual turnover. The company intends to sell both window profiles and complete windows, and will later set up window-making facilities at multiple manufacturing sites.
• Management is targeting 17% margins in the PVC window and door business, but declined to provide a timeline for when the ₹350 crore revenue will materialize, calling it "too early to reply."
• Four new piping systems being added: Polypropylene Silent Pipe system, PP industrial piping, polythene gas piping, and aluminum PP pipe. The aluminum PP pipe is already in the market; benefits from the other three will accrue from next year, with investment made this year.
• Greenfield valve unit at Malanpur: Project execution has commenced for a dedicated unit to manufacture industrial and ball valves, expanding the industrial portfolio.
• Cross Plastic Film plant: A newly developed 2,500 MT per annum capacity plant is progressing well and should be in operation by end of FY24.

Taparia: "This is a very big opportunity. In China, the market for plastic window and door is 0.45 crore ton. India is around 100,000 ton. Population India, China, more or less same. Then the opportunity you can calculate."

Industrial & Packaging: Steady, with Pockets of Improvement

• Industrial margins held up YoY: Industrial components posted 10.14% EBIT margin vs 10.08% last year; material handling improved to 10.79% vs 10.3%. The passenger vehicle segment in auto continues its bullish trend, and the impending festive season should help the appliance segment gather steam.
• Packaging margins improved despite lower realization: Realization per kg fell 6% YoY, but EBIT per kg increased 6% YoY because protective packaging developed new customized solutions that improved both realization and margins. The division continues to focus on new applications, value engineering, and export growth.
• Composite LPG cylinders progressing steadily: The division continues to supply Indian Oil Corporation against its LOI as per schedule and is pursuing other OMCs. Management expects to sell ~70% of capacity this year (~900,000 pieces average), though customer addition is described as a lengthy process due to the product's nature.
• Furniture business expected to grow well: Softening PP prices and introduction of several premium products support growth, with showrooms being added regularly.

Demand Environment & Housing

• Housing demand never weakened: Management was emphatic that housing demand remains strong and will stay strong for the remaining eight months of the year. The Q1 volume surge came additionally from agriculture and infrastructure, not at the expense of housing.
• Infrastructure demand has legs: Government push to infrastructure, particularly through Nal Se Jal, is expected to sustain good growth for the remainder of the year.
• Market share is increasing: The 47% YoY volume growth in pipes was partly driven by new locations contributing, indicating the company is gaining share as it expands its manufacturing footprint.

Taparia: "The housing demand is growing quite strong. When we started the first quarter, this was additional demand came from agriculture, infrastructure. Housing demand has never weakened. It remains strong and it's going to remain strong for the remaining eight months of the year." [15–16]

Guidance & Commitments

Key Metrics