Supreme Ind: An interesting franchise despite premium valuations

Supreme Industries, a leading plastic processor company, reported positive volume and value mix for Q4 FY18 on improved demand. Enhanced capacity plans, strong cash flow, heathy balance sheet, focus on value-added products and distribution reach makes it an interesting business to look at. Though its earnings trajectory is driven by improving consumption demand and infrastructure spending, the stock is trading at a premium to the market.

Segmental break-up
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Source: Company

Note: Industrial products eg: Automobile cockpit, soft drinks

Industrial and consumer segment drive Q4 growth

Q4 sales were up 15 percent year-on-year (YoY) led by volume growth of eight percent YoY. Industrial (17 percent of Q4 revenue) and consumer (seven percent of Q4 revenue) segments witnessed double-digit volume growth of around 17 percent YoY each. Piping segment (59 percent of Q4 revenue) witnessed YoY volume growth of eight percent. However, the packaging division (18 percent of Q4 revenue) reported a volume decline of three percent YoY on account of capacity constraints and decline in the cross laminated films business.

Result snapshot
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Source: Company

EBITDA margin improved YoY due to better margins in the piping and consumer businesses offsetting lower share of value added products (36 percent versus 38 percent YoY) and higher employee cost. Sequentially, decline in other expenses aided margin improvement. Net profit growth was further boosted by sequentially lower interest cost.

Capacity to reach 700,000 MT by FY21
The management said the company’s installed capacity has increased by five percent in FY18 to 568,000 MT. During FY19, it plans to invest Rs 300-350 crore, which would add another 50,000 tonne to capacity. Two new greenfield plants are expected this fiscal: one each in Telangana and Rajasthan. Another two new plants are on the anvil at Andhra Pradesh and Assam which would be operational in FY20.

The company intends to increase its capacity to 700,000 MT by FY21 at a capex of around Rs 1,200-1,300 crore. Strong balance sheet (debt-to-equity ratio of 0.13) and positive free cash flow, despite intermittent capex requirements, makes it well positioned to capture incremental growth in the sector.

Enforcement of lead-free plastic pipes in India

Supreme Industries seems well positioned to meet the regulatory challenge of lead-free plastic pipes in India. Earlier this year, following a National Green Tribunal order, the Ministry of Environment & Forest (MoEF) has drawn up a six-month roadmap to phase out lead-based stabilisers from plastic pipes.

Please read: Vikas ecotech may benefit from regulatory push.

The management said 20 percent of its manufactured pipes are lead free and the same can be scaled to 100 percent within a year once the government enforces the same.

Valuation & outlook
The management has guided for over 12 percent volume growth in the current fiscal and expects EBITDA margin in the range of 15.5 percent to 16 percent. This is commendable given the increase in competitive landscape and surge in raw material prices. In the near-term, the company expects polyvinyl chloride (PVC) prices to ease off, which should also aid margins.
In the medium-term, Supreme industries is expected to benefit from the shift to the organised plastic processing space on account of the implementation of the Goods & Services Tax.
Due to its well diversified business model and strong balance sheet, the management seems well positioned to meet incremental demand from packaging, furniture, piping and auto industries.

However, valuation for this consumer discretionary focused company is at a premium. The stock is currently trading at a 32 times FY19e earnings, which is ahead of the sector average (19 times) but below that of its key competitor in the piping business: Astral Poly Technik (46 times FY19e earnings).moneycontrol