Supreme Industries - Visit Note - Plastic Industry Juggernaut - Nirmal Bang

Supreme Industries (SIL), a pioneer in PVC plastic pipe industry in India, has evolved as a multi-product and multi-segment behemoth over the years. Despite facing fierce competition from players in organised as well as unorganised segment, SIL has outsmarted its competitors and continues to be the market leader in most of its product segments. Having compounded its annual turnover and book value at a CAGR of 22% and 20%, respectively, over a long period of 50 years, SIL has given its minority shareholders "bang for the buck". With 247mn Indian households (68% rural and 32% urban) and plastic pipe market size of US$3.3bn, we believe that PVC and CPVC pipe industry size is still like "a needle in a haystack". Apart from the plastic pipe segment, SIL enjoys market leader status in protective packaging, material handling and plastic furniture segments. With visible medium-term capex plan, superior capital allocation capabilities of the management and a strong product portfolio, we are confident that SIL will continue to enjoy premium valuation and deliver noholds-barred growth.

Consistent increase in value added products (VAPs) to protect superior margins: SIL, through technical collaborations with foreign players, has consistently brought innovation in all it product segments. Through consistent efforts, sales contribution from VAPs increased from 30% in FY12 to 38% in FY17. Sales of VAPs witnessed a CAGR of 14% over the same period. We believe that contribution of VAPs (EBITDAM > 17%) to total sales will continue to grow and stay above 35% till FY20E, allowing SIL to reduce its dependency on key raw material price fluctuations (PVC, PE, PP) and protect its current margin level.

Strong capex programme in line to drive medium-term growth: Currently, SIL has 387,000mt / 63,000mt / 62,000mt / 28,000mt / 450,000 unit capacity in plastic pipe / packaging / industrial / consumer / composite cylinder segments, respectively, while in CPVC / Silpaulin it stands at ~21,000mt / 27,000mt, respectively. In FY18, total plants of SIL will go up from 25 to 28 with total capex spending of Rs3,000mn-Rs3,500mn. SIL is expected to spend Rs12,000mn-Rs13,000mn over FY18-FY21 to build new capacity. With the new capacity, SIL has sufficient earnings visibility over the medium term.

Well diversified product portfolio with a pan-India presence: SIL has got the most diversified product portfolio among its peers. SIL witnesses contribution from plastic pipe (56%), packaging (22%), industrial (14%), consumer (7%) and composite cylinder (0.2%) segments to its total sales. A diverse product portfolio has allowed SIL to reduce its dependency on any one end-user industry. SIL's manufacturing base is spread across 11 States and Union Territories, thereby covering most parts of India. With new Greenfield expansion in Assam, SIL will make inroads into one of the least penetrated markets in India, giving it an edge over peers.

Valuation: We expect volume/sales/EBITDA/PAT to post CAGR of 11%/14%/15%/17%, respectively, over FY17-FY19E. SIL stock currently trades at P/E of 30x FY18E and 26x FY19E earnings, respectively. We have valued the stock at 30xFY19E earnings (average two-year P/E at 30x) and retained Buy rating on it with a target price of Rs1,396, up 16% from the CMP.

Shares of SUPREME INDUSTRIES LTD. was last trading in BSE at Rs.1197.5 as compared to the previous close of Rs. 1213.55. The total number of shares traded during the day was 1268 in over 177 trades.

The stock hit an intraday high of Rs. 1244 and intraday low of 1197.5. The net turnover during the day was Rs. 1533144.

Source : Equity Bulls

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