Supreme Industries - Target Price of Rs. 413 - Dolat Capital

Wide & comprehensive products offering: Offers the widest and most comprehensive range of plastic products including piping systems, packaging solutions like cross laminated films, protective packaging products and flexible films, plastic parts & accessories for consumer durables & automobiles, material handling products like crates and pallets & furniture.

- Strong business model with set guidelines / parameters: SIL's focus continues to be on adding plastic related products only and avoid subsidy driven business (hardly any government involvement in business, currently less than 3% of sales). It has also managed costs by locating facilities near to its customers and operating risk by not being dependent on any single variety of raw materials. The policy of 100% forex hedging helps contain volatility in earnings. Hence the above average ROACE in excess of 25%.

- Strong brand creation, now increasing the share of value added products: Brand creation has helped ability to pass on the input cost hikes in most of its products. Constantly increasing the share of value added products (SILPAULIN, some protective packaging products, CPVC pipes & premium furniture) which currently accounts for 31.5% of the total turnover.

- Niche products in pipeline: Looking to add niche value added products (technological driven) like LPG composite cylinders, composite pipes, composite pallets, plastic faucets - all of which would become operational by October 2013.

- Impressive track record with strong balance sheet: Consistent track record of growth in revenues, stable margins of 14%, ROE in excess of 30%, free cash flows all contributing to strong business model. Undergoing aggressive capex program of Rs. 10bn over next 5 years, entirely internally funded.

Valuation: At CMP of Rs. 357, the stock trades at 13.9x FY14E EPS and 11.6x FY15E consolidated earnings (including share of associates). We value SIL's core business at Rs. 398 (14xFY15E core earnings of Rs. 28.5). Further, SIL's 29.88% stake in SPL is valued at Rs. 15. Thus the SOTP target for SIL comes to Rs. 413.

Source : Equity Bulls

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