New Plants And Product Launches Will Expand Capacity In Plastic Piping Systems

Key Takeaways

• Expansion in production capacity and new product introductions are set to boost revenue and margin growth, increasing market reach and demand fulfillment.
  
• Strategic CapEx investment through internal accruals ensures debt-free growth, directly enhancing profitability and preserving net margins.
  
• Declining profits, cash reserves, and adverse PVC trends challenge Supreme Industries’ revenue growth, liquidity, and margin management amid uncertain market demand and infrastructure spending.

Catalysts

Engages in the manufacture and sale of plastic products in India.

• The company has several brownfield expansion projects underway and expects its piping system's annual capacity to increase from 820,000 tonnes to 900,000 tonnes by the end of fiscal year 2024-25. This enhanced capacity could drive future revenue growth as it allows the company to meet increased demand.
  
• The introduction of new products, such as PERT Piping System and PE single wall corrugated pipe, and the expansion of SKU from 421 to 629 are expected to contribute to revenue and margin growth as these products gain market traction.
  
• The establishment of three new greenfield plants in Jammu, Bihar, and Madhya Pradesh is set to take place in the coming financial year, potentially expanding the company's reach and increasing its market share, thus boosting future revenues.
  
• The company expects a 20% volume growth in its Cross Laminated Film business due to improved capacity utilization and participation in institutional businesses, which is likely to enhance revenue and profitability.
  
• Supreme Industries plans significant CapEx using internal accruals, ensuring a debt-free expansion, which can preserve net margins and allow the benefits of increased production capacity and new product introductions to flow directly to earnings growth.

Supreme Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Supreme Industries's revenue will grow by 15.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.8% today to 11.0% in 3 years time.
• Analysts expect earnings to reach ₹17.7 billion (and earnings per share of ₹139.75) by about January 2028, up from ₹10.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹12.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 49.0x on those 2028 earnings, up from 48.3x today. This future PE is greater than the current PE for the IN Chemicals industry at 30.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.09%, as per the Simply Wall St company report.

Supreme Industries Future Earnings Per Share Growth

Risks

• The decline in consolidated operating profit and profit after tax by 17% and 27% respectively in Q3 compared to the previous year indicates pressure on margins and profitability, affecting overall earnings.
  
• The company faces challenges in the Plastic Piping System segment due to adverse PVC resin price scenarios and lower than expected infrastructure spending, which could impact revenue growth.
  
• Continued decrease in PVC prices and uncertain PVC resin price trends pose risks to the company’s ability to forecast and achieve volume growth targets, impacting revenue and profit margins.
  
• Rapid depletion of cash reserves from ₹1,180 crores to ₹290 crores raises concerns about liquidity management, potentially affecting funding for future growth initiatives.
  
• Heavy reliance on inventory without significant demand clarity may lead to further inventory write-downs if market demand does not materialize as expected, impacting revenue and profit margins.

Valuation

• The analysts have a consensus price target of ₹4763.67 for Supreme Industries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹6458.0, and the most bearish reporting a price target of just ₹3233.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹161.8 billion, earnings will come to ₹17.7 billion, and it would be trading on a PE ratio of 49.0x, assuming you use a discount rate of 13.1%.
  
• Given the current share price of ₹3883.85, the analyst's price target of ₹4763.67 is 18.5% 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.