Supreme Industries shares declined over 6% on Monday, June 29, following JPMorgan's downgrade of the stock to 'neutral' from 'overweight' rating. According to reports from CNBC TV18, the brokerage firm has also cut its price target to ₹3,450 from ₹4,050, bringing the revised target nearly to the same level where the stock closed last Thursday. The stock was trading at ₹3,184.4 on Monday, marking the second consecutive day of losses after declining 4% on Thursday and 10% in the last month.
The downgrade stems from Astral's announcement of demerging its chemicals business into a separate entity, as reported by CNBC TV18. Astral shares also declined 10% on Monday following the announcement, with JPMorgan having downgraded that stock as well. JPMorgan warns that Astral's higher growth focus on the pipes business poses a risk for Supreme Industries, potentially creating a growth drag that makes it difficult for the company to underwrite margin improvement. The brokerage estimates that the chemicals business may reduce the company's valuation by around 5-8% after the restructuring, while separating the chemicals business frees up Astral's core plumbing business but could weaken the growth profile of the chemicals segment.
For the March quarter, Supreme Industries' EBITDA margin improved to 17.66% from 12.25% in the December quarter and compared to 13.75% during the same quarter last year, according to CNBC TV18 reports. However, JPMorgan cites uncertainty around domestic PVC prices likely to correct further in the near-term, which could result in further inventory losses and channel de-stocking. The brokerage advises investors to stay on the sidelines for both Astral and Supreme Industries given these market conditions.
As reported by CNBC TV18, 30 analysts have coverage on Supreme Industries, of which 21 have a 'buy' rating, five say 'hold', and four have a 'sell' rating. JPMorgan structurally prefers Astral over Supreme Industries, stating it does not view the demerger announcement as a major negative but awaits a better entry point for the stock once PVC price volatility settles. The recommendation comes at a time when both companies will have high volume base in the second quarter, potentially amplifying market challenges.
