Initiating Coverage on Supreme Industries - Moulding a success story - HDFC Securities

Mr. Rajesh Ravi, Institutional Research, HDFC Securities

We initiate coverage on Supreme Industries (SIL) with an ADD rating and an SOTP-based target price of INR 2,045/share. The company is India's largest plastic product manufacturer, commanding leadership position in most product categories- plastic pipes, furniture, material handling, and protective packing products. We expect SIL's consolidated revenue/EBITDA/APAT to grow at 11/16/19% CAGR during FY20-23E, buoyed by demand rebound across its entire product segments and rising share of premium products. Lean working capital should further accelerate both return ratios (to 20%+) and FCF generation, despite its continued reinvestment in growth Capex.

Leadership across most categories: SIL is India's largest plastic products producer with a pan-India presence. It is the leader in the fast-growing plastic piping segment with ~11% overall market share. Similarly, it enjoys 12% share in material handling, 15-55% share in many of its packaging product, and 13% share in plastic furniture (second largest in India).

Demand rebound and rising share of premium products: We believe SIL would benefit from demand rebound across most product categories - pipes, automotive and consumer durables parts, material handling components, protective packing and tarpaulin. SIL's rising share of high-margin sales to 40% in FY21 vs 35% in FY17 should drive margin expansion. Thus, we estimate the company would deliver 11/16/19% consolidated revenue/EBITDA/APAT CAGR during FY21-23E.

Superior return ratios and free cash flow generation: Aided by its healthy profitability and lean working capital, SIL has continuously generated FCF over the past nine years, despite its steady investments in growth Capex. SIL has also been able to sweat its assets well (>2x asset turnover), bolstering its return ratios (>15%+). We expect return ratios to further increase to 20%+ during FY21-23E.

Valuation and outlook: In our view, SIL's steady growth, market share gains across key business segments, lean working capital, and sustained high return ratios have rerated its valuation in the past five years. With better demand outlook further culminating into expansion of return ratios, valuation rerating should continue. Hence, we value the company at 19x its FY23E consolidated EBITDA (10% premium to its 5-year mean multiple) and value its 30% holding in its associate Supreme Petrochem at a 30% discount to its current market cap. These lead to SOTP valuation of INR 2,045/share. We initiate coverage with an ADD rating.

Shares of SUPREME INDUSTRIES LTD. was last trading in BSE at Rs.1975.05 as compared to the previous close of Rs. 1915.05. The total number of shares traded during the day was 6946 in over 1211 trades.

The stock hit an intraday high of Rs. 1989.95 and intraday low of 1920. The net turnover during the day was Rs. 13706732.

Source : Equity Bulls

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