Supreme Inds - Lower raw material prices to benefit: CRISIL

4 February, 2015 7:23 AM

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The Supreme Industries' (Supreme's) Q2FY15 (June-ending) consolidated earnings were below CRISIL Research's expectations. Core business revenues (plastics business) grew 9% y-o-y to Rs 10.2 bn led by 10% y-o-y volume growth. The company reported Rs 460 mn from sales of commercial real estate, up 19.5% y-o-y. As a result, overall revenues increased 9.4% y-o-y to Rs 10.7 bn. Core business EBITDA margin declined by ~330 bps y-o-y to 9.9% on account of inventory loss due to a sharp fall in polymer prices during the quarter. Adjusted PAT declined 44% y-o-y to Rs 353 mn. While the company has suffered inventory loss in the past two quarters due to decline in raw material prices, we expect it to be beneficial for the company in the medium-long term – lower raw materia l prices are likely to aid volume growth as well as EBITDA margin expansion. Hence, we remain confident of Supreme's long-term prospects and maintain the fundamental grade of 5/5.

During the quarter, raw material prices across products declined 23-32% which resulted in an inventory loss of ~Rs 500 mn. Accordingly, the core business EBITDA margin declined by ~330 bps y-o-y. With the stabilisation in crude oil prices, raw material prices are also expected to stabilise. We forecast core business EBITDA margin of 14.3% in H2FY15 (15.1% in H2FY14), translating into 12.7% for FY15. Further, we believe the company is unlikely to pass on the full decline in raw material prices which would aid EBITDA margin expansion – we forecast core business EBITDA margin to increase to 14.5% in FY16.

We have lowered FY15 and FY16 earnings estimates by 21% and 10%, respectively, to factor in (a) lower-than-expected earnings in Q2FY15 and (b) decline in realisations due to fall in raw material prices. We have rolled forward our estimates by one year to FY17 and have lowered the cost of equity by 50 bps. We maintain the discounted cash flow (DCF)- based fair value of Rs 620 per share.

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report. The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

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Source: moneycontrol.com

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