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Business Overview

* Supreme Industries (SIL) is India's leading plastic processing company having seven business divisions (incl sub segment) with annual capacity of ~700k tn from its 25 plants. SIL has forayed into various types of plastic processing such as injection moulding, rotational moulding, extrusion, compression and blow moulding

* Supreme has pioneered several products in India such as cross-laminated, multilayer films and Soil, Waste and Rain piping systems. SIL continues to enjoy largest market share of ~10% in the plastics piping and fittings segment and is one of the leaders with 14% and 12% share in plastic furniture and industrial product segments respectively as on FY21

Investment thesis

* We believe Supreme Industries to be a secular growth story. Upcycle in Indian real estate and Government of India’s (GoI’s) Smart City, Housing For All and Nal se Jal projects are providing the required impetus to the growth

* SIL has more than doubled its capacity from ~330k tn in FY11 to ~700k tn in FY21. It has expanded its manufacturing reach across the entire breadth and width of India with total of 25 plants. Three new plants are expected to come on stream by end of 1HFY23 which will add another 100k tn pa taking total capacity to 800ktn pa. We believe that strong manufacturing base and deep retail reach is extremely critical in the pipes segment given the bulky nature of the product and high freight cost

* We expect Supreme’s sales/EBITDA/PAT to grow at CAGR of 10%/9%/9% respectively over FY22-24E

Industry trends

* The Indian plastic pipes industry has been growing at CAGR of 10-12% between FY13-21. In FY21, total market size stood at Rs420bn of which 65% is captured by organized players while remaining 35% by unbranded, unorganized players. Consumers are showing gradual shift towards branded players in recent times

* Irrigation continues to be the biggest demand driver for the plastic pipes industry in India followed by plumbin

Findings of our cash flow analysis at a glance

* Supreme has been growing its OCF steadily over the last few years and nearly doubling over FY16-20. However, FY21 and FY22 were anomaly on account of high RM/PVC prices. This led to sharp improvement in OCF before WC changes in FY21 to Rs12.5bn. It continued to remain strong in FY22.

* Cash conversion cycle for Supreme Industries has remained in range of 45-55 days over last 5-6 years. Even during the years of pandemic (FY20, FY21), cash conversion remained stable and further improved in FY22 to 40 days.

* Supreme’s FCF remained strong and positive over the past years despite ongoing significant capex. However, high inventory level in FY22 impacted FCF and stood at Rs5mn. Cumulatively, Supreme has generated FCF of healthy Rs20bn over FY17-22.

* Conversion of OCF to EBITDA has remained stable at 60-70% over last 6 years. However, favorable pricing in FY21 while high inventory in FY22 disturbed the conversion ratio though they are an anomaly. We expect conversion rate to normalize to 60-70% in coming years

Valuation

* We assign a Buy rating on the stock remaining bullish on SIL’s secular growth story. Overall, we expect Supreme’s sales/EBITDA/PAT to grow at CAGR of 10%/9%/9% over FY22-24E

* We value Supreme Industries at 30x FY24E EPS. Our target multiple is based on the last five year PE median. Based on it we arrive at TP of Rs2,696

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