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Company Name: Supreme Industries (SIL)
Recommendation: BUY
CMP – Rs. 195/-
Target Price – Rs. 300/-
Mkt. Cap. - Rs.538.6 crore
Investment Rationale
Ø SIL, dominant player in domestic plastic processing industry, has reported encouraging performance for Q4 FY08. (Year end - June). However, it should be noted that company discontinued operations of low-end non-core businesses of Rigid PVC Films & Food Serviceware w.e.f. May 2007 and June 2007 respectively. On like to like basis, Total Income grew @ 25.6% to Rs. 444.12 crore (Rs. 353.54 crore). OPM% (excluding other income) declined to 11.7% (13.6%) mainly due to increase in other expenses. Consequently, PBT growth was restricted at 11.3% to Rs.32.08 crore.
Ø For FY 08, Total Income on a comparable basis was up by 20.7% to Rs.1319.16 crore (Rs.1092.81 crore). OPM% was subdued at 10.9% (11.3%). PBT registered a rise of 14% to Rs.74.23 crore. It should be noted that turnover of discontinued operations of low-end non-core businesses of Rigid PVC Films & Food Serviceware was Rs.75.5 crore in FY07.
Ø SIL has well diversified product portfolio across different segments such as Plastic Piping, Consumer Products Industrial Products and Packaging Products. All business lines are growing very well. Now company is giving more focus on Pipes & Fittings including made from PVC, Polyethylene and PP Random Copolymer (PPRC).
Ø Going ahead, Plastic processing organized sector will benefit immensely due to introduction of VAT throughout the country and phased reduction of CST (which is reducing size of gray business). National policy on Petrochemicals too will benefit Supreme immensely. To take advantage of emerging opportunities, SIL is:
** Establishing mega plastic products complex (of 1.5 lakh TPA) at Gadegaon, Maharashtra, taking total capacity to 2.55 lakh TPA at cost of Rs 255 crore. The products manufactured will be pipes from varied polymers, material handling products, inspection chambers, sewerage products and fabricated products from cross laminated film. Production at Phase I (Started from February 2008) has been stabilized at Gadegoan. Total facility to be fully operational by FY 2010.
** With focus on growing value-added : high-margin products, SIL is going for corrugated pipes using technology from Wavin Plastics – Netherlands, setting up facility to produce protective packaging, increasing capacity of cross-linked film used to make fumigation sheets, sacks, canal covers, tarpaulins, etc., and expanding capacities in material handling systems & furniture along with introduction of new products.
All these initiatives will lead to good growth in plastics products in next few years with higher profit margins, as company is exiting from low-margin non-core businesses and increasing share of high-margin, value-added products addressing new markets and applications.
Ø Company has bagged order from Tata Motors for their prestigious Global Truck Project constituting more than 65 parts. A dedicated plant is being set up at Jamshedpur with a capital outlay of Rs.17 crore to meet this demand. The plant will go into production coinciding with start of Tatas world Truck project at Jamshedpur. Business from this plant is likely to exceed Rs.200 crore in 4-5 years after it goes into production.
Ø Construction of Commercial Complex at Andheri having saleable area of 270,000 sq.ft., at a Project Cost of Rs.90 crore, is expected to be ready by April-June 2009.
Ø Company is on a major expansion spree and has been incurring capex for the same. It has incurred capex of Rs.275 crore in FY07 and FY08 and Rs.125 crore is to be incurred in FY09. A part of this capex has been financed thru divesting none-core businesses and disposing off surplus assets.
Ø SIL holds 30% stake in Supreme Petrochem (which manufactures polystyrene) is going in for massive expansion plans for value-added products. This will augur well for SIL.
Valuation
Ø At CMP, share is trading at 10.5 times FY 2008 EPS of Rs. 18.5 and 6.7 times FY 2009 expected EPS of Rs.29.3. In view of exciting future prospects, we recommend to “BUY” the share at CMP.
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