7 April 2020

Supreme Industries Stock Analysis

Supreme Industries is a market leader in India's plastic industry. The company was established in 1942 and has its head office is Mumbai. The Taparia family is the promoter of the company and they hold ~ 49.7% of the company. As per FY19 data, the company recorded a consolidated turnover of Rs 5,611 Crores and had a capacity of 400,000 MTPA.

Business Overview
The company's core business activity is processing polymers into finished plastic products.



  • India's piping market (Worth Rs 32,000 Crores) is very competitive with the organised sector having a 65% to 70% market share
  • The PVC pipe segment is expected to grow in high single digits over the next 5 years primarily on demand from Government's measures that target affordable housing, piped water to all houses and better irrigation facilities
  • Piping segment contributes ~ 56% of Supreme's revenues; the company faces competition from companies like Astral, Finolex, etc. This segment has low entry barriers and thus faces intense competition from local players
  • In the packaging space, the company derives majority revenues (~45%) from XFILMS
Financial Overview
The company changed its financial year end from June 30 to March 31 in FY16. We have not adjusted the effects of the same in the snapshot given below.

10 Year Financial Snapshot
  • The company has given double digit growth in revenues for a good 8 out of 10 years
  • While the operating profit margin has gone down from 16.12% in FY12 to 13.98% in FY19, the net profit margin has remained in the 8% to 8.5% range because of lower interest rates
  • The effective tax rate for the company is ~ 33% which will go down after the corporate tax cut, we can expect higher NPM margins in the future
  • The bright side is that value-added products (OPM > 17%) now contribute ~ 35% of the revenues and the management is stressing on increasing the share of these products.
The company has generated positive operating cash flow every year atleast for the last 10 years. Against Rs 3,021 crores of net profit for the last 10 years the company has generated OCF of Rs 3,823 Crores. The company has regularly paid dividends and has maintained a dividend payout of ~ 35%+

Utilization of cash flows
The company has maintained its debtor days at 23-25 which shows that the company is able to collect its receivables on time. The company has maintained a volume growth of ~ 7.7% over the last decade and the realization per KG has also increased from Rs 110/KG to Rs 141/KG.

Volume analysis
The company has maintained high ROE and ROCE ratios over the last 10 years. However, since the company's raw materials are cyclical, the margins and return ratios fluctuate on a yearly basis. We believe it is better to look at the performance over a period of atleast 3 years.

The principal raw materials of the company are plastic polymers which are derivatives of crude oil. The raw materials make up ~ 65% of the expenses. Volatility in crude oil prices can hit margins adversely. A fall in crude oil prices may reduce realization and cause  inventory losses. An immediate rise in crude oil prices can impact margins as it takes some time to pass on the price hike to the customers.

Valuations

At a market capitalization of Rs 10,150 Crores, the Supreme Industries stock trades at a PE Ratio of 21.41 and a M.Cap to Sales ratio of 1.8x. This is the lowest that the stock has traded in the last 3-4 years. We have been actively tracking the company for long term investment opportunities but the valuations always seemed expensive. Post Covid-19 scenario would not be rosy for the company because of multiple headwinds in the real estate space and low rural spending, but Government measures to boost spending in these areas could push up infra spending.

While we would ideally like to buy the stock at a market capitalization of ~ Rs 7,000-7500 Crores, the current levels provide a good entry point. Investors can add a small portion to their portfolio at current price point and on dips of 15%-30%, if any, can further increase allocation. Although the long term prospects are bright, we don't recommend a full allocation at current prices. The ideal PE zone to buy this stock for good returns over the long term is 14-16.

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