SUPREME INDUSTRIES. Strong performance. Strong volume growth in piping segment aids margin. Capex, new product launches to drive long-term growth

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1 India Midcaps RESULT UPDATE SUPREME INDUSTRIES Strong performance India Equity Research Miscellaneous Supreme Industries (SIL) reported a topline of INR6,176mn, above our estimate of INR5,827mn, driven by 28.3% YoY growth in volume. EBIDTA margin came in at 13.7% against our estimate of 13% primarily due to higher operating leverage. Core PAT stood at INR371mn, higher than our INR263mn estimate, mainly due to a higher-than-anticipated EBIDTA margin and lower interest costs. The company has guided for 25% topline growth, driven by 16% volume growth for FY13E. Maintain BUY. Strong volume growth in piping segment aids margin SIL reported a topline of INR6,176mn against our expectation of INR 5,827mn, up 28.6% YoY. The growth was primarily driven by 28.3% volume growth, largely due to a 40% volume growth in the piping segment. EBIDTA margin for Q1FY13 stood at 13.7%, higher than our estimate of 13%, primarily due to a significant amount of operating leverage. Piping witnessed 330bps margin expansion owing to a higher contribution from CPVC pipes (grew 90%) and shortage of raw materials with competitors thereby providing pricing premium to the company. Consequently, core PAT stood at INR371mn, above our expectation of INR263mn. Capex, new product launches to drive long-term growth The company has recently commenced a new unit for protective packaging segment in Hosur and 4000MT of cross laminated films in Gujarat. Further capacity of 8000 MT is likely to be operational in tranches of 4000 MT each by January and March, 2013 respectively. The company is eyeing the composites cylinder segment with an initial capacity of 0.5mn cylinders p.a., to be operational in Q3FY13. Also, SIL has a plan to enter composite pipes which are largely used in oil exploration. It has planned a capex of INR11bn over next five years and expects to generate an asset turnover of 3x. EDELWEISS RATINGS Absolute Rating Investment Characteristics BUY None MARKET DATA (R: SUPI.BO, B: SI IN) CMP : INR 291 Target Price : INR week range (INR) : 302 / 141 Share in issue (mn) : M cap (INR bn/usd mn) : 37 / 684 Avg. Daily Vol. BSE/NSE ( 000) : 67.1 SHARE HOLDING PATTERN (%) Current Q1FY13 Q4FY12 Promoters * MF's, FI's & BKs FII's others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) BSE Midcap Index Stock : NIL Stock over Index 1 month months months Outlook and valuations: Positive; maintain BUY We revise up our earnings by 4.7% for FY13E and 3.2% for FY14E to factor in a higher topline and margin assumption. We value SIL s consolidated business at 12x FY14E EPS of INR312 and SIL s holding in Supreme Petrochem (SPL) at INR9 per share. Giving a 30% holding company discount to SIL s share (29.9%) in SPL, we arrive at a fair price of INR321 per share for the stock based on our SOTP valuation. We maintain BUY. Financials (INR mn) Year to June Q113 Q112 % change Q412 % change FY12 FY13E FY14E Net revenues 6,176 4, ,263 (33.3) 28,968 35,733 43,931 EBITDA ,756 (51.7) 4,257 5,217 6,370 Core profit after tax (60.5) 2,324 2,650 3,299 EPS (INR) (60.5) Diluted P/E (x) EV/EBITDA (x) ROAE (%) Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Niket Shah niket.shah@edelcap.com Manoj Bahety, CFA manoj.bahety@edelcap.com October 29, 2012 Edelweiss Securities Limited

2 Miscellaneous Q1FY13 concall highlights SIL processed 60,012 MT of polymers in Q1FY13 compared to 46,761 MT in Q1FY12, volume growth of 28.3% YoY. Q1FY13 piping EDIDTA margin stood at 14.8% against 11.5% in Q1FY12, industrial at 9.2% against 11%, packaging at 18% against 17% and consumer segment stood at 11% against 11%. SIL plans to garner INR400mn as other operating income for FY13E on account of industrial promotion subsidy from the mega project at Gadegaon under the package scheme incentive, 2001 of the Maharashtra government. Debt on balance sheet has increased to INR5,860mn as on Q1FY13 as compared to INR 3510mn at end of FY12 primarily due to dividend payout, capex and higher inventory. The share of value-added products as a percentage of revenue has increased to 30.31% in Q1FY3 as compared to 28.61% in Q1FY12. Installed capacity for FY13E is expected to stand at 4,14,000MT as compared to 3,49,700MT at the end of FY12. The total capex outlay for the year stands at INR 4bn. Growth in piping segment higher due to delay in rains in Q1FY13 as compared to Q1FY12 and 90% growth in CPVC segment. However, for FY13E, the company expects 30% growth in CPVC segment primarily due to lack of availability of raw material from Kaneka Corp of Japan. The total contribution from CPVC pipes is expected to be around INR 2.1bn in FY13 against INR1.6bn in FY12. The company plans to invest INR 160mn in FY13 to launch high quality bath room fittings made from superior plastics. The company plans to sell these products through existing distribution segment. It wants to garner INR500mn in FY14E from this segment. Table 1: Segment-wise volume break-up MT Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Piping 35,462 26,290 41,047 39,948 43,959 36,972 industrial 8,375 7,949 8,819 11,589 9,917 9,487 packaging 8,148 8,481 9,960 9,557 9,360 9,572 consumer 5,008 4,041 4,819 4,890 5,025 3,981 Source: Edelweiss research Table 2: Segmental revenue In mn Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Piping 2,010 3,146 3,294 4,750 3,000 industrial 1,060 1,250 1,780 1,510 1,290 packaging 1,090 1,970 1,830 1,980 1,250 consumer Source: Edelweiss research Q4FY12 concall highlights 2 Edelweiss Securities Limited

3 Supreme Industries SIL processed 68,261 MT of polymers in Q4FY12 compared to 56,993 MT in Q4FY11, volume growth of 19.8% YoY. However, for FY12, the company processed 245,700 MT of polymers against 223,751 MT in FY11, a volume growth of 9.8% YoY. Segmental revenue break up: FY12 industrial segment revenue stood at INR5,600mn against INR4,910mn in FY11, consumer segment was at INR2,680mn against INR2,620mn, packaging segment revenue was at INR6,870mn against INR5,800mn and piping revenue stood at INR 13,200mn against INR10,360mn. FY12 piping EDIDTA margin stood at 13%, industrial at 13%, packaging at 20% and consumer segment stood at 14%. SIL has garnered INR323mn as other operating income for FY12 on account of industrial promotion subsidy from the mega project at Gadegaon under the package scheme incentive 2001 of Maharashtra government. Debt on balance sheet has reduced to INR3,500mn as on FY12 end compared to INR5,112mn as on FY11 end primarily due to decrease in working capital. The share of value-added products as a percentage of revenue has increased to 31.5% in FY12 compared to 29.3% in FY11. Management plans to further increase it to 33% in FY13. In FY12, exports stood at USD13.5mn. Management expects it to increase to USD20mn in FY13. Within consumer segment, 65% revenue is derived from commodity furniture and balance 35% from specialty furniture. Out of total INR13bn of piping sales in FY12, housing contributes INR8.5bn, infra INR500mn and irrigation contributes INR4bn. Installed capacity for FY12 stood at 349,700 compared to MT in FY11. The debt as on FY12 end stood at INR3.5 bn. SIL has sold 41,678 sq ft of premises for INR691.6mn in FY12. The company is currently witnessing slack demand for commercial property in Mumbai due to slowdown in overall business growth. SIL has received occupation certificate from BMC for the same hence expects to sell the balance area and expects to realise in excess of INR3bn from the balance project. The proceeds will be used to reduce debt going forward. We have not factored any real estate sales in our model. 3 Edelweiss Securities Limited

4 Miscellaneous Financial snapshot -(Consolidated) (INR mn) Year to June Q1FY13 Q1FY12 % change Q4FY12 % change FY11 FY12 FY13E Revenues 6,176 4, ,263 (33.3) 24,297 28,968 35,733 Raw material and components 3,923 3, ,046 (35.1) 16,279 19,388 23,941 Employee cost (20.1) 968 1,125 1,322 Others 1, , ,729 4,198 5,253 Total Expenditure (INR mn) 5,329 4, ,507 (29.0) 20,976 24,711 30,516 EBITDA ,756 (51.7) 3,321 4,257 5,217 Interest (14.0) 121 (5.6) Depreciation (11.9) Other income (87.0) PBT ,428 (61.6) 2,565 3,474 3,955 Tax (63.8) 877 1,150 1,305 Profit after tax (60.5) 1,697 2,324 2,650 Share of profits from associates (59.6) PAT after share of profits from assoc (59.0) 1,958 2,417 2,773 Equity capital (FV INR 10) No. of shares (mn) Adjusted EPS (60.5) Diluted P/E (x) EV/EBITDA (x) Market cap / Revenues (x) as % of net revenues Raw material Staff expenses Other expenses EBITDA Net profit * Annual numbers are on consolidated basis 4 Edelweiss Securities Limited

5 Supreme Industries Company Description SIL is one of the most prominent plastic manufacturing companies in India, having over 44 years of experience under the current management. It has been consistently increasing capacity in the plastics processing and has more than 7000 diversified products. It processes over 0.2 mn metric tonnes of plastic per annum, and has 19 manufacturing locations across India. The company s core operations involve processing polymers and resins into diversified plastic products spread under four broad categories: industrial products, consumer products, piping products and packaging products. Over the years, SIL has managed to gain a significant market share across its product portfolio. It is credited with pioneering various products including Cross- Laminated Films, HMHD Films, Multilayer Films, SWR Piping Systems, PP Mats etc. The company currently has around 1200 distributors of which 600 distributors are for PVC Pipes, 400 for furniture, 60 for cross laminated films and 140 accounting for others Investment Theme Supreme industries, the largest private plastic processing player in India, is poised to be the biggest beneficiary of shift from metals to plastic and higher GDP growth of India. Supreme has detailed a road map that will entail deployment of a sizeable capex of INR 10bn over by Post the capex, the installed capacity would expand from 3,49,700 MT pa in FY12 to 6,45,000 MT pa by FY15-16, marking a CAGR increase of 16.6%. The company has a strong balance sheet with the debt to equity at 0.5x in FY12. SIL has strong operating and free cash flows to fund its capex from internal accruals a great comfort factor. Moreover the company s net working capital cycle stands at around days, one the best in the industry as it gives cash discounts to customers on early payments as well as imports raw materials against which it gets a higher credit period. It also has strong return ratios with ROCE at 33% and RONW at 37% for FY12. Shareholders have been consistently rewarded with its liberal dividend policy (distributing ~30% of its profits as dividend). Key Risks The plastic industry is highly fragmented with unorganized players accounting for 60% of the output and posing a stiff competition to SIL. Sharp increase in raw material prices of PVC,LDPE,HDPE and delays in passing on the same. The company has an asset heavy model hence needs to invest continuously in the business to sustain growth. Any delay in expansion plans can affect the turnover of the business as the same has been factored in our model. Unavailability of skilled labour might hurt the capacity utilization of one or many plants thereby affecting the turnover and performance. The plastic industry has been growing in range of 1.8x-2x GDP growth rate of India.Hence any slowdown in GDP growth of the country might affect the topline of the company. 5 Edelweiss Securities Limited

6 Miscellaneous Financial Statements Key Assumptions Macro - GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Company - Segment wise rev. growth % Industrial Consumer Packging Pipes Income statement (INR mn) Net revenue 19,915 24,297 28,968 35,733 43,931 Materials costs 13,093 16,279 19,388 23,941 29,434 Gross profit 6,822 8,018 9,580 11,792 14,497 Employee costs ,125 1,322 1,603 Other Expenses 3,210 3,729 4,198 5,253 6,524 Total operating expenses 17,103 20,976 24,711 30,516 37,561 EBITDA 2,812 3,321 4,257 5,217 6,370 Depreciation & Amortization ,048 Other income Interest expenses Profit before tax 2,169 2,565 3,474 3,955 4,925 Provision for tax ,150 1,305 1,625 Net profit 1,421 1,687 2,324 2,650 3,299 Share in profit of associates Profit after minority interest 1,560 1,958 2,417 2,773 3,484 Shares outstanding (mn) Diluted EPS (INR) Dividend per share (INR) Dividend payout (%) Common size metrics - as % of net revenues Operating expenses Cost of goods sold Depreciation EBITDA margins Net profit margins Growth ratios (%) Rev. growth (%) EBITDA Net profit EPS growth (%) Edelweiss Securities Limited

7 Supreme Industries Balance sheet (INR mn) As on 31st March FY10 FY11 FY12 FY13E FY14E Equity capital Reserves & surplus 3,887 5,223 6,713 8,353 10,404 Shareholders funds 4,141 5,477 6,967 8,607 10,658 Secured loans 2,691 3,532 2,419 3,719 3,169 Unsecured loans 1,182 1,611 1,092 1,092 1,092 Borrowings 3,874 5,143 3,511 4,811 4,261 Deferred tax liability Sources of funds 8,713 11,414 11,310 14,249 15,750 Gross block 9,660 12,021 12,451 16,451 18,468 Depreciation 4,033 4,604 5,057 5,924 6,972 Net block 5,626 7,417 7,394 10,527 11,497 Capital work in progress Total fixed assets 5,757 7,677 7,731 10,705 11,672 Goodwill Investments Inventories 2,906 3,454 3,140 4,099 5,000 Sundry debtors 1,310 1,529 1,712 1,909 2,287 Cash and equivalents Loans and advances 978 1,535 1,706 1,876 2,064 Total current assets 5,382 6,660 6,701 7,996 9,520 Sundry creditors and others 2,536 3,124 3,101 4,329 5,080 Provisions ,011 1,248 Total current liabilities & provisions 3,148 3,839 4,010 5,340 6,329 Net current assets 2,234 2,821 2,691 2,657 3,191 Uses of funds 8,713 11,414 11,310 14,249 15,750 Book value per share (INR) Free cash flow (INR mn) Net profit 1,560 1,958 2,417 2,773 3,484 Depreciation ,048 Others Gross cash flow 2,311 2,679 3,555 3,942 4,778 Less: Changes in WC (544) (2) 477 Operating cash flow 2,855 2,136 3,519 3,944 4,301 Less: Capex 733 2, ,842 2,014 Free cash flow 2,122 (333) 2, ,287 Cash flow metrics Operating cash flow 2,855 2,136 3,519 3,944 4,301 Investing cash flow (675) (2,404) (643) (3,842) (2,014) Financing cash flow (2,100) 223 (2,874) (135) (2,229) Net cash flow 79 (44) 2 (32) 58 Capex (733) (2,468) (762) (3,842) (2,014) Dividends paid (534) (578) (664) (1,011) (1,248) 7 Edelweiss Securities Limited

8 Miscellaneous Profitability & efficiency ratios Gross profit margin (%) EBITDA margin (%) ROAE (%) ROACE (%) ROA Inventory day Debtors days Payable days Cash conversion cycle (days) Current ratio Debt/EBITDA Debt/Equity Adjusted debt/equity Interest coverage Long term debt / Capital employed (%) Total debt / Capital employed (%) Operating ratios Total asset turnover Fixed asset turnover Equity turnover Valuation parameters Diluted EPS (INR) Y-o-Y growth (%) CEPS (INR) Diluted PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%) Peer Comparison valuation Market Cap PE (x) P/BV (x) ROE (%) Price (mn) 2013E 2014E 2013E 2014E 2013E 2014E Time technoplast 46 9, Sintex 66 17, Astryl poly 331 7, Average Supreme Industries , Source: Bloomberg, Edelweiss research 8 Edelweiss Securities Limited

9 Supreme Industries Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai Board: (91-22) , Vikas Khemani Head Institutional Equities Nischal Maheshwari Co-Head Institutional Equities & Head Research Nirav Sheth Head Sales Coverage group(s) of stocks by primary analyst(s): AIA Engineering, Balkrishna Industries, Educomp Solutions, Everonn Systems, EID Parry India, Escorts, Jain Irrigation, Opto Circuits India Ltd, PI Industries, Shree Renuka Sugars, Supreme Industries, Sintex Industries Ltd, Solar Industries, United Phosphorus, VIP Industries Recent Research Date Company Title Price (INR) Recos 18-Sep-12 Supere Industries Power packed growth; Visit Note 30-Aug-12 Samsonite Market share gain continues; Global Pulse 07-Aug-12 Balkrishna Industries Steady performance; Result Update 282 Buy Not Rated 280 Buy Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation Buy Hold Reduce Total Rating Distribution* * 1 stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) Rating Buy Hold Reduce Expected to appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period 9 Edelweiss Securities Limited

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