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Supreme Industries Limited - Analysis

Business: Supreme Industries is a leading manufacturer of plastic products in India. The company has manufacturing sites at 19 locations throughout the country. The company manufactures wide range of products in the following 4 segments:
 
(1) Plastic Piping System: contributes about 45% to total sales 
(2) Consumer Products: contributes about 25% to total sales 
(3) Industrial Products: contributes about 20% to total sales 
(4) Packaging Products: contributes about 10% to total sales

The company also has a 29.8% stake in a listed subsidiary called Supreme Petrochem Ltd.

 
Growth Prospects: India has one of the lowest per capita consumption of plastic in the world.  In 2009, the per capita consumption of plastic in India was just 6 kgs as compared to the world average of 27 kgs. With the increasing growth and urbanisation in the country, the use of plastics can be conservatively expected to grow at least at the nominal GDP growth rate of 14-15% p.a. over the next decade. 

The thrust of Indian Government on infrastructure development provides additional opportunities for a company like Supreme Industries since its products are used in many infrastructure activities like irrigation, commercial vehicles, water projects and real estate construction.

What is important from an equity shareholder point of view, is that the company has demonstrated its competence over the last decade in growing the business in a manner that benefits the shareholders of the company, which is reflected in the Average ROE going up from 19.86% in FY 2005-06 to 43.72% in FY 2009-10.The management has also indicated in recent media interviews that sales would grow at 25% in FY12 and the company would also be able to maintain operating margins at around 14-15% range.


 
 
Other Business: The Company has constructed a commercial complex for sale/lease purposes on its own land in Andheri (NYSE:W), Mumbai and also holds a stake of 29.88% in the listed Supreme Petrochem Ltd.

Management:  Management holds 49.62% stake in the company and has increased the same over the past year from 48.89%. The management is very competent based on past track record and management compensation as disclosed in the Annual Report also appears reasonable compared to the profitability of the company.

Dividend Policy:  The Company has a consistent policy of paying dividend to the shareholders. In FY10, the company paid out 30% of the net profits as dividend. Also in FY11, the company has already paid out 19% of the profits made so far as interim dividend. I believe that this is a prudent policy as it precludes the company from doing unwarranted diversification and expansion and also helps to maintain high return ratios, in addition to providing regular cash flow stream to the investors. It also signifies the management confidence in the company’s free cash flow generation ability.

Institutional Holding: The institutional holding in the company is at just 5.32% which is good from an individual shareholder point of view as it reduces wild swings in the share price due to big bulk deals. Apart from this, Nalanda Capital, a PE firm also holds a stake in the company since a long time.

Risks The company imports half of its raw materials requirements (PVC Resin) from abroad which subjects it to forex risk (depreciation in INR) and commodity price risk (the company however performed admirably even in the turbulence of FY 2008-09 and was able to maintain its profitability and return ratios). The recent spike in crude prices may impact the margins of the company by a couple of % points for the next few quarters and any weakness in the stock price due to the same can be used as a further buying opportunity, assuming normalisation of crude prices once the current political crisis gets over.

Financial Performance:
 
 
 

The company has earmarked a capex of Rs. 180 crs (almost 30% of current Net Fixed Assets) for the current financial year, to be funded mostly from internal accruals, to further increase the share of value added products and expand dealerships. This will bring down the return ratios in the current year.

Valuation:



This looks like a stock which will not zoom up but has the potential of giving good consistent returns of 20-25% over the years. Compared to other quality stocks with good cash flows and return ratios, this company is still available at reasonable valuations, even though not at a very mouth watering level. 

Please let me know your thoughts/comments.

Disclaimer: I do not own this stock currently but can choose to buy at any time.