Supreme Petrochem Ltd

priyank9 · July 3, 2014, 6:13am

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.

value_investor · July 3, 2014, 7:04am

whichcould years(in myunderstanding wouldcreate

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

priyank9 · July 4, 2014, 7:19am

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.

csatishk · August 20, 2014, 9:11am

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.

hitesh2710 · August 20, 2014, 1:17pm

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.

priyank9 · September 8, 2014, 5:49am

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

priyank9 · September 8, 2014, 5:49am