Stock Pick From The Plastic Products Industry

HERE IS WHY

• ·         A strong balance sheet with the D/E of mere 0.5x in FY14 coupled with strong operating and free cash flows
• ·         Liberal dividend policy distributing around 30 per cent of its profits as dividend
• ·         Management expects EBITDA margin in the range of 13-14 per cent in FY15.

Supreme Industries (SIL) is the largest private plastic processing player in India. So what are the factors that have encouraged us to recommend this scrip to our readers? Let’s take a look at the factors. Firstly, the company is on an expansion mode and is likely to expand the capacity from 450,000 MT p.a. in FY14 to 645,000 MT p.a. by FY16. Apart from this, the company has a strong balance sheet with the debt to equity ratio at a mere 0.5x in FY14, coupled with strong operating and free cash flows to fund its capex through internal accruals. This is a great comfort factor for the company.

The company’s net working capital cycle stands at around 35-45 days, one of 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 RoE/ROCE over 28 per cent for FY09-14. Shareholders have been consistently rewarded with its liberal dividend policy distributing around 30 per cent of its profits as dividend.

Going forward, the outlook of the management also looks to be on the positive side. The management foresees revenue growth in the range of 15-20 per cent over. the next three years on a CAGR basis. Apart from the consumer segment, all the other segments of the company are likely to pick up in the current fiscal, which will work as a value accretive proposition for the company. Th e growth will be primarily driven by improvement in the macro scenarios.

Consumer segment is likely to see value growth as SIL is exiting from non commodity business and shift ing to branded business. The company has indicated that the domestic business outlook has significantly improved over the past three months. The management expects EBITDA margin in the range of 13-14 per cent in FY15. During the quarter, SIL realized `21.7 crore from the sale of 11,537 sq ft in Supreme Chambers in Andheri. The company sold 37,823 sq ft premises and realised Rs 60.2 crore during FY14. Currently, SIL is still maintaining price of  Rs 15,500/sq ft . The company is expected to sell around 25,000 sq ft in the near term at the current rate.

SIL has also commissioned composite LPG cylinder plant with effect from July 1, 2014, in Halol with capacity of 450,000 cylinders. The company has started executing its fi rst export order for 50,000 cylinders from South Korea. Out of this, shipment of 11,880 cylinders is likely to take place in August 2014. The management has indicated that SIL has received encouraging export enquiries from different countries which the company hopes to convert into orders during FY15. SIL is expected to generate revenue of Rs 110 crore from existing capacity going forward.

We believe that the company is well-poised to find its place in one’s portfolio for a capital appreciation of 25 per cent from the current levels for a time horizon of one year.