Accumulate Supreme Industries - Motilal Oswal

Supreme Industries operates across all product segments in the plastics space in India. It manufactures plastic pipes, furniture, Pallets for manufacturing and retailing Industries, Flexible protective Crosslaminated films and Composites. The company operates throughout the country with more than 23 plants in India and a wide dealer network.

Supreme in the plastics space: With a turnover of ~Rs 3000cr, Supreme is one of largest player in the plastics space. It has grown at double digit rates over the last 10 years (17.5% CAGR) in revenue terms and is likely to do so for the next few years.

Value added products to aid margin improvement: The company has over the years focussed on the value-added space increasing sales of value added products from 26% of sales in FY10 to almost 1/3rd of revenue as of 3QFY13 end. CPVC pipes has seen a 60% rise in revenues in FY12 with a further 30% rise likely in FY13E. Valueadded products have operating margin 1% higher than non-value-added products. Hence, this rise in value added revenues should improve margins.

Strong balance sheet and return ratios: Supreme Industries had a D/E of 0.5x at FY12 end and this level is likely to be mainted despite capex of Rs 1100cr upto FY15. This is despite Rs 800cr of capex over the last 6 years. Further, debtor days have been less than a month for the last 5 years. Return ratios have risen with ROE up to 40% from 16% in FY07. Payout continues to remain a healthy 37% despite high capex.

RISKS to our Investment Recommendation (1) USD/INR volatility brings in uncertainty in raw material costs since plastics are priced on an import-parity basis resulting in inventory gains / losses (2) Delay in capacity addition could push earnings growth by a quarter or two and could impact investor sentiments


Valuations & View: Revenues are likely to rise over FY12-FY15E at 16% CAGR with earnings growth of 17% CAGR. We estimate ROE to be in the region of 37-40% during this period of heavy capex, which should be funded primarily by internal accruals. The stock trades at a 20-22% premium to 5 year average valuations given that ROE is at a 10% premium to the 5 year average.

We recommend to Accumulate Supreme Industries for a target of Rs 410 - 15xFy14E EPS and Rs 14/share for Supreme Petrochem.

Source : Equity Bulls

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