Supreme Industries Limited - Commodity to technology - Antique

We rate Supreme Industries as a long-term structural story considering its diversified product portfolio, widespread geographic reach, strong brand equity, strict working capital management, and sound management credentials, which has enabled it to enjoy higher RoE and RoCE over a sustained period of time. SIL, one of the largest plastic processors in India, is expected to reap benefits of its ongoing capacity expansions amid strong demand outlook for its plastic piping and protective packaging segments, in particular. Revenues and PAT are expected to exhibit a 17% and 18% CAGR over FY13-FY16e, respectively. At the current market price, the company's core business is valued at 14.5x FY15e and 12.4x FY16e earnings. We maintain our Buy rating and target price of INR475 per share on a SoTP basis.

Standing tall in a business dominated by unorganised players

With over six decades of experience, regular innovation, and introduction of cost-effective solutions, SIL has created a niche and brand for itself in a business dominated by the unorganised sector. The company is now acclaimed with having the most diversified range of products, resulting in market as well as customer diversification. With bulk revenues from supplies via distribution channels and rest to original equipment manufacturers, the company has been able to generate assured as well as large volumes resulting in 21% revenue CAGR over the last five years (FY08-FY13).

Moving towards a technology-driven business: Key for further re-rating

The story is on a strong footing with the management taking concrete steps towards getting into niche value-added segments, which would not only increase visibility and drive revenues but also help maintain/improve margins going forward. As part of this renewed strategy, SIL is aggressively adding/entering niche products like high-rise low-noise SWR systems; CPVC fire sprinkler pipes; plastic faucets; manhole; and new product verticals within the cross-laminated division like 35 gsm SILPAULIN, roll-on reels and made-ups, LPG composite cylinders, composite pallets, composite pipes, etc over the next 12-18 months, apart from increasing focus on existing value-added products like SILPAULIN, chlorinated polyvinyl chloride (CPVC) pipes etc.

Capacity expansion initiatives to drive growth; Value-added products to drive margins

Backed by strong product demand, SIL has planned aggressive capex of INR10bn across business segments spread over the next five years. We expect the company to deliver 13% volume (in terms of polymers processed) CAGR to 405,000mtpa in FY16 from 281,452mtpa in FY13. Apart from capex, the company would continue to increase its share of value-added products (margins upwards of 17%) to over 35% in FY16e (from 31.4% in FY13) by enhancing its focus on cross-laminated films, CPVC pipes, and new categories like LPG composite cylinders, composite pallets, etc that would help maintain or even increase margins.

Clean balance sheet, strict working capital, and strong dividend payouts

We expect the company to maintain high RoE and RoCE due to: 1) Healthy topline growth on the back of strong capex initiatives and higher fixed asset turnover; 2) Increasing cash flows from core operations through strict control of working capital; and 3) Firmer margins. Besides, SIL has been continuously rewarding shareholders with strong dividend payout in a 30-40% range over the last three years. Moreover, it has not raised any capital in the last 12 years despite being in an asset-heavy business.

Source : Equity Bulls

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