Supreme Industries Ltd Q2 FY2025 Concall Summary

Key Takeaways

• Volume guidance slashed, but H2 rebound promised: Full-year pipe volume growth revised from 25% to 16-18% after a weak Q2, with management projecting over 40% piping volume growth in H2 on normalized channel inventory and peak agri season.
• PVC price crash triggered a destocking shock: Resin prices fell 17.5% in Jul-Aug, causing distributors to halt purchases and driving a 20% volume drop in July alone; the trade channel has since restocked and September grew over 15%.
• Inventory loss masked underlying margin resilience: A ~INR35-40 cr inventory hit dragged operating profit down 9%, but value-added product mix sustained margins at a level management calls "respectable," and full-year EBITDA guidance is held at 14.5-15.25%.
• New adjacency bets are moving from trial to commercial: Composite LPG cylinders, gas piping systems, and a captive window manufacturing plant all enter the market this quarter or next fiscal year, diversifying beyond the core pipe franchise.
• What to watch next quarter: Whether the promised 40%+ H2 piping volume materializes, the pace of inventory normalization toward March, and any disruption from the BIS certification deadline on 24 December.

The PVC Shock & Demand Disruption

• A textbook destocking cycle: PVC resin prices rose 19% in Apr-Jun, then fell 17.5% in Jul-Aug, leaving distributors holding high-cost inventory. The entire trade channel stopped buying to avoid losses, compressing Supreme's July volumes 20% YoY.
• Monsoon extended the pain: The rainy season stretched through end-September, suppressing agricultural pipe demand that normally revives in the second half of September; management called September a "washout" for agri demand.
• Recovery took hold by September: August volumes grew a marginal 3%, but September jumped to over 15% growth as channel inventory normalized and the monsoon withdrew.
• Channel inventory now normal: Management stated inventory "must have been now normal" as of October, with no reason for further de-stocking since the price drop occurred in mid-August.
• Government spending tailwind ahead: First-half government infra spending was low; the central government is now "in full position" and H2 spending began in October, which management says means demand is "definitely going to be better."

Taparia: "In July was a very bad month. In July, our business has gone down from 34,700 tonne to 27,700 tonne, it dropped by 20% in month of July."

Volume Guidance & H2 Bridge

• Full-year pipe volume growth cut to 16-18% from the original 25% target, reflecting the Q2 shortfall; the implied H2 ask is over 40% piping volume growth to hit the revised number.
• The H2 case rests on agri and construction: Reservoirs are 88% full across 155 major dams, giving farmers both water and incentive to invest in pipeline during the November-to-May peak agri season; housing construction continued steadily through the quarter, supporting CPVC plumbing demand.
• Festival season provides a near-term catalyst: Navaratri, Dussehra and Diwali fall in the period management identifies as the start of its busiest months, with November onwards being peak season.
• Country-level pipe demand seen at 10-12% over the next two years, with organized players gaining 1-2% market share annually as the sector formalizes.
• FY26 volume guidance of 12-15% will be discussed in April; management is not committing to a number now.

Margin & Inventory Dynamics

• Inventory loss obscured operating performance: The ~INR35-40 cr inventory hit from falling PVC prices drove a 9% decline in consolidated operating profit and 15% drop in PAT, but value-added product sales in August and September cushioned margins.
• Gross margin optics are distorted: Reported gross margins appeared to rise ~100 bps despite the inventory loss because overheads are absorbed into finished goods valuation when inventory builds up, making COGS an unreliable metric this quarter.
• Full-year EBITDA margin guided to 14.5-15.25%: Management is "quite comfortable" with this range but prefers to stay "on the safe side."
• Segment-level margin bands stated: Piping segment sustainable margin is 14-16%; packaging segment is 16-18%.
• Inventory normalization path: Operating cash flow shows a large inventory buildup in both raw material and finished goods; management expects inventory to normalize "properly" by end of March.

PVC Price Outlook & Supply Risks

• Prices have stabilized at lower levels: Management sees "very less chance of prices to go down until crude price comes down or economy goes very bad," and does not anticipate further declines.
• China stimulus and US rate cuts inform the view that "worst maybe behind," though management acknowledges this is a "big question hard to reply."
• India remains PVC-deficient: The country will need to import a minimum of 0.2 cr tonnes and will stay short up to 2030, providing a structural floor under domestic prices.
• BIS certification is a binary risk: Current certification is valid only until 24 December; very few companies have qualified. If not extended, management warns PVC prices could double and capacity may be forced to close, though it does "not anticipate such scenario."
• Antidumping duty on CPVC has been imposed on Chinese and some South Korean suppliers, but India sources CPVC from the US, Europe, Japan and Thailand, which are unaffected.

Taparia: "If they don't extend it, then there's going to be huge crisis in the country in January, February. There is no PVC. PVC prices will go up 100% more. And we have to close down the capacity also. But we don't anticipate such scenario."

New Adjacencies: From Trials to Commercial Reality

• Composite LPG cylinders: Supplies against the Indian Oil Corporation LOI are proceeding regularly; management expects additional orders beyond the current commitment.
• Gas piping system: Supreme is now offering gas pipe from its Gadegaon (Jalgaon) plant with monthly capacity of 3,000 tons, supplying both pipe and fittings; management anticipates receiving an order "in this quarter" (Q3 FY25).
• Window manufacturing: Equipment orders are placed and civil construction is awarded at Kanpur Dehat, UP, for a 5,000-ton capacity plant producing ~3,20,000 custom windows per year; Supreme will manufacture and install the entire window system, initially serving UP, Uttarakhand and NCR, with first supply expected in H1 FY26.
• Cross Plastic Film: Trials have commenced for a newly developed product with good export potential; commercial launch is expected by December 2024.
• Furniture expansion: 10 new chair and cabinet models were introduced in H1 FY25, and showrooms grew from 308 to 328.

Segment & Capacity Round-Up

• Capacity expansion on track: Total piping system capacity will reach 8,35,000 tonnes per annum by end-March 2025, with expansions at Jadcherla, Malanpur and Kharagpur coming online in Q3/Q4.
• New greenfield units: Malanpur (industrial and ball valves) commenced commercial production on 1 September 2024; land acquired at Patna (Bihar) and Kathua (J&K) for plastic product complexes, with execution starting next financial year.
• Capex fully internally funded: Total cash outflow for the current year is not expected to exceed INR1,000 cr, funded entirely from internal accruals; cash surplus declined from INR1,178 cr to INR674 cr as spending ramped.

Taparia: "In a house, the functional area is kitchen and bathroom, you cannot do anything without pipeline. Ours is essential product."

Guidance & Commitments

Key Metrics