Supreme Petrochem Ltd

My thoughts for Investing in Supreme Petrochem Ltd.

Management:

  • Very Strong promoters and management team with strong track record in Indian markets. M.P.Taparia
  • If you look at the Balance Sheet and check historical records, I observed that the management is good at asset allocation and not stretching its balance sheet with high debts or recoveries left over. (Similar trend could be spotted in the other promoted company Supreme Industries.
  • Buy back is on at Rs.70/- per share for close to 60 lakhs shares. That itself talks about managements confidence in the Business.

Business:

  • The company has been converting styrene monomer into Polystrene (PS) which is basically used in plastic industry like refrigerator, air conditioning body, television etc. Company holds 50% market share of the PS market in India.
  • PS is more or less a commodity and sold as a commodity. There is no great technology or barriers which can stop others to make it.
  • The company is now making a more value added product from its PS i.e. EPS and XPS. This requires a bit of technology, again no big rocket science here also. But the Difference would come from the way the product would be sold. EPS and XPS are likely to be sold as a Product under a brandrather than a commodity.
  • Secondly, This new materials would be having applications into much larger industries like Real Estate, Construction, Infrastructure, Cold Warehouses. This Industry are here to grow in India in coming decade.
  • Globally majority countries are using this advanced materialsand I believe that in India too the trend would pick it up.
  • The company is trying to increase the presence and awareness about this product in the Country.
  • The company has gradually created capacity of 150000 M3, and at present only 9044 m3 Is utilized that too more in the export markets of middle east. The capacity is created after the first positive response from their customers and so in the AR it has mentioned that they are going to increase the distribution in the retail channel in coming years for this products.
  • There is high scalability in this new products and I believe selling product would also lead to marginal improvement in the margins from the current levels.
  • The Property of this product EPS and XPS is that it reduces the temperature of the inner wall by 4-5 degrees and speeds up the construction activity,giving a green house effect.
  • 60% of China, 80%of Europe and US are using EPS as material forconstruction. Developing countries like Brazil, Kenyaetc are alsostarted using this material. Lot of references are available

Quantitative Analysis:

  • The Debt isvery less i.e. 65 cr.
  • Capex is not much required as capacity are ready and under utilized.
  • Inspite of the nature of business being a commodity, the company is still generating high ROCE% >20% in last couple of years. In 2013 it was at 30%.I feel this is more due to management and its ability to compete even with low margins. ROA% are high andMargins are low, but High ROCE% attracts more competitors, but ROCE% is just not factor of good business but management decisions also.
  • Withthis new product I feel that the company would be able to maintain high ROCE% and generate returns higher than the cost of capital for a sustainable period of time, given the scenario of Infrastructure improves in coming future under the newgovernment.
  • Sales cagr of 18% between 2008-2013, PAT Cagr 19-20% between 2008-13. This was the weak period of the economy which came down from 9% to 4.5% gdp growth. Rest you could expect for future.

RISK:

  • The most important risk is theacceptance of the new Products in the Indian market. Failure of the same would just change the Investment case.
  • The volatility in the Oil prices and Rupee Dollar movement, as majority raw materials is imported.

The Company don’t have any strong Moats whichcould sustain long term. However the first mover advantage, scale and low margins would prevent new players to jump into this business and keep them away for a atleast first 4- 5 years(in my view). More players would in myunderstanding wouldcreate more awareness and expand the application and the market.

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whichcould years(in myunderstanding wouldcreate

who are the main competitors of the company? and what are there market share forlast 2-3 years?

At Present the Supreme Petro is the main player in this new emerging business, and there is 1 American company. The reason I mentioned this para because in my observation,5- 7 years after the product is well accepted, lot of playersenter this space,but leaders takes a big jump in that period. And the reason that many players can enter this business in many countries made me feel that it want be so difficult to develop this product if the market is ready to consume large quantities.

Another positive according to me is that BASF was a leader in India in this space of EPS, but as their focus as a company was very small for this product, they have decided to move to value addition and much high grade products, which directly helped Supreme Petro take the advantage of this, as there is no other major nationalized player.

In Pure PS business Supreme Petrohas 50% market share.

In commoditised businesses being the lowest cost manufacturer is perhaps the only moat on can think of. This is true of almost all manufacturing businesses. I too was / am obsessed with sustainable competitive advantages however using such a criteria eliminates most of the chemicals cos…atul, vinati and couple of others were ideas which i looked and passed as it did not meet this criteria (I had come across few businesses in pharma /chemicals which i tracked in 2000- 03 which had high margins /ROEs but were making generic products - however i managed to connect with a global pharma major which was sourcing from them and they mentioned that the product is so generic and low in volumes that no one makes it globally and it is such a trivial item in their basket that they don’t mind paying marginally higher price as they would sooner or later phase the main product which uses this chemical). Most of them now are in doldrums (stagnation at best) - whereas the same cos were in limelight in for a short period.

I am aware that this is a generic observation and might not help in making an investment decision in this case. I shall go through Supreme Petrochem in detail and revert only if I have insights to share.

Great write up priyank.

I looked at the results and since past 3 quarters the results have not been great in terms of profitability. Any specific reasons attributable to that?

Having gone through your write up, the main bet here is on the success of the new products that are supposed to be game changers for the company till competitors catch up.

I think the perception of the management pedigree, ongoing buy back and the present state of the markets are helping the stock price.

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Dear Hiteshji,

Sorry for the late reply, as I was lined in my religious activities.

Regarding the Low profitability, there are couple of reasons in my view…

a) The import of Polystrene from Singapore had become very cheap and also from other Asian countries ( ready made consumer appliances imported from neighboring Asian countries also led to less pick up of polystyrene). However the situation shall change as in the current budget, import duty from Singapore has been increased to 7.5% making domestic manufacturing competitive.

b) Last year the major suppliers of Styrene Monomer( main r/m for polystyrene)in asia, had gone for routine maintenance , which led to increase in the raw material cost. This plants are likely to be operational from October this year and all should be providing regular quantity by Dec2014 to Mar 2015. So Raw material price would also correct going forward.

c) 2- 3 New Styrene Monomer capacities are coming up in Singapore, China etc which are likely to increase supply of the this r/m in the market by next yr, hence prices could settle down.

d) As mentioned in the Annual Report also, that due to high Polystrene prices, substitute like ABS and poly propylene is used in some industries…

e) Even the overall Consumer Durables and Consumer Appliances market was low last year, if that is likely to pick up in coming years the overall demand for PS would definitely increase.

Yes Hiteshji, my bet New Products, if you study developed markets, this product has a very high penetration, and even developing countries, like Brazil, CHina, Kenya, South Africa, and lot more examples, are gradually increasing the usage of this product and are also now quite sizeable to what we see in India.

Hiteshji, if you have any further view negative to my thoughts , it would enlighten my knowledge.

regards,

Priyank Kothari

Dear Hiteshji,

Sorry for the late reply, as I was lined in my religious activities.

Regarding the Low profitability, there are couple of reasons in my view…

a) The import of Polystrene from Singapore had become very cheap and also from other Asian countries ( ready made consumer appliances imported from neighboring Asian countries also led to less pick up of polystyrene). However the situation shall change as in the current budget, import duty from Singapore has been increased to 7.5% making domestic manufacturing competitive.

b) Last year the major suppliers of Styrene Monomer( main r/m for polystyrene)in asia, had gone for routine maintenance , which led to increase in the raw material cost. This plants are likely to be operational from October this year and all should be providing regular quantity by Dec2014 to Mar 2015. So Raw material price would also correct going forward.

c) 2- 3 New Styrene Monomer capacities are coming up in Singapore, China etc which are likely to increase supply of the this r/m in the market by next yr, hence prices could settle down.

d) As mentioned in the Annual Report also, that due to high Polystrene prices, substitute like ABS and poly propylene is used in some industries…

e) Even the overall Consumer Durables and Consumer Appliances market was low last year, if that is likely to pick up in coming years the overall demand for PS would definitely increase.

Yes Hiteshji, my bet New Products, if you study developed markets, this product has a very high penetration, and even developing countries, like Brazil, CHina, Kenya, South Africa, and lot more examples, are gradually increasing the usage of this product and are also now quite sizeable to what we see in India.

Hiteshji, if you have any further view negative to my thoughts , it would enlighten my knowledge.

regards,

Priyank Kothari

Hi Priyank, nice witeup…somehow missed reading it earlier.

  • “60% of China, 80%of Europe and US are using EPS as material forconstruction. Developing countries like Brazil, Kenyaetc are alsostarted using this material. Lot of references are available”
  • Will this EPS/XPS be an additive or is it replacing some existing material? Did you try to get some inputs from construction industry experts? That will help to understand if this has potential. I’ll try from my end.
  • Cheers
  • Vinod

Hi Vinodji…,

No haven’t yet able to get any feedback from construction industry as in Mumbai, However I am trying to. It would be good to get your feedback to on the same.

Some parts of the product, in my understanding is replacing existing products, like the eps beads which could be used in replace of sand used in construction industry ( Sand has become scarce and costly).

regards,

Priyank Kothari

Hello Priyank, What is the update of Supreme Petro results has been improved of Q3. Is the new product mfg has started?

Tejas,
Wednesday 20th april 2016 Results, will be out for year end ( 9 month ended). So things will be clear. However my expectation is that the company had declared 1.50 dividend last yr for 12 months, and this year for 9 months it has already declared Rs1.50/-. And now the notice is that it plans for a final dividend. That means for 9 months the company plans to share higher dividends, means the share of profits will also be high compared to last 12 months. ( its purely my assumption).

Regarding the second part of your questions, Manufacturing is already on for the new products. Its now important to see how the product is picking up and its capacities are utilized going forward.

Dear Priyank, thanks for your helpful reviews of this share, what according to you will be the share value of this company in the next 3 months? Is it a right buying price, today it quoted around RS. 140/-. Your inputs will be much appreciated. Thanks

Dear RajKumar,
Sorry for a very late reply, I dont think that it would be appropriate to suggest to recommend now as in last 30 days price has shoot up and results are already out.

However, i would continue to believe in this business and management for long term. 3 months is a very short time frame for me to give u any judgement. But if you have view that the products is increasingly seeing acceptance in the market, than the future is bright for this company.

Disclosure: I continue to HOLD the stock in my portfolio and I dont suggest any BUY or SELL.

I have attended the AGM of Supreme Petrochem on 12-Jul-2017 at Mumbai.

The 52 week high as well as historical high, was attended by the stock on 27-Apr-2017 at â‚ą446.80. In my view, the softening of the rates of Supreme Petrochem at the stock exchanges, since 27-Apr-2017, are for the following two reasons:-

  1. Because the price of raw material (Styrene Monomer), which is derivative of crude oil, has fallen, between 17-Feb-2017 till 15-May-2017, hence the inventory losses on account of raw materials, in Q1 FY 2018.

  2. All the white goods industries stockiest & dealers were interested in off loading the old inventories of “Polystyrene” from 15-May-2017 till 30-Jun-2017, because implementation of GST. And demand is being affected & EPS came down from Rs.4.73 (Q1 FY 2016-17) to Rs.1.07 (Q1 FY 2017-18).

As per my point of view, both the things are in the past & already being discounted as well.
Because in Q2 FY 2017-18 the EPS is Rs.3.79 as against Rs.2.97 in Q2 FY 2016-17 (a growth of 27.61%).

Supreme Petrochem’s 2 new products are being included in CPWD’s - Daily Schedule Rates, since 2016 & they are:

Expandable Polystyrene (EPS)
Extruded Polystyrene Insulation Board (XPS).

Also EPS 3D panel is one of the technologies selected under the “Pradhan Mantri Awas Yojna”. Where in you do not need BRICKS, PILLARS & BEAMS, while constructing GROUND PLUS 3 houses. They have sold 42,000 MT “Expandable Polystyrene (EPS)” in 2016-17. It is a low cost construction, built in thermal insulation, faster construction & safety against termites & earthquake etc.

Regarding: Styrene Methyl Methacrylate (SMMA), they are the only player in India so far.

Please go through the, CHAIRMAN’s STATEMENT at AGM dated 12-Jul for detailed information.

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EAA299FB-AB53-4725-ADD7-869CBE8A7C84-205934.pdf (450.4 KB)

This thread is silent despite there being steller performance by Supreme Petrochem in recent quarters! Company seems to be in new earnings trajectory.

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True really needs to study the turnaround story of this co. Anybodea what is the market size main RM and size of opportunity. Management is excellent we all know. But other factors needs to be studied.

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Hi… do you continue to hold Supreme Petrochem ?

Let me know what is your view for the next 5 years.

FY21 AR notes

  1. Revenue increase of 17%, OPM increased from 5% to 21% leading to PAT going from 102.6 cr to 477.5 cr.
  2. Mgmt. paid back 246.25 cr. out of the windfall profit in form of, interim dividend @ 2.5/- (23.5 cr.) , final dividend @ 12.5/ - 117.5 cr., share buyback 24,81,287 / 9,65,01,958 - 48.85 cr., reduction in share capital of 56.4 cr.
  3. Growth Drivers: Increased demand of Company’s products from OEMs, closure of one of the Company’s competitor’s plant and ban on import of air conditioners with refrigerant, improved demand from appliance manufacturers helped in achieving better performance of Polystyrene (PS) and Expandable Polystyrene (EPS) businesses. Speciality Polymers & Compound Business (SPC) division also did well as compared to the previous year. Styrene Monomer (SM) vapour leak at the PS/ EPS plant of one of Company’s competitors at Visakhapatnam in May, 2020 causing deaths and destruction in the vicinity of said plant led to its closure. The plant remains closed as of publication of AR. Supreme reaped it’s benefit’s from Q2’21.
  4. Raw material : Styrene Monomer (SM) ; Manufacturer of : Polystyrene (PS) & Expandable Polystyrene (EPS) , Speciality Polymers & Compound Business (SPC), Extruded Polystyrene Boards (XPS), Styrene Methyl Methacrylate (SMMA)
  5. Styrene Monomer (SM) : Imports of SM were stopped for over a month in Q1. Q2 also saw constraints due to unscheduled shutdown in world and a shutdown of large SM plant in Europe. Prices were largely stable during first half, China’s new SM capacity additions helped in moderating price in Asia. Two large world scale SM plants were commissioned in China in early 2020. A third SM plant with 6,30,000 MT capacity has been commissioned early this year in China. This augurs well for Company since the centre of gravity of SM trade flow shifts from China to India and the company being the biggest consumer of SM in India, stands to gain from this changed trade flow. Self sufficiency for SM in China also will mean more stable pricing regime due to removal of volatility associated with China’s SM imports.
  6. Polystyrene : Market degrew 12% in FY21. Company grew 25% due to increased demand from the appliance sector, competitor shutdown, Ban on import of Air Conditioners/refregirator with refrigerants (PG Electroplast also made this point their call). final recommending for levy of Anti-Dumping duty on imports of Polystyrene from certain countries was issued by the DGTR in June 2020. Govt. has not issued the required custom notification giving effect to the recommendations of DGTR. The Company has filed a writ in the Delhi High Court against Department of Revenue for same. Outlook : Company expects 16-18% market growth in F22 owing to larger appliance manufacturing and opening up of economy leading to demand for stationary/beads/bangles etc…
  7. Expandable Polystyrene (EPS) : market degrew 5.75%, company grew 20% due to growth in cold storage segment for vaccine handling, fish boxes, plastic crates for hygiene reasons apart from closure of competitor’s plant at Visakhapatnam. Outlook : We expect a growth of 10% in the current year due to appliance demand growth as well as growth in cold chain development happening across the country.
  8. Speciality Polymers & Compound Business (SPC) : Volume growth of 30% at 11,800 MT despite nationwide lockdown in the first quarter. Main growth drivers were customized UV stabilized pre-colour HIPS and FR PS compounds for appliance/ electrical and electronics segments. Pre-coloured ABS compounds are well received in many applications. Growth in masterbatch business is driven by Black MB in pipes for agriculture and portable water distribution, drip irrigation, mulch films, pond liners, packaging and industrial foam. White and additive masterbatches have shown steady growth in packaging and appliances. Company’s additive MB business is now firmly established with several prestigious customers added to the Company’s customer base. Outlook : SPC business is expected to grow by 25% in the year 2021 – 22 due to increased range of products now being offered by the Company
  9. Extruded Polystyrene Boards (XPS) : Sales degrew 8%. Refrigerated truck business picked up strongly ( COVID vaccines). Some of the important infrastructure projects of national importance are using Insuboard. Total number of distributors increased to sixty four during the year. XPS business is expected to grow by 25% - 30% during the year provided there are no restrictions imposed on the construction activities in the country.
  10. Styrene Methyl Methacrylate (SMMA) : Company was producing SMMA on campaign basis in order to utilize the spare capacity of the Polystyrene plant. However, due to increased demand of PS from domestic customers, the Company had to regretfully forego SMMA business in the year under review. However, in order to protect the SMMA compounds business which was developed with great efforts, the Company has tied up with a Japanese maker of SMMA for regular supply of SMMA. With this arrangement in place, Company hopes to revive the SMMA compounds business in the current year.
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Thank You Raj for AR transcript. But going further do you see any MOAT or monopoly/duopoly in supremes buissness. This extraordinary profitability is due to closure of competitors plant. But what will happen when import from china normalize. There are so many questions we need to answer. Of course managment quality is AAA but other factors are not in hand of anyone .

Any opinions on the results by the forum members?
To me at first glance the results seem to be pretty decent and not at all represent the fall in the share price that has happened over the past 2 days.
For now, I have added on my holdings for the stock considering that it is pretty well valued after the near 15% wipe out in the past 2 days!

Now, the results for this quarter are below:

Financials Q2 FY2022 Q1 FY2022 QoQ % Change Q2 FY2021 YoY % Change
Total Income â‚ą 1195.3530 crs â‚ą1055.9744 crs Up Tick / Down Tick13.20% â‚ą700.7309 crs Up Tick / Down Tick70.59%
Net Profit â‚ą127.0713 crs â‚ą146.2510 crs Up Tick / Down Tick-13.11% â‚ą86.1532 crs Up Tick / Down Tick47.49 %
EPS â‚ą13.51 â‚ą15.56 Up Tick / Down Tick-13.17% â‚ą9.16 Up Tick / Down Tick47.49%

The profit seems to have been affected by changes in inventory which has gone up.

Disclosure: Invested with stake increased post results