Strong rural demand cushions volume weakness for Supreme Industries

Expanding distribution reach, value added products to help revenues, margins

The stock of India’s largest plastic pipes company, Supreme Industries, is up 18 per cent since its lows in August on hopes that demand from the rural segment, higher realisations, and market share gains will support its revenue growth. 

Weak volume growth because of falling demand from the construction and plumbing segments had dented the financial performance of pipe companies in the June quarter; Supreme Industries reported a 27 per cent dip in revenues on the back of a 19 per cent drop in volumes. 

While the company operates in four segments -- including packaging, consumer, and industrial -- plastic piping is the mainstay, accounting for 63 per cent of revenues and an even higher share of the operating profit. Demand in this segment has been resilient, led by the rural market. Revenues and volume in this segment have declined only 1.3 per cent from May to August. 

The company has also gained market share as demand is shifting from the unorganised to the organised space; moreover, weaker players are losing share as the rise in the price of polyvinyl chloride by 20 per cent is causing working capital stress.

Analysts at ICICI Securities believe Supreme Industries, one of the largest plastic processors in India, is likely to witness a decent recovery in realisations in segments like cross-laminated films, protective packaging, performance films, and material handling products. This, coupled with improving volumes and a higher share of value-added products, is expected to boost margins.

The company has indicated that aggregate volumes over the FY20-25 will grow at 15 per cent. Analysts at Axis Capital believe 15 per cent volume growth is achievable, given share gains from transition to organised players and focus on expanding the product basket. New products and deepening distribution network in areas where the company is not present should enable growth, they add.  

While the outlook, especially for industrial and consumer products, should improve gradually and pick up pace in FY22, the near term is expected to be weak. With the stock gaining 66 per cent in the last six months and gains from growth likely to be back-ended, investors are better off awaiting consistent volume growth indicators before considering the stock.