Sector: Plastic / Mid cap

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52 Week High/Low INR 378/201

Bloomberg code SI IN

Reuters code SUPI.BO

Issued Equity

(shares in mn) 127.03

Mkt. Cap in INR mn

Mkt. Cap in mn USD

INR 44,841

$ 777

Avg. Daily Vol. (‘000) 63.94

Avg. Daily Vol. (mn) INR 22.57/$ 0.4

Shareholding Mar12 Dec12 Mar13 Sep12

Promoters(%) 49.62 49.62 49.63 63.35

FII (%) 7.99 12.29 14.33 9.21

DII (%) 10.22 8.75 7.17 1.34

Others (%) 32.17 29.34 28.87 26.10

Pledge (% of

promoter

holding)

0.00 0.00 0.00 0.00

Performance% 1M 3M 12M

Supreme 7.18 13.15 68.93

Sensex -2.31 0.08 16.70

Sathyanarayanan M +91-44-30007361

[email protected]

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Supreme Ind Relative Sensex (RHS)

Revenues are expected to grow at a CAGR of 19.4% between FY12-15 Supreme’s revenue has grown at a CAGR of ~22.7% from INR 13.1bn in FY08 to INR 29.7bn in FY12;

the revenue growth was largely aided by volume which grew at a CAGR of 15.3% and realization, which

grew at a CAGR of 7.5%. We expect Supreme’s revenue to grow at a CAGR of 19.4% between FY12-

15 and the growth will be aided by the volume growth of 14.3% CAGR and a realization improvement of

5.6% CAGR.

Stable EBITDA Margin

Supreme’s EBITDA margin has a strong linkage with crude oil and exchange rate. Recently, the crude

oil prices have cooled down a bit, which if sustains would be good for the company's margins over the

long term. However in the near term there would be a pressure on margins due to high cost inventory.

Going forward, we expect Supreme’s margin to be in the range of 14% - 14.5% as we believe

intensifying competition and expiry of industrial subsidy (see page no.14) will put pressure on margin

and restrict margin expansion.

Outlook & Valuation

Currently, Supreme Industries is trading at a P/E multiple of 13.8XFY14 and 11.3XFY15. In terms of

EV/EBITDA, SI is quoting at 8.1XFY14 and 6.4XFY15. SI with strong brand equity, well spread

distribution network, strong balance sheet, lean working capital, good dividend payout and modest

valuation makes it a good investment case. We initiate coverage on Supreme Industries’ with a BUY

rating and with a SOTP target price of INR 418. We have valued SI’s core business at 13XFY15E EPS,

EV/EBITDA at 7.4XFY15E and EV/Sales of 1.1XFY15E at INR 407/share. SI is currently holding

29.88% stake in Supreme Petrochemicals, which is valued at current market price after giving a holding

company discount of 20% at ~INR 11/share. Risk: The prices of raw materials are linked with crude oil

price and volatility in global crude oil prices will significantly impacts raw material costs of the company.

The plastic industry is considered to be highly fragmented and largely unorganized. Any intensification

of competition could lead to a price war, thus affecting the company’s operating margin.

Valuation Summary

Y/E June ( INR mn) FY12 FY13E FY14E FY15E

Revenue 29,656 35,144 42,036 50,522

EBITDA 4,719 5,120 5,969 7,326

PAT 2,417 2,775 3,250 3,976

EPS 19.0 21.8 25.6 31.3

EPS growth (%) 23.4 14.8 17.1 22.3

FCF / Share 19.2 -4.4 17.5 25.0

PE 18.6 16.2 13.8 11.3

P/ BV 6.4 5.1 4.2 3.4

EV / EBITDA 10.2 9.6 8.1 6.4

EV / Sales 1.6 1.4 1.2 0.9

Dividend Yield (%) 1.7 2.0 2.3 2.8

ROCE (%) 35.7 34.4 32.9 33.2

ROE (%) 38.8 35.4 33.4 33.1

Net Debt / Equity 0.5 0.5 0.3 0.2

Sensex Nifty 19,441 5,878

Supreme Industries Sector: Plastic / Mid cap

11 June 2013 Initiating Coverage

Background: Supreme Industries (SI) is a plastic product manufacturer and the largest plastic processor in India, processing over 0.24mn MT annually.

Company has four business verticals i.e. Plastic Piping (45.4%), Packaging Products (23.6%), Industrial Products (19.3%) and Consumer Products (9.2%).

SI has 22 manufacturing plants situated across India. Company enjoys a significant market share across its business verticals; Plastic Piping (9.48%),

Industrial Products (15%) and Consumer Products (13%). Supreme Industries is the market leader in the Packaging Products segments like XLPE (50%),

EPE Foam (36%), Cap Cell (30%) and Air Bubble Film (18%). SI’s sales and PAT have grown at a CAGR 22.7% and 34.6% respectively between FY08-12.

Price: INR 353 Target Price: INR 418 BUY

2

Industry overview:

The downstream plastic processing industry is highly fragmented and consists of micro, small and medium units. There are

about 26,000 registered plastic processing units of which ~75% are small-scale sectors and accounts for ~25% of polymer

consumption.

The size of the plastics industry in India is estimated at US$20bn. In FY11 the plastic consumption in India stood at 7.5 mn

tons and it is expected to grow to 15mn tons in 2015 and 24mn tons by 2020. The growth would largely be aided by the

strong demand drivers such as growth in the packaging, housing, irrigation, automotive and consumer durable sectors

coupled with low per capita consumption of plastics in India.

According to the Plastindia, the plastic consumption in packaging sector is pegged at 3.5mn tons and it is set to increase to

9mn tons by 2020 and demand for plastic in irrigation sector is pegged to cross 2.5mn tons by 2015. The current per capita

consumption of plastic in India is around 7 kg, which is significantly lower compared to other economies. Traditionally,

Western India has been the largest consumer of plastics accounting for almost 47% of the total consumption in India. North

India accounts for 23%, followed by South India (21%) and East India (9%).

Chart 1: India’s Plastic consumption

Source: Plastindia, CSEC Research

Chart 2: Global per-capita consumption of Plastic

Source: FICCI, Deutsche bank, CSEC Research

Chart 3: Consumption of Plastic in India (2010) - Region wise breakup

Source: IOCL, Industry Report, CSEC Research

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FY96 FY06 FY11 FY15 FY20

Plastic consumption (mn tons)

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Commodity plastics account for bulk of the plastic demand in India. Commodity plastics are Polyethylene (PE),

Polypropylene (PP), Polyvinyl Chloride (PVC) and Polystyrene (PS). Polyethylene is the largest volume plastic raw-material

used by the industry. According to Planning Commission of India, consumption of commodity plastic in India stood at

8.5mn MT in FY12. The consumption of commodity plastics has grown by 12.4% CAGR between FY07-12. It is expected

that the commodity plastics demand is likely to grow at a CAGR of 10.4% between FY12-17 to reach 14 mn MT. The

demand for commodity plastics has a linear relationship with GDP growth rate. Between FY07-12, the commodity plastics

demand grew by ~1.5X of GDP growth rate.

Table 1: Segment wise demand for commodity plastics in India

Product (KT) FY02 FY07 FY12 FY13E FY14E FY15E FY16E FY17E FY22E

LDPE 218 253 405 438 474 511 552 597 880

LLDPE 1470 631 1198 1319 1478 1655 1854 2076 3660

HDPE

990 1657 1822 1987 2165 2360 2573 3960

PP 1084 1423 2993 3275 3698 4105 4564 5015 8085

PVC 853 1219 1925 2118 2330 2563 2820 3102 4560

PS 201 246 377 430 479 533 598 638 935

Total 3826 4762 8555 9402 10446 11532 12748 14001 22080

Source: Planning Commission of India

Polyethylene (PE): Ethylene is the monomer for manufacturing polyethylene. PE has a wide application in flexible

packaging, raffia, blow moulding, pipe, wire & cable and injection moulding. There are three broad types of PE i.e. Low-

density polyethylene (LDPE), High-density polyethylene (HDPE) and Linear Low-density polyethylene (LLDPE). PE is one

of the major forms of plastic consumption in India that accounts for 38.1% of total commodity plastic consumption in India.

HDPE: It is used in raffia, blow moulding, film, pipes and injection moulding. Consumption wise it is in order of

HD-Film, general purpose blow moulding, raffia and pipe have the major share. Between FY07-12, the

consumption of HDPE has grown by 10.9% CAGR to 1.66mn MT and it is expected to grow at a CAGR of 9.1%

between FY12-22.

LLDPE: It is used in mono and multi-layered films, roto-moulding and wire & cables. Between FY07-12, the

consumption of LLDPE has grown by 13.7% CAGR to 1.19mn MT and it is expected to grow at a CAGR of 11.8%

between FY12-22.

LDPE: It is predominantly a branched polymer. The properties depend on the frequency and the length of

branches. It is used in general purpose film, heavy duty film, liquid packaging, injection moulding, extrusion

coating, wire & cables and adhesive lamination. Between FY07-12, the consumption of LDPE has grown by 9.9%

CAGR to 0.4mn MT and it is expected to grow at a CAGR of 8.1% between FY12-22.

Polypropylene: PP has a wide range of applications, viz packaging, lifestyle products (furniture, household products etc),

automotives and home appliances. In the last five years (FY07-12), PP was the fastest growing plastic polymer in India. PP

consumption has grown at a CAGR of 16% to ~3mn MT in the same period. Despite growing at a faster pace the per capita

consumption of PP is still lower than the global average. The current per capita consumption of PP in India is 2.2 Kg per

person compared to the global average of 7 Kg per person. It is expected that the demand for PP to grow at a CAGR of

10.4% between FY12-22 to reach 8.1mn MT.

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Polyvinyl Chloride: PVC is recognized as an infrastructure plastic and it is used in pipes, conduits, ducts, wire & cables,

flooring, windows & doors and roofing. Pipes continue to be the biggest end use sector with a share of ~70%. PVC

consumption in the country has grown by 9.6% CAGR between FY07-12, which is more than twice compared to the world

average growth of 4%. It is expected that the demand for PVC to grow at a CAGR of 9% between FY12-22 to reach

4.56mn MT.

Polystyrene: PS end use is mainly in the Electronics / appliances sector, which accounts for almost 60% of the total

demand. Between FY07-12, the consumption of PS has grown by 8.9% CAGR to 0.38mn MT. On relative basis, PS

demand growth between FY07-12 was lower than other plastic polymers. One of the reasons for the lower growth in

demand was due to the competition from other polymers, mainly PP in both packaging and durables (primarily for cost

reason). It is expected that the demand for PS to grow at a CAGR of 9.5% between FY12-22 to reach 0.94mn MT.

Chart 4: Porters Five Force Model:

Source: CSEC Research

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Company Overview:

Supreme Industries (SI) is a plastic product manufacturer and the largest plastic processor in India, processing over

0.24mn MT of polymers annually. Company has four business verticals i.e. Plastic Piping, Packaging Products, Industrial

Products and Consumer Products.

Chart 5: Supreme’s Business Verticals

Plastic Piping: Plastic Piping is the largest segment which contributes 45.4% of company’s revenue and 37.5% of

company’s EBITDA. This segment has an operating margin of ~13.4%. SI is the second largest manufacturer of PVC pipes

in India with a capacity of 0.25mn TPA (tons per annum) after Finolex Industries. In this segment company has over 5,500

products for 19 different application segments.

Company distributes plastic piping through 665 channel partners and more than 15,000 retail outlets. PVC pipes contribute

85% of the Plastic Piping’s revenue followed by CPVC (11%), PPRC (2%) and HDPE (2%). Company’s revenue from

Plastic Piping has grown by 28.9% CAGR and EBITDA by 35.2% CAGR between FY08-12. Market size of Plastic Piping

segment is estimated to be INR 135bn and SI has an overall market share of 9.48% and 15% of the organised domestic

market.

Packaging Products: Company derives 23.6% of their revenue and 28.8% of their EBITDA from this segment. This

segment has a highest margin (19.8%) amongst the other segments in which the company operates. Key categories in this

segment are specialty films; protective packaging products & cross laminated products. Cross laminated products

contributes 55% of the segmental revenue followed by protective packaging (33%) and packaging films (12%). Company’s

revenue from this segment has grown by 21% CAGR and EBITDA by 29.1% CAGR between FY08-12. Supreme Industries

is the market leader in the packaging products segments

Products Estimated Market Size (INR bn) Supreme’s Market Share

EPE Foam 3.25 36%

Air Bubble Film 2.4 18%

Cap Cell 1.6 30%

XLPE 0.6 50%

Source: Company

Business Verticals

Plastic Piping Division

ConsumerProducts

PackagingProducts

Industrial Products

saket.karan

Highlight

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Industrial Products: Company derives 19.3% of their revenue and 15.7% of their EBITDA from this segment. This

segment has an operating margin of 13.2%. Company’s revenue from this segment has grown by 21.6% CAGR and

EBITDA by 23.3% CAGR between FY08-12. Market size of Industrial products segment is estimated to be INR 11.6bn and

SI has an overall market share of 15%. Company has a list of marquee clients; In Automotive segment their clients list

includes Ashok Leyland, Hindustan Motors, M&M, Tata Motors, Subros, Piaggio, Exide, Maruti Udyog and Denso. In

consumer durable segment their clients list includes Hitachi, Panasonic, Samsung, Tata Chemicals, Videocon and

Whirlpool. In Material handling they supply to HUL, Pepsico India, Coca-Cola India and Reliance Retail.

Consumer Products: SI is the second largest player in the moulded furniture segment with processing capacity of

30,000MT. Company derives 9.2% of their revenue and 8.1% of their EBITDA from this segment. This segment has an

operating margin of 14.2%. Company has 750 Pan-India distributors and tie-up with 253 exclusive franchisee showrooms.

Company’s revenue from this segment has grown by 15.8% CAGR and EBITDA by 36.3% CAGR between FY08-12.

Market size of consumer products segment is estimated to be INR 20bn and SI has an overall market share of 13%.

Chart 6: Segment wise revenue share

Source: Company, CSEC Research

Chart 7: Segment wise EBITDA share


Chart 8: Segment wise EBITDA margin


19.5% 18.7% 20.5% 20.2% 19.3%

11.4% 10.8% 10.7% 10.7% 9.2%

24.5% 23.2% 23.2% 23.8% 23.6%

36.5% 41.1% 40.5% 42.5% 45.4%

8.1% 6.2% 5.1% 2.9% 2.5%

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Industrial Products Consumer Products Packaging Products

Plastic Piping Others

22.3% 21.0% 18.4% 18.2% 15.7%

7.7% 14.3% 11.8% 8.4% 8.1%

34.1% 27.8% 31.2% 32.7%28.8%

36.9% 34.9% 34.6% 33.3%37.5%

5.6% 5.9% 1.7% 3.1% 2.5%

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Plastic Piping Others

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Chart 9: SI has 22 manufacturing plants situated across India

Source: Company

Distribution network

SI has 1,970 distributors situated across India.

Chart 10: Segment wise distribution network


665

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Consumer Products

XL Films

Material Handling

Protective Packaging

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Products

Company’s product portfolio is selected in such a manner that neither it has to compete against imported plastic products

nor it is affected by the products made by the un-organised sector in the country.

Table2: Portfolio of Value added Products (VAP)

Source: Company

Management Profile:

Supreme Industries has a strong management team with excellent domain expertise. Taparia family has been at the helm

of affairs, since the company was taken over in 1966 from Kantilal K Mody family through outright purchase of equity

shares.

Mr. B L Taparia, Chairman

Mr. M P Taparia, Managing Director:

Mr. S J Taparia, Executive Director

Mr. V K Taparia, Executive Director

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Investment Rationale

Focus on high margin Value added Products (VAP)

The Company classifies its products as a VAP, where the operating margins are higher than 17%. As a conscious effort, SI

continues to specialize in high margin value added products that give an edge over its competitors. SI’s revenue share

from VAP has increased from 15% in FY07 to 31.64% in 3QFY13. The management expects the revenue share of VAP to

further increase to 35% by FY16.

The expansion in VAP revenue share would largely come from moulded furniture segment and protective packaging

segment. In the moulded furniture segment, the company plans to increase the VAP revenue share from 36.3% in FY12 to

80% by FY16 and in the protective packaging segment, VAP share is planned to increase from 36% in FY12 to 45% in

FY16. The company will increase the VAP revenue share in these segments, mostly by exiting from the commoditized

products, where the competition from unorganized sector is high.

SI’s entry into composite LPG cylinders and manufacturing cross - laminated films (XF) are its strategy to expand the

overall VAP share to 35% by FY16. Company has the exclusive rights to manufacture and market the XF films in India,

Africa, South Asia and East Asia (barring Mongolia). In FY12, the revenue from XF films grew by 20.7% YoY to INR 3.78bn

(13% volume growth).

The focus on high margin VAP and closure of three loss making and low margin units has resulted in margin expansion.

Between FY07-9MFY13, the operating margin improved by 415 bps to 14.6% in 9MFY13.

Table3: Segment wise revenue share of VAP

Product Group

FY11 FY12 Estimated revenue share in 2015-16 Total Net

Turnover (INR mn)

Revenue Share of Specialty Business

Specialty Business Turnover (INR mn)

Total Net Turnover (INR mn)

Revenue Share of Specialty Business

Specialty Business Turnover (INR mn)

Plastic Piping 9,927.2 21.90% 2,173.7 13,202.5 23.16% 3,058 25%

Molded Furniture 2,467.1 31.60% 779.6 2,626.3 36.26% 952.3 80%

Cross Lami. Films 3,132.3 100.00% 3,132.3 3,781.7 100.00% 3,781.7

100%

Prot. Packaging 2,020.9 34.74% 702.1 2,368.2 35.99% 852.3 45%

Others 5,782.9 6,393.1

Total 23,330.4 29.34% 6,844.2 28,371.8 30.75% 8,725.3 35% Source: Company

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Company is continuously introducing new products

Company has been continuously introducing new products. In the last three years, company has added 577 new products

in the plastic piping segment (company’s largest segment) and during the same period the revenue share from this

segment has increased from 40.5% to 45.4%. Going forward company plans to launch several new products across the

segments like premium furniture, bathroom fittings, manual cover for sewage (1 – 1.2 meter diameter), composite cylinder

and composite pipe. In the bathroom fittings, company plans to launch 31 new products, which the company will design

and manufacture in-house. Company is quite optimistic about bathroom fittings segment and expects the sales from this

segment to be around INR 500mn per annum.

Table4: Segment wise competitors

Product Segments Key Competitors

Plastic Piping Finolex Industries, Time Technoplast, Astral Poly Technik, Jain Irrigation, Tulsi Extrusions, Kisan Group, Nandi Group, Rungta Irrigation

Molded Furniture Nilkamal, Wim Plast, Time Technoplast, National Plastics, Prima Plastics

Industrial Products Nilkamal, Time Technoplast, Machino Plastics

Films & Sheets Cosmo Films, Polyplex Corp, Uflex, Jindal Polyfilms, Garware Polyester

Composite Cylinders Time Technoplast Source: CSEC Research

Composite segment - a hidden gem

Company has ventured into the composite products segment such as composite cylinders, pipes and pallets. Company

has so far invested INR 1.1bn in the composite segment. Composite LPG cylinder technology is four years old and only

three players are manufacturing such cylinders; Ragasco (Norway), Komposite (Czech Republic) and Composite

Scandinavia (Sweden).

Composite cylinders are currently at the testing stage and later will be sent for approval. Clearances for these products are

required from the authorities such as The Petroleum and Explosives Safety Organization (PESO), India and pipe has to be

accepted by American Petroleum Institute to launch these products in India. Meanwhile the company will focus on export

markets such as Africa, West Asia and Europe for these products. Company will start exporting these products from

1QFY14. Company has a capacity of 0.5mn units for composite cylinders. At full capacity revenues from composite

cylinders would be INR 1.25bn (~4.2% of FY12 revenue), however the company has not factored any revenues from the

domestic market for these products in FY14.

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Monetization of Real estate asset will further boost the revenue growth momentum.

SI has constructed ground plus 10-storey commercial complex in Andheri, Mumbai called Supreme Chambers. Supreme

Chambers has been awarded Platinum Certificate under “LEED India Core and Shell Rating System” by Indian Green

Building Council (IGBC) and it is second such building in Mumbai to get this prestigious rating.

Supreme Chambers has a total saleable area of 280,000sq.ft. of which company has already sold 95,000sq.ft. for

INR 1,510mn at an average rate of INR 15,895 per sq.ft. Out of INR 1,510mn Company has received INR 1,326mn till

August 2012.

Due to the depressed commercial real estate market condition in Mumbai, for the last 16 months (ending March, 2013),

company has not made any deal as they were holding on to the price. Commercial real estate prices in Andheri, Mumbai

has fallen by 12-17% from INR 17,000 – 18,000 per sq.ft to INR 15,000 per sq.ft., while the residential real estate price in

Andheri, Mumbai is 40 – 50% higher than the commercial real estate price.

Recently company has started to get many enquiries and company has decided to sell part of its real estate inventories at

the current market price. Company has guided that the sale of real estate inventories (at the current market price) may not

exceed INR 1,000mn and the company has not counted any revenue through the sale of real estate asset in its

20%+ revenue guidance for FY14 & 15. Any revenue recognized in FY14 through the sale of real estate asset will provide

significant boost to cash flow and revenue growth.

Ambitious capex plan

SI has embarked an ambitious five year capex plan of INR 11bn between FY12 - FY16. During the capex period company

planned to take the total plants to 28 from 19 at the beginning of the capex period. Of the 9 new plants, 3 would be for

protective packaging products, 2 each for plastic piping system and composite products and 1 each for industrial moulded

products and cross laminated film products. The bulk of the capex would be financed through internal accruals.

In the last two years (FY12 & FY13), company has already spent ~ INR 5.05bn capex (FY12: INR 700mn and FY13:

INR 4.35bn) and the total plant count has increased from 19 to 22 and one more plant would be commissioned by end

FY13. The bulk of the capex was spent on pipes & fittings (INR 1.3 – 1.4bn), cross laminated films (INR 1.25bn), composite

products (INR 1.1bn) and packaging products (INR 200-230mn).

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Financials Revenues are expected to grow at a CAGR of 19.4% between FY12-15

Supreme’s revenue had grown at a CAGR of ~22.7% from INR 13.1bn in FY08 to INR 29.7bn in FY12; the revenue growth

was largely aided by volumes which grew at a CAGR of 15.3% and realization grew at a CAGR of 7.5%. In the 9MFY13

Supreme’s revenue grew by 15.2% YoY to INR 23.5bn. Revenues from core business activity grew by 19.1% YoY to

INR 22.97bn; volume grew by 13.3% YoY to 201,127MT and realization grew by 5% YoY. We expect Supreme’s revenue

to grow at CAGR of 19.4% between FY12-15 and the growth would be aided by the volume growth of 14.3% CAGR and a

realization improvement of 5.6% CAGR.

Stable EBITDA Margin

Supreme’s EBITDA margin has a strong linkage with crude oil and exchange rate. As the company’s key raw materials

such as PVC, PP, LDPE and HDPE prices are linked with crude oil prices and exchange rate where the local prices are

fixed in line with the landed cost of imported material. In spite of volatile crude oil price and steep depreciation of INR

against USD (between FY08-12, INR has depreciated by 29.5% against dollar) Supreme’s EBITDA margin have increased

from 11% in FY08 to 15.9% in FY12. Company’s focus on VAP and their ability to pass on the cost increase (In the pipe

segment company passes on the price increase the very next day, while in other segments, it is passed on within next 2-3

weeks) has resulted in margin expansion. Between FY08-12, company’s raw material cost/MT has increased by 5.8%

CAGR, while the realization has increased by 7.5% CAGR.

Supreme operates under four major categories i.e. plastic piping, packaging products, industrial products and consumer

products. Among these categories packaging products has highest margin of 19.8% (contributes ~23.6% of revenue),

followed by consumer products (14.2%), plastic piping (13.4%) and industrial products (13.2%).

Recently, the crude oil prices have cooled down a bit, which if sustains would be good for the company in the longer term.

However in the near term there would be a pressure on margins due to high cost inventory. Going forward, we expect

Supreme’s margin to be in the range of 14% - 14.5% as we believe intensifying competition and expiry of industrial subsidy

will put pressure on margin and restrict margin expansion.

Lean working capital cycle

Supreme has lean working capital; their net working capital (excl. cash) stood at 8.6% of sales, which is relatively lower

compared to its peers like Finolex Industries (34.4%), Sintex Industries (46.9%) and Time Technoplat (38.5%). The

Company has extremely efficient receivables management system in the industry. As there is a strong demand for their

innovative products and the company receives advance payment for products like cross-laminated films. The company

sells most of their products through its distribution network where they able to maintain less than 30 days debtor days while

the industry average is 47 days. Management has guided for further reduction in debtor days to 22 – 23 days of net sales.

In FY12, company operated with lean working capital of a mere 33 days of net sales.

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Strong balance sheet and healthy return ratio

The company is consistently reducing its leverage ratio, in FY06 Supreme Industries’ Net debt-equity ratio stood at 1.06X,

which it reduced to 0.48X in FY12 with an interest cover of 7X. Company has a policy of maintaining the debt – equity ratio

in the range of 0.5X-0.7X. Supreme Industries’ has a healthy return ratio, RoCE of 35.7% and RoE of 38.8% in FY12.

Valuation

Currently Supreme Industries is trading at a P/E multiple of 13.8XFY14 and 11.3XFY15. In terms of EV/EBITDA, SI is

quoting at 8.1XFY14 and 6.4XFY15. SI with strong brand equity, well spread distribution network, strong balance sheet,

lean working capital, good dividend payout and modest valuation makes it a good investment case. We initiate coverage on

Supreme Industries’ with a BUY rating and with a SOTP target price of INR 418. We have valued SI’s core business at

13XFY15E EPS, EV/EBITDA at 7.4XFY15E and EV/Sales of 1.1XFY15E at INR 407/share. SI is currently holding 29.88%

stake in Supreme Petrochemicals, which is valued at current market price after giving a holding company discount of 20%

at ~INR 11/share.

Table 5: Relative Valuation (FY14):

Company OPM (%) NPM (%) P/E P/BV EV/EBITDA EV/Sales ROE (%) Div Yield (%)

Supreme Industries* 14.2 7.7 13.8 4.2 8.1 1.2 33.4 2.3

Nilkamal 8.4 2.7 4.4 N/A 3.5 0.3 10.7 N/A

Sintex Industries 15.6 7.0 3.9 0.4 4.6 0.7 11.3 1.4

Polyplex 10.0 1.2 11.7 0.23 4.7 0.5 2.0 2.7

Jain Irrigation 15.9 4.7 10.1 1.1 6.4 1.0 11.5 1.6

Time Technoplast 16.2 6.1 6.7 0.9 4.4 0.7 14.2 1.5

Astra Polytechnik 13.4 8.0 15.4 4.2 11.0 1.5 25.7 0.2

Source: *CSEC Research, Bloomberg (FY14)

14

Chart 11: P/E band chart

Risk:

Expiry of Industrial subsidy: Company is receiving industrial subsidy in the form of sales tax refund for its

Gadegaon plan in Maharashtra where, the company has invested ~ INR 1.7bn. The subsidy accounts ~1% of SI’s

revenue and it is going to expire in January 2015. The absence of the subsidy is likely to hurt the margins.

The prices of raw materials are linked with crude oil price and volatility in global crude oil prices will significantly

impacts raw material costs of the company.

Margins are sensitive to the exchange rate fluctuation as ~37% of raw material consumption (FY12) is met

through imports. Moreover, the local price of raw materials is fixed in line with the landed cost of imported

materials.

The plastic industry is considered to be highly fragmented and largely unorganized. Any intensification of

competition could lead to price war, thus affecting the company’s operating margin.

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Financials (Consolidated)

Income Statement (Abstract)

INR(million)

Particulars FY12 FY13E FY14E FY15E

Net Revenue 29,656 35,144 42,036 50,522

Growth (%) 20.09 18.50 19.61 20.19

Operating Expenditure 24,938 30,025 36,067 43,196

EBITDA 4,719 5,120 5,969 7,326

Growth (%) 32.04 8.49 16.59 22.73

Depreciation 725 817 986 1,185

Other Income (net of interest) -520 -479 -451 -560

Tax Paid 1,150 1,248 1,482 1,825

Tax Rate (%) 33.11 32.64 32.70 32.70 Reported PAT (after min. interest) 2,417 2,775 3,250 3,976

Adjusted PAT 2,417 2,775 3,250 3,976

Growth (%) 23.41 14.84 17.10 22.34

Balance Sheet (Abstract)

INR(million)


Share Capital 254 254 254 254

Reserves & Surplus 6,713 8,457 10,498 12,996

Net worth 6,967 8,711 10,752 13,250

Current Liabilities 6,350 7,785 9,538 12,111

Non-Current Liab 2,004 2,782 2,811 2,845

Total Liabilities 15,321 19,278 23,101 28,205

Net Fixed Assets 7,732 11,378 12,409 13,245 Other Non-Current Assets 1,508 771 771 771 Cash & marketable securities 144 116 1,460 4,020

Other Current Assets 5,937 7,013 8,461 10,169

Total Assets 15,321 19,278 23,101 28,205

Cash Flow statement (Abstract)

INR(million)


Cash flow from operations 2,941 3,903 4,245 5,199

Cash flow from investing -643 -3,715 -1,978 -1,981 Cash flow from financing -2,296 -216 -923 -658

Free cash flow 2,434 -561 2,227 3,178

Net change in cash 2 -28 1,344 2,560

Per Share Ratios


Adjusted EPS (INR) 19.0 21.8 25.6 31.3

Cash EPS 24.7 28.3 33.3 40.6

BV/Share (INR) 54.8 68.6 84.6 104.3

FCF/Share(INR) 19.2 -4.4 17.5 25.0

DPS (INR) 6.0 7.0 8.2 10.0

Key Ratios


Dividend payout (%) 31.54 32.00 32.00 32.00

EBITDA margin (%) 15.91 14.57 14.20 14.50

PBT Margin (%) 11.71 10.88 10.78 11.05

RoCE (%) 35.70 34.45 32.92 33.24

RoE (%) 38.84 35.41 33.40 33.13

Current Ratio 0.96 0.92 1.04 1.17

Net Debt/Equity 0.48 0.47 0.35 0.18

Inventory Days 39 39 39 39

Debtor Days 21 21 21 21

Creditor Days 30 30 30 30

CCC* 30 30 30 30

Interest Cover Ratio 7.01 8.80 10.23 10.30

DuPont Analysis


Net Profit Margin (%) 8.15 7.90 7.73 7.87

Asset Turnover 1.94 2.03 1.98 1.97

Leverage factor 2.46 2.21 2.18 2.14

RoE (%) 38.84 35.41 33.40 33.13

Valuation Ratios


P/E 18.6 16.2 13.8 11.3

P/BV 6.4 5.1 4.2 3.4

EV/Sales 1.6 1.4 1.2 0.9

EV/EBITDA 10.2 9.6 8.1 6.4

Div Yield (%) 1.70 1.98 2.32 2.84

*CCC – Cash Conversion Cycle

Cholamandalam Securities Limited Member: BSE,NSE,MSE Regd. Office: Dare House,2 (Old) # 234) N.S.C Bose Road, Chennai – 600 001. Website : www.cholawealthdirect.com Email id – [email protected]

Chola Securities is a leading southern India based Stock broker. Our focus area of coverage within the Indian market is Mid and small caps with a focus on

companies from southern India.

Our Institutional Equities services are carried out in partnership with RCCR, a boutique Investment research and Corporate Advisory firm founded by a

team with extensive experience in the Asset management industry.

RESEARCH

Singaravelu K P Head of Research +91-44 - 4505 6003 [email protected]

Alagappan Ar Financial Services +91-44 - 3000 7363 [email protected]

Sathyanarayanan M Consumption +91-44 - 3000 7361 [email protected]

Murugesa S Engineering & Cement +91-44 - 3000 7344 [email protected]

Michel Charles C Technicals +91-44 - 3000 7353 [email protected]

Rajasekhar R IT & Auto Ancillary +91-44 - 3000 7266 [email protected]

Sreedevi K Associate +91-44 - 3000 7266 [email protected]

INSTITUTIONAL SALES

Venkat Chidambaram Head of FII Business & Corporate Finance +91-44 - 24473310 [email protected]

Lakshmanan T S P Chennai +91 - 9840019701 [email protected]

Santosh Kumar Sharma Mumbai +022 - 22617210 [email protected]

RETAIL SALES

Ohm Halvadiya AHMEDABAD 079 – 30002968 / 69 [email protected]

Sathyanarayana N BANGLORE 080 - 41503340 / 44 [email protected]

Muthiah A N CHENNAI - HO 044 – 3000 7371 [email protected]

Baskaran S CHENNAI - Nungambakkam 044 – 28240052 / 54 [email protected]

Sridharan P S CHENNAI - Adyar 044 - 2452 2111 / 2333 [email protected]

V Kumar COIMBATORE 0422 - 4292041 / 4204620 [email protected]

Maneesh Gupta DELHI 011 - 30461161 / 62 / 63 [email protected]

Murthy A S L N HYDERABAD 040 - 40126821 / 22 [email protected]

Sudipta Bhaumik KOLKATA 033 - 44103638 / 39 [email protected]

Riken B Mehta MUMBAI 022 - 22617210 / 7203 [email protected]

Pravin S MADURAI 0452 - 2601195 / 96 [email protected]

Deepak V Kshirsagar PUNE 020 - 30225432 / 33 /34 [email protected]

M N Chandra Sekhar VIZAG 0891 - 6642718 [email protected]

COMPLIANCE

Balaji H Compliance +91-44 - 3000 7370 [email protected]

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Sector: Plastic / Mid cap

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