Substituting metals and wood with plastic in various applications, and growth in consumer durables, autos, agriculture, packaging and construction are expected to drive consumption of plastic products in the country.
Supreme Industries Limited (SIL), being one of the largest plastic processors in India with sales of over four lakh tonnes annually, should benefit from this trend.
Amid the ongoing market volatility, many fundamentally-sound stocks have corrected and Supreme Industries was no exception. The stock has corrected from its 12-month high of ₹1,476 to ₹1,130 currently.
The company has a better diversified portfolio of plastic products compared with peers, and extensive distribution centres and manufacturing facilities. SIL has a market share of 10-12 per cent in the segments it operates.
The pipe segment contributes approximately 52 per cent of revenue, packaging 16 per cent and industrial 19 per cent, with other segments accounting for the rest.
![1304Supremecolcol 1304Supremecolcol](/theme/images/bl-online/1x1_spacer.png)
Value addition
The company is the leader in the piping division and has a broad portfolio of over 7,000 products. With GST and demonetisation troubles waning, a pick-up in demand in affordable housing, infrastructure and irrigation augurs well for the company.
The key trigger to growth in the value-added products segment would be its diversification into value-added sales streams (adhesives, packaging, consumer products, CPVC pipes etc.), which command premium pricing over pure-play PVC pipes. The share of value-added products in FY19 so far is 38 per cent of the overall sales. SIL is taking concrete steps to increase the share of value-added products to its total sales to 40 per cent by FY20 by launching products in niche categories.
SIL aims to raise its capacity to 6,05,000 tonnes by FY19 against 5,70,000 tonnes in FY18. Work on two new capacities each in Telangana and Rajasthan is in full swing.
Healthy performance
In the nine months of FY19, net profit was 28 per cent higher compared with the corresponding period of the previous fiscal. Revenue was 16.5 per cent higher in the same period.
In the December quarter, SIL posted a net profit of ₹81 crore, down 22 per cent from the corresponding previous period. With a depreciating rupee and crude price at high levels for most of Q3, margins shrank.
Raw materials costs, as a percentage of net sales, stood at 68 per cent in the quarter against 65 per cent in the corresponding previous period. Top-line grew by 10 per cent, driven largely by a 7 per cent increase in realisation, while volume growth at 4 per cent was hit mainly by industrial and packaging products categories.
Margins declined by 300 bps to 12.5 per cent on account of inventory losses due to a decline in key raw material prices. PVC prices, however, remained stable.
Low raw material prices are likely to continue in the coming quarter and SIL expects to recoup part of the inventory losses in February and March. This will drive margins and volume off-take.
Challenges ahead
The packaging segment de-grew by 4 per cent. In packaging, SIL is a market leader in cross laminated films (Silpaulin brand) and protective packaging.
In the last two years, nearly nine players have entered this segment, whose products are 15-20 per cent cheaper Silpaulin. This has led to intense competition and price erosion.
SIL has adopted a three-pronged approach to counter this challenge.
It plans to enter new geographies, introduce new products and increase share of value-added products in the packaging segment.
The industrial segment, which grew by 2 per cent, was hit by a divestment of an automotive business in the quarter. Weak auto demand in the quarter also impacted the performance of the company.
SIL imports 50 per cent of its raw materials. With crude price falling and the rupee gaining strength vis-a-vis the dollar, polymer prices have moderated. However, any sharp rise in polymer price will affect the margins, if price rise is not passed on.
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.