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.
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