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Supreme Industries: CD Equisearch assign 'accumulate' rating with a raised target

CD Equisearch Pvt Ltd | 16 Jan, 2017  | Follow Author | Add to my Favourites 
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Supreme's fancy for purveying value added products is no secret as it has painstakingly added such products to its portfolio over the years. Its plastic piping systems division, for instance, introduced varieties of valves, floor traps and unions to pad its margins. Launch of advanced products - cPVC products (2'' to 4'') for industrial applications; large diameter cPVC pipe system; CPVC fire sprinkler system; hi-tech low noise silent pipe  system; Aqua Gold PVC plumbing system; Schedule 40 cPVC products (2.5'' to 4'' category) - gently buttressed revenue share of value added products from a measly 12.8% in FY09 to 33.4% last fiscal (see chart).

Persistently unveiling distinguished consumer products (read: premium furniture)  - designer chairs; mono block gas molded chairs; - is no mean feat not least due to ever changing consumers' tastes and preferences. Wherefore premium products now account for nearly half of its consumer business sales as against 30% in FY11, though its pace has sagged in last two years.

String of high capex is likely to continue for the company plans to invest Rs 250 crs ($36.6m) - Rs 87 crs ($12.8m) in H1 -this fiscal to set up a 20000 mtpa PVC pipe facility at Jalgaon (to be commissioned by Q4)and install new extrusion lines for PVC & PE pipes at Kharagpur, besides others. Protective packaging products business has also seen capacity augmentation at its Malanpur and Hosur plant this fiscal - cross linked block foam capacity ramped up by 1400 mt. It continues to scout for land for a green site project in Southern India and also land for performance packaging films.

Yet its revenue mix has been a catalogue of varied trends for all but plastic piping systems business underwent periods of entrenched stress. Volumes of its industrial products business flat lined for three years ending FY15 before retrenching 7.6% last fiscal - revenues all but kowtowed to variation in volumes - thus affecting capacity utilizations of its auto components and consumer durables units at Talegaon, Durgapur, Chennai, Gadegoan and Noida. Selective participation in commodity furniture thwarted consumer products volume growth for at least three years (till FY15) before a vigorous rebound (+18.4%) last fiscal. Packaging business, though, soon vanquished stress by gradually expanding capacities for cross laminated films, cross linked block foam and protective packaging.

Steady growth in plastic piping business over the years helped overwhelm feebleness in other businesses as it inexorably launched at least 150 new products each year in the last five years; nearly 200 new products are planned to be initiated this fiscal, which include large size chemical storage tanks, new range of bath room fittings and new plumbing system for hot & cold water. Volumes which grew by at least 7.1% in last four years (peak: 18.6% last fiscal) would climb by 11.5% this fiscal (13% projected for next), boosting its intriguing and fast pacing plastic products volume share to 72.2% next fiscal from 69.3% last fiscal (yet not ridiculously small 62.5% in FY12). Both consumer products and packaging products business would also lend sublimity to nearly 10% aggregate volume growth over the next two years.

Seasonality of business involved makes prognosis of margins no less arduous for margins in its principal plastic piping systems business often peaks in April - Sep period.  Return on capital employed would soon begin to reverse course for the expected buoyancy in  earnings - resulting from stable margins and decent  growth in dispatches -  swamp  deleterious effect of  subdued polymer prices ; typical case of positive asymmetry (convex) for  unexpected increase in polymer prices  would galvanize revenues without hurting volumes, while  a depressed base rules out a  case of  substantial decline in  polymer prices. Strenuous debt repayment plans would further strengthen the coverage ratios.

The stock currently trades at 30.1x FY17e EPS of Rs 29 and 26x FY18e EPS of Rs 33.48.  Expected  sturdiness in earnings next fiscal risks suppression not least because of subdued  demand for  cPVC  pipes (volumes down over 16% in H1) and cross laminated films (-9.4%)  and  fickleness  in dispatches of  consumer products. India's demonetization of high currency notes  has already  sent  a 'torpedo  shock' to most consumer sectors - be it housing, consumer durables; FMCG ;  passenger vehicles -  and so could cripple demand for pipes & fittings, plastic furniture , packaging films and  material handling products over the next few months. Yet supremacy of its products in the organized market would rather help abate fastidiousness of the Indian consumer. On balance we reckon that the stock merits an 'accumulate' rating with revised target of Rs 1004 (previous target: Rs 971) based on 30x FY18e earnings (three year historical average: 27.2x) over a period of 6-9 months.

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About CD Equisearch Pvt Ltd

CD Equisearch Pvt. Ltd. is one of the leading stock broking firms in the country with strong presence in the institutional and HNI broking segment. The company boasts of a strong Equity Research Division, and has offices in the several cities in the country including Mumbai, Kolkata, Delhi, Bangalore, Hyderabad and Chennai. The company serves a huge clientele of over 4,000 retail clients, High Net worth Individuals, Non Resident Indians, large Corporate Groups, and Financial Institutions. For more information, please visit


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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.

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