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Chola Securities
Supreme Industries (Outperformer)
CMP: ₹1,064.9
Target: ₹1,124
Supreme Industries is a plastic product manufacturer and the largest plastic processor in India, processing over 0.37 million MT annually. Company has four business verticals, i.e., plastic piping (55 per cent), packaging products (21 per cent), industrial products (16 per cent) and consumer products (7 per cent). SI has 22 manufacturing plants situated across India. Company enjoys a significant market share across its business verticals; plastic piping (9.48 per cent), industrial products (15 per cent) and consumer products (13 per cent).
Valuation: Currently, the stock is trading at around 26XFY20E and 22XFY21E earnings. We are valuing the company on a SOTP basis (SI core business is valued at 20XFY21EPS and Supreme Petrochemicals stake at 20 per cent discount to the market value) to arrive at a target price of ₹1,124 and give the stock an ‘Outperformer’ rating.
Risks: The prices of raw materials are linked with crude oil price and volatility in global crude oil price would significantly impact raw material costs of the company. The plastic industry is considered to be highly fragmented and largely unorganized. Any intensification of competition could lead to a price war, thus affecting the company’s operating margin.
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