Supreme Industries


(Abhishek Basumallick) #1

Notes from Annual Report 2010

  • The company expects to achieve 20%+ volume growth per year in medium term
  • No significant change in product wise share of revenue
  • Crisil has upgraded the rating outlook from A+Stable to A+Positive
    *** 1, 3 and 5 year sales growths are: 20%, 17.76% and 18.45% respectively
  • 1, 3 and 5 year PAT growths are: 48.6%, 42.39% and 43.66% respectively**
    *** Last 3 years average RoCE is 33%
  • Last 3 years average RoE is 34%**
  • Long term Debt-Equity ratio has reduced from 1.02 to .49. This should reduce even more with the increased sale of the commercial building space.

PLASTIC PIPING SYSTEMS

  • India‚Äôs capacity for PVC resin is 67% of demand. Rest is imported.
  • Kanpur plant‚Äôs capacity to be expanded from 8000 tons p.a to 15000 tons p.a. Plant is to be commissioned by Dec‚Äô10
  • Newly launched Lifeline CPVC grew more than 120%
  • ‚ÄúAqua Gold‚ÄĚ plumbing system for cold water has grown by over 50%. It is successfully replacing GI pipes.
  • Expects the renovation market to drive demand as more buildings undergo renovation
  • Polyethylene pipes have grown over 100% by volume
  • Exports have reduced by 9.21%

FURNITURE

  • Growth of 26% by value and 23% by volume - indication of improved pricing due to better branding
  • Planning new factory in Andhra Pradesh - plan to start production by end of 2010
  • Plans to increase exclusive franchise showrooms from 209 to 300 across India in 2010

INDUSTRIAL PRODUCTS

  • Bagged all plastic body washing machine project from Whirlpool - production to begin by Sep‚Äô10
  • Bagged order for manufacturing Tata Swach water purifiers from Tata Chemicals
  • Expanding capacity in Noida,Gadegaon and Durgapur to meet Tata Swach requirements
  • Volume growth of 25% and value growth of 20% - indicative of pricing pressure

PACKAGING PRODUCTS

  • Volume growth of 24%
  • New 5 and 7 layer lines are operating at 100% utilization
  • Expanding capacity of the 7 layer line by over 50%+ (from 6000 tons to 9500 tons)
  • Expecting a growth of 25% and expecting to reach full utilization by June 2010
  • The Khopoli plant unit was the first and only multilayer packaging company to receive the BRC (British Retail Consortium) certificate to export to European markets.
  • Very good traction seen in the construction and insulation business
  • Growth in the insulation division impacted due to unavailability of skilled labour

CONSTRUCTION

  • One block of the ‚ÄúSupreme Chambers‚ÄĚ at Andheri has already been sold for 20.5 crs and negotiations are on for a few more.
  • Commercial property offtake looks weak and it may take some time to sell all the units

Expected EPS (not adjusted for the split) for June 2011 : 70-75
PE range : 8-12
Expected price range : 560 - 900 (June 2011)
Building sale : Expected sale price based on executed deal maybe between 270 to 340 crs. EPS from building sale may be around 108 - 136 (assuming the whole building is sold off in FY11).

**Payout ratio is about 30% so its possible to see an exceptional dividend of Rs 30-35/per share. **

Price of shares may go up significantly based on the property sale to adjust for one time income. That would be the cue to take profits.


How to find a Compounding Machine
(Ayush Mittal) #2

This is one good stable company.


(Donald Francis) #3

Absolutely. Anyone who wants to update himself/herself quickly on why this is such a stable growing business, should read this excellent pieceSupreme Industries stock story Link: …/…/…/…/company/supreme-industries/stock-story , put up earlier by Abhishek.

Thanks Abhishek for the update. There seems to be strong traction across segments. Its heartening to see the very strong growth in its main segment of Plastic piping systems.

The plastic piping system is 44% of sales mix…that may grow close 60-70% as per these indications with the other segments also registering 20% plus growth.It may not be a surprise to see Sales outstripping the last 3 years stable record of ~20% kind of growth by a big margin.

Abhishek - I am interested to know your take on Sales growth for FY11.

And valuation-wise this trading at close to its higher range 8-12?

Rgds,

Donald


(Abhishek Basumallick) #4

Personally, I think Supreme will grow their core business at around 20-25% for the next few years (assume 20% to be conservative). The additional cash flow is coming their construction business. The Andheri site is one example. Their AR for 2008 (or 2009, I forget which) mentions that they have plans to develop similar commercial buildings at Salt Lake, Kolkata. Being from Calcutta, I know that the prices of real estate here is really firm and going up.

The focus on improving margins and return ratios are also heartening to see. The reason I like this company is that I think the addressable opportunity in plastics is huge. India is a very low per capita consumer of plastic and that is only going to go up. So, companies like Supreme will definitely do well over a period of time.

Also, since this is purely a commoditized business, it is not easy to find companies with such decent margins and return ratios. They do not have a large analyst following so available cheap.

The PE ratio is on the higher side now, but it is likely to go much higher simply because of the additional profits from the Andheri building.

I like this company because I think there is a lot of downside protection on this one. It is a good defensive company which will compound your money.


(Ravenrage) #5

Excellent results !


(Vinod MS) #6

Hi,

What is the valuation now after the split? Is it a good time to enter


(Abhishek Basumallick) #7

Hi Vinod,

That depends on your holding period. I think if you have a 3-5 year horizon, Supreme is a good buy. It has a lot of things going for it. It has a good conservative management. Pays dividend. Reasonable RoCE, RoE in a pure commodity business. Has a diverse product range and good branding. Very good penetration in Tier-II, Tier-III towns in India.

Valuation wise, PE is right now around 11 (TTM), which I feel is on the higher side. So, you can starting SIPping. But I would not suggest that you do not buy in large quantities immediately.


(Abhishek Basumallick) #8

Since, we talked about Supreme about 2 years ago, I thought, it is a good time to perk up this thread. The stock has done extremely well over this period and continues to be strong.

Putting in some comments from a HDFC Sec report that came out today.


Triggers

  1. SIL√Ęs net sales & PAT are estimated togrow at a CAGR of 20.5% & 17% respectively over JY12-14, likely to be driven by capacity expansion, increased share of value added productslike SILPAULIN, CPVC pipes and addition of new business verticals like plastic faucets, composite pipes and LPG composite cylinders. SIL targets toachieve a turnover of Rs. 60 bn by FY16, a CAGR of 20% over the next four years.
  2. Per capita consumption of plastics in India could improve due to strong focus on irrigation, infra & agriculture sectors by the Government. SIL expects its plastics volume growth to be 16% in JY13, higher than the industry growth of 10-12%. The company is well placed to exploit the available opportunities.
  3. Well-diversified product portfolio, strong brand equity and market position across segments gives SIL an edge over its peers. SIL isthe only Indian company to have technology to manufacture Patented Cross Laminated film Products (Silpaulin). SIL expects this product to be a major growth catalyst.
  4. SIL will be able to offset margin pressure on commodity segments through higher contribution from value-added products. We expect SIL√Ęs OPM to remain stable over JY12-14.
  5. With strong operating cash flows, SIL is likely to fund its huge CAPEX plan of Rs. 1.1 bn over JY12-16 mainly frominternal accruals. Further, proceeds from sale of remaining portion of Supreme Chambers would enable it to part fund its CAPEX plans & reduce its debt.
  6. Over the last three years, institutional holding in SIL has increased consistently from 0.68% in Q2JY10 to20.4% in Q4JY12. This shows the extent of confidence and trust the institutions have in this company. Steady revenue growth on large base from reputed management could result in gradual re-rating and institutional holding could increase further.
    **
    Valuation & Recommendation **

We have valued SIL on sum of the part basis (core plastics business on PE basis, construction business on expected profit per share basis and Supreme Petrochem on market cap basis), thus arriving at a price target of Rs. 322. We recommend investors to buy SIL at CMP and average it on dips in the price band of Rs. 240-253 for our target price over the next one to two quarters.


Personally, I am expecting a June 2013 stock price of about 320-350.

Disclosure: I continue to hold Supreme and it continues to be the largest position in my portfolio. So, I have a obvious vested interest.


(Akbar Khan) #9

Hi Abhishek,

Thanks for bringing alive this thread.

I attended the AGM in Mumbai… it was the first AGM I attended for any of my investments, hence I was more of an observer.

The chairman’s speech was circulated… it is also available at

http://www.bseindia.com/xml-data/corpfiling/AttachHis/Supreme_Industries_Ltd_210912.pdf

Observations:

1). Meeting started dot on time… I was couple of minutes late and the Chairman’s speech was in progress.

2). Most of the Directors and also Shareholders who asked questions are old.

3). There is a change in Company Secretary and Mr. R J Sahoo has taken over from O P Roongta who has retired after 40 yrs

4). The composite cylinder that the company would be producing would be costing double the current cylinder cost. It will be sold to refineries and not directly to the user. The composite cylinders are explosion proof and approved by authorities in Europe. Equipment is also ready at suppliers end. Initial production would be catering to export. It would generate 145 Cr in 2-3 years. I asked their youngest Director V K Taparia if it makes sense to invest in cylinders when we are moving towards piped gas in cities. He said at least 10 years there won’t be any issues with demand for cylinders.

5). Company’s current borrowing cost is 9.85%. The fixed deposits raised from shareholders which are bearing higher costs are being retired and they are not raising new funds by this route.

6). Capital investment is being made in West Bengal to reduce the cost of freight.

7). Nilkamal and finolex were named as competitors. No competitor in Cross Laminated film.

8). 52 funds have invested in the company with the holding being 20.6%

9). Focus on increasing share of high value added products and getting out of low value add products like commodity furniture.

10). First two months of the quarter (July, August) had shown growth of 33%. Expecting volume growth of 16%. Value growth will be higher due to shift to higher value added products.

11). There is slow down in real estate due to which the company is not able to sell the Andheri Building premises. however it is not going for distress sale. This could result in an increase in borrowing upto 100cr to meet their needs.

12). There were requests for bonus, changes to AGM date to Oct, factory visit which the Chairman tried to ignore saying it would be discussed at board meeting.

Obviously I am invested in Supreme and would continue holding it for now. Looks good to grow 25-30% and the stock should also follow in the same path.


(Hitesh Patel) #10

supreme seems to be one of the most unsung wealth creators of the market.

I agree with you it will be a steady compounder. Available at trailing PE of around 15 based on fy 12 (june ending) eps of 19. Looking at the growth projections by the management, I think this could potentially double in 2-3 years without too much sleep disturbance.

They are market leader or among top 2-3 in each of the 4 business segments they operate in.

and the growth with margin improvement over the years is fantastic.


(Aksh) #11

This definitely has investment merits. This is the stock one can hold longer if things don’t work out on short term basis.


(ranvir dehal) #12

With the recent drop in crude prices and appreciation of the rupee…the downside is limited .


(Hemant V Bhatia) #13

Conf Call details -Capital Market.

Supreme Industries
Q1 Sep'12 growth was abnormally high due to lower base of last year and higher sale of piping products due to delayed monsoon
The company held its conference call on 29thOct'12 and was addressed by Mr. M P Taparia MD

Key highlights

  • During Sep'12 quarter, the company processed about 60012 MT of polymers, up by 28% y.o.y and in terms of value, the growth on y.o.y stood at 30% to Rs 597 crore. However, Sep'11 was a low quarter in terms of volume and value growth, hence quarterly growth numbers looks elevated on y.o.y comparison.
  • For Sep'12 quarter, Plastic pipe segment sale stood at Rs 300 crore (Rs 200 crore for Sep'11 quarter), Consumer product segment sale stood at Rs 50 crore (Rs 50 crore for Sep'11 quarter), Industrial product sale about Rs 129 crore (Rs 106 crore for Sep'11 quarter) and Packaging product sale Rs 125 crore (Rs 109 crore for Sep'11 quarter). OPM for Sep'12 quarter for Plastic pipe segment stood at 14.8% (11.5% for Sep'11 quarter), Consumer product segment stood at 11% (11% for Sep'11 quarter), Industrial product at 9.2% (11% for Sep'11 quarter) and for Packaging product at 18% (17% for Sep'11 quarter).
  • Strong growth in plastic piping segment is because of delayed rainfall together with lower inventory of raw material being carried at competitors end resulting in spiraling of prices. Also the business of CPVC pipes both for replacement and new construction segment continue to remain strong.
  • Management expects volume and value growth of about 16% and 25% y.o.y basis, respectively for year ending June'13. Although things are going well for the company, as per the management, right now the uncertainty is so high that it is prudent to be conservative.
  • OPM is expected to remain around 14-15% for year ending June'13. Interest cost is also expected to be lower y.o.y as some loans will be repaid and also the interest rate on y.o.y is expected to be lower. Company has current debt of about Rs 585 crore as on Sep'12.
  • Sale of value added products as % of total sales stood at 31% during Q1 ending June'13 as compared to 28% for Q1 ending June'12. Management's endeavor is to take it to around 35% in next couple of years.
  • Supreme petrochem, the subsidiary of the company is expected to generate volume growth of 30% for the year and with better EBIDTA margin. The debt is also expected to come down by 50% y.o.y to around Rs 75 crore.
  • Management does not envisage any sale of commercial assets during the year as it expects prices of its real estate properties to rise higher given its prime location and other advantages.
  • The company has committed a capex of Rs 400 crore for expansions during the 12 months period ending June'13. This includes the following expansions: -

The new unit at Hosur in Tamilnadu for protective Packaging Products with an investment of about Rs 25 crore which commenced operations during Sep'12. Construction of building at New Unit for expanding capacities of Cross Laminated Film at Halol (Gujarat) is completed during Oct'12 and 4000 MT capacities got operational and further 8000 MT capacity will be operational by Mar'13.

  • Composite cylinder capacity of 5 lakh numbers is expected somewhere in Mar'13. However clarity from the government is yet to emerge.
  • Overall, from the capex of about Rs 400 crore, management expects to garner additional turnover of about Rs 1100-1200 crore and additional capacity of about 70000 MT plus 5 lakh cylinder capacity will get generated.
  • On demand side, the industrial demand continued to remain weak and that is the reason, the margin for that segment has come down slightly. However, management expects to recoup the margins in remaining part of the year.
  • Raw material prices in general have come down from Oct'12 onwards, however it is difficult to gauge a trend on it.
  • Industrial subsidy during the quarter stood at around Rs 5 crore. The other income for Sep'11 period was higher due to higher dividend income for that quarter.
  • Company has planned to enter into bathroom fittings whereby it envisages using same distribution line and investing about Rs 16 crore in the business, which will generate about Rs 50 crore of revenue in period ending Sep'14.
  • Also the company has plans to venture into composite pipes used in evacuation and exploration of crude oil and natural gas, however the management did not share the details on technology and capacity.

(Kunal Pawaskar) #14

Hi!

You might find this analysis of Supreme Industries useful. I agree with most of the Valuepickr members too that its a great company to own for the long-term. Just that I am a bit hesitant to add at the current valuations.

Cheers!

Kunal Pawaskar


(ranvir dehal) #15

Nice report…

One thing is for sure…supreme is a great company…It is far better to pay a fair price for a great company than to pay great price for a fair company…The words of Great Warren Buffett.

disclosure…adding postns even at current levels


(ranvir dehal) #16

Chart patterns of supreme indicate a possible upmove of 15-20 percent soon after a consolidation for four long months . similar price action was witnessed from mar12-july12 and then a break out for 30 percent upmove .

cheers

ranvir


(Abhishek Basumallick) #17

Supreme Industries: Growing in an organised manner

A company run on sound lines

The immediate thought that comes to mind after purveying through its annual report and accounts is that Supreme Industries ranks supreme in its product lines - well almost. According to Capital Market magazine the company with the highest revenues by far under the heading of Plastic Products is Jain Irrigation. Supreme checks in at No. 2. The name plate of the company does not give any clue as to what this 70 year old makes and markets, but that is really not the point. The way I see it, it must rank as an icon among the many family run enterprises that dot the Indian corporate landscape - and going ahead at full throttle at that. More to the point, it is in the ability of the promoter family to keep the company functional under one large umbrella inspite of the considerable passage of time -and in not having to meet the same fate as that of other family run companies of similar vintage. The Taparia family which controls the board by virtue of its majority shareholding presents an image of a unified group. The family directly owns 49.6% of the voting stock. But non residents and OCBs or overseas corporate bodies - who presumably represent the interests of the family - hold another crucial 0.59%. Including this bit of the apple pie, the family gets to lord over** 50%** of the voting stock. This represents a dicey holding pattern - but nevertheless. The holding of the management is enacted through several closely held companies.

Besides the chairman B L Taparia, there are four other family members donning the surname Taparia who have seats on the company’s board of directors. (In other words they also get to control the composition of the board consisting of nine members). Of this number, three members are employed by the company in their capacity as managing director or as executive directors. The chairman of the board on his part makes do with a minor honorarium. The three executive directors however make up for this lapse. The combined remuneration of the four family members accounts for 12% of the total compensation package of Rs 1.1 bn during the latest financial year. But full marks to the top gun for keeping all the family members cemented to the knittings.

For those who are not fully clued in, the company both manufactures and also trades in finished products. But the latter line of activity is more of an afterthought. It is primarily in the field of plastics and makes a host of value added items from the base material. Its output consists of five products groupings-plastic piping system, consumer products, industrial products, packaging products and composite products. That is to say it produces Polyvinyl chloride ** (PVC), ** High-density polyethylene ** (HDPE) **, Linear low-density polyethylene ** (LLDPE) and polypropylene pipe fittings and systems, injection moulding fittings, furniture, and plastic components for the automotive industry, material handling systems, flexible packaging film products, cross laminated film products, LPG gas cylinders, and composite pipes. ** That makes for a whole host of products. And apparently for logistical purposes, the products are manufactured out of **19 **factories spread over nine states and two union territories. The state of Maharashtra has the maximum number of units numbering six. The two union territories are Puducherry and Silvassa.

A snapshot of its financials

A snapshot of the performance highlights of the past 10 years makes for gripping reading. The production of processed polymers - as the company calls it - has risen in each year over the last ten years barring one year. The quantum of production rose from 91,913 metric tonnes in 2002-03 to 2.45 lac tonnes in **2011-12. ** Rupee sales on the other hand rose in each year over that of the preceding year. The value of sales rose from Rs 7.9 bn in the base year to Rs 32.2 bn in the latest year. Total income inclusive on other income did a similar over the ten year period. More importantly the pre-tax profit rose even more magnificently over the decade with the profit taking a leap in faith in 2006-07 and 2008-09. Put differently the total income net of excise rose 327% over the base year. But the pre-tax profit rocketed 1,817% over the same period. It may be noted that the other income quotient has quite some role to play in propping up the bottom-line in the latter part of the decade. In 2010-11 it accounted for 16.5% of pre-tax profit, with its share falling marginally to 14% in the latest year. The bulk of this other income constitutes a curious head of receipt called Industrial promotion subsidy.

The paid up capital over the decade rose from Rs 131 m to Rs 254 m (of the face value of** Rs 2** each) - that implies a 1:1 bonus issue of shares along the way. (The company also bought back and extinguished 22.1 lakh shares of Rs 10 each in 2008-09).This would have helped the management to accentuate its hold over the voting stock to a like extent by using company generated funds. The reserves and surplus rose far more dramatically from Rs 1.7 bn to Rs 6.1 bn after adjusting for the bonus issue. The company apparently sticks to a steady policy of paying out around 36% of post tax profits as dividends to its shareholders. Over 90% of the reserves and surplus is made up of general reserves, with securities premium reserves constituting almost the entire balance reserves.

From the looks of it, it also looks like some sort of a capital intensive operation. The gross block at year end amounted to an impressive Rs 12.5 bn which in turn supported gross revenues from operations of Rs 29.6 bn. That makes for a year end ratio of 2.3:1 on a rough reckoning in favour of revenues. In the last two years the company has added **Rs 3.4 bn **to its fixed assets base. So it is imperative on the part of the company to generate cash from its operating activities-or resort to additional debt to pay for the gross block addition.

Drastic pruning of debt

The company has drastically pruned debt during the year. At year end the outstanding debt fell to **Rs 3.5 bn **from Rs 5.14 bn previously. This was due to the net effect of several factors. On the one hand the company resorted to a much higher cash generation of Rs 2.9 bn from operations against Rs 1.7 bn previously. This gain was also due to the fact that while the revenue from operations rose 20%, the biggest item of expenditure by far - the rise in the cost of materials consumed rose at a marginally lower pace of 19.4% to Rs 19.6 bn. (The cost of materials consumed includes purchase of finished goods valued at Rs 1 bn against Rs 858 m previously). The other big item of expenditure at Rs 4.2 bn and categorised under ‚ÄėOther Expenses‚Äô rose even more softly by 12.5% as did the employee payouts. The ability to control cost increases led to better margins. Besides, the low inventory levels on the one hand coupled with a reduction in inventory holdings by Rs 314 m on higher sales, would have led to better cash flows. In line with this trend was the fall in trade receivables relative to rupee sales. Importantly enough the company is able to sell cash down which shows its hold over its trade debtors. Significantly, the trade payables in either year end were maintained at a higher level than the trade receivables. The current assets and current liabilities almost cancel out each other in value terms.

With a higher level of cash generation from operations, and the significantly lower outflow of cash from investing activities as compared to the preceding year, the company was able to pare debt drastically. It may be noted that the cash outflow on the purchase of fixed assets fell sharply to Rs 810 m from Rs 2.6 bn previously. (In the cash flow statement that the company has prepared - the cash flow from investing activities reveals a net cash inflow in both the years when actually it should read as a net cash outflow. The net figures should be denoted in parenthesis and not as shown). The year- end cash is kept at the bare minimum in either year. Such a definitive management of funds points to a very professionally run company.

No lateral investments

It also helps that the company has not given birth to a plethora of siblings as a means of a ‚Äėdiversification effort‚Äô. As a matter of fact it only boasts non- current investments of Rs 336 m at year end, the same as in the preceding year. Almost the entire investment is in an associate company called Supreme Petrochem Ltd. The extent of its holding in this company is not known. But the auditor‚Äôs report of the consolidated accounts states that the company does possess a foreign subsidiary and that they did not carry out the audit of this sibling. Judging from its very brief financials it is not a company of any significance. But still it is not known what the name of this sibling is and in which manner the stake holding in the sibling is held - unless I am missing out on some essentials here.

The company does not hold any cash in the form of debt investments. Attempting to make a buck or two by rolling over debt funds is the bte noir of India Inc. The only group company in which it has a stake is Supreme Petrochem - an associate company. It also boasts investments in the form of bits and ends in non group companies. The other income schedule reveals that it received dividend income of Rs 81 m during the year. This income can only pertain to its associate company. In which event it would amount to a judicious return on its equity stake in the associate.

From the looks of it this is a company which has a firm grip over its environment. The share would definitely rank as an investment for the long term. The share price oscillated from a high of Rs 238 to a low of Rs 160 during the financial year.

(http://www.equitymaster.com/outsideview/detail.asp?date=01/11/2013&story=1&title=Supreme-Industries-Growing-in-an-organised-manner)


(Hitesh Patel) #18

I think supreme remains one of the better bets in current market scenario. Inspite of the run up in stock price, it does not seem overtly expensive.

In the shorter term stock seems likely to breakout and give sharp upmove.

It has broken out above the congestion zone of 300 or thereabouts and seems to be consolidating above it.


(Soumya Kanta Panigrahi) #19

Prasad,

I think this is one more stock that can meet your criteria of 10x in 10 yrs.


(Abhishek Basumallick) #20

I have got 10x in about 3 years in this!! So, I will definitely be disappointed if it ‚Äúonly‚ÄĚ does 10x in the next 10 :wink: