Supreme Industries: Buy

>> Wednesday, August 12, 2009

nvestors with a risk appetite for commodity stocks can buy the stock of plastic products maker Supreme Industries (Rs.295). The company’s diversified product profile — consisting of pipes, packaging and industrial products — makes it a beneficiary of spending in segments such as irrigation, housing and infrastructure.

A relatively stable outlook for raw material costs and demand, after several challenges last year, make this a reasonable time to pick up the stock. The company’s current market price discounts the trailing four quarter earnings by eight times, at a par with players such as Sintex Industries.
Product profile

Supreme Industries operates across four segments — plastic pipes, which contribute to 40 per cent of total turnover, packaging (27 per cent), industrial (21 per cent) and consumer products (12 per cent).

Pipes made by the company find extensive use in irrigation, bore-wells, portable water supply, plumbing, drainage, underground sewerage, rainwater harvesting and water management. A derived demand could come from the increase in rural irrigation as well infrastructure outlays. Replacement of metal pipes with plastic is also a positive factor for the company.

The packaging division caters to a wide spectrum of user industries, such as sports goods, electronics, food items, textiles, healthcare, toys, insulation and construction. Offerings in this segment range from packaging film to protective packaging material. The company also makes cross laminated films or tarpaulin sheets which have agricultural and industrial applications.

In the industrial products segment, Supreme Industries manufactures dashboards and other components for automobile companies (Tata Motors and Mahindra and Mahindra being some of the important customers) and equipments for consumer electronic goods such as LCD TVs and air-conditioners.

That apart, it also manufactures industrial craters for storage of textiles, fisheries, food items and soft-drinks. PepsiCo India and Coca Cola India are major customers. In the consumer products division, the company is a market leader in the moulded furniture segment, which offers scope for better margins.

Recently, the company expanded its production capacity of cross-laminated film and products, at its Halol, Silvassa, Gadegaon and Pondicherry plants, from 9000 TPA to 13000 TPA. It has also increased the capacity of injection moulding machines and ancillary equipments and has started a new factory at Jamshedpur for the ‘World Truck’ project of Tata Motors. Similarly, it has expanded plant capacities in Gadegaon and Jalgaon to launch varieties of plastics piping systems.

While operating profit margins from segments such as pipes and packaging are vulnerable to raw material cost increases, Supreme Industries has managed to hold its margins at a steady 11-12 per cent in recent years. Volume driven growth in the pipes segment has been complemented by reasonable pricing power in the industrial and consumer segments.

It has managed a compounded annual sales growth of 9 per cent and operating profits growth of 13 per cent in the last three years. However, performance in 2008-09 did take a brief knock from the ups and downs of the commodity cycle. The company ended 2008-09 with a sales growth of 26 per cent and net profits growth of 82 per cent, but slipped briefly into losses in the December 2008 quarter mainly due to unusual fluctuations in raw material prices — polypropylene prices fell steeply from $1800 a tonne in July 2008 to $625 by end of the year. (Major raw materials consumed are PVC resin, polyethylene and polypropylene and they account for nearly 80 per cent of the total raw materials cost.) That prompted order cancellations, as the company’s customers expected a further fall in the prices of plastic products and opted to wait before making fresh purchases.

With commodity prices improving along with the crude oil cycle, polypropylene prices have since moved back to $940 levels. Net sales and margins started improving from the March quarter as material prices began to stabilise and customers resumed their orders. The expansion in the past year, pick-up in demand and a tilt in product mix towards high margin products, point to stability in margins in the coming quarters.
Risk factors

Unlike its peers, such as Time Technoplast and Sintex Industries, Supreme Industries has negligible exposure to foreign currency fluctuations. More than 60 per cent of the raw materials are domestically procured and less than 10 per cent of its total turnover is through exports to countries such as the UK Australia and New Zealand.

However, another bout of volatility in crude oil and thus polymer prices could destabilise margins.

Source : Hindu Business Line.