Does this multibagger stock have more steam left?

• The stock has given 112% returns in one year, and has risen by 57% in the last three months alone.
• It holds a dominant position in the plastic piping industry, which puts it in a sweet spot to gain from government initiatives, analysts say.
• A downward movement in PVC prices can dent in profitability going ahead, analysts worry.
• The stock has not only run up but has also breached the target prices set by brokerages.

Mumbai-based Supreme Industries, which makes plastic products, has turned a multibagger in the last one year. The recent sharp upswing in its shares was aided by its inclusion into the MSCI Index in the August review.

That’s led to fresh buying in the plastic pipe, packaging, industrial, and consumer product maker. In the last one year the stock has given 112% returns — and it had risen sharply in the last three months by 57%.

The run up in the stock also coincides with positive triggers like government spending on infrastructure like irrigation; activity in infrastructure, housing and more.

“Continued domination in the plastic piping industry puts Supreme Industries in a sweet spot to gain from the favourable government initiatives,” said a report by Bonanza. The research firm also believes it can deliver healthy revenue, EBITDA, net profit at a compounded annual growth rate (CAGR) of over 20% in FY23-26,” SAYS WHICH BROKERAGE??

Can it replicate its performance?

The company has benefited from high PVC prices over the last few years, but that those gains are unlikely to sustain in future. Realisation/kg for the company has shot up abnormally from ₹141 in FY19 to ₹197 in FY22. According to Keynote Capital, material price cooling has already taken place, and it looks like some softening will be seen in coming quarters. This fall in PVC prices will result in inventory losses and dent profitability.

The brokerage also adds that breakthrough efforts are needed to increase the contribution of value- added products. The company has put in considerable efforts since FY12 to increase the share of value-added products (VAP) to its sales. From FY17 onwards, the contribution of VAP to total sales has stagnated in the 38-40% range.

The company is on a capacity expansion spree and intends to spend around ₹750 crore in FY24, which will help in product segment expansion. It is also revamping and increasing its distribution network of channel partners from 4,500 channel partners in FY23.

The sector too has been moving towards consolidation, aiding large players like itself. But a few brokerages also worry that it might not be able to keep up pace with the growth it has already exhibited. A spike in its realizations had come since FY22 because of the elevated PVC prices which provided it with inventory gains and more.

“Over the last two years, sales and operating profit has grown based on rising PVC prices and exceptional performance from Supreme Petrochem. Sustainability of such performance looks difficult therefore SIL is expected to give mid to high single-digit growth at both levels,” says Chirag Maroo, research analyst at Keynote Capitals. For Supreme Industries to sustain its performance, PVC prices should start moving up from the current levels, opines Maroo.

Supreme Industries has a 30.7% stake in associate company, Supreme Petrochem. “Material price cooling has already taken place, and it looks like some softening will be seen in coming quarters. This fall in PVC prices will result in inventory losses and dent profitability,” says a report by Keynote Capitals.

Even if its performance improves, the multibagger does not offer any new entry points — as it has run up well ahead of the target prices assigned by two brokerages. Bonanza set a target price of ₹3,291 and Keynote at ₹1,958.

Its stock price has been hovering above ₹4,000 for the last one month indicating that there is little juice left ahead for it to provide good returns for new investors.