Supreme Industries Ltd.

20th July 2022

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.”

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.

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.

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.

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.

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.

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.

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.

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

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

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.

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.

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

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.

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.

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

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.

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.

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

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