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Supreme industries initiating coverage


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Equity Research report by Hedge Equities Limited

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Supreme industries initiating coverage

  2. 2. BUSINESS SUMMARY Sector: Plastic NSE Code: SUPREMEIND EPS (TTM): Rs.13.01Supreme Industries Limited (SIL) is one of the largest PE (TTM): 11.17 BSE Code: 509930plastic processing companies in India, processing over Industry PE: 12.29 Mkt. Cap: 1829.19 ISIN Code: INE195A01028two lakh metric tonnes of plastic per annum. The 52 Wk high: Rs. 169.90company’s core operations involve processing polymers 52 Wk low: Rs. 71.00 Reuters Code: SUPI.BOand resins into plastic products which are quote P/BV: 4.84diversified and spread over four broad product Beta: 0.45 Bloomberg Code: SI IN Yield (%): 2.50categories namely: - Piping products, Industrial Face Value: 2.00 Website:products, Consumer products and Packaging products. Debt/Equity: 0.78 Institutional: 4.56 % INVESTMENT RATIONALE/RISKSSIL is involved in an industry that is extremely under-penetrated, fragmented and dominated by theunorganized sector and thereby offering tremendousscope for a large and organized player the potential to (In crores) JUN-09 JUN-10 JUN-11E JUN-12Estake a claim and scale up their operations. The SALES 1654.94 2007.02 2616.74 2928.77company has put in place a well thought out and PAT 94.34 142.08 259.50 335.46rigorous strategy that is due to play out all the way until EPS 7.42 11.18 20.42 26.402015. PE 19.38 12.87 7.04 5.45SIL has a fantastic distribution network, diversified andvast product offerings, a superior brand image and isvery well positioned across India (SIL possesses 19manufacturing units that are spread out across the four Sensex vs SILkey zones across India). 25000.00 200.00The next two years (most notably the current year) will 20000.00 150.00 15000.00 100.00see SIL generate revenue through its non-core 10000.00construction business which is likely to be a crucial EPS 5000.00 50.00booster. 0.00 0.00 30-Apr-10 31-Oct-10 31-Mar-10 30-Sep-10 29-Dec-09 28-Feb-10 31-Jul-10 30-Nov-10 31-May-10 31-Aug-10 29-Jan-10 30-Jun-10Both the historical financials and the forecastedfinancials of SIL over the next two years paint a veryhealthy picture of the firm, be it earnings growth rates,ever-increasing margins, best-in-class ROE and ROCE, SENSEX SILcash flow position, debt levels, strength of the balancesheet and dividend payouts. SILs SHAREHOLDING PATTERNRisks include the possible volatility in PVC resin prices(crucial component in the manufacture of piping AS AT SEP 2010products) and rising crude oil prices (the prices of PROMOTER DII FII OTHERSpolymers such as polyethylene, polypropylene areclosely tied to crude oil prices. The other major risk isthe valuation (exemplified by the trailing PE ratio) whichis just a tad lower than the industry average. 46% 50%Institutional participation in the stock too is relativelylower and significant outperformance may depend on 4% 0%renewed institutional appetite. Source: Multiple Sources
  3. 3. December 30, COMPANY RESEARCH REPORT 2010ContentsBRIEF PROFILE .............................................................................................................................................................................. 2 COMPANY ADDRESS................................................................................................................................................................. 2 TOP MANAGEMENT ................................................................................................................................................................. 2BUSINESS ...................................................................................................................................................................................... 3SECTOR ......................................................................................................................................................................................... 7OUTLOOK AND SCOPE.................................................................................................................................................................. 9FINANCIALS AND VALUATIONS .................................................................................................................................................. 13 HISTORICAL FINANCIALS ........................................................................................................................................................ 13 FINANCIAL OUTLOOK ............................................................................................................................................................. 14RISKS........................................................................................................................................................................................... 16INVESTMENT RATIONALE........................................................................................................................................................... 17FINANCIAL HIGHLIGHTS -CONSOLIDATED.................................................................................................................................. 20FINANCIAL RATIOS -CONSOLIDATED.......................................................................................................................................... 21FINANCIALS GRAPH AND PEER GROUP COMPARISON .............................................................................................................. 22ANALYST NOTES AND COMPANY NEWS .................................................................................................................................... 23
  4. 4. December 30, COMPANY RESEARCH REPORT 2010BRIEF PROFILESupreme Industries Limited (SIL) is one of the mostprominent plastic manufacturing companies in India, COMPANY ADDRESShaving been set up in 1942, and having over 44 years Supreme Industries Limited,of experience under the current management. Thecompany is today one of the largest plastic processing E-2, Ansa Industrial Estate,companies in India, processing over 2 lakh metric Saki Vihar Road,tonnes of plastic per annum. The company’s coreoperations involve processing polymers and resins Saki Naka,into plastic products, which are quite diversified andspread over four broad product categories namely:- Andheri (E),Industrial Products, Consumer Products, Piping Mumbai- 400072Products and Packaging Products. SIL is credited withpioneering various products in the industry whichinclude Cross- Laminated Films, HMHD Films,Multilayer Films, SWR Piping Systems, PP Mats andmore. SIL has two subsidiaries. The company has a29.88% stake in Supreme Petrochem Limited (SPL)which is involved in the manufacture of polystyrene,expanded polystyrene, extruded polystyrene boards TOP MANAGEMENTand compounds of polystyrene and polyolefins. SPL is 1. Chairman – B L Tapariathe largest exporter of polystyrene (PS) from India 2. Managing Director – M P Tapariaexporting to over 80 countries across the globe. SILalso enjoys a 100% stake in Supreme Industries 3. Director – B V BhargavaOverseas (FZE) which is located in the United Arab 4. Director – H S ParikhEmirates (UAE). Another element of strengthassociated with SIL is the fact that it is extremely well 5. Director – N N Khandwalaspread out across the country. This subsidiary has 6. Director – S R Tapariaenabled SIL to have a product presence in 21 7. Director – Y P Trivedicountries. The company has 19 manufacturinglocations across all the key zones of India (North, 8. Executive Director – S J TapariaSouth, West, East and Central India). 9. Executive Director – V K Taparia 2
  5. 5. December 30, COMPANY RESEARCH REPORT 2010BUSINESS products are not just limited to India alone and have garnered a good response Supreme Industries Business Targeted Customer in territories such as theLimited (SIL) is involved Vertical Product Portfolio Segment uPVC Pipes, Injection UK, Australia and Newin the business of Moulded fittings, Handmade fittings, Zealand. Some of the keyprocessing polymers and Portable Water Polypropylene Random, applications where theresins into finished Plasic Piping Co-polymer Pipes & Supply, Irrigation, System Drainage & company’s pipingplastic products which Fittings, HDPE Pipe Sanitation Housing Systems, CPVC Pipes products are used includeare broadly spread across Systems, LLDPE Tube and Inspection Chambers the field of irrigation,four product categories Consumer Retail Stores and water transportation,namely Industrial Products Furniture and Mats Exports Auto Sector, industrial usage,Products, Piping Electronic infrastructure Industrial Component,Products, Consumer Industrial Material Handling Appliances, Water Purification, Soft requirements, borewellProducts and Packaging Products Products (Crates, Pallets Drink Companies, and Dustbins) applications, the buildingProducts. Of the four Agriculture & Fisheries industry, sewerageproduct segments, piping Electronics, Food industry and rain waterproducts are the largest Industry, Sports Specialty Films, Goods, Insulation, harvesting. The key pipingcontributor to the top- Packaging Protective Packaging Construction, product of Supremeline having contributed Products products, Cross Agriculture, Laminated Films Floriculture, includes UPVC Pipes,around 43.5% in both Horticulture, Grain Injection Moulded2009 and 2010. It is Storage Tarpaulin Fittings, Polypropylenefollowed by the Packaging Product segment, the Copolymer Pipes and Fittings, HDPE Pipe Systems,Industrial Product segment and the Consumer CPVC Pipe Systems, LLDPE Tube and InspectionProduct segment that have contributed on average Chambers. SIL has introduced various pioneering24%, 20% and 12% to the top line in the last two productas in this segment which include SWRyears. SIL also has a marginal exposure to the Drainage System, Acqu Gold High Pressure Plumbingconstruction sector, a story which is expected to play System, Indo- Green PP-R-hot and cold waterout until December 2011. system, Eco-Drain structured wall hi-tech pipes andPiping Products Nu-drain underground drainage system. The company recently introduced the sprinkler system inSIL is considered to be the leader in the plastic piping several states (which is essentially devised usingsegment with its products being using in 19 different polyethylene pipes) and this is one item that isapplications. The company enjoys an 18% market expected to be a key driver in the coming years asshare in the organized domestic plastic piping the volume of polyethylene pipes had grown bysegment in India and in the broader piping segment close to 100% volume on a y-o-y basis. Anothermarket in India valued at Rs.1000 crore, the product that stands out in the piping productcompany was able to secure a 7.3% market share in segment of SIL is the company’s lead free “Aqua2009-10. In fact the popularity of SIL’s piping 3
  6. 6. December 30, COMPANY RESEARCH REPORT 2010gold” plumbing system that carries cold water. This made using 100% virgin polymers, using computerproduct has been successful in replacing the GI pipes designed moulds at their various ISO certified plants.(Galvanized Iron) in the housing industry as the cost SIL also enjoys the distinction of pioneeringof production is 50% less and enjoys far superior lacquered and upholstered moulded plastic furnituredurability. The company is also a very prominent in India and also being the first to utilize high endmanufacture of PVC pipes that are fast becoming the injection moulding technology in theirpreferred mode of piping over the traditional forms. manufacturing process. The company’s strategy inThe advantages that PVC pipes has over the other the future includes focusing on the lacqueredpipes include a greater life span without any loss of segment and premium furniture products. Recentlystrength, being lightweight and hence reduction in the company introduced a designer chair calledtransportation costs, as well as ease of installation. “DIVA” that has been very well accepted by the market due to its inbuilt metal legs that provides SIL s REVENUE BREAKUP stability, gas moulded plastic seats that provides 2500.00 strength and transparent back that provides 2000.00 aesthetic beauty. 483.89 1500.00 407.39 237.43 1000.00 193.03 411.04 In order to sell its furniture items SIL has set up 209 333.12 500.00 720.50 874.86 exlusive franchise show rooms all across India and 0.00 will be ramping up their showroom strength to 300 2009 2010 units in the current year. PIPING PRODUCTS INDUSTRIAL PRODUCTS SIL’s mats segment hasn’t been doing particularly CONSUMER PRODUCTS PACKAGING PRODUCTS well as a considerable proportion of the final products are exported to countries abroad and that Source: Company segment was badly hit during the recession era. TheConsumer Products mats segment of SIL is still in a process of convalescence. However the management isSIL’s consumer products include furniture and mats. confident of turning things around in this segmentThe company is considered to be the second largest and believes that the future bodes well for thisplayer in the plastic moulded furntiture with a segment as most of the economies are beginning tomanufacturing capacity of 21700MT. Of the Rs.1100 come out of the woods.crore valued market, SIL was able to garner a marketshare of 13% in 2009-2010. The company’s vast Industrial Productsrange of plastic furniture can be divided into eight Under this broad product segment SIL manufacturessub categories, namely Upholsters, Premium industrial components and material handlingmonoblock chairs, monoblock chairs, Armless chairs, products. The estimated market size of the materialCentre tables & trolley, Dining tables, Baby chairs handling segment is Rs.560 crores and SIL enjoys anand Stools. Another distinct feature of SIL’s furniture 18% market share. The company’s materialmanufacturing expertise lies in the fact that it is 4
  7. 7. December 30, COMPANY RESEARCH REPORT 2010handling and storage product range is extremely has been striving to become a tier 1 supplier in thecomprehensive, from small Bins to Super Jumbo auto industry by associating itself with suppliersCrates, Injection SIL’S MANUFACTURING UNITS right from theMoulded and Roto Sr. No. Unit Location Piping Industrial Consumer Packaging conceptualization stage. Products products Products ProductsMoulded Pallets, Jalgaon Body parts are also 1 YESInjection moulded and (Maharashtra) provided for various Noida (Uttar 2 YESRoto moulded Garbage Pradesh) electrical appliance Punebins. The company’s 3 (Maharashtra) YES manufacturers in thematerial handling Halol country and Whirlpool is 4 YES (Gujarat)equipment are used in a Malanpur one of SIL key clients. 5 (Madhya YESwhole host of industries Pradesh) Earlier in the year SIL was Raigadranging from the 6 (Maharashtra) YES able to secure a ratherelectronic industry, 7 Hosur YES prestigious project from (Karnataka)engineering industry, Pondicherry Tata Chemicals for the 8 (Union YES YESautomotive industry, Territory) manufacture of watertextile industry, fisheries, Silvassa purifiers called Tata 9 (Union YESfruits and vegetable Territory) Swach and the reasoning Khushkherahandling, soft drinks 10 (Rajasthan) YES for Tata selecting SIL washandling, dairy products 11 Derabassi YES YES due to the latter’s (Punjab)handling and more. Of all 12 Durgapur YES YES admirable geographical (West Bengal)these industries, SIL’s Kanpur (Uttar spread across India. 13 YESmaterial handling Pradesh) 14 Guwahati YES Packaging Productsequipment are perhaps (Assam) Jalgaon Imost popular in the soft 15 (Maharashtra) YES YES YES YES SIL’s packagingdrinks industry where Urse 16 (Maharashtra) YES products are categorizedthe company is 17 Jalgaon II YES as Specialty Films, (Maharashtra)considered to be the Malanpur Protective Packaging 18 (Madhya YESlargest supplier of crate Pradesh) Products and Crossequipment and related 19 Sriperumbdur YES Laminated Films. The (Tamil Nadu)matter in the country. products manufactured in Source: CompanyRecently SIL has been manufacturing value additive, this division are most oftentailor made crates that are fast replacing the utilized for packaging purposes, constructionconventional and standard crates. Another industry purposes and insulation purposes. As is the case inin which SIL’s industrial products enjoy a degree of the most of its other product segments, SIL haspopularity is the auto industry. The company introduced various path-breaking technologies in thesupplies various body parts for illustrious auto country such as Instant Polyurethane Foams,makers such as Tata Motors and Maruti Suzuki. SIL Reticulated foam for air filtration, Sound absorbing 5
  8. 8. December 30, COMPANY RESEARCH REPORT 2010open cell foam, High temperature and File Resistant Construction BusinessMelamine Foam. SIL also has the distinction of being SIL has established a 11 storied state-of-the-artthe only Indian company to have the technology to commercial complex in Andheri, Mumbai calledmanufacture XF films under the brand name of Supreme Chambers. The complex was designed bySilpaulin. Silpaulin is used in agricultural Sanjay Puri who is considered to be one of India’sapplications, civil engineering applications, leading architects. SIL is now looking to sell 2,75,000packaging application, export marketing and general square feet of the project and in fact has alreadyapplication purposes. been successful in selling about 40,000 square feet In the previous fiscal the company’s collaborators and raising Rs.60.20 crore through that sale. Thehad developed the Cross Line Bonded Films which is management is now looking to sell the entireessentially a next generation XF film with superior complex except one floor and is looking to achieveproperties. SIL has been granted Indian patents uptil sale closure by December 2011, with a sales target of2023 and also enjoys the exclusive right to produce Rs.375 crore. There has been no clarity on whetherthe same, in India & SAARC this construction activity ofCountries, as well as the right to SUPREME CHAMBERS- A LUCRATIVE AVENUE Supreme is just a one-off, orexport the product to all the FOR SIL something that the company willcountries in the world, except  2,75,000 sq.feet to be sold for continue to look at in the futurePortugal, Spain and Rs.375 crore. as well.  Project cost- Rs. 155 crore.Switzerland. In the last fiscal  40,000 sq.feet already been sold Research & Developmentthere was another interesting for Rs.60.20 crore.development for the packaging For a company that is involved in  Sale to fructify by Decemberproduct segment as the 2011. the business of churning outcompany’s Khopoli pioneering products on amanufacturing unit was able to consistent basis, one wouldprocure the BRC (British Retail Consortium) expect SIL to have a strong R&D culture and theCertificate, thereby making in the First Multilayer company doesn’t disappoint on that front. ThePackaging company in India to receive this company’s R&D centre is located in Mumbai andcertification. An admirable facet of this product is undertakes CAD (Computer Aided Design), CAMthat since it is a flat product it is not freight (Computer Aided Manufacture) and CAE (Computerintensive. This first mover advantage will enable the Aided Engineering) related projects, particularly forcompany to tap the European Marketand the engineering and fabricating intricate moulds andcompany has already been in touch with various dies. Before the product is sent out for commercialcompanies that have been scouting for materials manufacture, an evaluation of the product is donethat have the BRC certification. by simulating the prospective performance of the product. Product development teams at all Supreme Divisions work in synergy with the Centre, to effectively turn specific customer requirements into 6
  9. 9. December 30, COMPANY RESEARCH REPORT 2010precisely tailored products. In addition to the in- India plastic manufacturers today are proving to behouse R&D Centre, SIL has also collaborated with quite popular onglobal partners in places such as Switzerland, the global front.Belgium, Japan and Korea to develop a whole host of While the INDIAN PLASTICproducts, most notably in its packaging products qualities of SECTOR HIGHLIGHTSsegment. finished goods  The Indian plastic industry are quite is characterized by SIL’S R&D COLLABORATIONS superior, what fragmentation, under- actually swings it penetration and the COMPANY PRODUCT LINE in the Indian domination of theRasmussen PolymerDevelopment, Cross Laminated Films plastic unorganized sector.Switzerland manufacturers’  Indian plasticSapac Packaging Instant Packaging SolutionSolution, Belgium favour is the cost manufacturers are noted for their low cost expertise.Foam Partner, Reticulated PU Foam of production.Switzerland  Plastic consumption in Production costsSanwa Kako, Japan 2 Stage Foam India in terms of volume in India arePE Tech, Korea Cross Linked Foam grew by 16% last year. estimated to be However India’s plastic Source: Company 20-25% lower consumption is just 1/5th of than in the US. the world average.SECTOR Some of the  Polymer production isThe origins of the Indian plastic industry extend all characteristics expected to rise in thethe way back to 1957 which was the year which saw that are utilized current year therebythe modest and promising beginning of the to describe the allaying fears of rawproduction of Polystyrene, which is essentially a Indian plastic material shortage forpolymer (Polymers are further processed and refined industry today is domestic produce plastic). In the initial phases, the plastic  Going forward, government that it is highlywas manufactured using natural and synthetic initiatives such as the fragmented, Jawaharlal Nehru Nationalmaterials of different forms, attributes and under penetrated Urban Renewal Missionappearances. However with time, organic and possesses a and the Housing and Urbancompounds (materials containing carbon, hydrogen highly dominant Poverty Alleviationand other elements) were preferred as ingredients unorganized programe are expected toover natural and synthetic materials. Economic sector. Per capita boost the fortunes of plasticliberalization from 1991 stimulated the Indian plastic consumption of piping manufacturers inindustry even further, as joint ventures, foreign plastic and and easier access to technology from polymers in Indiadeveloped countries began to unfold. leaves much to be desired in comparison with the world levels. Even 7
  10. 10. December 30, COMPANY RESEARCH REPORT 2010though plastic consumption in India, in volume terms Nationalgrew by 16% (yoy) in the last fiscal, to reach 8 million Urbantonnes, the quantum of consumption in relative Renewal LESS-PUBLICIZED MERITS OFterms is extremely low. To put things into Mission PLASTICperspective, India’s consumption of plastic is just (JNNURM),  Plastic has a strong utilitarian1/5th of the world average. The per capita polymer the Central value in road construction activities saving 5-10% ofconsumption stood at a lowly 5.66 kgs. In the US that Government bitumen costs per kilometer.figure stood at 71.46 Kgs., while China and Brazil has given a  Contrary to the generalposted figures of 30.74kgs and 22.71 kgs. However special focus perception, plastic can actually be recycled into non-there is tremendous scope for growth, as the current to improve critical items of daily use.consumption level of 8 million tonnes is expected to the  Usage of plastic over metals indouble to 16 million tonnes by 2018 and reach 20 infrastructur automobiles reduces CO2million tonnes by 2020. e of 91 cities emissions by 50 mmt per year for the automobile sector from 63 globally.The cost of raw materials too are not expected to be citiers anda huge impediment in the near term as the towns asdomestic supplies of polymer are expected to announcedincrease and hence serve as a boon for the polymer earlier in the country. Under this scheme theprocessors such as SIL. The expanded capacity of government has budgeted Rs. 11619 crore in FY11the PP (Polypropylene) plant of Reliance Industries to improve drinking water supply and solid wasteLimited at Jamnagar began production earlier in the management. In addition to that the governmentyear. Another major manufacture of polymers- has budgeted another Rs.1000 crore for HousingHaldia Chemicals too increased the capacities of its and Urban Poverty Alleviation in FY11.This willPP (Polypropylene) and PE (Polyethylene) units in increase the market for plastic piping systems asWest Bengal. If there is a risk however it is the rising real estate developers go about their business. PVCcrude oil prices as it is a key ingredient in the plastic pipes are fast turning out to the preferredmanufacture of polymers. piping system across the world with China being While the under-penetration of plastics in India is one of the biggest propagators of this product. PVCquite evident there also exists a number of key pipesgrowth drivers that are likely to help bridge the Increasing urbanization, improving lifestyles inlevel of under-penetration in the country and semi-urban and rural segments and a pickup inprovide a fillip to the plastic manufacturers in India. consumer sentiment in the export markets areAnd these growth factors extend across all four of likely to aid the consumer product segments in theSIL’s broad product segments. SIL ‘s piping product near term. The industrial products division will besegment is likely to see significant traction due to looking to strong growth drivers in the autothe government’s thrust on irrigation facilities and industry and the soft drink industry which are theurban sanitation. Under the Jawaharlal Nehru biggest users of SIL’s industrial products and 8
  11. 11. December 30, COMPANY RESEARCH REPORT 2010material handling equipment. The packaging is still below world levels. In fact contrary tosegment as well is bound to prosper due to general perception plastic can be recycled into non-increased urbanization and a greater thrust on critical items of daily use and waste plastic can alsopackaged foods by the government. The increasing be used to generate fuel. According to CRISIL,sale of white goods is expected to be another plastic waste has tremendous utilitarian value instimulant. road construction as it can be blended with Bitumen to improve binding properties and increase savingsThere is also great scope in the export market as of 5-10% per kilometer in the cost of bitumen. Alsocurrently India only has a miniscule share of 1.5% of what most people aren’t aware of is the fact thatthe export volume of plastic. According to CRISIL plastic has energy saving properties. Its energyworld trade in plastics is expected to be 140 MMT savings properties are bestby 2012 and there lies a exemplified in the auto and thevery lucrative opportunity 5 YEAR STRATEGY OF SIL electrical appliances industries.for Indian based plastic  Reach the Rs.4500 landmark on the According to the Automotivemanufacturers. The rating topline. Research Association of India,agency goes on to stress  Increase share of value added the replacement of metals bythat however, India would products (Products with OPM>17%). plastics improves the mileage ofneed to realign its trade vehicles and reduces CO2basket to focus more on  Diversify product portfolio. emissions by 50 mmt per yearhigh value plastic products  Expand capacity to 595000MT by for the automobile sectorrather the polymers as is 2014-15. globally.the case currently. India’s  Increase the number of manufacturingtrade basket is skewed units from 19 to 31. OUTLOOK ANDtowards polymers withpolymers accounting for  Capital expenditure of Rs.1000 crore SCOPE68% and processed plastic over the next 5 years. SIL has done remarkably well upaccounting for 32%. until now, with its compellingAccording to CRISIL, in the future, plastic growth growth story. In a hypothetical sense mostwill best be seen in Packaging usages(processed companies that may have followed SIL’s growthfoods, agricultural produce), plasticulture usages chart may be tempted to consolidate for a while(irrigation, mulch films, green houses) and before embarking on further growth initiatives butinfrastructure usages (pipes, power and telecom when one is involved in an extremely undercables and geo-synthetics). penetrated and fragmented market such as the Indian plastics market that would represent anA well-publicized drawback of plastic products or opportunity lost. Keeping this is mind SIL has put inperhaps a big misconception is that it is not place some very interesting targets that it hopes toenvironmentally friendly and this could perhaps be achieve by 2014-2015. It is already widelyone of the reasons why plastic consumption in India acknowledged to be the leader in the Indian plastics 9
  12. 12. December 30, COMPANY RESEARCH REPORT 2010segment and has such a vast spread in terms of will be looking to develop electrofusion anddistribution network and strategically positioned compression moulded fittings. The company alsomanufacturing units, but the management now wants to widen and deepen its distribution networkwants to take the company to the next level. and increase the number of its channel partners. The management feels that there are still severalIf the “Management Discussion and Analysis” towns where dealer net works have to be createdsegment in an annual report is anything to go by, and over the next two years the target will be tothen one can certainly expect a very eventful future cover the unrepresented towns with growthfor SIL. Some of the targets that the management potential.has set until 2014-2015 SIL’S LIST OF NEW MANUFACTURING UNITS TO BEinclude increasing the SET UP BY 2015 However while all those plansnumber of manufacturing Division No. of New Proposed are going to transpire in the Locations Locationsunits from the existing 19 long-term, things are lookingunits to 31 units, enhancing Industrial Ahmedabad, fairly encouraging in the near- Moulded 3 Jamshedpur &the manufacturing capacity to Products Pondicherry term as well and the next two595000MT augmented by years particularly the currentRs.1000 crores of capital Plastic Piping year, one could see a huge 1 West Bengal Systemexpenditure, diversifying surge in the company’s top linetheir product portfolio even Cross Laminated and bottom line as it goes 1 Halolfurther by focusing on Film about disposing blocks of its 12technological innovation and storied commercial complex- Protective Hosur,Gujarat,increasing the component of Packaging 4 West Bangal & The Supreme Chambers. SIL isvalue added products and Products Rajasthan looking to sell 275000 squarespecialty products across all feet of the state-of-the artits four product segments Furniture 3 Andhra,East Zone property that is estimated to & North Zone(The value added products fetch them revenues to theare essentially high margin Source: Company tune of Rs.375 crores. Theproducts or OPM>17%, that contribute additional management has stated theirvalue without adding to the cost. The company desire to see the fructification of the entire sale ofwants to increase the contribution of value added the commercial complex bar one floor by Decemberproducts of SIL to 30% by 2014 and 20% in the 2011. There are obviously certain question markscurrent year. Last year the contribution of value over SIL’s corporate focus as it is not clear if theadded products to total sales was 17.78%). As part construction business is something that theof the company’s initiative to develop and company will be looking to continue with, in theintroduce innovative products for new applications, future, but it is certainly going to be earningsthe company sees great scope in the micro accretive in the current year and that is somethingirrigation and composite segment and the shareholders or prospective shareholders of SILinfrastructure and gas distribution segment where it should welcome. 10
  13. 13. December 30, COMPANY RESEARCH REPORT 2010 Interestingly enough SIL is also able to secure crucial cash flow looking to strengthen its strong from the sale of the land and brand equity position and has TWO YEAR OUTLOOK OF SIL building as well. set up a training centre to train In the last fiscal the company’s people about the right method Sale of SIL’s Supreme Chambers to fructify by December 2011. material handling equipment of the installation of its wide Strengthening of brand equity, division (crates) was adversely range of piping products. It has particularly through the new affected by the disappointing also set up a Display Centre training and display centres that monsoon conditions as retail showing various systems made were set up in September 2010. chains tend to use the by the company. Both the Retail marketing initiatives will be company’s material handling training and display centres stepped up on a pan India basis. equipment for the have started operations since Demand for SIL’s food handling transportation of crops such as September 2010. The crates (particularly Tomatoes and Tomatoes and Grapes during management is quite Grapes) to increase in the current post harvest transportation (SIL optimistic about this initiative fiscal. is the preferred supplier of and is encouraging its channel The number of consumer product crates in this segment). In the partners to bring their showrooms to be increased from 209 to 300 in the current year. current year due to the dealers/sub-dealers and end Besides the West Zone consume spectacular monsoon, this customers to visit the training product market to flourish due to segment is likely to post better and display centre. logistical advantages provided by results. SIL has also developedThe company’s core activities of the Gadgeaon plant that several new moulds to cater toconverting polymers and resins commenced manufacture of its ever increasing applicationsinto finished plastic products furniture in September 2010. and the supplies of theseacross four broad categories, The furniture manufacturing products have just started.too looks fairly encouraging. capacities of SIL’s Durgapur, Pondicherry and Guwahati plants to With regard to its consumerThe management took the be enhanced. product segment, the companydecision of shutting down its Production generating capacity of is continuing to ramp up theNandesari unit which was not the Kanpur plant to be increased production of its value addedcontributing to the business from 8000 tonnes p.a. to 15000 products and recently launchedgrowth due to pollution issues tonnes p.a. its Designer Chair “DIVA” whichand other factors. Since then Demand for SIL’s piping products to is already proving to be quitethe company has reconditioned get stimulated from the popular. The company currentlyand shifted all the major replacement market. has 209 exclusive showroomsequipment to other plans and that showcase SIL’s superiorthose equipments are now range of furniture and intends torunning to their original design increase the number ofcapacity. The company was also 11
  14. 14. December 30, COMPANY RESEARCH REPORT 2010showrooms to 300 by the end of the year. To environment of the mixing division and consistencyaugment the increase in showrooms the company in quality. PVC resin is one of the crucial componentswill also be increasing the furniture manufacturing used for making SIL’s pipes and the prices of thatcapacity of its Durgapur, Pondicherry and Guwahati material are something that could affect margins ofplants. Besides, in September 2010, the company this division. The company will also be launchingstarted the manufacture of furniture from its sprinkler systems in several states for the first timeGadegaon plant in order to cater to the West Zone and that should contribute decently to SIL’smarket. Previously it was catering to this market financials. The management also sees significantfrom its Pondicherry unit and this was nurturing scope in the replacement market as more and morelogistical disadvantages for the company. Andhra buildings are undergoing renovation. To meet thePradesh is another territory where the company is additional requirement of this market thelooking to set up a furniture manufacturing plant in management has stated that they will be focusing onorder to nullify the logistics cost disadvantage and it retail marketing on a PAN India basis.has also initiated actions to acquire land in the state There have also been recent reports suggesting thatas well as look for channel partners in this region. SIL is in the process of manufacturing plastic gasThe mats’ sales of the company as well are expected cylinders which, if true, could prove to be a pathto pick up as most of the economies across the breaking product. It would also give the company aworld, are slowly coming out of the woods and first mover advantage. However the managementexports account for a bulk of the mats’ sales of SIL. has stated that one of their thrust areas in the futureAs far as its piping products division is concerned the will be electro fusion and compression mouldedcompany is looking to enhance the production fittings for infrastructure and gas distribution.generating capacity of its Kanpur plant from 8000 While the management is going to be investingtonnes p.a to 15000 tonnes p.a. To facilitate the around Rs.180-270 crores of capex in the currentexpansion, the company had acquired a further 7 year, most of it is going to be devoted to theacres of adjoining land. At its Piping manufacture Industrial products division, Consumer productsplant at Gadegaon the company had not only division and Piping products division. Thecompleted the expansion of its UPVC and CPVC management will not be devoting much to theproduction lines but had also increased the level of performance packaging films segment and the crossautomation in the production capacity. In the last laminated film segment as committed capacities infiscal due to severe drought conditions a lot of state these two segments still have to go into productiongovernments had enforced a ban on the digging of due to low capacity utilization and a shortage ofnew borewells and this had affected the business of labour.this division. Due to the fantastic monsoon in thecurrent year, the situation is expected to bereversed. This has thrown up a number of benefitsfor the firm such as increase in output, reduction inman power requirements, improvement in the 12
  15. 15. December 30, COMPANY RESEARCH REPORT 2010FINANCIALS AND VALUATIONS Depreciation too has been another item that hasn’t caused a lot of strain on the profits. Depreciation as a %HISTORICAL FINANCIALS of Net sales which stood at 3.4% at the end of June 2007 dropped to 2.63% at the end of June 2010. All in all theThe historical financials of the company provide a profits of therelevant picture of the degree of prosperity that SIL has company haveenjoyed up until now. Before dissecting the financials, it grown at a HISTORICAL FINANCIALSmust be noted that SIL’s annual results are published notable CAGR ofevery June (SIL follows a July-June time period for 44% from Rs. 47 3 year historical sales has grown ataccounting). a CAGR of 19.7% from Rs.1116.22 crores at the end crore to Rs.2007 crores.From June 2007 - June 2010, SIL‘s revenue has grown of June 2007 to Piping products are the biggestfrom Rs. 1116.22 crore to Rs. 2007 crores, growing at a Rs.142 crores at contributor to the toplineCAGR of 19.7%. Taking into consideration a two year the end of June contributing around 44%, followed 2010. PAT by packaging products, industrialaverage, the plastic piping product segment has been products and consumer productsthe biggest contributor to SIL’s annual revenue margins as well that contributed 24%, 20% and 12%contributing around 44 % to the topline, the next big have moved up respectively.contributor is the packaging product segment in the last three Debt equity ratio has ranged fromcontributing around 24 % to the top line. The industrial years (there was 1.03 to 0.78 in the last three years.products segment and the consumer products segment a decline in 2008 3 year operating profits have growncontribute around 20% and 12% respectively to the however on a at a CAGR of 33% from Rs.121 croreoverall top line. yoy basis due to to Rs.289 crore. increase in theThe operating profit for the same time period has grown 3 year net profits have grown ata interest CAGR of 44% from Rs.47 crores tofrom Rs. 121 crores to Rs. 289 crores, growing at a rather Rs.142 crores. component. Theimpressive CAGR of 33%. Operating margins (OPM) have company had Operating profit margins in the lastclimbed up the ladder quite impressively. OPM which increased its three years have increased fromstood at 10.4% moved up year on year to end at 14.79% 10.4% to 14.7%. secured loanat the end of June 2010. component Net profit margins in the last threeSIL’s debt levels have always hovered around a significantly by years have increased from 4% to 7%.manageable level and consequently interest payments Rs.72 crore inhaven’t been a major impediment in transferring the that year) from Last year’s ROE and ROCE were 39.8% and 38.7% respectively.buoyancy at the operating level down the bottom line. 4% at the end ofThe debt equity ratio which stood at 1.03 at the end of June 2007 to 7%June 2007 rose up marginally for the next two years to at the end ofreach 1.13 before petering down to 0.78 at the end of June 2010.June 2010. Consequently interest as a % of sales has SIL also has a decent set of cash levels. It has been ablebeen quite negligent. Interest as a % of sales was 2.9% at to maintain a strong set of cash at both the operatingthe end of June 2007 and even though it rose to 3.3% the levels and net levels in every year. At the end of Junedouble impact of expanding top line growth and 2010, SIL has generated cash worth Rs.146 crores from itsdecrease in interest payment sent that figure to a lowly operating activities and Rs.19 crores of net cash.1.7% at the end of June 2010. 13
  16. 16. December 30, COMPANY RESEARCH REPORT 2010FINANCIAL OUTLOOK of total products. Value added products are productsSIL’s management has put in place a set of targets that have an OPM >17%.which it hopes to achieve by 2014-2015 and has However since we are only forecasting for a two yeargiven a decent guidance on some of the initiatives it time horizon we have only considered informationwill be taking up until then. The management has set that is relevant within that stipulated time frame fora target of achieving Rs.4500 crore on the top line by arriving at our share price targets. All things2014-2015 which would represent a CAGR of around considered the next two years look very encouraging17%+. This top line growth will be augmented by for SIL both from a top line and bottom lineincreasing the number of manufacturing units from perspective. In addition to the management’sthe current 19 to 31 by the end of 2014-2015 and a initiatives to spur top line growth, there also existsgrand capital expenditure plan of Rs.1000 crores (an some strong tailwinds (macro-economic, industry- average of oriented and government oriented factors) that are around Rs.200 likely to stimulate SIL’s fortunes. 2 YEAR FINANCIAL OUTLOOK crore per year).  Top line to grow by 30% in the first What’s also Despite putting up a decent set of financials in the year and 12% in the second year. quite last fiscal, the sales of some of SIL’s key products  The contribution of value added impressive is came under pressure due to the drought like products (products with OPM>17%) that the scenario. However this year’s superior monsoons are to total sales to increase from 17.78% to 20% in the current year. management is likely to rectify that scenario. Of particular relevance looking to was SIL’s piping product segment, where the  Operating profits to grow at a 2 year CAGR of 37%. generate this government had to ban borewell digging due to the figure through drought situation. Besides PVC pipes are fast  OPMs to increase from 14.3% to 16.6% and 18.6% for the next two superior sales becoming poular around the world, with China years. and internal placing special emphasis on PVC pipes over the  Rs.180 crore to Rs.270 crore of accruals rather traditional pipes. This year will also see SIL introduce CAPEX to be spent in the current than debt. SIL the sprinkler system for the first time in various year. has also set states. In addition to the likely buoyancy in the  Interest as a % of net sales to be dual objectives piping segment, the industrial product division brought down to less than 1%. It of seeking (material handling equipemt) too is likely to benefit was 1.7% in the previous year. greater top line this year after having faced some difficulties in the  Depreciation to grow at a 2 year growth and last year. SIL’s crates are used by retail chains for the CAGR of 20% as rapid plant expansion comes into play. increasing the transportation of crops such as Tomatoes and component of Grapes during the post harvest season and last year  Net profits to grow at a 2 year CAGR of 54% and NPMs to reach 10% and 11.4% value added there was some pressure seen due to the poor over the next two years. products or monsoon. The thrust of the government in various specialty issues tied directly or indirectly to the plastic products as a % industry, too, are likely to boost top line growth. 14
  17. 17. December 30, COMPANY RESEARCH REPORT 2010Under the FY11 Union Budget, the government has 12% (high base effect, marginal income fromallocated Rs.11619 crore for the Jawaharlal Nehru construction business).National Urban Renewal Mission (JNNURM), to As previously mentioned the SIL management hasimprove the infrastructure of 91 cities and improve already stressed their desire to gradually increasethe drinking water supply and solid waste the contributions of value added products ormanagement. Besides the government has also specialty products across all its product segmentsallocated a further Rs.1000 crore under the Housing and this is likely to throw up much superiorand Urban Poverty Alleviation in FY11 which will lift operating margins. The contribution of value addedreal estate development and demand for piping products to total sales was 17.78% at the end of Juneproducts. SIL is also resorting to significant brand 2010 and SIL intends to increase that figure to 20% inbuilding exercises and strengthening its presence in the current year and 30% by 2014. The managementuntapped towns and the unorganized sector of India. is also looking to maintain cost competitivenessHowever perhaps the most attractive features of SIL through continuously enhancing operationalover the near term is going to be the revenue they efficiencies, leveraging on economies of scale andwill secure through their construction business. The effective working capital management. Assuming acompany in collaboration with one of India’s leading degree of stability in commodity prices, the rationalearchitects (Sanjay Puri) has completed the of high value added products and superior top lineconstruction of Supreme Chambers, a 2, 75,000 growth operating profits for the next two years aresquare feet commercial complex for which the expected to grow at a CAGR of 37% while operatingcompany has already sold 40,000 square feet, raising margins are expected to rise from 14.3% to theRs.60.20 crore ( but only Rs.36 crore accounted for in 16.6% in June 2011 and 18.6% in June 2012 (SIL’sthe previous quarter which means the remaining management wants to maintin OPMs of >15% tillRs.24 crore will be accounted for in the December 2015 at least).quaryer. The management has stated their desire to From different sources of data it is determined thatfructify the entire sale by the end of December 2011 SIL will be spending anything between Rs.180 croresand is looking to accrue a total of Rs.375 crore to Rs.270 crores in the current fiscal and perhaps the(inclusive of the Rs.60.20 crore). The cost of the most impressive facet of that figure is that theproject is estimated to be Rs.155 crore so taking a management is looking to procure that sum mainlynet figure of Rs.220 crore and providing for the sum through sales revenue and internal accruals whichalready received, one is expecting at least Rs.184 means it is all but certain that the debt componentcrore to be collected at an average of around Rs.37 or interest component isn’t likely to go down. In factper quarter for the next five quarters. the management has stated that they will be lookingKeeping all these factors in mind and including the to bring down the interest as a % of net sales figureconstruction income, we are forecasting the sales of to less than 1 in the current year. Interest as a % ofSIL to grow by 30% from the June 2010 figure of net sales stood at 1.7% at the end of June 2010. SILRs.2007 crore to Rs. 2470 crores and grow by a lower will also be increasing the number of manufacturing 15
  18. 18. December 30, COMPANY RESEARCH REPORT 2010units from 19 to 31 in the next 5 years and the feel that SIL’s spectacular bottomline growth overdepreciation component is most certain to go up. the last three years (35%) and the prospect of anEven though it is not likely to increase in terms of even better bottom line growth metric (53%) oversales (due to the greater sales effect), depreciation in the next two years more than justifies entry at thisisolation, is likely to go up in absolute terms. This point. Besides, in comparison to the valuation ofnon cash expense which grew at a miserly 6.3% from India’s benchmark index, a PE multiple of 11.3FY06-FY10 is expected to grow by a far superior 20% doesn’t appear too daunting, particularly whileover the next two years. considering the fact that the company is one of the biggest players or perhaps the biggest player in anBringing all these factors into the equation, we are extremely under penetrated, all pervasive andforecasting the net profits to grow at a 2 year CAGR growth oriented industry such as the plasticof 53.6% with an June 2011 EPS of 20.4 and a June industry.2012 EPS of 26.4. At a CMP of Rs.148, the stock istrading at 7.3 times its June 2011 EPS and 5.7 times Pedantic business theorists, who attachits June 2012 EPS. considerable attention to corporate focus, may not be particularly buoyed by SIL’s significant, one-off RISKS (unconfirmed) construction venture, despite it PVC resin prices are a crucial component in the being earnings accretive in the near term.manufacture of SIL’s PVC pipes, and in the last fiscalthese prices were fairly stable with less volatility. In RISKSfact last year there was a supply shortage in thedomestic shores, and about 0.6 million tonnes had  PVC resin prices were fairly stable last year. Howeverto be imported to make up for the demand. No in the current fiscal, no major capacity additions are forecasted in the world market and this might resultmajor large capacity additions of PVC resins are in price rise if demand goes up in the current year.expected in the world markets and there is a Rising crude oil prices are another concern as itlikelihood that SIL will continue to depend on these shares a very close correlation to plastic orientedhuge imports that could see significant price rises if polymers.demand moves up. Crude Oil is another commodity  The trailing PE multiple of the SIL stock is very closethat plays a key role in SIL’s manufacturing process to the average industry PE and value investors may(the prices of PVC resin, polyethylene and question the prospect of outperformance at thesepolypropylene are linked to crude oil prices) and if levels.crude oil prices continue their northward journey  SIL’s one-off construction business may not whollythat could as well hurt SIL’s cost of production. appeal to pedantic or traditional business theorists. The valuations of the SIL stock when viewed from aprice to earnings multiple are quite close to theindustry average of around 12, and may not whollyappeal to the consummate value investor, but we 16
  19. 19. December 30, COMPANY RESEARCH REPORT 2010INVESTMENT RATIONALE opportunity for SIL to stake a claim and dominate the plastic industry and the management has set in The SIL stock has pretty much all the ingredients place a whole host of initiatives in order tothat make for a fundamentally robust stock. SIL is capitalize, all the way uptil 2015 atleast.involved in the business of manufacturing a productthat is ubiquitous and has tremendous utilitarian SIL is hoping to reach the Rs.4500 crore sales figurevalue in a whole host of applications. In fact, if one landmark by 2015 and that is to be augmented bywere to just pause and look around one’s increasing the number of manufacturing units fromsurroundings, it would be hard to disregard the 19 to 31 for the same time period. Product wise asprevalence of plastic in one’s life. Being such an well, they have a nice diversified mix across fouromnipresent product one would expect the plastic broad segments, and the company’s R&D unit (andmarket to be dominated by a whole host of players in some cases), in collaboration with globalwith little scope for growth but that is not the case technology majors (Schoeller Wavin Systemsin the Indian plastic market. Firstly compared to the International Services Germany, Rasmussenglobal rates, consumption of plastic in India leaves Polymer Development AG Switzerland is constantlymuch to be desired. The country’s consumption of looking to add more innovative and value addedplastic is just one-fifth of the global consumption products across its entire product basket. Theaverage. Under penetration, fragmentation, company is also looking to strengthen its dealerdomination by the unorganized sector and very few network, its channel partners and try and capturepublicly listed players all suggest that the Indian various untapped towns and regions that have goodplastic market is crying out for a strong plastic growth potential. With regard to its consumermanufacturer to grab it by the scruff of the neck product segment which it displays through 209and stake a claim. The Indian plastic market is a showrooms, SIL has set a target of increasing thefantastic market to build a strong market share and number of showrooms to 300 by the end of thisscale up, and SIL with its impressive branding year.initiatives, geographical diversification and spreadin both its manufacturing and distribution network A number of government policies such as theand superior resources, diversification in the JNNURM and the Housing and Urban Povertyproduct portfolio and leadership (SIL’S leadership Alleviation programme coupled with strongtheory is far from irrefragable as Sintex Industries, a industry and other macroeconomic tailwindslisted peer, posted marginally better sales in the (monsoon, better harvest season, pickup in globalprevious year on a standalone basis and has a far economies that will benefit SIL’s consumersuperior market capitalization to SIL. However products, strong prospects in various plastic“leadership” is not an absolute term in the Indian dependent economies such as infrastructure,plastic industry as it is such a wide industry with irrigation oriented, real estate, soft drinks, autos,innumerable products and dominated by the electrical appliances) too are quite conducive forunorganized sector). There exists a wonderful SIL’s fortunes, atleast over the next two years. 17
  20. 20. December 30, COMPANY RESEARCH REPORT 2010Another impressive facet of is going to be generating aSIL’s strategy is to increase the construction income over thecomponent of value added next two years. While the INVESTMENT RATIONALEproducts in terms of total sales debate over corporate focuswhich will lead to better may be stimulated, we see this  SIL is functioning in an industry that ismargins for the company. In avenue being a one-off, shot in under-penetrated, fragmented andfact the management of SIL lacks leadership in the real sense of the the arm for the company’ twohas set a strong base target of word. SIL has all the ingredients to year EPS.maintaining a 15% OPM become a dominant force in this industry in years to come. While fundamentally, SIL has(Operating Profit Margin) for  Macro-economic factors, government ticked pretty much all the boxes,the next five years and that policies and industry opportunities are the current valuation of thecertainly gives out an air of all very conducive for SIL to flourish. stock may worry some of thereassurance. Overall its  SIL has put in place a very lucid and impressive growth strategy up until core value investors as the stockhistorical financials have been 2015. is currently trading at 11.3 timesvery good and over the next  Key facets of the strategy include its trailing earnings intwo years as well, that trend is expanding manufacturing units, comparison to the industryexpected to continue. Solid showrooms and distribution network, average of 12 and this wouldgrowth rates, ever-increasing funding a bulk of the expansion plans through internal accruals and sales perhaps suggest limited upsidemargins, best-in-class ROE and rather than debt, increasing the at current levels. We wouldROCE, moderate or low levels prevalence of value added products in however like to argue that SIL’sof debt and strong cash flows the product structure, diversifying the strong earnings growth moreare some of the strong points product basket even more, maintaining than justifies a PE of 11.3.of SIL. a base level for OPMs and achieving Rs.4500 crore on the top line. Historically earnings have grownTraditionally SIL has been  SIL’s construction income is expected at a four year CAGR of 35% andextremely generous with to be a pivotal EPS booster for the next thus employing a PEG ratio onerewarding its shareholders two years. gets a figure of 0.32 which is  Dividend payout ratios of SIL havewith divided largesse. The extremely encouraging. If one varied between 29-41% for the last fourdividend payout ratios have years. were to consider future epshovered between 29-41% for  Best-in-class ROE and ROCE (close to growth rates the PEG drops eventhe last four years. In the 40%). further to 0.21.previous year, the dividend  Current trailing PE valuations may suggest that it is not an ideal entry Investors may note that ourpayout ratio stood at 29.32%. point, particularly for value investors, share price targets are quite but a trailing PEG ratio of 0.32 and aHowever the big positive steep from current levels and forward PEG ratio of 0.21 provideskicker for SIL over the next our justification for the same, in ideal support for an entry into the SILtwo years, particularly in the stock. addition to the strongcurrent year is the fact that it investment rationale thesis, is 18
  21. 21. December 30, COMPANY RESEARCH REPORT 2010that our share price targets are based on annual epstargets. Considering that SIL’s annual results willonly be announced at the end of June of every yearas opposed to the popular and standard trend ofannouncing annual results at the end of everyMarch, expectations have been built in for a longerperiod (nine months as opposed to other companieswhich have only about six months left to run,before annual results are announced).Investors with a one-two year time horizon andthose with an aggressive risk appetite (because ofthe high valuation feature) are advised to considerinvesting in the SIL stock at current levels with a 1-2year time horizon with share price targets of Rs.230and Rs.244. 19