Initiating Coverage on Supreme Industries - Cholamandalam Securities

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.

Source : Equity Bulls

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