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Plastic King

Supreme Industries is India’s largest plastic processing company. Here’s why you should invest in it…

An annual capacity of 100,000 tonnes with 19 plants located in the country makes this 70-year-old company, India’s largest plastic processing company. Supreme operates in four major verticals – plastic piping (46.6 per cent of FY12 revenues), packaging film (24.2 per cent), industrial which includes dashboards and other automobile components (19.8 per cent) and consumer products which includes furniture (9.5 per cent).

Strong momentum: Supreme saw its revenue grow by 24 per cent (y-o-y) in the June 2012 quarter on the back of strong traction in all segments. Volume growth too was up 20 per cent at 68,261 MT. Piping volumes were up 24 per cent (y-o-y), industrial 18 per cent and packaging by 15 per cent. The company has guided 25 per cent growth to its topline in FY13. In terms of volumes, that translates to around 16 per cent growth – higher than the industry growth rate. Analysts tracking the company expect it to maintain its momentum going in FY13 with topline growth estimates pegged at 20-22 per cent.

One-off margin gains: The company reported Ebitda margins of 19 per cent in the June 2012 quarter. This was on the back of inventory liquidation, higher value added sales and other cost control measures. Higher value added business has improved its share from 29 per cent (last year) to 31 per cent. The company guides that this segment should grow to 33 per cent of sales by FY13. It has also guided margins to moderate to 13-14 per cent levels in the current financial.

Capacity gains: Supreme has planned a capex of Rs 1,100 crore in the next five years out of which Rs 250 crore is estimated to be spent in FY13. Composite cylinders are expected to go into production by March 2013. Also on the cards is the production of composite pipes used in oil exploration. The company’s new plant at Hosur (Tamil Nadu) is expected to become operational from September 2012 while its 500,000 MT unit at Halol (Gujarat) remains on track. Phase 1 capacity expansion of 12,000 MT is expected to come online by October 2012.

Real estate hangover: The company’s sole real estate project in Mumbai suffers from the slowdown plaguing the sector with more than two-thirds remaining unsold. There was no revenue recorded from its real estate project during the last quarter and the management has indicated that it does not plan to sell these properties at lower valuations; hence no additions have been made by analysts to the company’s EPS from this project.

Outlook and valuation: Supreme has been able to compound its earnings at an impressive rate of 38 per cent annually in the past five years. Its return on capital is at a phenomenal 51 per cent without resorting to too much debt. Given the capex expansions, benefits will start coming in this year itself. Supreme should maintain its momentum going forward. At the CMP the stock trades at 13 times its TTM earnings. Buy.