Stock Review: Supreme Industries

 

 

A strong growth outlook, sound financials and a real estate boost make Supreme Industries an attractive long-term bet

 

MUMBAI-BASED Supreme Industries is expanding aggressively while its plastic goods business is growing fast. Rising domestic demand, sound financials and the expected earnings from sale of its commercial complex in Andheri make the company attractive for long term investors at current valuation.

BUSINESS:

Supreme Industries is India's largest manufacturer of plastic goods with annual volumes exceeding 1.9 lakh tonne and turnover over 2,000 crore. Established in 1942, the company now operates 19 plants across India and produces a range of plastic products such as pipes, furniture, industrial and packaging products. The plastic piping systems is by far the single-largest segment for the company contributing 43.6% to its total turnover in the financial year ended June 2010. Packaging products accounts for 24.1%, industrial products 20.5% and consumer products 11.8% of the turnover. Less than 3% of the company's revenues came from exports.

GROWTH DRIVERS:

The company spent 79 crore on expanding capacities during FY10. Further, it has lined up an ambitious expansion programme, which will expand capacities at most of its existing plants and add new products to its portfolio, such as composite LPG cylinder. The company will be investing nearly 270 crore during FY11 and further 55 crore by October 2011 under this expansion.
   Supreme has developed a commercial complex at its land in Andheri with 250,000 sq ft saleable area. This is expected to generate over 350 crore revenues, which will be used for the expansion project. Recently, the company got permission to build additional 25,000 sq ft of saleable area, which will be ready by December 2010, thanks to additional FSI.

   In India, the consumption of plastic goods is growing fast with improving lifestyles and rising number of new applications for polymers. During FY10, the domestic consumption grew by 16% and is likely to continue growing in double-digits for the next 3-4 years. At the same time, with new polymer capacities coming up in India and Middle East, raw material prices are likely to remain soft in coming months. The company aims to achieve at least 20% growth in its polymer volumes during FY11. For the first quarter ended September 30, 2010, the company achieved 18% volume growth y-o-y.

FINANCIALS:

Over the past five years, the company's profits have grown at a cumulative annualised growth rate (CAGR) of 44% as against sales growth of 20%. The company has a history of strong operating cash flows and has consistently increased dividend in the past four years. During the September quarter, the company more than doubled its net profit to 40.3 crore, while the sales grew 37% y-o-y. The past couple of years, its PBDIT margins averaged above 15%, which rose to 16.5% during the September quarter.

VALUATIONS:

The company's shares, which had been on a secular uptrend over the past one year, have corrected after its 5:1 split falling over 12% in three weeks, despite its robust September quarter numbers. At Friday's closing price, the scrip is trading at 11.2 times its earnings for trailing 12 months, while the dividend yield comes at 2.5%. Considering the healthy growth prospects ahead and strong financials, it appears attractive for long-term investors.