Initial Coverage Report

Initial Coverage Report

Supreme Industries Ltd. | Initiating Coverage Report

Supreme Industries Ltd.

20th July 2022

Volumes to rally while realizations may correct

Supreme Industries Ltd. (SIL) is India’s most prominent plastic product
manufacturer, with a presence across multiple plastic businesses. SIL holds
leading positions in all four business segments (plastic pipes, packaging,
industrial, and consumer products). The company generates most of its
business from the plastic piping business, where it has the pole position with
an approximately 12% market share of the plastic piping industry. We
initiate coverage on Supreme Industries Ltd. with a NEUTRAL rating and a
target price of Rs. 1,958.

NEUTRAL
CMP Rs. 1,893
TARGET Rs. 1,958 (+3.4%)

 

Company Data

MCAP (Rs. Mn) 2,40,475
O/S Shares (Mn) 127
52w High/Low 2694 / 1669
Face Value (in Rs.) 2
Liquidity (3M) (Rs.
Mn)
107

Elevated PVC prices led growth may not sustain for long

Overall realization/kg for SIL has shot up abnormally from Rs. 141 in FY19 to
Rs. 197 in FY22. This spike has come because of the elevated PVC prices.
Material price cooling has already taken place, and it looks like some softening
will be seen in coming quarters. This fall in PVC prices will result in inventory
losses and dent profitability. Though realization levels might not come down to
historically low levels, FY22 levels are challenging to sustain, given the supply,
situation continues to normalize.

Shareholding Pattern %

Mar 22 Dec 21 Sep 21
Promoters 48.85 48.85 48.85
FIIs 16.16 16.16 10.38
DIIs 19.65 19.70 25.30
Non-Institutional 15.34 15.29 15.47

Breakthrough efforts are needed to increase the contribution of Valueadded products

The company has put in considerable efforts since FY12 to increase the share
of Value-Added Products (VAP) to its sales. From FY17 onwards, the
contribution of VAP to total sales has stagnated in the 38-40% range. The
company needs to accelerate efforts to be able to breach this range.

Supreme vs Nifty

s vs n


Source: Keynote Capitals Ltd.

Optionalities have started performing

The company achieved a much-needed breakthrough with its composite LPG
cylinders in FY22. SIL received an order for Indian Oil Corporation Ltd., which
marks the introduction of this product in the domestic market. Currently, the
scale is very small to move the needle, but SIL can benefit immensely if this
becomes widely acceptable. Another positive is that this product falls under
the VAP category. More considerable success can increase the VAP
contribution to total sales and might result in valuation re-rating.

Key Financial Data

(Rs mn) FY22 FY23E FY24E
Revenue 77,728 80,449 83,940
EBITDA 12,421 13,676 14,270
Net Profit 7,641 8,279 8,451
Total Assets 52,607 59,601 67,585
ROCE (%) 27% 25% 22%
ROE (%) 28% 25% 21%

Source: Company, Keynote Capitals Ltd.

View & Valuation

We initiate coverage on Supreme Industries with a NEUTRAL rating and a
target of Rs. 1,958 (24x FY23 earnings). Over the last two years, sales and
operating profit has grown based on rising PVC prices and exceptional
performance from Supreme Petrochem. Sustainability of such performance
looks difficult therefore SIL is expected to give mid to high single-digit growth
at both levels. Strong performance can sustain/correct moderately if PVC
prices start moving up from current levels.

Chirag Maroo,
Research Analyst
chirag@keynotecapitals.net

Supreme Industries Ltd. | Initiating Coverage Report

About Supreme Industries

Incorporated in 1942 at Wadala Mumbai, Supreme Industries Ltd. (SIL) was
promoted by the family of Kantilal K Mody. In 1996, the Taparia family took
control of the company by outright purchasing shares. Supreme Industries Ltd.
is one of the largest plastic processors in India. In FY22 alone, SIL processed
more than 400,000 MT of polymers.

The company operates in 4 different segments in the plastic processing space
where they manufacture a plethora of plastic products starting from PVC
Pipes, CPVC Pipes, Plastic Furniture, Packaging Films, Yoga Mats, Plastic LPG
Cylinders, Dustbins, Crates, etc. This makes SIL the most diversified plastic
player in India. Apart from this, Supreme Industries Ltd. also holds a 30.78%
stake in an associate company called “Supreme Petrochemicals Ltd.”

Segment Product Application
Plastic Piping System UPVC, CPVC, PPR, Overhead Tanks,
Septic Tanks, Bath Fittings, Solvents,
Drainage Systems, Sprinkler Irrigation
Systems, Casing Pipes, Column Pipes,
Screen Slotted Pipes, Double Wall
Corrugated Pipes, etc
These products find application in Building
Plumbing, Building Drainage, Civil & Infra
projects, Pressure Piping Systems, Bore Wells,
Underground Drainage & Sewerage for Civil
Projects and Infrastructure.
Packaging Products Protective Packaging Films,
Performance Packaging Films, Multilayered Cross Laminated Films
Used for cushioning/protection, Insulation,
Toys, Protection from water, rain, and making
packages containing edible items.
Industry-Specific Crates, Bins, Pallets,
ROTO Moulded Crates, Bins, and
Pallets.
Products are used in various manufacturing
setups for material handling, Waste
management, etc.
Consumer Products Moulded Plastic Furniture Various indoor and outdoor setups like houses,
offices, restaurants, gardens, etc.

Source: Company, Keynote Capitals Ltd.

 


graph

Supreme Industries Ltd. | Initiating Coverage Report

“Most Diversified Plastic Player” a plethora of plastic products manufactured and sold by
Supreme
Industries Ltd.

pps

Products – Plastic Piping System

pp

Products – Packaging Products

 

ip

Products – Industrial Products

Crates & Bins

cp

Products – Consumer Products

Furniture

Source: Company, Keynote Capitals Ltd.

Supreme Industries Ltd. | Initiating Coverage Report

Not only products, but the company is well diversified in terms of production units also. SIL has 25
production units spread across 10 states of India.
page4 table
Source: Company, Keynote Capitals Ltd.

 

Supreme Industries ltd. has a vast pan India network of production units
where the company manufactures products for single/multiple segments at
each production unit. Supreme Industries Ltd. has taken up three new
projects primarily for Plastic Piping Systems in the states of Assam, Odisha,
and Tamil Nadu. These facilities will come on stream during the first half of
the current year.

Segment Capacity (in MT)
Plastic Piping 525,000
Plastic Packaging 90,000
Industrial Products 80,000
Consumer Products 30,000

Source: Company, Keynote Capitals Ltd.

Supreme Industries Ltd. – Business Progression in Numbers


page4 Steady


page4 bulk

Supreme Industries Ltd. | Initiating Coverage Report


page5 plp


page5 cons

Constantly improving Net Working Capital (Days)

page5 net working capital

 


page5 roe and roce

 


page5 price driven


page5 -ve

Supreme Industries Ltd. | Initiating Coverage Report

Understanding The Piping Business

Indian Polymer Piping Industry Overview

Indian polymer piping industry is currently pegged at ~Rs.400-450 bn.
Significant demand for piping comes from irrigation, residential, and
infrastructure segments. These segments can be housed under public and
private projects undertaken by various institutes, companies, and the
government at multiple levels. This demand is generated from areas like
irrigation, WSS (water supply and sanitation), and real estate (mainly
replacing traditional steel pipes with plastic pipes and new projects). In the
coming years, the industry is poised to grow at 10%-12% p.a. and can reach
550-600 bn in size

This kind of growth will be driven due to i) the government’s infrastructure
thrust ii) various government schemes like “Nal Se Jal,” “Housing for All,”
“Pradhan Mantri Awas Yojna,” etc. iii) replacement of steel pipes with
plastic pipes iv) discovery of novel applications. Over the years, the plastic
piping industry has evolved from an unorganized segment-dominated
industry to an industry which organized players now dominate. This can be
attributed to multiple factors, including regulatory changes (GST, RERA, etc.)
and private players’ efforts on marketing, innovation, and distribution.

Four leading listed private players have managed to take away market share
from unorganized players. The list includes Supreme Industries Ltd, Astral
Ltd, Finolex Industries Ltd, and Prince Pipes & Fittings Ltd.


page6 market share

 

Market Structure

Polymer piping is a vast and the largest segment in the building material
space, offering significantly higher growth than other building material
industries. The industry is expected to grow at a double-digit rate and can
reach Rs. 550-600 bn. by FY25. The entire piping market can be divided into
various types of pipes with multiple uses based on the characteristics of
different pipes.

Supreme Industries Ltd. | Initiating Coverage Report

page7 comp

Comparison of Various Types of Pipes
Pipe Type Industry contribution
% as of FY19
Brief Detail
UPVC ~65% These pipes find application in irrigation and plumbing for potable water
supply. Demand for UPVC has grown mainly because of the constant
replacement of GI pipes as these pipes have higher durability and affordability
compared to GI. According to CRISIL, this segment can register a low double digit growth of around
10%-12% in the coming
few years.
CPVC ~15% These pipes are mainly used in plumbing systems as well as the distribution of
hot and cold water. This has been and is expected to be the fastest-growing
sub-segment because these pipes are corrosion, fire, and lead-free. Another
peculiarity of CPVC pipes is that they can withstand high temperatures.
According to CRISIL, CPVC pipes can grow at a 20% rate in the coming few
years.
HDPE ~15% These pipes find application in sectors like city gas distribution, chemicals, etc.
Apart from traditional applications like irrigation and drainage, HDPE pipes
gained prominence over metal pipes due to their durability and longevity. As
per CRISIL, the segment is expected to grow in the low double digits.
PPR ~5% The contribution of PPR pipes to the industry is very small and is used for
industrial purposes. These pipes are relatively costly compared to other plastic
pipes. This acts as a growth damper. According to CRISIL, this segment is
expected to clock a 6%-7% growth in the coming years.

Source: Prince Pipes & Fittings RHP, Keynote Capitals Ltd.

 

Piping Demand Mix FY14 vs FY19
fy14
fy19
Source: Prince Pipes & Fittings RHP, Keynote Capitals Ltd.

Supreme Industries Ltd. | Initiating Coverage Report

UPVC pipes continue to dominate the mix, but the contribution of CPVC has
gone up in the past few years. Its contribution is likely to increase given the
growth these pipes sub-segment is witnessing. The contribution of UPVC has
come down from ~70% in FY14 to ~65% in FY19, whereas the contribution
of CPVC has gone up from ~10% in FY14 to ~15% in FY19. It looks hight likely
that the contribution of CPVC will only head north from here based on the
demand scenario.

Comparing Parameters UPVC CPVC HDPE PPR GI
Life (Years) 20-25 30-35 50 50 15-20
Max Temp (Degree C) 60-70 90-100 90-100 90-100 200-250
Cost Cheaper than GI Cheaper than GI but costlier than UPVC Cheaper than GI but costlier than UPVC Cheaper than GI but costlier than UPVC Costlier than plastic pipes
Corrosion No effect due to chemical resistance Has anticorrosiveproperties Excellent anti-corrosion and chemical resistance Good chemical and corrosion resistance Corrodes Faster
Chance of Leakage Leakage free Leakage free for life Leakage free Leakage free but requires installation by skilled manpower Vulnerable to Leakage
Installation Done through cold welding Done throughcold welding Done through cold welding but these pipes are more tolerant to poor installation Fusion welded system which requires specialized training &
equipments
Time and energy consuming
Expected Growth 11%-12% 20%+ 12%-13% 6%-7%

Source: Prince Pipes & Fittings RHP, Keynote Capitals Ltd.

 

Manufacturing Process

page8 process

Supreme Industries Ltd. | Initiating Coverage Report

Supply Chain Structure

The piping industry generally follows a two or three-step distribution chain
where the company supplies to the distributor, who goes ahead and either
sells to a sub-dealer or directly to the end consumer. For large projects,
piping companies go through the distributor route or directly deal with the
end customer.

Plastic pipe is a bulky product; hence, distribution/manufacturing network
diversification plays a vital role for a plastic pipe manufacturing company.
Freight cost is a material cost component for pipe manufacturing players.
This cost can be significantly controlled by strengthening the distribution
chain and localizing production.

page9

 

Major Raw Materials and their Sources

PVC – Roughly half of India’s PVC demand is indigenously met and the rest is
met collectively by countries like China, Japan, Korea, etc.

CPVC – Most of India’s demand for CPVC is met by imports. India heavily
relies on countries like Korea, China, Japan, etc for its CPVC material. There
are very few CPVC resin suppliers globally and local pipe majors have already
tied up with these CVPC suppliers as CPVC pipes are expected to grow the
fastest.

ADD on CPVC – GOI in August 2019 imposed an “anti-dumping duty” on
imports of CPVC from China and Korea for a term of 5 years. As per data
shared by GOI, these two countries account for 32% of India’s CPVC resin
imports.

PPR – Almost 90% of PPR’s demand in India is domestically met

PE – For PE, roughly 60% of demand is internally met, and the rest is
imported from countries like UAE, Saudi, Singapore, and USA. These
countries account for the biggest import share of PE in India.

pvc resin

PVC Resin

Supreme Industries Ltd. | Initiating Coverage Report

Tailwinds for the Industry and Especially for Organized Players

GOI’s Focus on Improving Infrastructure – The government of India has
rolled out many initiatives to improve the overall infrastructure of the
country. They are putting immense focus right on building bridges, roads,
houses, water transport, etc. Pipes have an important role to play in almost
all infrastructure projects. Apart from this, large organized players have a
better chance to cater to the demand coming out of these projects as
smaller players will not be able to fulfill such huge demands within time and
of the right quality. Therefore, organized private players with an established
presence will have a better chance against unorganized smaller players to
cater to this growing demand.

Market Consolidation – Plastic piping industry, like many other industries, is
increasingly being dominated by organized and well-managed players.
Market share in the hands of the top 4 organized players has gone from 25%
in FY18 to 33% in FY22. This has been possible because small players are
squeezed from two sides, on one side, government reforms around imports,
the introduction of GST, etc have made life difficult for these players and on
the other hand, strong organized players are continuing to invest behind the
right things such as production, branding, distribution, and innovation,
unlike small unorganized players who lack the muscle power to invest
behind these initiatives. The combination of these two has forced and will
force a lot of small players out of the industry.

Development of Private Infrastructure – Along with the government, there
are a lot of private sector investments in infrastructure which will propel
India’s future growth. Piping as a construction material doesn’t contribute
more than 5% to the overall project cost therefore it won’t take a lot of
mind share from customers. Private players are constantly positioning
themselves as the best pipe manufacturers with the help of advertising at
multiple platforms and events. Also, organized private players have a lot to
offer in terms of the product range. These two factors offer them an
advantage to tap the private infra growth over smaller unorganized players.

Plastic pipes will continue to replace GI pipes – Plastic pipes are much
more cost-effective compared to traditional GI pipes. Apart from this, plastic
pipes offer several other benefits like low chances of leakage, less/not prone
to corrosion, less/no impact of chemicals, etc. Due to this, there is a
replacement wave, customers across the country are replacing GI pipes with
plastic ones.

Major Players in Plastic Piping Industry
astral

Supreme Industries Ltd. | Initiating Coverage Report

1. Plastic Piping Business – Supreme’s Supremacy

Supreme Industries is India’s largest plastic pipe manufacturer and seller.
The company roughly sold ~275,000 MT pipes in FY22 alone. This scale is
slightly lower than Astral Ltd, and Prince Pipes and Fittings Ltd put together.
Both these leading companies in FY22 managed to sell ~288,000 MT pipes at
a combined level.

In the piping business, SIL clocked a more than 50bn turnover in FY22. The
company enjoys leadership with an 11%-12% market share of a 400-450 bn
piping market. A good chunk of the sales for SIL comes from the sale of PVC
pipes, the demand for which is generated by both the irrigation and the
housing and infrastructure sectors. Currently, the company has a pipe
manufacturing capacity of 525,000 MT, which is expected to go up to
585,000 by the end of FY23.

The company has talked a lot about the potential of the export market. Also,
the company has been sharing growth numbers from time to time, but
exports as % of total sales are not encouraging.

 

Plastic Piping Business Progression in Numbers


page11 fy23


page11 steady

 


page11 fy21


page11 fy19

Supreme Industries Ltd. | Initiating Coverage Report


page12 inc price


page12 Operating

 

Plastic Piping Business Progression

Over the years, Supreme Industries Ltd. has made relentless efforts in
building and improving its plastic piping business. As a result, the
company has not only managed to maintain leadership but also gain
market share from weaker players and become even more dominant in
the industry.

 


page12 share

 

Continuous Investments in Building Production Capabilities – Over the
years, the company has continued to invest in its piping business which has
turned into a powerhouse of growth for the company. The company has
increased its production capacity year after year which now stands at more
than 5 lakh MT. This capacity will further go up to 5.9 lakh by the end of FY23
as the company has planned to put up 3 new plants driven by the Plastic
Piping segment.

 


page12 ~8%

Supreme Industries Ltd. | Initiating Coverage Report

Constant Addition of New VA Products – Supreme Industries Ltd. has
constantly worked on improving its piping and allied product portfolio. The
company from being a PVC pipe manufacturer has developed competencies
in manufacturing all types of pipes. Not only this, SIL has introduced a
plethora of bath fitting products which fetch the company a healthy ~20%
margin. These efforts are still going on, and SIL continues to innovate and
expand its product portfolio by introducing new products every year. Piping
product portfolio has grown at a CAGR of ~5% in the last 5 years.

 


page13 skus

 

Entry into Segments where SIL has High Winning Probability like Water
Tanks
– Plastic Overhead Water Tanks have emerged as an emerging
opportunity that provides potential to big players like SIL for increasing
market share. SIL has been at the forefront of taking this opportunity and has
set up multiple manufacturing facilities to tap Rs.50-60 bn plastic tanks
market.

If executed properly, this segment can generate meaningful sales for SIL. In
the latest annual report, the company highlighted that they would be
producing tanks at eight different locations. This will enable the company to
service customers more economically. SIL has a robust expansion plan to
increase the tank business through a distribution strategy of directly serving
retailers from production units

Expansion of Distribution Network – Plastic pipe is a bulky product. It
becomes extremely important for a company like SIL to diversify and
increase its production and distribution reach. Along with increasing its
production capacity over years, the company has also been cognizant of
strengthening its distribution network. SIL has nearly doubled its distribution
reach in the past 7-8 years.

 


page13 CAGR

Supreme Industries Ltd. | Initiating Coverage Report

Plastic Piping Peer Analysis


page14 top4

 

Market share gain by leading listed players can be attributed to 3 key
strategies the prominent private players followed over the years.

Brand Creation – Private players have changed how marketing is done in this
commoditized industry by roping Bollywood superstars and building a brand
presence at prestigious sports tournaments and other events. Unlike
traditional trends, industry players are willing to spend 2-3% of their revenue
on marketing activities.

Expanding Production & Distribution – This is another area where all
prominent private players have made significant strides. The leading players
have diversified their production by putting up plants at various locations
across India and have also strengthened their distribution network year after
year. This helped them immensely as the plastic pipe is a bulky product and
proximity to customers makes it increasingly viable to supply goods at lesser
freight cost, which is a material cost component for all plastic piping players.

Product Innovation & Portfolio expansion – Over the last few years,
prominent private players have demonstrated their capabilities of producing
innovative (new to market) products and received encouraging customer
responses. Having created a strong foundation of innovation enables them
to spend significantly on marketing while constantly increasing their
capacity.

These areas continue to be on the focus list of leading private players who
are trying to improve in these areas each passing day. Players who will
continue to excel in these three areas will continue to gain
disproportionately over smaller players who don’t have the operational and
financial bandwidth to focus on these areas

 

Supreme Industries Ltd. | Initiating Coverage Report


page15 all

 

Except for Prince Pipes & Fittings Ltd, all the piping players have diversified
into other businesses. All of them have followed a different path. Astral has
chosen to get into businesses like adhesives, paints, and faucets, which are
not complimenting the existing business. Supreme Industries Ltd. has
chosen to get into adjacent plastic segments, whereas Finolex has chosen
to integrate + diversify by dabbling in the PVC business.


page15 astral

Long term PVC price (in USD/Ton) analysis

page15 long

Supreme Industries Ltd. | Initiating Coverage Report


page16 comp

 

All the major players have seen significant jumps in realization due to the
recent spike in PVC prices. Astral Ltd. has the best realizations/kg because
of its higher sales contribution from CPVC pipes which is a premium
product compared to PVC. Prince Pipes & Fittings Ltd. has also shown
considerable improvement over the last few years and has surpassed SIL.
Realizations for SIL and Finolex are lower because of the higher
contribution from UPVC pipes. All players will have increased focus on
CPVC in the future as it is the fastest-growing sub-segment with healthy
margins.

SIL will have to catch up in comparison to peers in terms of Advertisement
spending as % of Sales

page16 sil

 

Supreme Industries Ltd. has been on the backfoot for years even though
other players in the industry have turned pro marketing. So far, SIL has
come out unscathed without spending heavily on advertising. If SIL doesn’t
step up ad-spends, it can result in market share loss for the company in the
long run.

Supreme Industries Ltd. | Initiating Coverage Report

Operating margin in the plastic piping business for all the players are in
line except Finolex

page17 op

 

Peer comparison on other financial parameters
Particular Astral Supreme Industries Prince Pipes & Fitting Finolex Industries
FY22 Total Installed Capacity (MT) 3,74,882 7,25,000 3,05,000 6,42,000
FY22 Total Sales Volume (MT) 149,569 393,908 139,034 461,819
FY22 Debt/Equity (x) 0.04 0.01 0.12 0.07
6Y Cumulative CFO/EBITDA 84.2% 66.4% 56.8% 64.4%
FY22 Piping Market Share (Based on Revenue) 8.0% 12.0% 6.3% 9.2%
Current PE 70.7 24.5 26.4 8.22
FY22 Receivable Days 26 24 67 30
FY22 Net Working Capital Days 22 44 86 99
5Y Avg. ROE 18.4% 24.1% 19.6% 18.1%
5Y Avg. ROCE 22.7% 27.5% 21.2% 20.2%

Source: Company, Keynote Capitals Ltd.

Supreme Industries Ltd. | Initiating Coverage Report

2. SIL’s Packaging Business – Competition Questioning
Dominance

Supreme Industries Ltd. is a significant packaging player in the Indian
packaging industry. In FY22, the company sold 54,000 MT worth of
packaging products. SIL’s packaging product business can be divided into
three broad categories.

Performance Packaging Product

SIL is among India’s largest manufacturers of co-extruded multi-layer barrier
films and is the only company that has two imported 7-layer blown film lines
from Windmoller & Holscher, Germany which are world leaders in multilayer blown films. The company also has
a bag and
pouch-making machines
for critical vacuum packing.

Protective Packaging Products

SIL’s protective packaging division offers solutions for a diverse set of
industries like sports goods, healthcare, toys, white goods, etc. The
company has prepared custom-designed solutions which can prevent dents,
breakages, and scratches during transit. SIL has a strong blue-chip clientele
both in India and overseas.

Cross Laminated Products

SIL is a leader in the plastic Tarpaulin Industry. For many years, the company
has been manufacturing multi-layered Cross Laminated UV Stabilized Films
which are used in various agricultural and industrial applications. Supreme
has a technical collaboration with Rasmussen Polymer Development AG,
Switzerland. Technology to manufacture SILPAULIN is a patented one and is
limited to only 6 countries in the world. These products are lightweight but
are extremely strong and have gained acceptance in geographies like
Europe, America, the Middle East, etc

Packaging Business Progression in Numbers (Rs. mn)


page18 pp


page18 rg

Supreme Industries Ltd. | Initiating Coverage Report

The revenue share of the plastic packaging segment in the overall revenue
pie has significantly reduced from 23% in FY16 to 16% in FY22. This is a
cause of concern for the company as most of the products in the plastic
packaging segment belong to the value-added category where operating
margins are greater than 17%. It seems like the trend is playing out because
of increased competition from local players who are manufacturing substandard and cheaper products. Based on
realization
& margin trend, it
looks like SIL is unable to exercise pricing power in this segment, unlike
other businesses.


page19 f


page19 o


page19 c

 


page19 d


page19 i

Supreme Industries Ltd. | Initiating Coverage Report

Looking at the operating profitability timeline for the packaging business of
SIL, one thing is very evident they are unable to exercise pricing power on
customers despite having the best-in-class customers and making the best
quality product.

Profitability has seen steep degrowth since 2016. Hopefully, some part of it
will come back with Tarpaulin business normalizing on account of normal
business this year. For the last two years, the Tarpaulin business was getting
impacted due to COVID as India was in a country-wide lockdown during the
peak season of Tarpaulin sales which is Q1 & Q2. Things can change if this
business starts contributing closer to 40%.

Bottom line is, competition is impacting SIL in the packaging business and
that is visible in numbers. The company has mentioned the impact on the
business from competition on various occasions in various communications
in the past. Given the current product portfolio and competitive scenario in
this business, it might not be possible for the company to reclaim the
historical 17% kind margins.

Packaging Business Progression
page20 table

Supreme Industries Ltd. | Initiating Coverage Report

page21 table

 

Commentary and actions such as producing economical products from reprocessed granules and
scrap indicate that there is intense competition.

Supreme Industries Ltd. | Initiating Coverage Report

3. Supreme’s Industrial Products Business – Coming back on track

The industrial components business of Supreme Industries Ltd. can be
subdivided into three categories based on the customer base and the type
of product of the company.

Automotive

In the automotive business, SIL supplies various exterior and interior plastic
body parts to auto OEMs. SIL generates maximum revenue from auto.

Consumer Durables

SIL in its consumer durable business manufactures exterior boxes for
washing machines, ACs, Coolers, and Refrigerators

Material Handling

The Material Handling business of Supreme manufactures various products
like crates, pallets, bins, etc. which find application under various industrial
setups

Industrial Products Business Progression in Numbers


page22 a


page22 r

 


page22 s


page22 o

Supreme Industries Ltd. | Initiating Coverage Report


page23 r


page23 o

 

Industrial Products Business Progression
page23 table

Supreme Industries Ltd. | Initiating Coverage Report

page24 table

 

SIL in the industrial business is serving top-notch customers in the
automobile and consumer durables segment. Apart from this, the company
is also catering to varied industries with its material handling products.

This business segment, unlike other segments, has shown record volumes
since 2017. Also, the margins have come back to the normal range of 8%.
These margins cannot be expected to go to a 15%+ range because this is a
B2B business where the SIL is dependent on customers who will always have
bargaining power over SIL.

This bargaining power of customers over SIL can be seen in the company’s
action to set up a plant near its large AC customer in Ghiloth, Rajasthan.

The business provides good growth prospects as end-user industries like
consumer durables and auto are expected to grow. Also, entry barriers of
strong relationships and large-scale capacity will keep competition at bay
because it enjoys strong relationships with customers and is also capable of
delivering large quantities required by large customers.

Supreme Industries Ltd. | Initiating Coverage Report

4. SIL’s Consumer Products Business – Can it Breakout?

The Consumer Products segment of Supreme Industries Ltd. houses the
furniture manufacturing business of the company. SIL manufacturers various
type of plastic furniture which is used in various indoor and outdoor setups.
The company holds a leadership position in “Premium Range” plastic
furniture and manufactures furniture using Injection moulding, Blow
moulding, and Roto moulding technologies.

SIL in its furniture business enjoys excellent pan-India reach because the
company manufacturers plastic furniture at 7 locations across the country.
The company’s focus now is to create large retail showrooms across India
and strengthen this business. Supreme plans to have 100 showrooms across
India by the end of FY23.

Consumer Business Progression in Numbers


page25 c


page25 r

 


page25 s


page25 c

Supreme Industries Ltd. | Initiating Coverage Report


page26 r&c

 

page26 table

 

The story in the furniture business remains like that of packaging when we
look at aspects like unorganized competition. Unorganized players are giving
tough competition to SIL here as well. Apart from this, the company has
been talking about the export potential and its efforts.

Supreme Industries Ltd. | Initiating Coverage Report

Composite Cylinder Business – Some green shoots are
now visible. Sustainability & Scalability will be key things
to watch out for.

SIL manufactures composite LPG cylinders which can replace traditional
metal cylinders. There are good reasons for this switch to happen but
somehow it hasn’t happened yet. There are multiple advantages that
composite cylinders provide over traditional cylinders which are as follows.

  1. They are less than half the weight of conventional steel cylinders
  2. Wall transparency provides gas level visibility
  3. Explosion-proof
  4. Rust and moist proof

Despite the good quality and many advantages which the product provides,
SIL was unable to develop a business for composite cylinders as it is a B2B
product and switching decision lies in the hands of oil marketing companies.
Therefore, SIL had to wait for such a long time before it got an order to
supply 7,35,186 cylinders to Indian Oil Corporation Ltd.

Composite LPG Cylinder Business Progression
page27 table

Supreme Industries Ltd. | Initiating Coverage Report

page28 table

 

Supreme Pertochem Ltd.

Supreme Petrochem Ltd (SPL) was formed as a JV between Supreme
Industries Ltd and Rajan Raheja Group; the company started commercial
production in 1995 with the business of manufacturing Polystyrene (PS),
which is used in plastic industries like refrigerators, air conditioning bodies,
television, etc. SPL holds a 50% market share of the Polystyrene market in
India.

To widen the spectrum, the company is now making more value-added
products from PS, i.e., Expanded polystyrene (EPS) and Extruded Polystyrene
(XPS). SPL is now increasing its operations toward value-added products.

The company has two manufacturing plants. One is in Raigad, Maharashtra,
and another in Chennai, Tamil Nadu. The key raw material for
manufacturing PS and EPS is a Styrene monomer. International pricing and
demand/ supply risks are inherent in importing this raw material; therefore,
the company has entered annual contracts for procuring its raw materials


page28 sup

 

SPL showed abnormal performance post-COVID. Revenues of the company
rallied from ~27,000 mn. To ~50,000 mn. In a matter of 2 years. Not only
growth but also the margins are now on a trajectory that looks
unsustainable. The above chart shows historical data which says that
standard margins stay in the 3%-6% range. Even a 10% number in 2017 was
unsustainable. Currently, margins have doubled from 2017 levels as well.

Normalization of profitability of Supreme Petrochem will weigh on SIL’s
profitability just like it aided the profitability of SIL in a big way in the last
two years.

Supreme Industries Ltd. | Initiating Coverage Report

Historical Capital Allocation – Complete Reliance on Operations/Accruals
page34 his cap

 

A decade of cash flow history of Supreme Industries Ltd. depicts that almost
all the cash generated by SIL came from operating activities. On the
deployment front, almost 50% is deployed behind increasing production
capabilities.

SIL has constantly invested in plants and machinery over the years and has
increased its plastic processing capacity at a CAGR of 6% in the last 3 years
despite COVID disruption. The company has also planned further expansion
of its capacity which is expected to increase by 10% this year as well.

Almost 30% of this is paid back to shareholders in the form of dividends,
and the rest is used for repayment of borrowing, interest costs, and other
activities.

Based on the above breakup of cash inflow and outflow we think that the
capital generation and allocation activities of SIL look healthy and have no
red flags. SIL has relied on its internal accruals to expand its capacity and
has attained debt-free status. Apart from this, surplus generated funds are
given back to the owners of the company.

Supreme Industries Ltd. | Initiating Coverage Report

Management Analysis – Layer 1 indicates rearrangement requirements, and Layer two
indicates a pipeline of sufficient professionals who can step up.
Name Designation With SIL Since? Age Qualification
BL Taparia Chairman 45+ 87 B.A, B. Com
MP Taparia MD 45+ 84 B.A
SJ Taparia Ex. Director 45+ 74 BE. Mech
VK Taparia Ex. Director 35+ 66 B. Com
R. Kannan Ind. Director 8 74 M. Tech
RM Pandia Ind. Director 8 72 ME. Chem, BE
Ms. Ameeta Parpia Ind. Director 3 57 BA, LLB
S Behuria Ind. Director 3 70 B.A

Source: Company, Keynote Capitals Ltd.

 

Looking at the first layer of leaders, we can say that there are enough family
people with significant experience at the helm of Supreme Industries Ltd. One
concern is that 85%+ members are above the age of 65. This indicates a clear
need to rejig the top brass.

Second Level Management – Well-experienced & loyal professionals waiting in the wings
Name Designation With SIL Since? Qualification
AK Tripathi Ex. VP Plastic Piping 36 Exe. MBA, ISB
Vasudeo Malu Ex. VP Industrial Components 16 BE Mech
Susanta Patniak COO Protective Packaging 2 MBA, IIM C
Siddharth Roongta VP Cross Laminated Films 30 CA
Pradeep Kamat VP Composite Cylinders 7 Engineering Plastic
Sanjeev Jain VP Furniture 32 BE Mech
Manish Poddar VP Commercial 31 Cost Accountant
Sanjay Mishra AVP Business Head 6 B. Sc

Source: Company, Keynote Capitals Ltd.

 

A deep dive into the second-tier management team tells us that all the
segments are led by credible and capable leaders most of whom are with the
company for decades.

Supreme Industries Ltd. | Initiating Coverage Report

Compensation & Skin in the game
Particulars Mar-18 Mar-19 Mar-20 Mar-21 Mar-22
% Promoter Holding 49.7% 49.7% 49.9% 48.9% 48.9%
Promoter Salary (Rs. Mn) 282 292 330 439 464
% of PAT 6% 6% 7% 4% 5%

Source: Company, Keynote Capitals Ltd.

 

Promoter shareholding in the company has stayed close to 50% for the past
five years which signifies good skin in the game of the promoter. Also, their
salary has been in the range of 4%-6% of PAT, which is a comfortable
compensation range.

Top Shareholders %
Particulars Mar-18 Mar-19 Mar-20 Mar-21 Mar-22
Nalanda India 5.94% 4.81% 4.81% 4.81% 4.81%
Kotak MF 2.15% 2.45% 3.14%
DSP MF 1.17% 1.33% 1.43% 1.72% 2.37%
HDFC MF 1.69% 2.07% 2.30% 2.15% 1.93%
Gov. Pension Fund Global 1.35 1.47% 1.64% 1.66%
Axis MF 1.24% 2.36% 2.78% 4.16% 1.50%

Source: Company, Keynote Capitals Ltd.

 

Supreme Industries Ltd. | Initiating Coverage Report

OPPORTUNITIES

 

Strong volume rebound is expected from PVC pipes

Nearly 30% of SIL’s piping business comes from the agriculture sector. Most
of this demand is generated around Q1, just before monsoon. Demand was
impacted in Q1 of FY21 & FY22 due to COVID restrictions post which prices
of PVC skyrocketed, which affected demand.

Now that COVID has receded, the prices of PVC have softened along with
expectations of a normal monsoon. These factors indicate that demand for
plastic pipes (mainly PVC) will sharply rebound.

Prudent capital allocation along with maintaining return ratios

SIL has constantly invested in expanding its capacity and has sourced most
of its capital from the business, thereby relying less on external funds. Along
with augmenting capacity across segments, the company has done well to
maintain its return ratios. In the future, SIL is expected to meet their
capacity expansion requirements through internal accruals. They are going
to invest at least 3-4bn p.a

 


page31 trend


page31 his

 

Optionality Bearing Fruits

For many years, SIL struggled to get a breakthrough in its composite
cylinder business as there was no customer acceptance. Recently, SIL
received an order from IOCL to supply 7,35,186 cylinders, pushing them to
double their cylinder capacity. This augmented capacity at 100% utilization
can generate 1.8-2.0 bn revenue.

This is a very positive development that was long pending for SIL and its
investors.

Supreme Industries Ltd. | Initiating Coverage Report

CHALLANGES

 

Profit Normalcy on the cards – Difficult to sustain and grow profits
from this level as the rise is commodity-led.

Supreme Petrochem Ltd, the associate company of SIL has shown a staller
performance due to business tailwinds. As a result of this, the “Share of
Associate” on the PNL for Supreme has elevated from an Rs. 300 mn run
rate to upwards of Rs. 1400 mn in the last two years. This plus PVC inflation
has led to a sharp jump in profitability for SIL.

This jump in the performance of SPL can be primarily attributed to the
inflationary commodity environment for SPL’s products. It is difficult to say
that this kind of performance will sustain for long.

 


page32 ab

 

Lack of Marketing Spends vs Peers

Plastic product segments in which SIL operates (except furniture) were not
branding-oriented product segments. But the game is not the same
anymore. Players like Astral Ltd and Prince Pipes and Fittings Ltd. have
changed the game by creating brands in a commoditized sector like piping.
This strategy has given them great success and therefore they continue to
put thrust on branding and marketing.

Astral ltd and Prince Pipes and Fittings Ltd. have signed up high-profile
Bollywood actors like Salman Khan, Akshay Kumar, and Ranveer Singh. SIL
has lagged in this area and is also not looking committed to increasing
marketing spending in the future. This can be detrimental to the company’s
growth, especially in the VAP segment.


page32 sil

 

Supreme Industries Ltd. | Initiating Coverage Report

There is a stark difference in the ad-spend trend between SIL and other
piping majors. Astral ltd has taken its spending from 2.9% in 2017 to 3.3% in
2021. Prince Pipes and Fittings Ltd. has increased spending from 1.2% in
2017 to 3.2% in 2021, close to Astral ltd. SIL has not only not spent behind
marketing but has shown a declining trajectory which is not very
encouraging. Also, it doesn’t look like the situation will change in the future

Struggle vs Competition in the Packaging Segment

Supreme Industries Ltd, despite having excellent quality packaging
products, is unable to grow its business and sustain its profitability along the
way. This is because the company faces fierce competition from low-cost,
low-quality unorganized players.

 


page33 pack

 

Products in which SIL can generate 17%+ EBITDA are considered VAP by
the company. In FY17-18, the entire packaging segment was operating at
VAP margin levels. These margins started coming down from FY19 and
have not been able to recover ever since.

On multiple occasions in the annual reports, the company has also
mentioned competitive pressure weighing on the packaging business. The
company has also made sincere efforts to produce cost-effective products.
However, it is still unable to fight low-quality competition and hence, ends
up sacrificing the business as the company doesn’t want to operate below a
certain margin.

Sacrificing such a business is a reasonable step by SIL, but it eventually
dents the overall business and profitability as this was a healthy profitmaking business.

Supreme Industries Ltd. | Initiating Coverage Report

Financial Statement Analysis


page35 is


page35 cf


page35 bs


page35 kr

 

Supreme Industries Ltd. | Initiating Coverage Report

Valuation

5 Year Trailing PE – Supreme looking optically cheap due to abnormal earnings since last 2 years

page36 Trailing


page36 ab

 

A look at the PE band says that Supreme Industries Ltd. is trading a little
lower than –ve one standard deviation from the mean. A closer look at
earnings acts as an eye-opener and gives a reality check. Earnings for SIL
over the last 2 years have been abnormally high because of PVC inflation
and supernormal performance from the associate Supreme Petrochem Ltd.
This performance doesn’t look sustainable in the long run.

PVC prices and the supernormal performance of Supreme Petro might not
normalize immediately. It is impossible to predict price movements, but it
looks tough for these numbers to move up from here or sustain at these
levels for long.

It is prudent to not fall for this optically low PE and take a harder look at
earnings sustainability and growth, raising a question on sustainability.

2-3 piping companies in the past calls have gone on to highlight the same
point and have said that volatility in PVC prices now is very high and price
prediction is impossible. Volatility might stay as it is for some time but the
peak level which the PVC prices saw, doesn’t look sustainable and must
normalize. This will lead to inventory losses and hence, profit
normalization

Supreme Industries Ltd. | Initiating Coverage Report

Valuation based on Sensitivity of Realizations

 

page37 table

 

It is impossible to predict the price trend of PVC in the future. Still, if we go
by the past data and words of the management of a few companies, we
can safely say that price volatility can remain for some time. Still, PVC
prices going beyond FY22 levels now look difficult given the normalization
of global supply chain disruptions.

Base Case – We have built a 10% lower realization for FY23 because the
realizations of FY22 capture the rampant PVC upcycle post COVID. These
levels of realization don’t look sustainable. At the same time, the recent
drop in PVC prices points towards a strong volume recovery which we have
built in our assumptions as well. Normalization of realizations with
improved volumes makes us arrive at a target price of Rs. 1,869, which is
~5% higher than CMP.

Bull Case – We have assumed peak realizations to continue along with
higher volumes. SIL can generate a substantial 35% upside, given things
remain as it is. This coupled with multiple re-rating, can result in a price of
Rs. 2,532 a share

Bear Case – We have assumed an ~18% drop in realizations given the sharp
correction from the peak visible in the PVC prices. This scenario will result
in a ~16% downside from current levels bringing the price down to Rs.
1,575 at a PE of 23x

 

Supreme Industries Ltd. | Initiating Coverage Report

Rating Methodology
Rating Criteria
BUY Expected positive return of > 10% over 1-year horizon
Neutral Expected positive return of > 0% to < 10% over 1-year horizon
REDUCE Expected return of < 0% to -10% over 1-year horizon
SELL Expected to fall by >10% over 1-year horizon
NOT RATED (NR)/UNDER REVIEW (UR)/COVERAGE SUSPENDED (CS) Not covered by Keynote Capitals Ltd/Rating & Fair value under
Review/Keynote Capitals Ltd has suspended coverage

 

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Supreme Industries Ltd. | Initiating Coverage Report

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Supreme Industries Ltd. | Initiating Coverage Report

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