initiating coverage plastic products nilkamal ltd ... · nilkamal pvt ltd (indo-us jv, engaged in...

Incorporated in 1942, Supreme Industries Ltd (SIL) is India's leading plastic processor, offering a wide range of plastic products. With a total installed capacity of 5.44 lac MTPA of plastic processing, 25 manufacturing facilities spread across India and a vast network of 2,950 channel partners, SIL operates in various product categories like Plastic Piping System, Cross Laminated Films, Protective Packaging Products, Moulded Plastic Furniture, Industrial Components, Material Handling Products and Composite LPG Cylinders.

The Indian Plastics industry provides immense growth potential in the coming years, given the low per capita consumption, anticipated revival in economy, shifting consumer preference towards branded plastic products, rising youth population and increasing usage of plastics by manufacturing segments. Government initiatives such as Make in India campaign, Digital India, Swachh Bharat Abhiyan, GST implementation, etc, are opening up opportunities for more accelerated growth in this industry. The plastics consumption in India is estimated to grow by 10.4% CAGR over FY15-20E to reach 22 MMTPA.

SIL holds leadership position in the organized domestic plastic piping market (~14% market share) and is the second largest player in moulded plastic furniture. Further, it has a strong presence across other segments of plastics like packaging products (cross laminated & protective packaging) and industrial products. Diversified offerings, strong brand equity, steady capacity addition across segments (SIL has envisaged total Capex of Rs 1,200-1,300cr by FY21) and constant focus on technology enhancement & innovation places SIL in a sweet spot to leverage its strength and grow faster than the market.

Through technical collaboration with foreign players, SIL has constantly focused on innovation across its product segments, which has led to a steady rise in the revenue share of value added products from 32% in FY13 to 37.5% in FY17. This has made SIL's profitability less prone to volatility in the input cost. We expect this share to improve further in the coming years.

Led by demand revival, steady capacity additions and enhanced product offerings, SIL's consolidated revenue is estimated to grow by 14.2% CAGR over FY17-20E. Volume offtake is likely to improve across the segments. GST transition would clearly yield benefits over the long term. While EBITDA margins are likely to contract in FY18E, we expect a meaningful improvement in FY19E and FY20E, led by operating leverage, stability in the input cost and higher share of value added products. This, along with improved profits from Supreme Petrochem (in which SIL holds 29.99% stake) and declining interest cost would add to bottomline. Market leadership, leverage free balance sheet, healthy cash flows & return ratios and steady dividend payouts would provide valuation comfort. We recommend a BUY on the stock with target price of Rs 1,473.

April 3, 2018

CMP (Rs)

Target Price (Rs)

Potential Upside

Sensex

Nifty

Key Stock data

BSE Code

NSE Code

Bloomberg

Shares o/s, Cr (FV 2)

Market Cap (Rs Cr)

3M Avg Volume

52 week H/L

Shareholding Pattern

(%)

Promoter

FII

DII

Others

1 Year relative price performance

1,195

1,473

23.3%

33,255

10,212

509930

SUPREMEIND

SI:IN

12.7

15,179

72,210

1,476/1,020

Research Analyst

Mehernosh Panthaki, CA [email protected]

Investment rationale

Outlook & Valuation

In supreme positionBUY

Net Revenue 4,462.3 4,976.5 5,772.8 6,638.7

EBITDA 761.9 741.5 889.0 1,042.3

EBITDAM (%) 17.1 14.9 15.4 15.7

APAT 430.4 398.6 487.3 584.9

APATM (%) 9.6 8.0 8.4 8.8

EPS (Rs) 33.9 31.4 38.4 46.0

ROE (%) 28.6 22.4 24.3 25.4

P/E (x) 35.3 38.1 31.1 26.0

Particulars (Rs cr) FY17 FY18E FY19E FY20E. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Source : Company; RBL Research

17-Jun 17-Sep 17-Dec

Initiating Coverage Plastic Products Nilkamal Ltd.

Religare Investment Call

Plastic ProductsInitiating Coverage Supreme Industries Ltd.

Financial Summary (Consolidated)

49.7 49.7 49.7

10.2 10.4 10.4

18.5 18.6 18.7

21.6 21.3 21.2

90

100

110

120

130

140

150

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

Dec

-17

Jan

-18

Feb

-18

Mar

-18

Ap

r-1

8

Supreme Ind Ni�y

Contribution from bathware segment to improve gradually

Source : Company; RSL Research

he company currently has three foreign subsidiaries [two in Sri Lanka (76% stake) and one wholly owned subsidiary in UAE], namely, i) Nilkamal Eswaran Plastics Pvt Ltd (into manufacturing of moulded furniture), ii) Nilkamal Eswaran Marketing Pvt Ltd, iii) Nilkamal Crates and Bins FZE (manufacturing of plastic containers, pallets, waste bins, ice boxes, etc) and one Indian subsidiary Nilkamal Foundation (98% stake; incorporated in FY17 for carrying out CSR activities). Further, it has two 50:50 JVs, viz i) Nilkamal Bito Storage System Pvt Ltd (Indo-German JV, engaged in metal storage systems) and ii) Cambro Nilkamal Pvt Ltd (Indo-US JV, engaged in manufacturing of hospitality products).


Investment rationale

L o w p e r c a p i t a c o n s u m p t i o n , government init iatives provides significant growth potential for Indian plastics industry

India's plastic processing sector is likely to grow by 10.4% CAGR to 22 MMTPA over FY15-20E

Well placed to capitalize on available opportunities in plastic processing industry

Prospects of Plastic Processing Industry look bright

As per FICCI (Federation of Indian Chambers of Commerce and Industry), the per capita consumption of plastics in India is about 11kg per person, which is significantly lower compared to developed countries like US (109kg) & Europe (65kg), emerging markets like China (38kg) & Brazil (32kg) and global average (28kg). The per capita consumption in India is low, largely due to low penetration levels of plastic products in the Indian market, especially the rural segment.

However, the scenario is changing rapidly and we expect a meaningful improvement in per capita plastic consumption going forward. New technologies are being developed and usage of polymers is increasing in newer areas like construction, agriculture, health and others thereby increasing the demand for plastic products. Due to increasing domestic consumption and high potential, India is emerging as one of the focus destinations for plastics and downstream players worldwide. Plastics are gradually becoming the material of choice for extensive usage due to their unique and diverse set of properties.

Anticipated revival in economy, shifting consumer preferences (towards branded plastic products), rising youth population and increasing usage of plastics by manufacturing segments provides immense growth potential for the Indian plastics industry in the coming years. Various Government initiatives such as Make in India campaign, Digital India, Swachh Bharat Abhiyan, etc, increased budgetary allocation for promoting growth in rural infrastructure and increasing focus on irrigation are opening up opportunities for even more accelerated growth in this industry. GST transition could prove to be highly beneficial for the organized plastics industry in the long run.

As per FICCI, the plastic processing industry has grown at a CAGR of 10.1% in volume terms from 8.3 MMTPA in FY10 to 13.4 MMTPA in FY15 (in value terms, it has grown by 11% over FY10-15 to Rs 1,000bn) and is estimated to grow at a CAGR of 10.4% from FY15 to FY20 to reach 22 MMTPA. Further, the export of finished plastic products is estimated to double to $ 15bn in the next 5 years (Source: Plastindia Foundation).

Initiating Coverage Plastic Products Supreme Industries Ltd.

D/E to decline further

Indian Plastic Processing Industry



ROCE to remain healthy

Per capita consumption of plastic products

Segmental Revenue Breakup (Consolidated)

Revenue Break – Plastics Division

Plas�cs

89.3%

Lifestyle Furniture, Furnishings &Accessories

10.7%

Material

Handling

57%

Moulded

Furniture

41%

Ma�ress

2%

8.3

13.4

22.0

0

5

10

15

20

25

FY10 FY15 FY20E

Plas�c Processing (MMTPA)

109.0

65.0

38.0 32.0

11.0

28.0

0

20

40

60

80

100

120

US Europe China Brazil India Global

Per Capita Comsump�on of Plas�c Products (kg)





SIL has a well-diversified product portfolio across 5 verticals with installed capacity of 5.44 lac MTPA of plastic processing

SIL holds leadership position in the organized domestic plastic piping market, commanding ~14% share

SIL is one of the leading players in protect ive packaging segment , commanding 25% market share

SIL enjoys 13.5% market share in material handling segment

Wide reach, diversified offerings, product innovation, technical collaborations, augurs well for SIL

SIL has a well-diversified revenue model with a large product portfolio across 5 verticals having a total annual installed capacity of 5.44 lac MT of plastic processing. Its business segments comprise of i) Plastic Piping System, ii) Packaging Products, iii) Industrial Products, iv) Consumer Products and v) LPG Composite Cylinders & Others. Plastic Piping is a major contributor, accounting for 54.3% of SIL's total revenue. Packaging Product segment contributes 22.1%, while 15.6% & 7.3% revenues come from Industrial and Consumer Products segment. Revenue share of ‘others’ segment (which includes LPG Composite Cylinders) is meagre at 0.7%. With 25 technologically advanced manufacturing facilities spread across India (in 11 States and Union Territories) and a wide distribution network comprising 2,950 channel partners (which has increased steadily by 9.5% CAGR over FY13-17), the company has a strong presence across each of its segments. It derives ~97.5% of its revenues from India. Despite marginal contribution to the total revenue, the company has a good presence in overseas markets with its products exported to nearly 31 countries across five continents. Further, it has been awarded the top exporter award in 'Fittings for Plastic Pipes and Hoses' and 'Tarpaulin' categories by Plexcouncil consecutively for last four years.

Plastic Piping System: SIL holds leadership position in the organized domestic plastic piping market, commanding ~14% share. With a processing capacity of 3.87 lac MTPA and a strong distribution reach, comprising 916 channel partners, the company offers wide range of nearly 7,300 products (which include uPVC Pipes, Injection Moulded fittings, HDPE & CPVC Pipes Systems, etc) for 23 different application systems. Its products are custom designed to suit specific applications. Further, SIL is the only company to supply pipes and fittings from all major polymers like PVC (Polyvinyl Chloride), CPVC (Chlorinated Polyvinyl Chloride), PE (Polyethylene) and Polypropylene (PPR). The division has grown at a CAGR of 9.7% over FY13-17, led by 7.6% growth in volumes and despite significant volatility in the RM prices, its operating margins have remained in a narrow range of 13-16% over the same period. SIL has introduced various path breaking technologies in India in this segment like S.W.R. Drainage System, Aqua Gold High Pressure Plumbing System, Indo-Green PP-R hot and cold water system, etc. This has enabled the company to maintain its leadership and growth momentum under this segment.

Packaging Products segment: SIL manufactures Specialty Films, Protective Packaging Products and Cross Laminated Films products. Its wide product range comprises of thermoplastic PE foam sheets and profiles, cross-linked and blended PE foams (block & extruded), air bubble films and composites and customized products, which include anti-static, UV resistant and aluminum foil laminated foam & bubble films, besides EPDM blended and other specialty rubber foams. The company is a turnkey packaging solutions provider having access to latest technologies and innovations, helped by tie-ups with global industry leaders. It is one of the leading players in protective packaging segment (42% revenue share within the segment) with market share of ~25% and it is the only company to have the technology to manufacture patented Cross Laminated Film products under brand name Silpaulin. The company has introduced various path breaking technologies in the past like reticulated foam for air filtration, sound absorbing open cell foam, etc. The division has registered revenue growth of 8.7% on CAGR basis over FY13-17, while the margins have improved at a steady pace by 200bps to 22%.

Industrial Products Segment: SIL is a major player in the industrial products segment, manufacturing industrial components (like moulded parts and other interior & exterior parts for Automobiles, cockpit assemblies for Auto segment, plastic body for consumer durable products, plastic body of ATMs, Electronic Voting Machines, etc) and material handling products (like crates, pallets, bins for user industries like soft drink, beverage, warehousing, dairy and fisheries). The company enjoys 13.5% market share in material handling segment. Further, it is a major supplier to the Soft Drinks industry (key clients include Coca Coola, Pepsi Co, etc) and was the first to launch injection moulded plastic pallets. Within industrial components space, the company has a well-established relationship with some key clients like Mahindra, Honda, Maruti, Piaggio, Whirlpool, Samsung and Bosch.






SIL is the second largest player in plastic moulded furniture with 10.5% market share

Diversified offerings, wide reach, technical collaborations provides competitive advantage

Consumer Products segment: SIL is the second largest player in plastic moulded furniture with 10.5% market share and processing capacity of 30,000 MT. The company is a one stop solution providing for varied furniture needs, made from 100% virgin polymers, using computer designed moulds at ISO certified Plants. It was the first company in the industry to make blow moulded furniture for varied new usage and to use the gas injection technology in moulding process. SIL has been a pioneer in introducing products like Lacquered furniture, Upholstered moulded plastic furniture and Hybrid Furniture. The division's revenue has grown by 3.2% CAGR over FY13-17. The company's strategy to increase focus on premium products and gradually exit commodity business seems to have worked well, as the segment's margin trajectory improved significantly from 12.3% in FY13 to 20% in FY17, though it impacted the revenue growth to some extent. The proportion of premium products increased from 38% in FY13 to 52.1% in FY17.

LPG Composite Cylinders: Citing good prospects in India, SIL ventured into LPG composite cylinders segment in 2012 and commenced commercial production in 2014. The current installed capacity (at Halol) stands at 4.5 lac cylinders. In FY17, SIL signed a MOU with Bangladesh government for supply of 2.5 lacs LPG composite cylinders and received initial trial order from HPCL. The segment is yet to report meaningful growth in terms of revenue and profits, since Government's final approval for complete launch of these cylinders in India is still pending.

Diversified offerings, wide reach, technical collaborations provides competitive advantage

Despite being a leader in the plastic piping system, SIL continues to face competition from other reputed players in this business like Finolex, Jain Irrigation, Astral Poly, Prince Pipes & Fittings, Ashirvad Pipes and Kisan Mouldings. In Consumer Products segment, it faces stiff competition from Nilkamal, who is a market leader with ~32% market share, and limited competition from other notable players like Wim Plast and Prima Plastics. Further, Packaging segment is highly competitive with presence of large organized players like Uflex, Jindal Poly and Essel Propack as well as existence of unorganized players. Competition within the industrial segment is from companies like Nilkamal, Sintex and Motherson Sumi. In LPG Composite Cylinders, where SIL has a very small presence, Time Technoplast is the major competitor (with an annual installed capacity of 14 lac cylinders).

Notwithstanding the presence of stiff competition across divisions, SIL holds an edge over its peers, since there is no single competitor having presence across all the business segments under which SIL operates. SIL's well-diversified offerings across segments of plastic products insulates it from slowdown & dependence on growth in any one particular segment, thus providing stability to the revenue flows. The company has one of the widest distribution reach amongst its peers with manufacturing plants spread across the country. Further, SIL has entered into various technical collaborations for different Product lines and is also having design & development centre as well as testing lab and quality facilities at its plants to regularly carry out different test work on products at various stages of production process to ensure the required standards and efficiencies. This has enabled the company to further strengthen its innovation capability and brand recall, thus providing competitive advantage. Through constant focus on innovative offerings, the revenue share of SIL's value added products has risen steadily from 32% in FY13 to 37.5% in FY17.


Company

Product Line

Rasmussen Polymer Development, Switzerland

Cross -laminated Films

Wavin, Netherlands

Plastic Piping Systems

Foam Partner, Switzerland

Reticulated PU Foam

Sanwa Kako, Japan

2 stage Foam

PE Tech, Korea

Cross Linked Foam

Kumi Kasai Co. Ltd., Japan

Automotive Components

Kautex GMBH Composite LPG Cylinders

Spears Mfg. Co. Los Angeles Fire Sprinkler Pipes from CPVC

Calcamite Sanitary Services (PTY) Septic Tanks

SIL's foreign Technical Collaborations for different product lines

Source : Company Presentation




Industry outlook of SIL's business segments remain bright

With market leadership / strong presence across segments, strong brand recall, expanding reach, constant focus on product innovation and sustained brand building efforts, SIL is placed comfortably to leverage its strength and capitalize on the available opportunities in India's Plastic Processing industry. All its business segments viz; plastic pipes, packaging products, consumer products, and industrial products offer significant growth potential.

Demand uptick, capacity expansion and enhanced product offerings to drive revenues over FY17-20E

Led by revival in demand, steady capacity addition by the company across the segments and its continued efforts towards strengthening its reach, brand equity and product offerings, we expect SIL's consolidated revenue to grow at a faster pace by 14.2% CAGR over FY17-20E (compared to 7% CAGR over FY13-17). The growth would be largely volume led (estimated to grow by 12.3% CAGR over FY17-20E) and is likely to be driven across the business segments. Further, increasing the share of value added products across segments would remain a key focus area, which will drive the realizations. GST transition and


Uptick in infra spending, higher a l l o c a t i o n f o r i r r i g a t i o n , G S T implementation to drive the growth of Plastic Pipin division

Favourable demographic factors and increasing demand from end-user industries to drive the growth of Packaging segment

Shift in preference for branded products, fast growth of organized retailing in India augurs well for SIL's consumer products segment

Consolidated revenue is likely to grow by 14.2% CAGR over FY17-20E, largely volume led


Company Industry Growth drivers

Indian plastic pipes industry is estimated at Rs 300bn of which 60% is

serviced by the organized players. With unorganized space still accounting

for 40%, the growth potential for organized industry is huge, which will be

driven by GST transition and implementation of E-way bill.

As per FICCI, the Indian Packaging industry is expected to reach $73bn in

2020 from $32bn in FY15, growth of 18% CAGR with flexible packaging

segment likely to report a faster growth.

Further, the per capita consumption of packaging in India is just ~4.3kg per

person p.a., which is very low compared to other countries like 42kg in

Germany and 20kg in Taiwan. This offers huge opportunity for growth.

The market size of material handling products is estimated at Rs 18bn.

The moulded plastic furniture industry is estimated at Rs 31bn.

Led by shift in preference for branded products, fast growth of organized

retailing in India and GST implementation, the organized industry is likely to

grow at a healthy pace.

The global composite LPG cylinders market is expected to grow by 9.7%

CAGR over 2017-2022 to reach USD 189.7mn. While there is lack of demand

in the Indian markets for these products at present due to regulatory

obstacles, once government’s approval is obtained for full-fledged launch,

demand could improve significantly.

LPG composite cylinders have various advantages over steel cylinders like

light weight (40-45% less bulky), easy handling, 100% explosion proof,

corrosion resistance and eco-friendly. Hence, going forward, there could be

meaningful shift in preference towards these cylinders despite higher cost

involved.

High entry barriers will provide competitive advantage to existing players

with capacities already in place (like SIL and Time Techoplast).

Plastic Piping System

Packaging Products

Industrial Products

Consumer Products

LPG Composite Cylinders

Growth drivers include uptick in infrastructure spending (led by Government's

initiatives like Housing for all by 2022, Swachh Bharat Mission & Amrut), higher

budgetary allocation for irrigation and good monsoon (likely to drive the

demand for in agriculture pipes).

Preference for plastic pipes is increasing over Galvanized Iron Pipes due to

advantages like cost effectiveness, corrosion resistance, easy installation due

to low weight, etc.

Growth is likely to be driven by strong favourable demographic factors such as

increasing disposable income levels, rising consumer awareness and increasing

demand from end-user industries like agriculture, white goods, construction,

packaged foods (represents ~48% of the total packaging consumption), sports

goods and healthcare.

Increasing demand from end-user industries like automobiles, soft drinks,

agriculture & fisheries, electric household appliances and water purification

will drive the growth of material handling products & industrial components

industry.




implementation of E-way bill would be beneficial for the company over long term, as it would result in meaningful shift in demand from unorganized to organized players. SIL also has plans to increase its overseas presence significantly and expects improved contribution from the export business over the next five years from current 2.5%.

The company has envisaged a total Capex in the range of Rs 1,200-1,300cr over the next three years, which will increase the total annual installed capacity to 7 lac MT by FY21 from current 5.44 lac MT. For FY18E, the company is likely to incur Capex of Rs 425-450cr, which will increase the total manufacturing plants to 28 and total capacity to 6 lac MT by end of FY18E. Keeping in view the expansion opportunities, SIL has finalised to purchase about 11.2 acres of land adjoining to its Puducherry plant which was made available to it. The project work at Rajasthan (capacity expansion of industrial components), Assam (expansion of plastic piping system) and Telangana (expansion of plastic piping system, protective packaging products and moulded plastic furniture) is on track and is likely to go into production in next financial year. This would improve the capacity utilization and volume growth under these segments, especially in the packaging products division, which witnessed subdued volume growth in Q3FY18 due to capacity constraints. Further, once the company receives the Government approval for sale of LPG Composite cylinders in India, it would add to SIL's revenues significantly.

While the industry outlook of SIL's business segments remains healthy, company initiatives would result in faster growth across its segments.


Demand revival, capacity additions and enhanced product offerings to drive the revenue growth

Revenue to grow by 14.2% CAGR over FY17-20E


Volume offtake to remain healthy

3,9

62

.2

4,2

55

.2

2,9

60

.1

4,4

62

.3

4,9

76

.5

5,7

72

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6,6

38

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16.4

7.4

(30.4)

50.7

11.5

16.0 15.0

-40

-20

0

20

40

60

2,000

3,000

4,000

5,000

6,000

7,000

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8E

FY1

9E

FY2

0E

Net Revenue (Rs cr) - LHS Growth (%) - RHS Volumes (MT) - LHS Growth (%) - RHS

2,7

5,4

68

3,0

1,9

30

2,3

5,4

86

3,4

0,9

06

3,8

0,2

59

4,2

9,6

93

4,8

3,4

05

1.8

9.6

(22.0)

44.8

11.5

13.0 12.5

-40

-20

0

20

40

60

0

1,00,000

2,00,000

3,00,000

4,00,000

5,00,000

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8E

FY1

9E

FY2

0E


Segments Company Initiatives, which will drive the growth

Capacity expansion at Assam and Telangana.

Increasing focus on enhancing the share of value added products will drive

the realizations. Further, constant efforts to add new customers and

expanding the overall reach will help drive the overall growth.

Capacity addition at Telengana, constant focus on new product

introductions with enhanced technology & innovation.

Increasing export presence in existing markets like US, UK, Denmark &

Australia and aim to get foothold in new markets like South East Asia, Africa,

Russia & South America. SIL is in negotiation with retail chain stores in US

for selling tarpaulins through stores and online websites.

Capacity addition at Rajasthan.

Strengthen presence in strategic marketing segments and geographical

areas, which are still not adequately covered.

Continued focus on exploring export opportunities for its products.

Capacity addition at Telengana, new product launches under premium

categories.

Once government’s final approval is obtained for full-fledged launch of LPG

composite cylinders in India, the order inflows and utilization levels of SIL

would improve significantly, leading to strong revenue and profit growth

under this segment.

Citing good response from domestic customers going forward, the company

is hopeful of getting orders OMCs going forward.

Consumer Products

LPG Composite Cylinders


Packaging Products

Industrial Products





SIL's EBITDA margins have remained in narrow range of 15-17% over FY13-17 despite huge fluctuations in input cost

Led by stability in input cost and higher share of VAP, EBITDA margins are likely to improve in FY19E and FY20E

Through constant focus on product innovation, revenue share of VAP has increased steadily from 32% in FY13 to 37.5% in FY17

Rising contribution of value added products to support the operating margins

Despite a significant volatility in the price of key inputs like Poly Vinyl Chloride Resin, Polyethylene and Polypropylene (derivatives of crude oil), SIL has been able to maintain its EBITDA margins in a narrow range between 15-17% over the last 5 years. Through technical collaboration with foreign players, SIL has constantly focused on innovation across its product segments, which has led to a steady rise in the revenue share of value added products (VAP) from 32% in FY13 to 37.5% in FY17. This has reduced the company's dependency on behaviour of crude oil prices for its profit growth and margin performance. The increase in share of VAP has been across the product segments. Share of VAP from the Plastic Piping division increased from ~27% in FY13 to 31.7% in FY17, while from Moulded Furniture and Protective Packaging segments, it improved from ~38% & ~35% from FY13 to 52.1% & 44.2% respectively in FY17. The share of VAP is 100% in Cross Laminated Films and LPG Composite Cylinders. This has certainly improved the margin trajectory of all its product segments. As per the management, VAP are those which fetch operating margin of >17%. On an overall basis, SIL's EBITDA margins have improved from 15.7% in FY13 to 17.1% in FY17.

While the overall performance at operating level was impressive over FY13-17, 9MFY18 saw a 210bps decline in EBITDA margins (14.3%), impacted by rising input cost (which the company was unable to pass on completely to its customers), volume de-growth across major segments and lower contribution from VAP. Major contraction was witnessed in Plastic Piping and Consumer Products segments. While the overall EBITDA margins are estimated to decline by 220 bps to 14.9% in FY18E, we expect a decent revival in FY19E and FY20E. We see low probability of crude oil prices exhibiting a vertical rise over the next two years and it would most likely remain range bound. Even if crude oil prices remain high, we feel SIL would largely be able to pass on the cost inflation to its customers, given its strong brand recall, innovative offerings and anticipated revival in demand. This, along with volume growth revival across segments (operating leverage) and management's continued focus on technological innovations and designs and enhancing the overall contribution of VAP would result in steady margin gains in FY19E (+50bps to 15.4%) and FY20E (+30bps to 15.7%). Post a meaningful pick-up in sales of LPG Composite cylinders (which is currently awaiting government's approval for full-fledged launch in India), margin trajectory could improve further. In value terms, while EBITDA is estimated to decline by 2.7% in FY18E, we expect a healthy rebound in growth in FY19E (+19.9%) and FY20E (+17.2%).

Increasing share of VAP


EBITDA margins to revive in FY19E & FY20E

58

8.8

66

6.1

45

3.3

76

1.9

74

1.5

88

9.0

1,0

42

.3

14.9

15.7 15.3

17.1

14.9 15.4

15.7

13

14

15

16

17

18

200

400

600

800

1,000

1,200

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8E

FY1

9E

FY2

0E

EBITDA (Rs cr) - LHS EBITDA margins (%) - RHS

32.0 32.3

34.2

36.7

37.5

30

31

32

33

34

35

36

37

38

39

FY1

3

FY1

4

FY1

5

FY1

6

FY1

7

Revenue Share of VAP (%)






S P L c o u l d b e a h e a l t h y p r o fi t contributor for SIL

The estimated revenue from balance unsold area of Andheri commercial complex stands at Rs 100-120cr

Higher EBITDA margins, healthy profits from SPL and decline in interest cost to drive PAT margins in FY19E & FY20E

Risks & Concerns

Higher EBITDA margins, healthy profits from Supreme Petrochem, lower interest cost to drive the PAT growth and margins We expect SIL's PAT to grow by 10.8% CAGR over FY17-20E. While the growth is likely to decline by 7.4% in FY18E on the back of subdued performance in 9MFY18E, we expect a meaningful revival in FY19E (+22.2%) and FY20E (+20%). PAT margins are likely to improve from 8% in FY18E to 8.8% in FY20E. Besides improvement in operating margins, continued healthy profits from SIL's associate company 'Supreme Petrochem Ltd' (SPL) and expected decline in the interest cost (overall debt is expected to decline on the back of healthy cash flow generation) is likely to drive the PAT margins.

SPL to be a healthy profit contributor for SIL: SPL is engaged in manufacturing of polystyrene (PS), expandable polystyrene (EPS), specialty polymers compound (SPC), extruded polystyrene foam (XPS) and styrene methyl methacralate (SMMA). It is the largest single site producer of polystyrene with an annual installed capacity of 2.55 lac MT, accounting for 2% of the world capacity and owning 60% of the domestic installed capacity. SPL is a debt free company with healthy return ratios. Its growth prospects look bright, given steady capacity additions of its products along with robust demand outlook for Polystyrene, which finds usage across various industries like food packaging (for making plastic cutlery, containers, bowls), building & construction (for roofing, plumbing, insulation), consumer electronics / domestic appliances (refrigerators, vacuum cleaners, TVs) and medical applications (tissue culture trays, test tubes). SIL holds 29.99% stake in SPL and hence improved profits would directly add to SIL's bottomline to the extent of its share in SPL.

Monetization of Real Estate could further add to profits: SIL owns a commercial complex in Andheri, which is spread over total land area of 94,347 sq. ft. (TDR purchased stood at 92,463 sq. ft). The total construction includes Ground+10 storeys+2 level basement). Other facilities in complex include health club, conference room, parking of 350+ cars, DG back up, green building with platinum rating from the USGBC, pocket terraces at different levels, terrace garden, cafeteria, 6 high speed elevators and 2 service elevators. The project cost was Rs 145cr and total saleable area stood at ~2,83 lac sq ft. Till March 2017, the company had sold about 2.12lac sq. ft. for Rs 338.7cr (amount already received). The estimated revenue from balance unsold area of about 63,868 sq. ft. (6,681 sq. ft. has been kept by SIL for its own use), which could possibly be monetized in the near future, currently stands at Rs 100-120cr. This would further add to SIL's net profits. However, we have not factored the same in our projections.

PAT margins to revive at a steady pace


28

3.4

32

2.2

22

6.3

43

0.4

39

8.6

48

7.3

58

4.9

7.2 7.6

7.6

9.6

8.0

8.4

8.8

6

7

8

9

10

11

100

200

300

400

500

600

FY1

4

FY1

5

FY1

6

FY1

7

FY1

8E

FY1

9E

FY2

0E

PAT (Rs cr) - LHS PAT margins (%) - RHS





Strong Balance Sheet

Despite a steady increase in gross block, which has grown by 11.4% CAGR over FY11-17, SIL has managed to reduce its D/E from 0.9x in FY11 to 0.2x in FY17. With healthy cash flows, the total borrowings have reduced significantly from Rs 5.1bn in FY11 to Rs 2.8bn in FY17. The average operating cash flows generated over FY11-17 stood at Rs 3.6bn, which is encouraging. This, along with efficient working capital management has enabled the company to incur majority of its Capex through internal accruals, thus resulting in consistent decline in its D/E.

With steady growth in profits and further improvement anticipated in cash conversion cycle (which is already one of the best in the industry), we expect the cash flow generation to remain robust over the next three years. SIL has plans to enhance its existing capacity to 7 lac MTPA by FY21 with Capex of ~Rs. 12-13bn, which we expect it to be funded largely through internal accruals. This would result in further decline in D/E. We expect the company to attain debt free status over the next few years.

SIL enjoys superior return ratios compared to most of its peers with a ROCE of 32.8% and ROE of 28.6% (in FY17). While there could be some deterioration in FY18E due to profit de-growth witnessed in 9MFY18, we expect the return ratios to improve meaningfully in FY19E & FY20E on the back of strong rebound in the profit growth. Further, the company has a good track record of enriching its shareholders' wealth with consistent and rich dividend payouts. The dividend payouts have remained in the range of 31-43% over the last six years (FY12-17), which we expect to improve further with steady & healthy cash flow generation.


D/E to decline further


Cash Flow generation to remain healthy

Opera�ng Cash Flows (Rs cr)

16

9.8

35

7.8

38

4.4

32

9.6

65

8.9

15

1.4

43

9.8

63

3.0

59

8.6

70

1.4

0

100

200

300

400

500

600

700

800

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

E

FY

19

E

FY

20

E

0.94

0.48 0.53

0.45

0.32 0.31

0.16 0.14 0.10 0.05

0.0

0.2

0.4

0.6

0.8

1.0

1.2

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17

FY

18

E

FY

19

E

FY

20

E

Debt-Equity (x)

ROCE to remain superior


Healthy dividend payouts to continue

15

20

25

30

35

40

FY

14

FY

15

FY

16

FY

17

FY

18

E

FY

19

E

FY

20

E

ROCE (%)

10

1.6

11

4.3

95

.3

38

.1

19

0.6

17

7.9

21

6.0

0

10

20

30

40

50

0

50

100

150

200

250

FY

14

FY

15

FY

16

FY

17

FY

18

E

FY

19

E

FY

20

E

Dividend (Rs cr) - LHS Dividend Payout (%) - RHS

Healthy cash flows has helped SIL reduce its D/E from 0.9x in FY11 to 0.2x in FY17

D/E to reduce further, cash flow generation to remain healthy

With healthy cash flow generation, dividend payouts could improve further

With strong rebound in profits, return ratios are estimated to improve in FY19E & FY20E






Incorporated in 1942, Supreme Industries Ltd (SIL) is engaged in processing of polymers and resins into finished plastic products. It is India's leading plastics product manufacturer (processing over 3.4 lac MT p.a.), offering a wide and comprehensive range of plastic products. With 25 technologically advanced manufacturing facilities spread across India (in 11 States and Union Territories) and a strong distribution network comprising 2,950 channel partners, SIL operates in various product categories like Plastic Piping System (which includes uPVC Pipes, Injection Moulded fittings, HDPE & CPVC Pipes Systems, Double Wall Corrugated HDPE pipes, etc), Cross Laminated Films & Products, Protective Packaging Products, Performance Packaging Films, Moulded Plastic Furniture, Industrial Moulded Components, Storage & Material Handling Products and Composite LPG Cylinders. Over the years, the company has forayed into different types of plastic processing in Injection Moulding, Rotational Moulding (ROTO), Extrusion, Compression Moulding, Blow Moulding, etc.

With a total installed capacity of 5.44 lac MT of plastic processing p.a, the company operates its business under five segments, namely, i) Plastic Piping, ii) Packaging, iii) Industrial, iv) Consumer and v) LPG Composite Cylinders & Others. Plastic Piping is a major revenue contributor, accounting for 54.3% of the total revenue. Packaging Product segment contributes 22.1%, while 15.6% & 7.3% revenues come from Industrial and Consumer Products segment. Revenue share of others segment (which includes LPG Composite Cylinders) is meagre at 0.7%. The company has a strong domestic presence with ~97.5% of its revenues derived from India, while balance contribution comes from exports. Despite a marginal overseas presence, SIL has been awarded the top exporter award in 'Fittings for Plastic Pipes and Hoses' and 'Tarpaulin' categories by Plexcouncil consecutively for last four years. The company's products are exported to 31 countries across five continents.

With a processing capacity of 3.87 lac MTPA, around 7300 products for 23 different application systems and a strong distribution network comprising 916 channel partners with 25,000+ retail touch points, SIL holds leadership position in organized domestic Plastic Piping segment, commanding ~14% market share (other notable players in this segment include Finolex, Jain Irrigation, Astral Poly, Prince Pipes & Fittings, Ashirvad Pipes and Kisan Mouldings). It is the only company to supply pipes and fittings from all major polymers like PVC (Polyvinyl Chloride), CPVC (Chlorinated Polyvinyl Chloride), PE (Polyethylene) and Polypropylene (PPR). Further, it is the second largest player in plastic moulded furniture with 10.5% market share (after Nilkamal, the market leader; other players include Wim Plast, Prima Plastics) and processing capacity of 30,000 MT. It was the first in the industry to make blow moulded furniture and to use the gas injection technology in moulding process.

Within the Packaging Products segment, SIL is one of the leading players in protective packaging segment (42% revenue share within the segment) with market share of ~25% and is the only company to have the technology to manufacture patented Cross Laminated Film products under brand name Silpaulin. The company is also a major player in the

Company Background

SIL is India's leading producer of plastic products, processing over 3.4 lac MT p.a

Plastic piping segment is a major revenue contributor, accounting for 54.3% of SIL's total revenue

SIL is a leader in organized domestic Plastic Piping segment (~14% market share) and is No 2 in plastic moulded furniture

Segmental Revenue Breakup


Geographical Revenue Break

Plas�c

Piping

54.3%

Packaging

22.1%

Industrial

15.6%

Consumer

7.3%

Others

0.7%

Domes�c

97.5%

Exports

2.5%






industrial products, commanding 13.5% market share in material handling segment. It is a major supplier to the Soft Drinks industry and was the first to launch injection moulded plastic pallets.

The company currently has one wholly owned overseas subsidiary, namely, Supreme Industries Overseas FZE, Sharjah UAE, which is a marketing enterprise, engaged in principal activity of promoting globally plastic piping products. However, its revenue and profit from operation is negligible. Further, SIL holds 29.99% stake in Supreme Petrochem (SPL), a JV between SIL & Rajan Raheja group, engaged in manufacturing of polystyrene, expandable polystyrene, extruded polystyrene foam, specialty polymers compound and styrene methyl methacralate. SPL is the largest single site producer of polystyrene with annual installed capacity of 2.55 lac MT, accounting for 2% of the world capacity and owning 60% of the domestic installed capacity. The company reported Net revenue & PAT of Rs 2,899cr & Rs 179.4cr respectively in FY17 (a growth of 42% & 215% respectively) and Rs 2,119cr and Rs 75cr respectively in 9MFY18.

Risks & Concerns

The product offer ings are wel l d i v e r s i fi e d a c r o s s i t s b u s i n e s s segments


Business Vertical Product Portfolio Targeted Customer Segment

uPVC Pipes, Injection Moulded fittings,

Handmade fittings, Polypropylene

Random, Co-polymer Pipes & Fittings,

HDPE Pipe Systems, CPVC Pipes

Systems, Inspection Chambers, Water

Tanks, Septic Tanks, DWC HDPE PIPE,

Bath Fittings, Solvents

Potable Water Supply, Irrigation, Drainage& Sanitation, Housing

Consumer ProductsPlastic Moulded Furniture Household, Office Establishments,

Institutions

Industrial Products

Industrial Components (moulded and

other interior & exterior parts for

Automobiles, plastic body for consumer

durable products, etc) and Material

Handling Products (Crates, Pallets, Bins

& Dustbins)

Auto Sector, Electronic Household

Appliances, Water Purification (filters),

Soft Drink Companies, Agriculture,

Fisheries

Packaging Products

Specialty Films, Protective Packaging

Products, Cross Laminated film

products, Cross Line Bonded Film

Products

Electronics, Food Industry, Sports Goods,

Insulation, Construction, Agriculture,

Tarpaulin, Pond lining, Floriculture,

Horticulture

Composite Products LPG Cylinders Retail / Household


SIL's comprehensive product portfolio





Key risks include: i) sharp spike in crude oil prices, ii) economic slowdown, iii) rising competition, iv) delay in ramp up of capacities

Risks & Concerns


Poly Vinyl Chloride Resin (PVC), Polyethylene (PE) and Polypropylene (PPR), derivatives of crude oil, are key inputs, which account for a major portion of the total material cost. A sharp rise in the crude oil prices could result in higher prices of PVC, PE & PPR and impact SIL's margins in the event of its inability to pass on the input cost inflation to its customers (as evident from margin contraction witnessed in 9MFY18).

Slowdown in economic growth could lower the infrastructure and consumer spending

and impact the demand for company's products across segments of plastics. This could put pressure on the volume growth. Further, any delay in the execution of Government's initiatives like Housing for All by 2022, Swachh Bharat Mission and Amrut could hamper the demand for plastic products in India.

Increasing competition from the organized players could result in pricing pressure and impact the company's operational performance. To remain in competition and sustain market share and growth momentum, constant focus on product innovation is essential.

The performance of packaging product segment was impacted recently (in Q3FY18) largely due to capacity constraints. While the expansion plans are underway, any delay in the ramp up could impact the growth in this division. Steady capacity addition across segments is essential to maintain the growth momentum.




P&L Account - Consolidated


Balance sheet - Consolidated

Particulars, Rs cr FY17 FY18E FY19E FY20E

Net Revenue 4,462.3 4,976.5 5,772.8 6,638.7

Growth (%) 50.7 11.5 16.0 15.0

Material Expenses 2,891.7 3,344.2 3,867.8 4,441.3

Employee Expenses 211.7 238.9 271.3 305.4

Other Operating Expenses 597.0 651.9 744.7 849.8

EBITDA 761.9 741.5 889.0 1,042.3

EBITDA Margin (%) 17.1 14.9 15.4 15.7

EBITDA Growth (%) 68.1 (2.7) 19.9 17.2

Depreciation 154.3 169.0 189.0 206.9

EBIT 607.6 572.5 700.0 835.4

Other Income 5.1 3.1 3.8 4.9

Interest 30.3 20.3 17.3 12.9

PBT 582.5 555.3 686.5 827.4

Tax 205.8 197.1 243.7 293.7

Minority Interest - - - -

Share of Profit/(Loss) in Associated 53.7 40.5 44.5 51.2

Company

RPAT 430.4 398.6 487.3 584.9

RPAT Growth (%) 94.4 (7.4) 22.2 20.0

EO items (net of tax) - - - -

APAT 430.4 398.6 487.3 584.9

APAT Growth (%) 90.2 (7.4) 22.2 20.0

EPS 33.9 31.4 38.4 46.0

EPS Growth (%) 90.2 (7.4) 22.2 20.0



SOURCES OF FUNDS

Share Capital 25.4 25.4 25.4 25.4

Reserves 1,670.3 1,840.3 2,114.1 2,439.8

Total Shareholders Funds 1,695.7 1,865.7 2,139.5 2,465.2

Minority Interest - - - -

Total Debt 279.0 254.0 204.0 129.0

Net Deferred Taxes 116.3 116.3 116.3 116.3

Long Term Provisions & Others 14.1 15.8 18.4 21.1

TOTAL SOURCES OF FUNDS 2,105.1 2,251.7 2,478.1 2,731.6

APPLICATION OF FUNDS

Net Block 1,263.3 1,544.3 1,705.3 1,848.4

CWIP 45.9 45.9 45.9 45.9

Investments 174.6 177.0 177.0 177.0

LT Loans & Advances and Others 54.8 61.4 71.2 81.9

Total Non-Current Assets 1,538.6 1,828.5 1,999.4 2,153.1

Inventories 776.9 743.1 854.1 964.0

Trade Receivables 275.3 300.0 332.1 372.9

Cash & Equivalents 79.8 24.0 31.5 82.3

ST Loans & Advances and 146.7 164.3 190.6 219.2

Other Current Assets

Total Current Assets 1,278.7 1,231.4 1,408.3 1,638.4

Trade Payables 453.3 518.1 593.1 673.0

Other Current Liabilities 259.0 290.1 336.5 387.0

& Provisions

Total Current Liabilities 712.2 808.2 929.6 1,059.9

Net current Assets 566.5 423.2 478.8 578.4

TOTAL APPLICATION OF FUNDS 2,105.1 2,251.7 2,478.1 2,731.6








Cash Flow statement - Consolidated


Key Financial ratios - Consolidated


Reported PBT 582.5 555.3 686.5 827.4

Non-operating & EO items 3.3 2.0 2.4 3.2

Interest Expenses 30.3 20.3 17.3 12.9

Depreciation 154.3 169.0 189.0 206.9

Working Capital Change (118.1) 87.5 (48.0) (48.9)

Tax Paid 205.8 197.1 243.7 293.7

OPERATING CASH FLOW ( a ) 439.8 633.0 598.6 701.4

Capex (190.3) (450.0) (350.0) (350.0)

Free Cash Flow 249.5 183.0 248.6 351.4

Investments (48.5) (2.4) - -

Non-operating income 3.3 2.0 2.4 3.2

Others 50.4 28.9 28.7 32.5

INVESTING CASH FLOW ( b ) (185.1) (421.4) (318.9) (314.3)

Debt Issuance / (Repaid) (133.1) (25.0) (50.0) (75.0)

Interest Expenses (30.3) (20.3) (17.3) (12.9)

FCFE 86.1 137.6 181.3 263.5

Dividend (45.7) (228.7) (213.4) (259.2)

Others 5.4 6.7 8.5 10.8

FINANCING CASH FLOW ( c ) (203.8) (267.3) (272.2) (336.3)

EO items - - - -

NET CASH FLOW (a+b+c) 51.0 (55.8) 7.5 50.8

Closing Cash 79.8 24.0 31.5 82.3


PROFITABILITY (%)

GPM 35.2 32.8 33.0 33.1

EBITDAM 17.1 14.9 15.4 15.7

APATM 9.6 8.0 8.4 8.8

RoE 28.6 22.4 24.3 25.4

RoCE 32.8 28.0 31.4 33.8

EFFICIENCY

Tax Rate (%) 35.3 35.5 35.5 35.5

Fixed Asset Turnover (x) 1.9 1.8 1.9 1.9

Cash Conversion Cycle (days) 49.0 38.5 37.5 36.5

Debt/Equity (x) 0.2 0.1 0.1 0.1

Interest Coverage (x) 20.1 28.2 40.4 64.8

PER SHARE DATA

EPS 33.9 31.4 38.4 46.0

CEPS 46.0 44.7 53.2 62.3

BV 133.5 146.8 168.4 194.0

Dividend 3.0 15.0 14.0 17.0

VALUATION

P/E (x) 35.3 38.1 31.1 26.0

P/BV (x) 9.0 8.1 7.1 6.2

EV/EBITDA (x) 20.2 20.8 17.3 14.6

Dividend Yield (%) 0.3 1.3 1.2 1.4






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