Company Name – Supreme Industries Limited (Supreme) Current Share Price – INR 2,746 (February 17, 2023) Market Cap – INR 34,872 cr |
1. What is interesting about the stock?
Plastics have a wide range of uses for humans, including packaging, construction, transportation, electronics, medical devices, and consumer goods. Plastics are lightweight, durable, and versatile, making them a popular material for many applications. According to available data, China is currently the largest producer and consumer of plastic in the world. Other countries that are also significant producers and consumers of plastic include the United States, India, Japan, and Germany. However, the overuse and improper disposal of plastics have led to significant environmental issues, including pollution and harm to wildlife.
Supreme Industries Limited (Supreme) is India’s largest plastic products producer with a pan-India presence. It operates in four major segments including piping systems, packaging products, industrial products & consumer product categories with revenue contributions of 65%,16%, 13% & 5%, respectively in FY22. The Company has 27 plants spread over 12 states/union territories in all five regions of India. The Company exports to 55+ countries and distributes its products through 4000+ distributors.
Sector outlook
The Indian plastic piping industry is a rapidly growing sector that has seen significant growth in recent years. The industry is primarily driven by the country's growing infrastructure, construction, and agriculture sectors.
The Indian plastic piping industry is comprised of various types of pipes, including polyvinyl chloride (PVC) pipes, polyethylene (PE) pipes, and polypropylene (PP) pipes. These pipes are used in a variety of applications, such as water supply, drainage systems, gas pipelines, and agricultural irrigation.
The PVC pipe segment dominates the Indian plastic piping industry, accounting for more than 60% of the total market share. The demand for PVC pipes is primarily driven by the growing construction industry and increasing urbanization.
The industry is highly fragmented, with many small and medium-sized enterprises operating in the market. However, a few large players also hold significant market share. Some of the major players in the Indian plastic piping industry include Finolex Industries, Supreme Industries, Astral Polytechnik, and Prince Pipes.
Despite its rapid growth, the Indian plastic piping industry also faces some challenges, including competition from other materials such as metal pipes and environmental concerns related to plastic waste. However, the industry is expected to continue to grow in the coming years, driven by factors such as government investments in infrastructure and increasing demand from the agriculture and construction sectors.
The per capita consumption of plastic in India is estimated to be ~11 kilograms per year. In comparison, the per capita plastic consumption in the United States is estimated to be ~90 kilograms per year, which is significantly higher than in India. Similarly, the per capita plastic consumption in China is estimated to be ~38 kilograms per year, which is also higher than in India.
Business segments
Plastic piping division - The piping segment is the largest business segment. It accounts for ~65% of its consolidated revenue. The Company is present in all premium product types (uPVC, cPVC, HDPE, and PRR pipes) and the fitting segment, commanding higher realization due to its specialized nature. This segment's key drivers include demand growth from both the agricultural and real estate sectors.
Industrial products - Supreme caters mainly to various B2B customers in this segment- primarily automotive, consumer durables (CD), and material handling components. In the automotive segment, the Company is a tier-1 supplier of automotive companies. The material handling component segment of the Company makes crates, pallets, bins, dustbins, etc. A strong uptick in e-commerce sales is also boosting demand for its material handling products.
Packaging division - The Company’s product offerings under this segment fall under three categories: protective packing (PPD), cross-laminated film products (CLF), and specialty performance film division (PLD). The protective packing division (PPD) comprising EPF foam, air bubble film, and cross-linked foam accounts for ~50% of the segmental revenues. Under the cross-laminate film (CLF), Supreme sells mainly tarpaulin, bags, fumigation covers, vermi beds, rainwater harvesting sheets, and pond liners. In specialty performance films (PLD), the Company makes multilayer co-extruded film up to seven layers, which is used by various applications, ranging from oil films to thermoforming films, vacuum pouches, bulk bags, UHT milk films, etc.
Consumer products - The consumer products division comprises the plastic furniture business. It is the second largest plastic furniture manufacturer in India, next to Nilkamal. The Company is a pioneer in injection-molded furniture with about three decades of experience in it. It is also expanding its range of blow-molded and Roto-moulded furniture with almost 50% of its segmental revenues coming from premium products.
2. Key Historical Financials
Supreme revenue and profit have been growing 12% and 18% on a CAGR basis respectively in the last 5 years
EBITDA margin has come down from 20% in FY21 to 16% in FY22. Margin further weakened in Q2FY23 due to lower PVC resin prices and inventory losses. A stable margin for the next few quarters could be around 13-14%
Fall in EBITDA margin led to lower net profit in FY22 and Q3FY23 on a YoY basis
Working capital days increased from 20 in FY21 to 45 in FY22 driving a lower cash flow conversion (CFO/EBITDA) ratio
ROCE and ROE came down in FY22 to 35% and 28% respectively – but are still quite healthy
3. What is my view on company valuation?
Supreme is trading at a P/E (TTM) of ~42x as against the median P/E (5 years) of 27x. The sectoral median is also ~20x currently, so the Company is valued higher than the sector on account of its better working capital management and return ratios. However, taking into account the normalization of profits expected in the next few quarters, it would be advisable to wait for the price to correct to its median P/E levels at least before entering the stock.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Any economic slowdown directly affects the consumer products segment of the Company as people spend less money on discretionary items
Volatile crude prices have a direct impact on the products as it directly impacts the raw material costs and any price increase typically leads to a drop in demand in certain segments of the business
About the Author
I have over 18 years of experience in private equity and public markets. I am an engineer by background and MBA from a premier institute in India.
Disclosure
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.