Expansion Into High-Margin Products Mass ABS And XPS To Improve Future Margins

Key Takeaways

• Strategic expansions and high-margin product diversification are expected to enhance revenue streams and improve margins without increasing debt.
  
• Stabilization of raw material prices and internal efficiencies could lead to improved operating margins and export profitability.
  
• Reliance on imports, market competition, and logistical challenges threaten profitability, while project delays may impact future revenue and investor confidence.

Catalysts

Manufactures and sells polystyrene, expandable polystyrene, masterbatches and compounds of styrenics, other polymers, and extruded polystyrene insulation board in India and internationally.

• The implementation of the Mass ABS project with a capacity of 70,000 tonnes per annum is progressing well and is expected to be mechanically completed by March 2025, with commissioning scheduled for Q1 FY '26. This is expected to boost future revenue and improve margins due to better operational efficiencies of the Mass ABS process compared to emulsion ABS.
  
• The company’s debt-free status and substantial investable surplus of ₹680 crores will enable it to invest in capital programs and expansion projects, such as the new Haryana facility, using internal accruals. This prudent financial management could support earnings growth by funding strategic expansions without leveraging debt.
  
• The upcoming expansion in Haryana, including new downstream units and diversification into high-margin products like Mass ABS and extruded polystyrene (XPS), is expected to enhance revenue streams and improve margins. The expanded production capacity and entry into more value-added product lines would likely contribute positively to EPS.
  
• The stabilization of raw material prices, particularly styrene monomer, after a declining trend, is expected to alleviate margin pressures. This stabilization, coupled with the company’s cost control measures and production efficiency improvements, might lead to better gross and operating margins in the future.
  
• International versus domestic market dynamics could favor Supreme Petrochem, especially if global freights stabilize at lower rates, improving export profitability. Additionally, with internal efficiencies and an increasing focus on higher-margin products, net margins are expected to benefit.

Supreme Petrochem Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Supreme Petrochem's revenue will grow by 20.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.9% today to 8.1% in 3 years time.
• Analysts expect earnings to reach ₹8.5 billion (and earnings per share of ₹45.18) by about February 2028, up from ₹4.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.1x on those 2028 earnings, down from 30.9x today. This future PE is lower than the current PE for the IN Chemicals industry at 28.2x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.11%, as per the Simply Wall St company report.

Supreme Petrochem Future Earnings Per Share Growth

Risks

• The reliance on imported raw materials, such as styrene monomer, exposes the company to currency fluctuations and higher import costs, impacting net margins and profitability.
  
• Declining styrene prices have led to pressure on margins due to the timing mismatch between purchasing and selling, which could affect EBITDA and earnings growth adversely.
  
• High competition in the EPS market due to numerous local players and lack of government mandates for insulation usage could limit revenue growth potential.
  
• Export business faces challenges due to exorbitant freight rates, reducing the competitiveness and profitability of international sales.
  
• The lack of clear timelines and potential delays in scaling up new projects, like the Haryana plant and Phase 2 Mass ABS, could affect future revenue projections and investor confidence.

Valuation

• The analysts have a consensus price target of ₹750.5 for Supreme Petrochem based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹105.3 billion, earnings will come to ₹8.5 billion, and it would be trading on a PE ratio of 24.1x, assuming you use a discount rate of 13.1%.
  
• Given the current share price of ₹682.2, the analyst price target of ₹750.5 is 9.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.