Ambit SupremeInd Initiation 16aug2013

Industrials
August 16, 2013
Supreme Industries
Bloomberg: SI IN EQUITY
Reuters: SUPI NS
BUY
The snowball
INITIATING COVERAGE
Year to June
Operating income
EBITDA
EBITDA (%)
Adjusted EPS (`)
RoE (%)
RoCE excluding real estate (%)
P/E (x)
FY12
29,279
4,719
16.1%
16.6
33.9%
22.8%
21.0
FY13
34,040
5,356
15.7%
22.3
36.0%
25.6%
15.6
Source: Company, Ambit Capital research
FY14E
40,413
6,408
15.9%
26.7
34.3%
24.7%
13.0
FY15E
48,758
8,291
17.0%
32.3
32.8%
24.6%
10.8
FY16E
56,288
9,273
16.5%
39.2
31.5%
24.7%
8.9
`350
`442
Upside (%)
27
EPS (FY14):
`28.1
Variance from consensus (%)
6.1
Stock Information
Mkt cap:
`44bn/US$721mn
52-wk H/L:
`380/264
3M ADV:
`19mn/US$0.3mn
Beta:
1.2
BSE Sensex:
19,368
Nifty:
5,742
Stock Performance (%)

1M
3M
12M
YTD
(1)
27
17
18
18
Absolute
Rel. to Sensex
Shareholding pattern (%)

Others,
30%
Promoters
, 50%
DII, 10%
FII, 10%
Source: BSE, Ambit Capital research
One-year forward P/E chart

15
13
11
9
7
5
Aug-13
Key consolidated financials (` mn, unless specified)
CMP:
Target Price (12 Months):
Apr-13
Attractive valuation with limited downside risks, BUY, TP 442: We use

the SOTP method for our target price of `442Plastic business: `420 (DCF),
implying 16.8X FY14E EPS and 13.7X FY15E EPS; real estate and Supreme
Petrochem: `22. Current valuations at 13.1x FY14E core EPS are not
representative of its superior competitive advantages, balance sheet capacity
and high return ratios. The stock trades at an unjustified 10% discount to
Astral despite its larger size, higher RoEs and better liquidity. Key risks: Entry
of large global players and lower-than-expected volume growth.
Recommendation
Dec-12
Strong operating cash flow generation to fund mega capex: Revenue

CAGR of 17% in FY13-16 would be due to capacity additions in the piping and
packaging segment. Adjusted RoCEs of ~25% would sustain thanks to the
strong 14% volume CAGR in FY13-16 and stable EBIT margins of ~13%.
Operating working capital will deteriorate by 5 days in FY14 due to higher
sundry creditors. Overall, Supreme will generate CFO of `21.2bn in FY13-16
(~10% FY14E CFO yield), which would be sufficient to fund its growth plans.
Tel: +91 22 3043 3203

tanujmukhija@ambitcapital.com
Aug-12
Snowball gathering momentum on a solid platform: Supreme has

created a solid platform (sales of `34bn in FY13 vs `13bn in FY08) by: (a)
consistent modifications in its product portfolio mix to increase VAP share
(31.7% in FY13 vs 22% in FY09), and (b) capacity expansion without putting
stress on the balance sheet. Supreme is well placed to increase its reach and
size in the fast-growing piping and packaging segments through mega capex
(`12.3bn in FY13-16) funded by internal accruals (`21.2bn in FY13-16).
Tanuj Mukhija
Apr-12
Well-built competitive advantages key: Supreme has delivered superlative

adjusted RoCEs (average 22.3% in FY09-13) in a capital-intensive industry,
owing to its strong competitive advantages built through: (a) unmatched
manufacturing (22 manufacturing plants) and distribution reach, (b)
technology tie-ups with renowned international players (Wavin, RPD
Rasmussen), and (c) diverse products servicing multiple industries. These
advantages are helping it gain market share from unorganised players.
Tel: +91 22 3043 3241

nitinbhasin@ambitcapital.com
Dec-11
Change to this position: POSITIVE
Nitin Bhasin
Aug-11
Supremes competitive advantages in the fast-growing plastic piping

and packaging industry stem from its unmatched manufacturing and
distribution reach, consistent new product launches (including valueadded products) and technological tie-ups. This is validated by its FCF
generation and increasing RoCEs (FY13: 26% vs FY11: 20%). Its
competitive advantages and surging CFO (36% CAGR in FY10-13) will
provide further support to this platform (`9bn capex in FY13-16) which
will in turn lead to higher volume/revenue growth (14%/17% CAGR in
FY13-16) and higher CFO for further product/capacity expansions.
Current valuations (13x FY14E EPS) do not reflect its superior plastics
business, unrivaled financial profile and top-quality management. We
initiate coverage with a BUY and a TP of `442 (`420 for core business).
Competitive position: STRONG
Accounting: GREEN
Predictability: GREEN
Earnings momentum: GREEN
1 yea r fo r w a r d P E
A ver a g e 1 yea r fw d P E ( x )
Source: Bloomberg, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit
Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Please refer to the Disclaimers at the end of this Report.
Supreme Industries
CONTENTS
Supreme Industries: Multi-industry plastic processing leader.... 3
Indian plastics sector: Poised for growth.. 5
Mapping Supremes well-built competitive advantages7
Snowball effect to gain momentum 15
Mega capex to drive growth with stable RoCEs 19
Valuations not reflective of supreme plastic business 22
Accounting analysis: Clean chit.. 29
Ambit Capital Pvt Ltd
Supreme Industries
Supreme Industries: Multi-industry

plastic processing leader
Exhibit 1: Business overview - multi-industry servicing business segments
FY13
Segments
Sub-segments/ Products
Application/
customers
Plastics
piping
system
uPVC Pipes, injection moulded fittings &

handmade fittings, polypropylene random
copolymer pipes & fittings, HDPE and CPVC
Pipes Systems, LLDPE Tube and Inspection
Chambers, manholes
Potable water supply,

irrigation, drainage and
sanitation, housing
Packaging films
Packaging
products
Protective packaging products: Noncross-linked foam packaging, cross-linked PE

foam packaging
Cross laminated films
Construction,
automobiles and other
industries for insulation
applications; CLF films
for covering purposes in
multiple sectors
Industrial components: Customised plastic

parts for the automobile sector (e.g. cockpit
assembly) and the consumer durable sector
(plastic body for washing machines)
Auto sector, consumer

durable products, water
purification
Industrial
products
Composite products: Cylinders and pipes

(under development)
Casing pipes for oil and

gas industry, cylinders
for household use
Consumer
products
Material handling: Heavy duty industrial

crates, fabrication facility to manufacture
customised crates, roto moulded items,
plastic pallets
Furniture (tested for ergonomic comfort,
resilience and environmental resistance)
Sales
volumes
(MT)
180,746
41,307
40,033
Revenue
share
Revenue
growth
EBIT
share
Share of
VAP in
segment
52%
29%
52%
24%
21%
-2%
27%
53%
18%
12%
14%
~16%
Soft drink companies,

agriculture and fisheries
Retail
stores,
educational institutions
Total
19,366
281,452
9%
-3%
7%
~40%
100%
17%
100%
31.0%
Source: Company, Ambit Capital research, Note: VAP= Value added products.
Technological collaborations across segments

Supreme Industries does not have its own R&D division to create new products.
Hence, it has entered into technological tie-ups with renowned international
players across all product categories at very low royalty and license fees. Through
technological collaborations, the company has launched new products whilst
keeping product quality ahead of unorganised players. Supreme would not have
created products such as Silpaulin and CPVC pipes without technological
assistance from other players. It is creating a new segment (composite products)
with the help of European and South African technology (Lomold) partners.
Exhibit 2: Technology partnerships
Segments
Plastics piping
system
Sub-segments/ Products
uPVC pipes and fittings, PPRC Pipes & Fittings
CPVC pipes (currently, a `8bn-10bn market)
Packaging
products
Industrial
products
Protective packaging (two-stage cross link foam for

insulation purposes)
Cross laminated films (cross line bonded film and
cross plastics film, the next generation with
superior properties)
Composite LPG cylinders
Composite drill pipes
Technology partner/ collaborator

Wavin Overseas B.V., Netherlands is a subsidiary of Mexichem. It is a
leading player in above and below ground pipe systems for hot and
cold water applications in Europe.
The technology partner is not known but competitors highlight
that it is a European company. Raw material sourced from Kaneka.
Sanwa Kako of Japan, the largest makers and patent holders of
polyethylene block foam in the world.
RPD Rasmussen Polymer Development AG, Switzerland, is the patent
holder of cross-laminated film. Supremes patent is valid until 2023.
Names not disclosed. Supreme currently has a tie up with a
German Equipment manufacturer. Apart from this German company,
there are two other companies which provide the technology.
Lomold, South Africa is the first company to manufacture plastic
commingled with long glass-fiber into a closed mould in a cost
effective way.
Supreme Industries
SWOT analysis
Exhibit 3: SWOT analysis of Supreme Industries
Strengths
Weaknesses
Diversified product portfolio across segments such as pipes,

packaging and industrial products.
An unmatched distribution and production network22

manufacturing plants and more than 1,250 dealers across
India, with a strong presence in south and east India.
Our primary checks suggest that Supremes products are not

available due to capacity constraints especially in Chennai. We
believe this is a lost opportunity for Supreme.
Market leader in the fast growing PVC pipes segment for

buildings and has a monopoly in cross-laminated films in India.
PVC pipes of any company are easily replaceable by a competitor

due to the standard nature of the product.
Technical tie-ups in all segments with reputed international

players.
The company has to continuously update technology through

international collaborations.
Higher EBIT margins through focus on value-added products

(VAP) such as pipe fittings and its cross laminated film,
Silpaulin, (22% in FY09 vs 31.7% in FY13).
The business is capital-intensive

reinvestment in gross block.
and
requires
continuous
Strong balance sheet (FY13 gross debt:equity of 0.5x) vs other

organised competitors like Jain Irrigation (1.6x) and Finolex
Industries (0.99x).
Opportunities
Organised PVC pipes account for only 50% of the market.
Supreme, with a better quality product and a renowned brand,
is well placed to capture the structural shift to organised
players.
Per capita plastic consumption of India is only 7kg, significantly

below the global average (of 28kg) especially in the agriculture
and infrastructure sector.
Higher plastic pipe demand through PVC (replacement of GI)

and better technology pipes such as CPVC
Supremes technology tie-ups with global players provides an

opportunity to add new products.
Recent entry into composite products especially composite

cylinder can be huge opportunity in India and the Middle East.
Threats
Increase in competition from international players: For example: the

Belgian firm, Aliaxis, acquired a majority stake in the unlisted,
Ashirvad Pipes. Other large international players like Tessenderlo
Group and JM Eagle may also follow Aliaxis example.
Weak monsoon and low GDP growth may affect PVC pipe demand
from agriculture (30% of total PVC pipe sales for Supreme).
Unavailability of raw material for PVC pipes and CPVC pipes can
probably reduce growth.
Supremes competitive advantage would be reduced if competitors

start innovating new products or improve distribution reach.
INR depreciation can increase the product price, thereby reducing

demand.
Supreme Industries
Indian plastics sector: Poised for growth

Plastics industry: Fastest-growing industry in India
The plastics industry has expanded at a volume CAGR of 9.2% over the last six
years to reach 8.5mn tonnes by FY12. Plastics can be classified based as
commodity, engineering and specialty products. Commodity products such as
Polyethylene (PE), Polypropylene (PP), and Poly Vinyl Chloride (PVC) account for the
bulk of plastic demand. Engineered and specialty plastics are derivatives of styrene
which exhibits superior mechanical and thermal properties. Further, plastics can
also be classified on the basis of the manufacturing process (as shown below).
Exhibit 4: FY11 demand break-up of plastics by type
Market
share
Consumption
volume
(mn tonnes)
Exhibit 5: Classification of plastics by manufacturing

process
FY06-11
CAGR growth
Polyethylene (PE)
36%
2.8
8%
Polypropylene (PP)
34%
2.6
12%
Poly Vinyl Chloride (PVC)
24%
1.9
10%
6%
0.6
3%
7.9
9.2%
Others
Total
Source: Report of the Sub-group on Petrochemicals
Moulding
Market
share
Extrusion
Injection
Blow
Roto
Products
Films and sheets, fibre and filaments pipes,

68% conduits and profiles, miscellaneous
applications
Industrial injection moulding, household
25% injection moulding and thermoware/
moulded luggage
5% Bottles, containers, toys and houseware
1% Large circular tanks such as water tanks
Source: CIPET
The Department of Chemicals and Petrochemicals, India expects a more than 10%
demand CAGR for commodity plastics and 10.7% demand CAGR for PVC pipes in
FY12-17. The competitive intensity is very high in the plastic processing industry,
due to the existence of more than 23,000 plastic processing units in India. The
industry is highly fragmented and has a large number of unorganised players. In
FY06-11, plastic processing capacity in India increased at a CAGR of 15%. The
Department of Chemicals and Petrochemicals expects capacity addition of 8.25mt
by FY17. We believe a large portion of this capacity addition will be from
organised players which will have better technology and higher applications.
Exhibit 6: Supremes key competitors in plastic processing industry
Segment
Companies
Supreme, Finolex Industries, Jain Irrigation, Astral Polytechnik, Ashirvad Pipes,
Plastic piping system
Prince
Packaging products Supreme, Polyplex, Jindal Poly, Uflex ltd, SKF
Consumer products
Supreme, Neelkamal Plastics, National Plastics
Industrial products
Supreme, Motherson Sumi, Tata Autocomp, Sintex Industries, Time Technoplast
Key demand drivers for plastic products

Low per capita consumption of plastics in India (7kg vs global average of 28kg),
increase in disposable income and urbanisation will lead to higher demand for
plastics in healthcare, packaging, consumer durables, automobiles, retail etc.
Plastics have several advantages over other competing materials in:
Packaged goods: Consumption of packaged goods is increasing due to

lifestyle changes, price advantage of plastic vs competing packaging material
and wide use in segments like drinking water and milk supply.
Construction sector: Plastic PVC pipes are replacing galvanised pipes, as PVC
pipes are easy to install and have a longer life.
Agriculture sector: Use of plastics in agriculture (like surface cover cultivation

using plastic films) can conserve soil moisture and a provide favourable micro
climate, leading to improvements in crop yields.
Supreme Industries
Auto industry: Replacement of iron and steel parts by relatively lower weight
plastics helps to improve fuel efficiency of the automobile.
We expect blue-collar wage growth in rural India to drive demand for entry-level
consumption products like PVC pipes for housing, plastic furniture etc. The wages
of blue-collar workers have recorded a 15% CAGR in FY10-12 despite GDP growth
slowing down by 550bps due to reverse migration, pursuit of education and
withdrawal of women from the labour force.
PVC pipes industry: Replacing the traditional metal

PVC applications by sector
(%)
Plumbing
, 10
Flexible
,4
Sewage
, 12
Others,
1
Water
Supply,
29
Irrigation
, 45
Source: Finolex Industries
Plastic pipes are the second-highest selling plastic product in India. Further, PVC
pipes are the largest-selling plastic pipes in the world. PVC pipes have replaced
galvanised steel pipes, as PVC pipes are easy to install and have a longer life.
Supreme is a market leader in PVC pipes followed by Finolex Industries. The PVC
pipes industry is highly competitive and dominated by unorganised players.
Industry participants estimate total PVC pipes demand in India is 1.6mn tonnes.
Supremes main target segment is the plumbing and sewage sector unlike the
general industry.
Growth avenues for Indian plastic piping sector

We believe that there is a strong growth potential for plastic pipes in the housing
sector due to housing shortage and strong replacement demand for galvanised
iron (GI) pipes. In India, there is shortage of 22 million urban units and 54 million
rural units. The penetration of PVC pipes in industrial and sanitation applications is
low. Thus, we believe that the plastic piping industry will upgrade to higher
technology, and HDPE, PP-R and PE pipes will be used in underpenetrated sectors.
Continuing shift to PVC from GI; absorption of new technology: In India,

galvanised iron (GI) pipes were mainly used for hot and cold water applications in
agriculture and construction. However, in the last 15 years, PVC pipes are
substituting GI pipes because PVC pipes are easy to install, have longer life and
If the price differential between are one-fifth the weight of GI pipes at similar costs. We expect this trend of
PVC pipes and other superior adopting new plastic pipe technology to continue, such as CPVC pipes in housing
plastic pipes were to decrease and other upcoming new technologies such as HDPE and composite pipes.
then
demand
for
new
The developed countries in Europe have started adopting more advanced
technologies would increase
technologies such as PP-R pipes and HDPE pipes. The advantage of PP-R over PVC
pipes is that they are environmentally friendly, as they do not contain chlorine.
HDPE pipes have higher tensile strength, and thus they can remain bent for a
longer period of time. Also, HDPE pipes unlike PVC pipes do not crack near plastic
and steel joints. The next generation of pipes after HDPE pipes is polystyrene
pipes. Polystyrene pipes have superior tensile strength than other common plastic
pipes. However, their use in India is limited, as they are expensive. The key
demand driver for PVC pipes is superior performance at a lower price as compared
to GI pipes.
Higher demand in underpenetrated industrial and sanitation sector: India
has adopted PVC pipes at a rapid pace in the housing and agriculture sector (as a
substitution for GI pipes). However, the penetration of plastic pipes is low in the
According to UNICEF, Indias
sanitation industry owing to low government spending. Thus, an increase in
urban sanitation penetration is
government spending to improve Indias sanitation could lead to strong demand
50% and rural penetration is
for PVC pipes. In the developed European and North American markets, PVC pipes
even lower at 21%
are extensively used in various industries such as chemical processing, textiles,
pharmaceutical, paper mills, steel wire plants and battery manufacturing. This
shows that there is a large untapped opportunity for PVC pipes and newer
technologies in the Indian industrial sector.
Supreme Industries
Mapping
Supremes
competitive advantages
well-built
The plastic processing industry is generally viewed as a commodity industry.

However, in our opinion, Supreme Industries has built strong competitive
advantages through an extensive manufacturing and distribution network, creating
a unique feedback loop that allows the company to consistently modify its products
to meet consumer needs. Supreme has consistently increased its plastic piping
product portfolio to 5,682 products through an unmatched distribution network
which translates into higher-than-industry growth and margins. In cross-laminated
films, Supreme has a monopoly by creating a new segment in tarpaulins. In our
opinion, Supreme is an average player in the other two existing segments
Industrial and Consumer products segments.
We have done a competitive mapping of Supremes segments namely:
(a) Plastic pipe segmentPVC pipes and CPVC pipes
(b) Packaging segment
(c) Industrial segment
(d) Consumer products segment
(e) Composites segment
(a) Plastic pipe: Supreme is the best placed

The PVC pipes industry has consistently recorded 14% sales CAGR in FY06-11
especially for housing applications. The penetration of PVC pipes has increased
due to the replacement of galvanised pipes, urbanisation and growth in the
construction sector. In our opinion, the industry faces stiff competition from
unorganised players
Exhibit 7: Porters five forces analysis for the PVC pipes industry
Bargaining power of suppliers HIGH
The main raw material for PVC pipes is

PVC resin which is in shortage in India.
PVC prices are positively correlated to
crude prices. So, all PVC pipe
manufactures are price takers for PVC
resin.
The raw material for CPVC is supplied by
only two companiesLubrizol and
Kaneka. The demand for raw materials is
higher
than
supply,
consequently
increasing the bargaining power of CPVC
resin suppliers.
Barriers to entry MEDIUM
Whilst it may be easy to set up a PVC pipe

manufacturing plant, we believe it is
difficult for a new player to set up a
distribution network.
In case of CPVC pipes, shortage of raw
material is a major entry barrier for any
new entrant.
Competition HIGH
Bargaining power of buyers
More than 25,000 plastic

pipe processing companies in
India,
leading
to
stiff
competition in commodity
plastics industry
MEDIUM
Organised players are better

placed than unorganised
players in the VAP segment
due to better product quality
and better brand recognition.
The company and its peers pass

through raw material cost
increase to customers within 2-5
days. This highlights strong
demand for PVC pipes and high
bargaining power of the
industry.
However, consumers can easily

switch between companies
(brands), thereby limiting the
bargaining power of individual
companies.
Since VAP demand is high,

organised players are not
focusing on market share
gain
Shortage of CPVC pipes in
the market implies that each
player has the potential to
fully utilize capacity without
worrying about competition.
Unchanged
Deteriorating
Threat of substitution LOW
Threat of PVC pipe substitution

by other product like galvanised
steel is low because PVC pipes
are easy to install and have a
longer life. New technology
products will substitute but will
take time
Improving
Supreme Industries
Supreme: Know your plastic pipe competitors

Supreme is a market leader in the highly fragmented PVC pipes industry
dominated by unorganised players. Supremes closest pan-India competitor is
Finolex in the PVC pipes segment and Astral Pipes is the largest competitor in the
CPVC pipes segment. Although Jain Irrigation is a large company, it caters largely
to the agricultural segment. We have identified four other important unlisted
players in the PVC pipes industryAshirvad Pipes, Ajay Pipes, Nandi Pipes and
Prince Pipes.
Exhibit 8: Know your competitors in the plastic piping business segment
Mcap
(US$mn)
PVC pipe and

related segment
revenues
(` mn)
Supreme
Industries
715
16,502
(50% of company
revenues)
Jain Irrigation
406
Finolex
Industries
273
13,778
(55% of company
revenues)
170,000
Astral Poly
208
8,254
(100% of company
revenues)
49,495
12%
Ashirvad Pipes
Unlisted
6,759*
NA
NA
Ajay Pipes
Unlisted
NA
NA
12.5%
Nandi Pipes
Unlisted
NA
NA
NA
Prince Pipes
Unlisted
5,190*
NA
NA
Companies
11,300
Pipe
volume
sales
(MT)
180,745
NA
Segment EBIT
Brief business description and products
margin
16%
EBIT margin of 8%
for PVC pipe
5.2%
Supreme manufactures a number of plastic compound pipes

(PPRC, PPR, HDPE, LLDPE). The company has recently
launched products like CPVC pipe systems, Nu Drain
systems which are finding increasing acceptance amongst
institutional buyers (infra, residential developers). Nearly 2025% of this segments sales come from plastic pipe fittings.
With a market share of 15%, it is one of the three major PVC
players in the organised market and a leader in the rural
water & irrigation markets, but lagging in the building &
construction sector. It sells PE pipes in the gas and cable duct
segments and for sewage & effluent disposal. This segment
will be a major beneficiary of infra capex spending. It is
developing its CPVC pipe offering.
Finolex is the largest pan-India competitor of Supreme
Industries. Finolexs main target segment is the agriculture
sector which accounts for 70% of its PVC pipes sales. Finolex
has in-house manufacturing of PVC yet its margins are more
than 900bps below Supremes. We believe this is due to two
factors: (1) focus on highly competitive irrigation pipes
segment vs fast-growing housing segment and (2) high
margin fittings as a percentage of PVC pipe sales are less
than 10%, whereas fittings account for more than 20% of
Supremes sales. Finolex mainly has a presence in west and
south India.
One of the fastest-growing pipe companies in India (~44%
CAGR over last four years) with the highest realisation. The
company manufactures PVC and CPVC pipe systems. The
company has increased focus on CPVC pipes (60% of FY13
sales) as their margins are better than PVC pipes. The
company has a tie-up with Lubrizol for CPVC raw material
sourcing. Astrals distribution network is mainly in west India
and is now building in South India.
Four-decade-old firm (mainly present in South/West India)
manufacturing UPVC, CPVC, SWR pipes/fittings. One of the
three Indian partners of Lubrizol for FlowGuard pipes.
Leading player in the Borewell segment (a `8bn market).
Aliaxis, a large global plastic pipes company, acquired
a majority stake in Ashirvad Pipes for US$150mn in Feb,
2013.
Ajay Group is a diversified engineered plastic products
manufacturer with a presence across refrigeration sealing,
water/irrigation, automotive parts and extruded products.
Apart from UPVC pipes, the company also manufactures
CPVC pipe systems using the technology of Lubrizol.
Company manufactures PVC, HDPE, UPVC pipes sells across
irrigation, construction and infra segments. It offers CPVC
pipe systems in a technological collaboration with Sekusui
Chemical Ltd, a Japanese chemical company.
Prince pipes established in 1973 manufactures uPVC, CPVC
pipes and fittings catering to housing, agricultural and
infrastructure clients. Based on our dealer checks, Prince has
a strong presence in western India.
Source: Company, Industry, Ambit Capital research; Note: * FY12 revenues for Ashirvad Pipes and Prince Pipes
Supreme Industries
(1) PVC pipes - competitive mapping scorecard
We have built a scorecard to evaluate the competitive positioning of six large
organised PVC pipe players in India. We have selected five parameters that we
believe are the key to their performancethree-year average RoIC, revenue size
and growth, financial leverage, product diversity, and distribution network. Based
on our scorecard, Supreme is the best player in the industry followed by
Astral Polytechnik. In our opinion, Jain Irrigation and Prince Pipes are laggards.
Exhibit 9: Supreme best ranked amongst peers (based on Exhibit 10)
3-year
average
RoIC
Piping
revenue size
and growth
Financial
Leverage
Supreme
Astral Polytechnik
Finolex
Jain Irrigation
Ashirvad Pipes
Prince Pipes
Product Distribution
diversity
network
Overall
Rank
Source: Company, Ambit Capital research; Note: Rank 1 indicates the best player on each parameter in the
industry whilst rank 6 implies the worst-placed player. We have assigned equal weightages to each of the five
parameters.
Exhibit 10: Numbers behind our scorecard

Company
name
3-year
average
RoIC
Supreme
23.5
Astral
18.0
Finolex
Jain
Irrigation
Ashirvad
Pipes
Prince Pipes
8.6
8.4
FY13 pipe 3-year pipes

FY13 Net
Product Line
revenue
revenue debt/Equity
beyond uPVC
(` bn)
CAGR
(x)
CPVC, PE, PP-R
16.9
24.7%
0.44
pipes and fittings
CPVC pipes and
8.3
41.2%
0.22
fittings
13.8
18.4%
0.65 Fittings
PE pipes and 2
11.3
10.0%
1.48
fitting products
Most important
client
Housing
Housing
Agriculture
Agriculture
31.8*
6.7*
39.3%*
0.84* CPVC and fittings Housing
7.0*
5.2*
16.4%*
2.37*
CPVC, PP-R and

fittings
Housing and
agriculture
Pipe
manufacturing
plants
North, Central
and West India
North and West
India
West India
West and South
India
Distributors
South India
700+
400+
500+
3000+
4000
retailers
West and North

India
Source: Company, Industry, Ambit Capital research; Note: *For the unlisted players, Ashirvad Pipes and Prince Pipes, we have taken only FY12
numbers from the Ministry of Corporate Affairs website to evaluate financial performance.
Result: Domestic PVC pipe players are not a threat to Supreme

Our competitive mapping report card implies that there is no material threat to
Supremes market leadership in PVC pipes from domestic players. Finolex is
focusing on the agriculture sector, which accounts for 70% of its PVC pipes sales.
Astral Polytechnik is building its distribution reach in the niche CPVC product. Jain
Irrigation is not in direct competition with Supreme Industries as it sells entire
irrigation systems wherein PVC pipe is a component. Other organised players like
Prince Pipes and Ajay Group are currently too small in size to compete on a panIndia scale.
Now, a large global player with deep pockets like Aliaxis (acquired a majority
stake in Ashirvad Pipes) can be a strong competitor by quickly scaling up its
capacity and distribution reach. We believe that several other large international
players like Huliot plastic pipes and the Tessenderlo Group would like to enter the
fast-growing Indian markets. In fact, Huliot conducted a feasibility study to enter
the Indian markets in 2009.
Three-year average Return on Invested Capital: Supreme has the secondhighest three-year average RoIC due to efficient capital allocation in fastgrowing products. Finolex and Jain Irrigation despite larger turnover than
Supreme have allocated capital in the less-profitable agriculture and micro
Supreme Industries
irrigation sector, resulting in lower RoIC. Astral Polytechnik has improved its
RoIC on a small base due to strong demand of CPVC pipes. Ashirvad Pipes has
the highest RoIC on a small base whereas Prince Pipes is the worst placed.
Piping revenue size and growth: In our opinion, growth on a large base
creates a platform for growth through internal accruals. Our rank is based on
the average of piping revenue size and piping revenue growth. Thus, Supreme
with market leadership and second-best growth is ranked 1. Astral has the
highest growth but due to its smaller size, it is ranked 3.
Financial leverage: We believe stronger balance sheet will enable the

company to expand through capacity expansion and acquisitions. Astral has
the best net debt:equity (0.22x) whilst Jain Irrigation (net debt:equity of 1.5x)
and Price Pipes (net debt/equity of 2.3x) are highly leveraged.
Product diversity: In our opinion, products catering to multiple industries

provide numerous growth avenues in the fast-penetrating engineered plastics
segment. Fittings account for 20-25% of sales for Supreme vs 35% for Astral
and only 10% for Finolex. We rank Supreme as rank 1 because it has a largest
product portfolio with 5,682 products in the plastic piping segments alone.
Also, Supreme has consistently increased its VAP contribution to the plastic
piping segment revenues in the past six years by launching new fittings and
PVC pipe products like CPVC, leading to higher-than-peer EBIT margin.
Supreme has products for multiple industries such as building, agriculture and
infrastructure.
Exhibit 11: VAP drives plastic piping revenue growth
220
30%
170
25%
120
20%
70
15%
10%
20
FY07 FY08 FY09 FY10 FY11 FY12 FY13
Exhibit 12: Fittings growth driven by consistent new

launches
5,800
200
5,600
175
5,400
150
5,200
125
5,000
100
4,800
75
50
4,600
FY10
FY11
FY12
FY13
Pipe mtrs sold (metres)
Pipe products (nos)
VAP % share in piping revenues (RHS)
Pipe fittings (mn pcs, RHS)
Fast growing CPVC pipes

6
4
Distribution network: A strong distribution network allows a company to

increase the penetration of its products. Supreme has 22 manufacturing plants
spread across India whereas other players are concentrated in west and south
India. As a result, Supreme has developed a strong presence in the lesscompetitive north and east India markets with minimum delivery time and
without additional freight charges.
(2) CPVC: Prime example of Supremes product launches strategy
2
0
FY11
Astral (Rs.bn)
FY12
FY13
Supreme (Rs.bn)
Source: Company
Supreme launched CPVC pipes (used for hot and cold water applications) in 2008,
with a modest capacity. The demand for CPVC pipes has recorded a CAGR of
more than 40% in the last four years. In our opinion, raw material sourcing for
CPVC is the main barrier for new entrants, as there are only two manufactures of
CPVC resin in the worldLubrizol and Kaneka. Supreme has an exclusive tie-up
with Kaneka for CPVC resin supply in India. Lubrizol supplies CPVC resin to three
10
Supreme Industries
players in IndiaAstral, Ajay Pipes and Ashirvad Pipes. Supreme is planning to
launch CPVC pipes for industrial and fire sprinkler applications and so is Astral.
Comparing Supremes cost structure with Astral Polytechnik

Supreme has higher gross margins as compared to Astral Polytechnik because
Supreme gets cash discount on purchase of PVC resin from domestic
manufacturers and better product mix (high margin Silpaulin and fittings products).
Supreme has higher power and fuel cost due to use of expensive captive power in
Southern states such as Tamil Nadu. Further, Astral has higher advertising costs
because of its national media advertising v/s low cost local media marketing
strategy of Supreme Industries. Hence, Supreme has higher EBITDA/EBIT margins.
Whilst Astral has significantly reduced its net-debt-to-equity in FY13 (0.22x v/s
0.85x in FY12) resulting in lower interest costs, Astrals interest expense as % of
sales are still higher than Supreme. However, Supremes PAT margins are similar
to Astral due to higher tax expense as Astral got MAT credit entitlement in FY13.
Exhibit 13: Comparison of Supreme cost structure with Astral Polytechnik
% of revenues unless otherwise specified
Net Income (` mn)
FY11
FY12
FY13
Supreme
Astral
Supreme
Astral
Supreme
Astral
24,297
4,113
28,587
5,827
33,880
8,254
Cost of materials consumed
67.0%
71.7%
67.8%
71.7%
67.7%
71.5%
Gross margin
33.0%
28.3%
32.2%
28.3%
32.3%
28.5%
Employee cost
4.0%
2.6%
3.9%
2.6%
3.8%
2.5%
Power and Fuel cost
4.2%
2.4%
4.1%
2.5%
4.1%
2.3%
Freight and Forwarding charges
1.7%
2.5%
1.5%
1.5%
1.4%
1.6%
Commissions and discounts
3.1%
2.7%
1.7%
3.3%
1.3%
2.9%
Advertising and Publicity Expense
0.7%
1.4%
0.7%
1.0%
0.6%
2.0%
Labour charges
2.1%
0.0%
2.2%
0.0%
2.3%
0.0%
Repair Expenses
0.7%
0.7%
0.5%
0.5%
0.5%
0.3%
Other SG&A
2.9%
2.5%
2.7%
2.7%
2.7%
2.9%
13.7%
13.4%
14.9%
14.2%
15.5%
14.0%
2.5%
2.6%
2.5%
2.4%
2.4%
2.2%
11.1%
10.8%
12.4%
11.8%
13.1%
11.8%
Interest Expense
1.8%
1.1%
2.0%
3.9%
1.6%
2.3%
Interest received
0.1%
0.1%
0.1%
0.1%
0.1%
0.0%
EBITDA margin
Depreciation
EBIT margin
Other income
0.2%
0.2%
0.1%
0.5%
0.0%
0.2%
PBT margin
9.6%
10.1%
10.5%
8.6%
11.6%
9.7%
Tax expense
3.3%
2.1%
3.5%
1.8%
3.8%
2.3%
PAT margin
6.3%
8.0%
7.0%
6.8%
7.7%
7.4%
(b) Packaging: Silpaulin created new segment

Supreme Industries has created a new segment in the tarpaulin industry through
its highly successful product, Silpaulin. The company has an exclusive patent with
RPD Rasmussen Polymer for selling it in India and SAARC countries until 2023.
Supreme got this patent through the merger of group company Siltap Chemicals in
2003. We believe Silpaulins product placement is perfect between HDPE and
Nylon.
11
Supreme Industries
Exhibit 14: Silpaulin has a unique positioning - high quality and value for money
High Price
Low Quality
Nylon
Silpaulin
PE films
Cotton
High Quality
Low Price
Silpaulin is three times cheaper than nylon films, thus limiting competition from
nylon films from price-sensitive buyers. Although Silpaulin is twice as expensive as
HDPE films, Silpaulins price range for small-ticket buyers like farmers is between
`150- `500, making it highly affordable. Also, Silpaulin has a longer life than
HDPE. Overall, our dealer checks also suggest that Supreme has created a brand
for Silpaulin and the demand is quite strong in India, except in/near Chennai
(c) Industrial: Supreme is an average player

The industrial segment services the auto industry, bottling crates and consumer
durable appliances. Competition in the industrial products segment is intense and
fragmented. Supreme has the lowest three-year revenue CAGR amongst peers
and its three-year average EBIT margins at 12.7% are above Machino Plastics and
Plastiblend but below Time Technoplast. In our opinion, the advantage of
operating in this segment is sales visibility but the disadvantage is limited pricing
power and client concentration risk. Overall, our analysis suggests that Supreme
does not have a competitive advantage over its peers.
Exhibit 15: Industrial plastic products overview
Industry
Important
Clients
Auto
Tata Motors,
Maruti Suzuki,
Piaggio
Consumer
Whirlpool
Durables
% of
sales
Key Competitors
30%
Motherson Sumi, Machino

Plastics, Sintex Industries,
Precision Pipes, Time
Technoplast
Exhibit 16: Supreme

industrial segment
is
an
average
player
30%
Precision Pipes, Plastiblends
the
20%
25%
15%
20%
15%
10%
10%
30%
in
5%
5%
0%
0%
Supreme: Machino
Time Plastiblend
Industrial Plastics Technoplast
Bottling
Crates
Coca Cola,
Pepsi
40%
Nilkamal, Time Technoplast,

Tulsi Extrusions
3 year CAGR sales growth

3 year average EBIT margin (RHS)
12
Supreme Industries
(d) Supreme shedding consumer products weight

Exiting competitive consumer
products
20
15
10
5
0
20%
15%
10%
5%
0%
FY10 FY11 FY12 FY13
Supreme Sales (Rs. bn)
Nilkamal Sales (Rs. bn)
Supreme EBIT margin(RHS)
Nilkamal EBIT margin(RHS)
Source: Company
Over the last decade, Supreme Industries has exited several low-margin consumer
plastic products like mats (FY11-12), food serviceware and embossed sheets in
FY07. As a result, the revenue contribution of consumer products to overall
revenues has more than halved from 21% in FY04 vs 8.4% in FY13. The plastic
furniture industry has high competition intensity from unorganised players. We
have compared Supreme with Nilkamal (largest plastic furniture manufacturer) to
identify Supremes competitive positioning in this segment. Nilkamal, although
larger in size, has lower margins than Supreme. Supreme is focusing on VAP
products for higher margins at the expense of lower topline growth. Although
Supreme has increased its VAP share in the consumer segment to 40% vs 31.6%,
yet the margins are lower than the overall company margins. This discrepancy
highlights that the standard furniture business is not very profitable.
(e) Composites: High potential, high uncertainty

Supreme will create a new segment in FY15 through composite products such as
composite cylinders, composite pipes, composite pallet and composite auto
components. To start off, the company will focus on export of composite cylinders
to the Middle East. We believe the market has underestimated the risks involved in
the composite products of Supreme Industries. We agree that composite cylinders
(the main focus in Supremes composite portfolio) have a large untapped potential
market in the Middle East and India. However, it will not be easy for Supreme to
enter the composites cylinder market because:
Supreme is a step behind competitors in product development: Supreme

has not yet developed composite cylinders whereas large international players
such as Hexagon Composites and Luxfer Gas Cylinders have been selling
composite cylinders for more than a decade. Even the local competitor, Time
Techoplast, has access to the composite cylinder product through the
acquisition of Kompozit-Praha for US$5.2mn in 2009.
Composite cylinders to be priced more than twice as much as current

steel LPG cylinders: Supremes composite cylinders will be priced around
`3,000/cylinder. In our opinion, the end consumer will have to bear the extra
cost of replacing the steel cylinder. Thus, price-sensitive consumers could
potentially avoid the lightweight advanced composite cylinders.
Composite drill pipes can be used in short radius oil drilling applications.
Their main advantage over steel pipes is that they can remain bent for a long
time without stress fatigue and can be used in multiple drills. However, the use
of composite drill pipes has been limited, as they break near the plastic and
steel joints due to stress. We are not very bullish on composite drill pipes due
to limited success of this product in other regions.
In order to account for the risks involved in the composite business, we expect
composite revenues of only `750mn in FY15 vs management guidance of `2bn.
Further, we have estimated long-term gross block turnover of 1.0x-1.5x for
composites, significantly below the gross block turnover of Supremes other plastic
products (2.3x-2.5x). In our opinion, EBIT margins will consistently increase from
15% in FY15 to 18% in FY17 due to economies of scale.
13
Supreme Industries
Competitive advantages verified through dealer

checks
We conducted dealer checks across India to understand: (1) why customers buy
Supremes products, and (2) the competitive advantage of Supreme in PVC pipes,
CPVC pipes and cross-laminated films.
PVC pipes: Supreme has unmatched reach across India

Competitive
edge
over
peers:
Supreme
has
a
presence in all the regions:
south, north, east, west and
central, whilst its competitors
do not have national reach
Customers and dealers believe that Supreme has built a moderate brand
through a better quality product and hence it charges a marginal premium
to its competitors. The product quality of organised players is better than
unorganised players wherein some sell their products without ISI approval.
A dealer mentioned that customers can compromise on outside drainage pipes
but the customers are not price sensitive for bathroom fittings as they
are visible and used every day. Supreme has the widest range of fittings
products and this makes Supreme popular with customers.
There are no supply-side constraints in the PVC pipes market. Also, the
PVC pipes of one company can be easily substituted by those of any other
company, reducing the pricing power of the PVC pipe manufacturer.
The dealer margins are almost the same for each company.
CPVC pipes: Strong demand but capacity constraints
The demand for CPVC pipes is very strong across India. Astral and Supreme
have better quality products than Prince and other unorganised players.
According to the dealers in Mumbai, Supremes products are not easily

available as compared to those of Prince and Astral. The management
confirmed that they are not very strong in Mumbai but they have a good
network in the rest of Maharashtra.
The dealers have to pay for Supremes products in advance in Chennai,

as there are only two distributors in Chennai.
Silpaulin: Created a unique segment with a strong brand name
Competitive advantage of
Silpaulin: Cheaper than nylon
and can substitute nylon
tarpaulin applications; better
quality than HDPE films but
Silpaulin is not very expensive
as compared to HDPE
Silpaulin has been available in the Indian market for the last 27 years. The
buyers of Silpaulin can be classified into three segmentsindustries, truck
owners and farmers.
Silpaulin is placed between competitive tarpaulin products made from nylon
and HDPE. Silpaulin is sold at about `300/kg whereas HDPE is sold at
`120/kg. Nylon is more than three times more expensive than Silpaulin. Also,
Silpaulins product life is 2-3 years which is in the middle range of the product
life of nylon (10-15 years) and HDPE (1 year).
It has built a strong brand name in the market due to its value-for-money
product positioning and good product quality.
14
Supreme Industries
Snowball effect to gain momentum

We analysed Supremes business performance over the last 15 years and found
three markedly different phases of evolution. The next phase from hereon will be a
high-growth phase (on a high revenue base) driven by mega capex plans.
Exhibit 17: Evolution to a great business model part 1
80
60
Phase2: Planted seeds for

high growth and RoE
Phase4: Mega Capex

to drive growth with
stable RoCE
Phase3: Bore fruit from

ideal product placement
strategy
19%
17%
15%
50
Total Revenue
Composites
FY16E
FY15E
FY14E
FY13
FY12
FY11
EBIT margin
FY10
Plastic Piping
5%
FY09
7%
0
FY08
10
FY07
Packaging
FY06
9%
FY05
20
FY04
Industrial
FY03
11%
FY02
30
FY01
Consumer
FY00
13%
FY99
40
FY98
Revenues (Rs. bn)
70
Phase1: First
failed attempt to
improve business
model
Exhibit 18: Evolution to a great business model part 2

Phase1:
First failed
attempt to
improve
business
60%
50%
40%
Phase3: Bore fruit

from ideal product
placement strategy
Phase2: Planted seeds

for high grow th and
RoE
Phase4:
MegaCapex to
drive grow th
w ith stable RoE
3.5
3.0
2.5
2.0
30%
1.5
20%
1.0
FY16E
FY15E
FY14E
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
0.0
FY00
0%
FY99
0.5
FY98
10%
RoE
(LHS,%)
Capexto-CFO
(x) (RHS)
Debt-toEquity (x)
(RHS)
Phase 1 (FY1998-FY2001): First attempt (failed) to improve business model
In FY98, Supremes interest cost was 10% of turnover, leading to lower RoE.
Hence, the new strategy by the management in FY98 was to achieve pre-tax
RoE of 20% by reducing interest costs to 5% of turnover by repaying debt.
This was the first signal by the management for improving returns for
shareholders. During this period, the management not only restructured the
group but also reduced capex to repay debt.
Exhibit 19: Restructuring measures during phase 1 to improve RoE

Year
Disposal/restructuring loss-making asset/subsidiary
FY2000
Disposed off loss-making Premier Lighting Industries
FY2000
Turnaround of Supreme Vinyl Films Limited from loss-making
FY2001
Closed down Supreme Capital Management
FY2001
Shut down Huntsman Supreme
15
Supreme Industries
However, the company failed to deliver on its promises. Supremes RoEs

did not improve in FY1998-FY2001. To add to its troubles, Supreme had a
huge capital expenditure in FY01 (2.2x of CFO) which it funded through
borrowings, leading to an increase in the gross debt:equity again to 2.0x in
FY2001 from 1.5x in FY2000. At the end of FY2001, the company again
targeted a debt-to-equity ratio of 1.0x by FY04 through consolidation of its
existing business and sale of idle assets.
Phase 2 (FY01-06): Planted seeds for high growth and RoEs through
deleveraging and product mix change
Over FY01-04, Supreme Industries reduced its debt by `720m through

operating cash flow and cutback on expansion capital expenditure in consumer
products segment. The company achieved its targeted D/E of 1.0x in FY04.
After deleveraging, Supreme changed its product mix (increased exposure to

cross-laminated films and pipes at the expense of consumer products), which
laid the foundation for a fourfold jump in the phase 3 post-tax RoE (10.6% in
FY06 vs 41.7% in FY12).
In FY03, Supreme Industries merged Siltap Chemicals to get exclusive patent

rights of its future blockbuster productcross-laminated film. Also, in FY04-06,
Supreme had a cumulative capital expenditure of more than `1,491mn,
mainly to increase the capacity of PVC pipes and fittings, thereby laying the
foundation for a strong revenue CAGR of 19% in phase 3.
Phase 3 (FY07-12): Bore fruits of the ideal product placement strategy
The managements product placement strategy to avoid competition with

exports and to focus on fast-growing freight-intensive plastic products such as
PVC pipes and Silpaulin paid rich dividends in phase 3. The company recorded
sales CAGR of 19% in FY06-12.
Their VAP focused product strategy led to improvement in EBIT margins

(782bps during FY06-12) and debt reduction resulted in lower interest costs.
As a result, RoCEs improved from 8.0% in FY06 to 23.4% in FY12.
Strong revenue growth and lower raw material prices due to decline in crude
prices led to 33% EBIT CAGR. This along with an improvement in working
capital days (31 days in FY12 vs 52 days in FY08) helped the company
generate a cumulative operating cash flow of ` 11.4bn.
Supreme reduced its gross debt:equity from 1.1x in FY06 to 0.5x in FY12 and
tripled its capital expenditure (`8.1bn in FY07-12 vs `2.4bn in FY01-06)
through internal accruals.
Phase 4 (FY13-FY16E): Mega capex to drive growth with stable RoCEs
In our opinion, Supreme got its product portfolio right in the previous phase.
Now, we expect Supreme to increase the capacity of its high-demand
products, such as PVC, CPVC pipes and Silpaulin, through a capex of `13.0bn
in FY13-16 vs ` 5.9bn in FY09-12. The company plans to increase the PVC
pipes capacity from 200,000 tonnes in FY12 to 325,000 tonnes by FY15.
We believe Supremes strong EBIT CAGR of 17% in FY12-17 will generate a

cumulative operating cash flow of `20.9bn in FY13-16, which would be
sufficient to fund its mega capex plans and repay debt of `1.0bn by FY16.
Also, during this phase, the company will introduce a new product segment
composite products (such as composite cylinders and composite pipes).
Composite products have a huge potential but with business risks.
Overall, we believe the RoCEs, excluding real estate assets, at ~25% and EBIT
margins of 13-14% will remain stable in FY13-17 as capex in the existing
products will supplement revenue growth.
16
Supreme Industries
Reaping rewards of efficient capital allocation

We believe efficient capital allocation is the crux to building a successful plastic
processing business. Supremes management has thoughtfully designed its product
mix over the last 10 years by exiting commodity plastics and increasing its share of
VAP (31.7% as on June 2013 vs 22% in FY09). During this period, Supreme has
consistently increased the capacity of high demand products like plastic pipes and
cross-laminated films without losing balance sheet strength. Supreme is reaping
the benefits of efficient capital allocation in the following two areas:
(1) Expansion of the distribution feedback loop: Supreme has strategically
built 22 manufacturing plants to penetrate all the five regions in India. As a result,
Supreme has the most cost-efficient distribution network in the industry. The
company has built a successful feedback loop system through distributors to
understand the customers needs and the structural changes in the industry. This
unique feedback loop has helped Supreme make minor modifications to its
existing product line without significant additional freight costs. As a result, valueadded products (with EBIT margins higher than 17%) constitute 31.7% of total
sales, leading to higher-than-industry-average EBIT margins.
An example of gains from the distribution feedback loop is consistent new
launches in high-margin fittings products. The company plans to launch 30 new
fitting products in the next quarter alone. According to the management, fitting
products account for more than 20% of its plastic piping segment vs 10% for its
largest peer, Finolex Industries. In sync with its product modification strategy,
Supreme plans to launch a new CPVC product for industrial applications and
noise-free PVC pipes for high-rise towers.
piping
and
40%
25
30%
20
15
20%
10
30%
30%
Consumer
durables
25%
25%
Industrial
products
20%
20%
15%
15%
10%
10%
Packaging
products
Plastic piping
5
10%
FY13
FY12
FY11
FY10
FY09
VAP revenue
share (RHS)
5%
5%
0%
0%
EBIT
margin
(RHS)
RoCE
(RHS)
Revenue
Growth
FY13
30
FY12
Rsbn
Exhibit 21: consistently high revenue growth and

steadily increasing RoCE
FY11
in
FY10
35
VAP
FY09
Exhibit 20: Rising share of

packaging system led to.
(2) Achievement of an ideal product portfolio: In the last decade, Supreme

has moved out of low-margin commodity products such as food serviceware and
BOPP film. Supreme shut down its two consumer product manufacturing plants in
Malanpur and Daman. On the other hand, the company has pro-actively
increased its focus on PVC pipes and cross-laminated films (as can be seen from
the table below). It has launched highly successful products in the piping segment
such as CPVC, fittings products, and uPVC pipes. Supreme added its blockbuster
productcross-laminated filmsthrough a merger of Siltap Chemicals in 2003.
17
Supreme Industries
Exhibit 22: Changes in product/ revenue mix towards piping and packaging systems
Year
Plastic Piping System
Consumer Products
Industrial products
(+) Rigid PVC film and BOPP

film.
(+) Cross laminated film, Wide
Width film
2002
2003
2004
(+) Polypropylene random Co-polymer

pipes and fittings
(-) BOPP Film
2006
(-) Wide width film

(-) Food Service ware and
embossed sheets
2007
2008
2009
2012
Packaging Products
(+) material handling

pallets
(+) HDPE Pipe Systems, CPVC Pipe

systems
(+) uPVC Pipes, LLDPE Tube and
Inspection Chambers
(+) Manholes
(-) Mats
Source: Company, Ambit Capital research, Note: (+): new product addition, (-) product deletion from portfolio
Rewards of efficient capital allocation: Supreme has recorded revenue CAGR

of 21% in FY08-13 and its EBIT margins have increased by 820bps in FY08-13. As
a result, Supreme has the highest RoIC amongst the listed plastic pipe
manufacturers. RoICs above 25% and efficient working capital management have
meant that Supreme has generated strong operating cash flows which are again
reinvested in the business, thereby creating a snowball effect. As a result, Supreme
has funded its capacity expansions without stretching its balance sheet.
Exhibit 23: Supreme has the highest RoIC amongst
peers
30
60%
25
RoIC (%)
Exhibit 24: Supreme achieved 25% sales CAGR in

FY09-13 without stretching its balance sheet
50%
20
40%
15
30%
10
20%
10%
0%
FY10
FY11
Supreme Industries
Jain Irrigation
FY12
FY13
Finolex
Astral Polytechnik
-10%
FY10
FY11
Supreme Industries
Jain Irrigation
FY12
FY13
Finolex
Astral Polytechnik
18
Supreme Industries
Mega capex to drive growth with

stable RoCEs
We expect Supreme to increase the capacity of high-demand products such as
PVC, CPVC pipes and Silpaulin through a capex of `13.0bn in FY13-16 vs `5.9bn
in FY09-12. Supreme has already incurred a capex of `3.75bn in FY13. The
company plans to further increase the PVC pipes capacity to 325,000 tonnes by
FY15. We believe that Supreme will generate cumulative operating cash flow of
`20.9bn, which would be sufficient to fund its mega capex plans and repay debt of
`1.0bn in FY13-16. Overall, we believe the RoCEs, excluding real estate, ~25%
and EBIT margins (between 13% and 14%) will remain stable in FY13-17 as capex
will supplement revenue growth.
Exhibit 25: Key assumptions (` mn, unless specified)
Particulars
Revenues
FY12
FY13
FY14E
FY15E
29,279
34,040
40,413
48,758
19%
16%
19%
21%
13,148
16,910
20,909
25,872
25%
29%
24%
24%
7,146
7,000
8,478
9,787
24%
-2%
21%
15%
5,431
6,070
6,501
7,232
YoY growth (%)

Plastic Piping Segment
YoY growth (%)
Packaging Products
YoY growth (%)
Industrial products
YoY growth (%)
FY16E Comments
56,288
15% Revenue CAGR of 18% in FY13-16 to be driven by
mega capex plans in plastic piping and packaging
31,139 products segments.
20%
The company plans to increase PVC pipes capacity

11,073 cumulatively by 47% in the next three years.
13%
Also, Supreme has increased capacity of Silpaulin by

8,504 40% in FY13.
8%
12%
7%
11%
2,858
2,760
2,985
3,228
8%
-3%
8%
8%
8%
Adjusted plastics EBIT
3,532
4,439
5,119
6,096
7,277
Adjusted plastics EBIT margin
12.4%
13.1%
12.8%
12.9%
Plastic Piping Segment
13.0%
16.0%
14.7%
14.2%
Packaging Products
20.0%
20.0%
20.0%
20.0%
Industrial products
13.0%
12.0%
10.0%
11.0%
20.0% We believe the piping segments EBIT margin of 16% in

FY13 are unsustainable and will decline to 14.7% in
12.0% FY14.
Consumer products
14.0%
12.4%
12.8%
11.5%
11.5%
Net depreciation
725
817
1,021
1,190
1,366
Net Interest Expense
548
523
452
382
283
Average interest rate
13.2%
14.5%
11.5%
11.0%
10.5%
Consumer products
YoY growth (%)
18%
In our opinion, high-potential composites segment will
3,491 contribute only 2% of overall sales in FY16.
We expect margins to remain steady at ~13.0% in

13.1% FY13-16, as increase in the share of the high-margin
piping segment will be offset by a decline in margins in
14.0% the consumer and piping segment.
Net interest expense to decrease due to decrease in

debt.
PBT before EO
3,474
4,014
4,965
6,751
7,657
Adjusted consolidated PAT
2,107
2,834
3,394
4,108
Consolidated PAT margin
7.4%
8.4%
8.5%
8.7%
4,980 Strong 14% volume CAGR in FY13-16 will drive growth

in net profit. Lower interest costs will lead to marginal
9.0% improvement in margins.
15.9
20.6
25.0
30.5
31
19
24
26
2.76
2.92
2.86
2.83
CFO
3,519
4,046
4,365
6,102
Capex
(762)
(3,698)
Free Cash Flow
2,736
561
0.48
0.44
Adjusted plastic business EPS

(`.)
Average Working capital days
excluding cash & real estate
Capital Employed turnover
excluding real estate
Net Debt to Equity
37.3
We expect working capital cycle days to increase due
to decline in trade payables.
Capital employed turnover to remain steady as mega
2.78
capex will be complemented by sales growth.
28
6,448
Strong operating free cash will be sufficient to fund

(2,500) (3,250) (3,500) capex and repay debt, producing surplus cash for
1,865
2,852
2,948 reinvestment in business. Hence, net debt to equity will
reduce to 0.1x by FY16E.
0.33
0.17
0.09
19
Supreme Industries
Financial performancegreatness depicted
2.5
2.0
Consumer
durables
18%
Industrial
products
12%
Packaging
products
10
6%
Plastic piping
systems
0%
Total sales
growth (RHS)
40
30
20
FY11
FY16E
FY15E
Capex (Rsmn, RHS)

Capital employed turnover ex. real estate (x) (LHS)
9,000
16%
8,000
12%
12%
10%
8%
Revenue growth
EBIT margin (RHS)
FY16E
FY15E
FY14E
FY13
FY12
6%
FY11
6%
7,000
15%
6,000
5,000
4,000
14%
3,000
2,000
1,000
13%
EBITDA margin(RHS)
Consumer
durables
Industrial
products
Packaging
products
Plastic Piping
Systems
Total EBIT
margin(RHS)
FY16E
14%
16%
Rsmn
FY15E
18%
18%
FY11
24%
Exhibit 29: Rising share of EBITDA from the Piping and

Packaging products segment
FY14E
Exhibit 28: We expect 17% revenue CAGR in FY13-16 at

steady EBIT margins of ~13%
FY12
FY13
FY14E
FY13
FY12
FY11
1.5
24%
50
FY16E
3.0
30%
Rsbn
FY15E
3.5
60
FY14E
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
FY13
4.0
Exhibit 27: Product portfolio shift towards piping and

packaging segment at the expense of consumers
FY12
Exhibit 26: Mega capex of `13.0bn in FY13-16 to drive

revenue growth, resulting in steady capital turnover
Exhibit 30: High growth on a large base will lower

financial gearing
Exhibit 31: High RoCEs leading to sufficient CFO to fund

capex and repay debt
20
1.0
18
0.8
16
0.6
14
0.4
12
0.2
10
FY11
FY12
FY13 FY14E FY15E FY16E
Working capital turnover excl. real estate (X) (LHS)

D/E (x) (RHS)
40%
30%
20%
10%
(1)
0%
FY11
FY12
FY13 FY14E FY15E FY16E
CFO (Rsbn)
RoCE (RHS)
FCF (Rsbn)
RoE (RHS)
20
Supreme Industries
Ambit vs Consensus
Exhibit 32: Ambit vs consensus estimates
Consensus
Ambit
Divergence
FY2014
40,842
40,413
-1.1%
FY2015
47,837
48,758
1.9%
Revenue (` mn)
Reported EBIT (` mn)

FY2014
5,081
5,387
6.0%
FY2015
6,117
7,101
16.1%
FY2014
26.5
28.1
6.2%
FY2015
31.3
37.7
20.4%
Comments
Our FY14 revenue estimates are in line with
consensus and management guidance of 19%
YoY revenue growth
Our EBIT margin forecasts are higher than
consensus estimates because we assume an
increase in the percentage of high-margin
Silpaulin and CPVC pipes to overall EBIT.
Reported Cons. EPS (`)

Above consensus mainly due to higher EBIT
estimates
Source: Company, Bloomberg, Ambit Capital research
Quarterly performance
Exhibit 33: Quarterly performance of the company (` mn, unless specified)
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
Volumes sold (tonnes)

Plastic piping segment
26,290
41,067
39,948
43,959
36,972
40,935
47,500
54,105
Packaging products
8,481
9,979
9,557
9,360
9,572
10,417
11,117
9,635
Industrial products
7,949
8,870
11,589
9,917
9,487
10,373
10,952
11,346
Consumer products
4,041
4,778
4,890
5,025
3,981
4,862
4,947
4,944
100
109
114
133
101
120
120
127
5,012
7,697
7,685
9,263
6,176
8,150
9,177
10,362
6%
32%
16%
24%
23%
6%
19%
12%
Net realisation per kg (`)

Net Sales
YoY growth (%)
Total operating expenditure
4,301
6,494
6,637
7,507
5,329
6,956
7,833
8,644
% of net sales
86%
84%
86%
81%
86%
85%
85%
83%
EBITDA
711
1,203
1,048
1,756
848
1,194
1,344
1,718
YoY growth (%)

EBITDA margin (%)
-9%
48%
25%
54%
19%
-1%
28%
-2%
14.2
15.6
13.6
19.0
13.7
14.7
14.6
16.6
Depreciation
172
171
172
211
186
190
197
291
EBIT
549
1,044
880
1,549
663
1,004
1,147
1,454
11.1%
13.7%
11.6%
16.9%
10.9%
12.5%
12.7%
14.3%
-18%
57%
31%
56%
21%
-4%
30%
-6%
133
142
152
121
115
138
137
147
EBIT margin
YoY growth (%)
Interest
Profit before tax
YoY growth (%)
Tax
Adjusted net profit
YoY growth (%)
416
902
728
1,428
548
866
1,010
1,335
-31%
61%
34%
65%
32%
-4%
39%
-7%
138
288
235
490
178
283
330
413
326
593
548
950
390
664
758
995
-29%
43%
13%
58%
20%
12%
38%
5%
Net profit margin (%)
6.5
7.7
7.1
10.3
6.3
8.1
8.3
9.6
EPS
2.6
4.7
4.3
7.5
3.1
5.2
6.0
7.8
Source: Company
21
Supreme Industries
Valuations not reflective of supreme

plastics business
We have used SOTP valuation for Supreme IndustriesDCF valuation for the
plastic processing business, market value of the real estate assets and current
trading share price of Supreme Petrochem, resulting in a target price of `442 for
Supreme Industries. We prefer a DCF-based valuation for Supremes plastic
business, because we believe that this is the best way to value a company that is
capital-intensive and on a high-growth trajectory. Our DCF-based valuation of
`420 for the plastic processing business implies 16.8x FY14E EPS and 13.7x FY15E
EPS (adjusted EPS for the plastics business). Supreme deserves premium valuations
to its peers due to its superior revenue growth and profitability ratios.
Exhibit 34: SOTP valuation per share (`, unless specified)
Segment
Plastic Processing
Real Estate
Supreme Petrochem
Equity value per share

420
13
9
Supreme Industries Target Price
442
Current Share Price
348
Upside Potential
27%
Implied Plastic processing business FY14E P/E
16.8
Implied Plastic processing business FY15E P/E
13.7
Implied Plastic processing business FY14E EV (` mn)
55,807
Implied Plastic processing business FY15E EV (` mn)
62,270
Implied Plastic processing business FY14E EV/EBITDA
9.1
Implied Plastic processing business FY15E EV/EBITDA
8.5
Source: Company, Ambit Capital research, Bloomberg
DCF-based valuation of `420/share

We believe that DCF is the best method to value plastic processing companies,
because the key value drivers will be free cash flows based on revenue growth,
profitability (RoIC and EBIT), working capital turnover and capital employed
turnover. Our DCF-based valuation drivers/determinants are as follows:
Snowball effect from increasing revenue size:
As mentioned earlier,
Supremes perfect product portfolio positioning in the last five years created a
snowball effect for operating cash flow generation. We expect Supremes snowball
to gain momentum over the next five years (FY13-16), generating operating cash
flow of `20.9bn, which would be sufficient to fund capital expenditure and repay
debt. The key determinants of our FCF are:
a) Near-term and long-term revenue growth estimates: Our 18% revenue
CAGR forecasts for FY13-16 are based on capacity expansion done by
Supreme in high-demand PVC pipes and Silpaulin. We believe main growth
driver of 14% volume CAGR in FY13-16 would be increasing penetration of
engineered plastic products as Supreme has moderate pricing power (4% price
increase CAGR in FY13-16) in its existing products. After FY16, our revenue
growth assumptions are more moderate than FY13-16, because we expect
growth to taper off to ~10% for its existing product portfolio. Our five-year
revenue CAGR over FY12-17E is at 17% vs 11% over the next five years (FY1722E). Our ten-year revenue CAGR over FY12-22E is at 13%.
22
Supreme Industries
Exhibit 35: Capacity expansion in PVC

Silpaulin will drive revenue growth
60
pipes
and
30%
Exhibit 36: ..leading to higher contribution of plastic

piping and packaging products in total revenue
100%
80%
8% 7% 6%
16% 16%
17%
19% 19%
Consumer
durables
Industrial
products
60%
22% 21% 20%

25% 21%
Industrial
products
12%
Packaging
products
40%
10
6%
Plastic piping
systems
20%
0%
Total sales
growth (RHS)
0%
FY16E
FY15E
FY14E
FY13
FY12
FY11
20
54% 56% 57%

46% 52%
Packaging
products
Plastic piping
systems
FY16E
30
FY15E
18%
8%
FY14E
40
24%
10%
FY13
50
Consumer
durables
FY12
Rsbn
b) EBIT margins to be range bound: We expect a marginal decline in EBIT

margins in the industrial products and piping segment because piping
segments FY13 EBIT margins of 16% are unsustainable. Overall, EBIT margins
will remain steady at ~13% in FY13-16.
Exhibit 37: Total EBIT margin will marginally increase
from higher proportion of piping, packaging products
13%
FY16E
FY15E
FY14E
FY13
FY12
10%
Plastic Piping
Systems
Total EBIT
margin(RHS)
5%
FY16E
1,000
Packaging
products
FY15E
2,000
15%
FY14E
14%
3,000
Industrial
products
FY13
5,000
4,000
20%
FY12
15%
6,000
Consumer
durables
FY11
7,000
FY11
25%
16%
Rsmn
8,000
FY10
9,000
Exhibit 38: Segmental EBIT margins to remain steady
Plastic Piping Systems
Packaging products
Industrial products
Consumer durables
c) Operating cash flows: Supreme had an efficient working capital cycle,

excluding real estate, of 19 days in FY13 due to an increase in sundry creditor
days (68 days in FY13 vs 45 days in FY12). We believe FY13 sundry creditors
days will decrease due to the current liquidity crunch market, leading to an
increase in working capital days (excluding cash and real estate) to 24 days in
FY14.
d) Mega capex plans to increase size: Supreme has increased its capacity by
more than 40% in Silpaulin and PVC pipes in the last two years which will drive
sales. Also, Supreme is investing to add high-potential new products in
composite plastics like composite cylinder. Overall, Supreme will incur a mega
capex of `13.0bn in FY13-16.
23
Supreme Industries
Terminal growth rate of 5%: We have taken a terminal growth rate of 5% for
the company post FY24 which is conservative in our opinion. Supremes revenues
have never declined on a YoY basis in the last 30 years and we do not think plastic
penetration will reach a level that will pull Supremes growth lower to 5%.
WACC of 14%: We assume Cost of Equity of 15% and take a WACC of 14%. We
believe Supremes beta is understated due to lower liquidity. Hence, we have
assumed beta of 1.25x for Supreme.
Our 12-month DCF-based valuation of `420/share valuation implies 16.8x FY14
adjusted plastics EPS and 13.7x FY15 adjusted plastics EPS.
Exhibit 39: FCF over FY14-24E
2,800
Exhibit 40: Terminal value forms 67% of the enterprise

value
30%
(Rs mn)
2,400
25%
2,000
22,900
Terminal value
32,907
10%
Enterprise value
55,807
5%
Less: net debt at June 2014
20%
1,200
15%
400
FY24E
FY23E
FY22E
FY21E
FY20E
FY19E
FY18E
FY17E
FY16E
FY15E
FY14E
` mn
PV of the forecasting period up to FY24E
1,600
800
Particulars
2,505
Implied equity value
PV of FCFF
WACC (RHS)
RoCE excluding real estate (post tax) (RHS)
53,302
Implied equity value (` per share)
420
Exhibit 41: Sensitivity to our WACC and terminal growth rate

Terminal growth rate
WACC
TP: ` 420
3.0%
4.0%
5.0%
6.0%
7.0%
12%
484
525
578
648
747
13%
420
450
488
537
602
14%
368
391
420
455
500
15%
326
344
365
391
424
16%
291
305
321
341
365
Exhibit 42: Sensitivity to average capital employed turnover of plastic business

Average plastic business capital employed turnover
Target Price
FY12
FY13
FY14E
FY15E
FY16E
Base
2.34
2.38
2.31
2.34
2.35
420
Bull
2.34
2.38
2.38
2.53
2.63
468
Bear
2.34
2.38
2.25
2.18
2.12
372
Commercial real estate - contributes only 3% to our target price: Supreme

has ready-to-occupy commercial real estate space of 161,241 square feet in
Andheri, Mumbai, with a value of `2.4bn. The property was developed in FY12 but
due to sluggish demand in commercial real estate, more than half of the area is
unsold. Supreme is not in a cash-crunch situation and hence it has held on to its
price of `15,000/sq ft. We have estimated that Supreme will be able to sell this by
FY16.
24
Supreme Industries
Supreme Petrochem - contributes only 2% to our target price: Supreme
Industries has a 30% stake in Supreme Petrochem. Supreme Petrochem is the
domestic market leader (with a market share in excess of 50%) in the polystyrene
business. It also exports to multiple countries in Europe and the Middle East. In
India, 90% of polystyrene manufactured is used in consumer durable appliances
such as refrigerators and water purifiers. The remaining 10% polystyrene
manufactured is used in the construction industry. Supreme Petrochem is a small
company with a market cap of `5.7bn and annual turnover of `22.7bn. Its net
profit for FY12 was `0.3bn. We apply a 30% holding company discount to market
value of Supreme Petrochem, resulting in an additional contribution of `9/share
(only 3% of Supreme Industries current market price).
Supreme deserves premium valuations to peers

Supreme is trading at 27%/23% premium to its plastic processing peers on FY14E
P/E and FY14E EV/EBITDA. We believe Supreme deserves premium valuations to
its peers due to the superior RoE and better EBITDA margins. We expect Supreme
to record 18% revenue CAGR in FY13-15 vs 14% (consensus) for the industry.
Supremes adjusted PAT margins are 280bps above the industry average. As a
result, we expect Supremes adjusted RoE to be 34.5% in FY14, twice the industry
average. Supremes direct peer in PVC pipes for the construction and building
sector is Astral Polytechnik. Supreme is trading at a 10% discount to Astral
Polytechnik on FY14E P/E and on FY14E EV/EBITDA. In our opinion, Supreme
deserves a premium to Astral due to Supremes larger pipes business, multiple
business segments, larger balance sheet and higher RoEs.
Exhibit 43: Plastic processing relative valuation - Supreme deserves a premium due to its higher profitability
Companies
Supreme Ind*
Mcap
Revenue
(US$mn)
Revenue
EBITDA PAT margin
CAGR margin (%)
(%)
US$ mn
FY13
FY13-15
FY14
FY14
FY14
719
627
18.0
15.3
8.4
34.3
13.1
RoE (%)
P/E (x)
EV/EBITDA (x)
FY14E FY15E
FY14E
FY15E
10.7
7.5
5.6
2,258
4,655
14.6
8.4
2.8
30.4
17.0
12.9
7.5
6.1
Jain Irrigation
394
904
14.0
15.6
4.3
10.4
10.7
7.3
6.4
5.6
Sintex
122
934
9.2
15.1
6.8
9.9
2.3
2.0
4.0
3.5
Time Technoplast
121
331
17.7
16.3
6.1
13.7
5.9
4.7
4.1
3.6
Finolex Ind
237
391
9.5
10.7
7.8
22.0
18.6
14.6
7.8
6.9
Astral Polytechnik
202
152
18.3
12.9
8.8
25.7
14.5
11.9
10.3
8.4
24
313
14.4
8.4
2.7
10.7
2.9
2.1
3.0
2.5
12.5
5.6
17.5
10.3
7.9
6.1
5.2
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
Motherson Sumi
Nilkamal
India Average
Global Players**
Aliaxis
Tessenderlo Chemicals
China Liansu
Global Average
1,342
3,057
N.A.
881
2,738
(2.1)
9.8
2.9
14.3
13.4
11.1
5.8
5.1
1,848
1,726
14.8
17.9
11.7
21.5
8.6
7.6
4.7
4.2
13.8
7.3
17.9
11.0
9.4
5.2
4.7
Source: Company, Bloomberg, Ambit Capital research; Note (a) * June-ending companies, rest are March-ending, (b) Market cap is as on 14 August
2013, (c) ** Global players are December-ending (d) We have used adjusted the financial performance of plastics of Supreme Industries to compare
with its peers.
25
Supreme Industries
Relative valuation: Lets think out of the (plastic)

box
We have tried to think out of the plastic box to identify Supremes peers in
industries which have similar characteristics. We have selected five key plastic
processing characteristics to identify Supremes peers in other industries:
Industry structure: The highly competitive and fragmented industry structure

is the underlying reason behind Supremes limited pricing power.
Replacement cycle: The replacement cycle of Supremes products is between

2 years and 10 years. So, we have identified products with similar product
lifecycles.
Product ticket size: The average product ticket size is critical to understand
the price sensitivity of the end buyer.
Market capitalisation: We have selected other mid-cap companies to

compare with Supreme.
After scanning the Indian mid-cap space, we have identified six peersFinolex,
Astral Polytechnik, Bajaj Electricals, V-Guard, Kajaria Ceramics and Cera
Sanitarywarethat are comparable to Supreme in the internal building
products category (products used for internal construction in the housing
industry). In this extended universe, Supreme is trading at a discount of 15%/14%
on one-year forward P/E and on one-year forward EV/EBITDA multiples to its
peers. Contrary to consensus, we believe Supreme deserves premium valuations
owing to higher RoE, larger revenue size and higher EBITDA margin implying
further upside potential and rerating of Supreme Industries.
Exhibit 44: Think out of the (plastic) box - Supreme is trading at a discount to peers
Mcap
Revenue
(US$mn)
US$ mn
FY13
FY13-15
FY14
FY14
FY14
Supreme Industries*
719
627
18.0
15.3
8.4
34.3
13.1
Finolex Industries
237
391
9.5
10.7
7.8
22.0
18.6
Astral PolyTechnik
202
152
18.3
12.9
8.8
25.7
Bajaj Electricals
269
622
15.9
6.0
2.8
19.4
Kajaria Ceramics
283
296
18.9
15.1
6.6
Cera Sanitaryware
107
90
24.2
15.3
9.0
V-Guard
266
250
22.2
8.8
5.0
18.2
11.5
6.7
Companies
Average
Revenue
EBITDA PAT margin
CAGR margin (%)
(%)
RoE (%)
PE (x)
EV/EBITDA (x)
FY14E
FY15E
10.7
7.5
5.6
14.6
7.8
6.9
14.5
11.9
10.3
8.4
15.0
9.2
7.8
5.4
30.1
13.6
10.5
7.2
6.0
26.1
11.8
9.8
7.1
6.0
19.5
15.5
12.1
9.8
15.5
11.9
8.7
7.1
24.7
FY14E FY15E
Source: Company, Bloomberg, Ambit Capital research; Note (a)* Companies are June-ending, rest are March-ending, (b) Market cap is as on 14
August 2013 (c) We have used the core plastic business financials of Supreme to compare with peers.
26
Supreme Industries
Cross-cycle valuation: Marginal correction from

all-time high
Whilst Supreme is trading near its all-time high on 1-year forward P/E and
EV/EBITDA multiples, we believe a comparison of the three-year historical crosscycle valuations can be deceiving. Over the last three years, Supreme has
recorded revenue growth of 20% in FY10-13, maintaining RoEs consistently above
34%. Thus, Supremes rerating of P/E and EV/EBITDA multiples is justified, in our
opinion. We believe there is further potential for rerating underpinned by strong
revenue CAGR of 18% (on a large base) in FY13-16, which will generate sufficient
operating cash flow to fund capital expenditure and repay debt.
Exhibit 45: Supremes one-year forward
marginally corrected from all-time highs
P/E
has
Exhibit 46: Supreme is trading near its all-time high

valuations backed by a strong operating performance
15
13
8
7
11
1 year forward PE
Average 1 year fwd PE (x)
SourceCompany, Bloomberg, Ambit Capital research
Aug-13
May-13
Feb-13
Nov-12
Aug-12
May-12
Feb-12
Aug-11
Aug/13
May/13
Feb/13
Nov/12
Aug/12
3
May/12
5
Feb/12
4
Nov/11
7
Aug/11
Nov-11
1 year forward EV/EBITDA (x)

1 year fwd average EV/EBITDA (x)
Source: Company, Ambit Capital research ,
Key catalysts
Higher-than-industry-average volume growth due to recent capacity

expansions: Supreme has spent `3.75bn in FY13 to increase capacity in PVC
pipes and cross-laminated films. The increase in capacity in these two highdemand products can lead to higher-than-industry volume growth for Supreme
Industries.
Strong balance sheet to launch new products with the help of

technology tie-ups with international players: We expect Supreme
Industries to generate strong cash flow from PVC pipes and cross laminated
films in at least the next five years. In sync with the companys strategy,
Supreme could potentially tie-up with an international player to launch a new
product in the Indian market. For example, Supreme acquired the patents for
manufacturing and distribution of cross-laminated films from RPD Rasmussen
Polymer Development AG, Switzerland. In FY13, the product contributed
`3.7bn to the companys topline, with EBIT margins in excess of 20%.
Future product modifications could increase turnover and margins:

Supreme has a strong track record of introducing product modification of the
existing product-line to meet consumer needs. For example, Supreme will
launch no-noise high-rise pipes in 1QFY14 in the VAP range (above 17%). The
company could consistently launch such product modifications to increase
turnover and margins.
27
Supreme Industries
Risks to our BUY stance
Increase in competition intensity from large international players: We

do not expect a significant threat to Supremes market share in the PVC pipes
business from local organised players such as Finolex Industries and Jain
Irrigation. Aliaxis, a large international player (with a CY12 turnover of
US$3.2bn), acquired Ashirvad Pipes for US$150mn. Ashirvad Pipes has CPVC
raw material sourcing tie-up with Lubrizol. Now, a large player with deep
pockets like Aliaxis can quickly scale up its capacity and distribution reach,
thereby increasing competitive intensity in the PVC pipes segment. We believe
that several other large international players like China Lesso Group Holdings
(the largest piping company in China), JM Eagle (the largest plastic pipe
company in the world), Georg Fischer, and the Tessenderlo Group, would like
to increase their exposure in the fast-growing Indian markets.
Inefficient capital allocation could potentially deteriorate RoCE: In our
opinion, Supremes strength over the last decade has been its efficient capital
allocation in the expansion of fast-growing products like PVC pipes and crosslaminated films. In the future, if the company were to allocate its surplus cash
generated from operations in commodity plastics then Supremes RoCE would
deteriorate eventually, reducing the momentum of its snowball effect.
Substitution of PVC pipes by HDPE pipes: HDPE pipes are technologically
superior to PVC pipes because PVC joints are brittle as compared to HDPE
joints. Currently, HDPE pipes are 25% more expensive than PVC pipes, thereby
limiting their use in India. However, if the price advantage of PVC over HDPE
were to reduce then HDPE pipes could be used as a substitute for PVC pipes.
Whilst this a risk, we believe Supreme, given its portfolio and technological
reach, can also shift its portfolio.
Wavin could stop technical collaboration in PVC pipes with Supreme:
Supremes PVC pipes technology partner is Wavin Overseas, a subsidiary of
Mexichem. Another subsidiary of Mexichem, Aliaxis, has acquired a majority
stake in Ashirvad Pipes (Supremes competitor in PVC pipes). So, there is a
remote possibility that Mexichem might stop its technological collaboration
with Supreme to avoid indirect competition with its subsidiary.
Management key man/ succession risk minimized by divisional
organization structure: Whilst we agree that M.P. Taparia (Managing
Director) has been instrumental in the success of Supreme Industries but
Supreme has divisional organization structure responsible for day-to day
running of company operations. Supreme has an independent chief officer of
each manufacturing plant who manages production/operations of the plant.
The directors have delegated marketing and selling to individual Vice President
(VP) product heads of each product. All the VPs and chief officers report to
Directors on a quarterly basis.
Exhibit 47: Supreme Management structure

Supreme Industries
Directors
B. L. Taparia, Chairman
M. P. Taparia, Managing Director
B. V. Bhargava, Director
H. S. Parikh, Director
N. N. Khandwala, Director
S. R. Taparia, Director
Y. P. Trivedi, Ind Director
Chief Officer Plants (23)
VP, Finance
VP, Product head Piping system
VP, Product head Packaging

products
VP, Product head Industrial products
VP, Product head Consumer

products
Source: Company
28
Supreme Industries
Accounting analysis: Clean chit

Supreme Industries follows sound accounting practices and emerges as a strong
player on most of our accounting checks. Amongst its peers, Supreme has the
highest RoE, a low debt:equity (0.4x in FY13), a tight working capital cycle, and a
healthy cash flow generation profile. However, the only concern is the higherthan-peers unclassified loans and advances as a percentage of net assets.
Exhibit 48: Supreme Industries on our forensic accounting score
Field
Score
Comments
Accounting
GREEN
Predictability
GREEN
Earnings
momentum
GREEN
In our accounting analysis of BSE-500 companies, we have classified Supreme Industries as

an industrial company. Supreme Industries emerges as the best industrial company
(amongst 14 industrial companies) on account of its higher ranking on most of the
parameters (such as miscellaneous expenses as a percentage of revenues, other loans &
advances /net worth, asset turnover, and audit fee CAGR/revenue CAGR).
The company has always given a detailed description and has made timely disclosures
regarding its future strategy, expansion plans, expected business momentum and expected
earnings performance in their annual reports and during their conference calls.
Over the last six months, consensus EPS estimates for FY14 and FY15 have been revised
upward by 15-20%.
DuPont Analysis: In FY09-13, Supreme Industries RoEs have been consistently

above 30%. The increase in Supremes RoEs is due to a consistent improvement in
PAT margin. The asset turnover and financial leverage of the company have
reduced between FY09 and FY12 but Supreme still has the best asset turnover and
financial leverage. GREEN FLAG
Exhibit 49: DuPont Analysis
Company/metric
RoE (%)
PAT margin (%)
Financial leverage (x)
Asset turnover (x)
FY10 FY11 FY12 FY13 FY10 FY11 FY12 FY13 FY10 FY11 FY12 FY13 FY10 FY11 FY12 FY13
Supreme Industries
40.2
35.3
37.3
34.1
7.2
6.9
7.8
7.9
3.0
2.7
2.6
2.7
1.9
1.9
1.8
1.6
Astral Polytechnik
26.4
24.8
23.8
28.5
9.5
8.0
6.8
7.3
2.0
2.3
2.5
2.8
1.4
1.3
1.4
1.4
8.1
1.8
1.5
N.A.
5.7
1.3
1.2
N.A.
0.9
0.9
0.7
N.A.
1.7
1.6
1.8
N.A.
Finolex Industries
24.3
12.6
11.7
N.A.
9.1
3.9
3.6
N.A.
1.0
1.3
1.3
N.A.
2.7
2.4
2.5
N.A.
Time Technoplast
17.0
17.8
12.6
N.A.
8.5
8.7
5.9
N.A.
1.1
1.1
0.9
N.A.
1.8
1.9
2.0
N.A.
Peers avg. (ex Supreme)
19.0
14.3
12.4
N.A.
8.2
5.5
4.4
N.A.
1.2
1.4
1.4
N.A.
1.9
1.8
1.9
N.A.
Divergence with avg.
21.3
21.0
24.9
N.A.
(1.0)
1.4
3.5
N.A.
1.8
1.3
1.2
N.A.
(0.0)
0.1
(0.1)
N.A.
Tulsi Extrusions
Source: Ambit Capital research. Note: (a) Financials of Tulsi Extrusions and Finolex Industries are on a standalone basis (b) Supreme is a June-ending
company.
Cash conversion: Supremes CFO/EBITDA ratio has deteriorated over FY09-12

due to a sharp fall in average creditor days. Supreme has started paying in cash
for raw materials (like PVC) to avail cash discounts. Supremes cash conversion
cycle remains materially better than the industry average. GREEN FLAG
Exhibit 50: Cash conversion cycle
Company/metric
Supreme Industries
Astral Polytechnik
Cash conversion cycle (days)

FY10
7
FY11
25
FY12
21
FY13
Average creditor days

FY10
FY11
FY12
20
57
43
39
CFO pre tax/EBITDA (%)
FY13
42
FY10
FY11
FY12
70
73
87
FY13 FY09-12
86
79
49
28
18
21
94
107
106
87
71
106
114
64
100
Tulsi Extrusions
205
213
232
N.A.
39
64
72
N.A.
(128)
(126)
N.A.
(91)
Finolex Industries
-10
15
20
N.A.
85
68
58
N.A.
117
(23)
97
N.A.
113
Time Technoplast
94
91
84
N.A.
39
47
52
N.A.
73
72
75
N.A.
77
Peers average (ex Supreme)
85
87
88
N.A.
64
71
72
N.A.
33
73
N.A.
50
(78)
(62)
(67)
N.A.
(7)
(28)
(33)
N.A.
37
66
14
N.A.
30
Divergence with avg.
Source: Ambit Capital research. Note: (a) Financials of Tulsi Extrusions and Finolex Industries are on a standalone basis (b) Supreme is a June-ending
company.
29
Supreme Industries
Unclassified loans and advances as a percentage of net assets: Supremes
unclassified loans and advances are the highest in the industry but this proportion
has marginally declined from FY11. RED FLAG
Exhibit 51: Unclassified loans and advances to net assets
Unclassified loans and advances to net assets (%)
Companies
FY11
FY12
FY13
Supreme Industries
13.7
13.0
13.2
Astral Polytechnik
2.1
1.3
1.2
Tulsi Extrusions
0.4
N.A.
Finolex Industries
5.8
7.6
N.A.
Time Technoplast
5.7
6.7
N.A.
Peer group average (ex Supreme)
3.5
3.9
N.A.
10.2
9.2
N.A.
Divergence with average
Source: Ambit Capital research, Company. Note: (a) we have not taken loans and advances for FY09 and
FY10 due to the new accounting standard; unclassified loans and advances in FY11 and FY12 are not
comparable to FY09 and FY10. (b) Tulsi Extrusions and Finolex Industries financials are on a standalone basis
and the rest is consolidated. (c) Supreme Industries is as on June ending
Miscellaneous expenses as a percentage of revenues

Supremes miscellaneous expenses as a percentage of revenues are among the
lowest vs its peers and have remained stable in FY09-13. Further, as
miscellaneous expenses form less then 0.5% of revenues, it is not a cause for
concern. GREEN FLAG
Exhibit 52: Miscellaneous expenses as a percentage of revenues
Company
Misc expenses as % of revenues

FY10
FY11
FY12
FY13
Supreme Industries
0.3
0.3
0.3
0.2
Astral Polytechnik
0.2
0.3
0.2
0.3
Tulsi Extrusions
0.2
0.3
0.4
N.A.
Finolex Industries
0.8
1.3
0.9
N.A.
Time Technoplast
0.3
0.4
0.6
N.A.
Peer group average (ex Supreme)
0.4
0.5
0.5
N.A.
(0.1)
(0.2)
(0.2)
N.A.
Divergence with average
Source: Company, Ambit Capital research. Note: (a) Financials for Tulsi Extrusions and Finolex Industries are
on a standalone basis and the rest is consolidated. (b) Supreme Industries is a Juneending company.
Invisible restatement analysis

Supremes summation of FY13 quarterly reported numbers, both in terms of sales
and net income, are broadly in line with the FY13 annual revenue and net profit
disclosed in the annual report. Similarly, for most peers, the quarterly and annual
sales and PAT numbers are in sync with the annual report. GREEN FLAG
Exhibit 53: Invisible restatement
Companies
Sales deviation
PAT deviation
Supreme Industries
-0.9%
-0.1%
Astral Polytechnik
-0.3%
0.8%
Tulsi Extrusions
2.5%
1.3%
Finolex Industries
0.0%
0.0%
Time Technoplast
0.0%
0.0%
Source: Company, Ambit Capital research. Note: (a) Financials of Tulsi Extrusions and Finolex Industries are
on a standalone basis and the rest is consolidated. (b) Supreme Industries is a June-ending company.
30
Supreme Industries
Balance sheet
Year to June (` mn)
FY12
FY13
FY14E
FY15E
FY16E
Shareholders' equity
254
254
254
254
254
Reserves & surpluses
5,223
6,713
8,536
10,753
13,798
Total net worth
5,477
6,967
8,790
11,007
14,052
Debt
5,203
3,520
4,089
4,089
3,589
Deferred tax liability
812
840
907
907
907
Total liabilities
11,491
11,327
13,785
16,002
18,547
Gross block
12,021
12,451
16,068
18,548
21,798
7,417
7,394
10,277
11,737
13,797
CWIP
262
338
330
350
350
Investments
916
887
1,098
1,098
1,098
Cash & equivalents
142
144
239
486
1,130
Debtors
1,529
1,712
2,031
2,412
2,848
Inventory
3,454
3,140
4,668
5,284
5,524
Loans & advances
1,536
1,706
1,660
2,028
2,395
19
19
19
Net block
Other current assets

Total current assets
6,660
6,702
8,617
10,228
11,916
Current liabilities
2,456
3,027
5,342
6,054
6,872
Provisions
1,323
975
1,196
1,357
1,742
Current liabilities and provisions
3,779
4,001
6,538
7,411
8,613
Net current assets
2,881
2,700
2,079
2,817
3,302
Miscellaneous
Total assets
16
11,492
11,327
13,785
16,002
18,547
FY12
FY13
FY14E
FY15E
FY16E
29,279
34,040
40,413
48,758
56,288
18.6%
16.3%
18.7%
20.6%
15.4%
24,560
28,684
34,005
40,467
47,015
Income statement
Year to June (` mn)
Operating income
growth
Operating expenditure
EBITDA
4,719
5,356
6,408
8,291
9,273
EBITDA margin
16.1%
15.7%
15.9%
17.0%
16.5%
Depreciation
EBIT
Interest expenditure
Non-operating income
725
817
1,021
1,190
1,366
3,994
4,539
5,387
7,101
7,907
548
523
452
382
283
28
(2)
30
32
33
Adjusted PBT
3,474
4,014
4,965
6,751
7,657
Tax
1,150
1,330
1,613
2,194
2,489
Adjusted PAT/ Net profit
2,014
2,617
3,170
3,878
4,744
growth
31.6%
29.9%
21.1%
22.3%
22.3%
93
217
223
230
237
2,107
2,834
3,394
4,108
4,980
Share of associates
Adjusted Consolidated net profit
31
Supreme Industries
Cash flow statement

Year to June (` mn)
FY12
FY13
FY14E
FY15E
FY16E
3,475
4,014
4,965
6,751
7,657
Depreciation
725
817
1,021
1,190
1,366
Net Interest Expense
548
523
452
382
283
PBT
Other Income
Tax
Change in net working capital
(25)
326
698
517
(1,167)
(1,114)
(1,613)
(2,194)
(2,489)
(36)
(198)
(786)
(725)
(886)
3,519
4,046
4,365
6,102
6,448
(762)
(3,698)
(2,500)
(3,250)
(3,500)
Dividend income
81
41
Interest Income
30
28
30
32
33
(643)
(3,627)
(2,470)
(3,219)
(3,467)
Net borrowings
(1,632)
1,187
(500)
(500)
Dividends paid
(664)
(960)
(1,196)
(1,357)
(1,742)
Cash flow from operations

Purchase of fixed assets
Investments
Others
Cash flow from investments
Issuance of equity
Interest paid
Cash flow from financing
Net change in cash
(578)
(552)
(452)
(382)
(283)
(2,874)
(324)
(1,648)
(2,239)
(2,524)
95
247
644
456
142
237
484
1,128
1,584
2,757
348
1,865
2,852
2,948
Year to June
FY12
FY13
FY14E
FY15E
FY16E
EBITDA margin
16.1%
15.7%
15.9%
17.0%
16.5%
EBIT margin
13.6%
13.3%
13.3%
14.6%
14.0%
7.2%
8.3%
8.4%
8.4%
8.8%
31.5%
33.9%
35.3%
33.0%
35.0%
0.5
0.4
0.3
0.2
0.1
17.8
18.5
16.1
14.6
13.7
2.8
2.9
2.9
2.8
2.8
Closing cash balance

Free cash flow
Ratio analysis
Net profit margin

Dividend payout ratio
Net debt: equity (x)
Working capital turnover (x)
Gross block turnover (x)
RoCE
22.8%
25.6%
24.7%
24.6%
24.7%
RoE
33.9%
36.0%
34.3%
32.8%
31.5%
Year to June (` mn)
FY12
FY13
FY14E
FY15E
FY16E
Adjusted EPS (`)
15.9
20.6
25.0
30.5
37.3
Reported EPS (`)
16.6
22.3
26.7
32.3
39.2
55
69
87
111
138
Valuation parameters
Book value per share (`)

Dividend per share (`)
P/E (x)
P/BV (x)
EV/EBITDA (x)
12
13
21.0
15.6
13.0
10.8
8.9
6.3
5.0
4.0
3.1
2.5
10.1
9.0
7.5
5.6
4.9
32
Supreme Industries
Institutional Equities Team

Saurabh Mukherjea, CFA CEO, Institutional Equities
(022) 30433174
saurabhmukherjea@ambitcapital.com
Research
Analysts
Industry Sectors
Desk-Phone
Aadesh Mehta
Banking / NBFCs
(022) 30433239
E-mail
aadeshmehta@ambitcapital.com
Achint Bhagat
Cement / Infrastructure
(022) 30433178
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Technology / Telecom / Media
(022) 30433211
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Automobile
(022) 30433285
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(022) 30433255
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Metals & Mining / Healthcare
(022) 30433261
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Strategy
(022) 30433251
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Banking
(022) 30433205
vkrishnan@ambitcapital.com
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E&C / Infrastructure / Cement
(022) 30433241
nitinbhasin@ambitcapital.com
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Technology
(022) 30433291
nitinjain@ambitcapital.com
Pankaj Agarwal, CFA
NBFCs
(022) 30433206
pankajagarwal@ambitcapital.com
Pratik Singhania
Real Estate / Retail
(022) 30433264
pratiksinghania@ambitcapital.com
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Metals & Mining
(022) 30433223
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Consumer / Real Estate
(022) 30433201
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Banking / NBFCs
(022) 30433181
ravisingh@ambitcapital.com
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Economy / Strategy
(022) 30433175
ritikamankar@ambitcapital.com
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Healthcare
(022) 30433292
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Shariq Merchant
Consumer
(022) 30433246
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E&C / Infrastructure
(022) 30433203
tanujmukhija@ambitcapital.com
Utsav Mehta
Telecom / Media
(022) 30433209
utsavmehta@ambitcapital.com
Sales
Name
Regions
Deepak Sawhney
India / Asia
(022) 30433295
Desk-Phone
deepaksawhney@ambitcapital.com
Dharmen Shah
India / Asia
(022) 30433289
dharmenshah@ambitcapital.com
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India / USA
(022) 30433053
diptimehta@ambitcapital.com
Nityam Shah, CFA
USA / Europe
(022) 30433259
nityamshah@ambitcapital.com
Parees Purohit, CFA
USA
(022) 30433169
pareespurohit@ambitcapital.com
Praveena Pattabiraman
India / Asia
(022) 30433268
praveenapattabiraman@ambitcapital.com
Sarojini Ramachandran
UK
+44 (0) 20 7614 8374
E-mail
sarojini@panmure.com
Production
Sajid Merchant
Production
(022) 30433247
sajidmerchant@ambitcapital.com
Joel Pereira
Editor
(022) 30433284
joelpereira@ambitcapital.com
E&C = Engineering & Construction
33
Supreme Industries
Explanation of Investment Rating

Investment Rating
Expected return
(over 12-month period from date of initial rating)
Buy
>5%
Sell
<5%
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Ambit SupremeInd Initiation 16aug2013

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Industrials

August 16, 2013

Source: Company, Ambit Capital research

Variance from consensus (%)

Stock Performance (%)

Shareholding pattern (%)

Source: BSE, Ambit Capital research

One-year forward P/E chart

Key consolidated financials (` mn, unless specified)

Attractive valuation with limited downside risks, BUY, TP 442: We use

Strong operating cash flow generation to fund mega capex: Revenue

Tel: +91 22 3043 3203

Snowball gathering momentum on a solid platform: Supreme has

Well-built competitive advantages key: Supreme has delivered superlative

Tel: +91 22 3043 3241

Change to this position: POSITIVE

Supremes competitive advantages in the fast-growing plastic piping

Source: Bloomberg, Ambit Capital research

Please refer to the Disclaimers at the end of this Report.

Ambit Capital Pvt Ltd

Supreme Industries: Multi-industry

uPVC Pipes, injection moulded fittings &

Potable water supply,

Protective packaging products: Noncross-linked foam packaging, cross-linked PE

Industrial components: Customised plastic

Auto sector, consumer

Composite products: Cylinders and pipes

Casing pipes for oil and

Material handling: Heavy duty industrial

Soft drink companies,

Technological collaborations across segments

Protective packaging (two-stage cross link foam for

Technology partner/ collaborator

Source: Company, Ambit Capital research

Ambit Capital Pvt Ltd

Diversified product portfolio across segments such as pipes,

An unmatched distribution and production network22

Our primary checks suggest that Supremes products are not

Market leader in the fast growing PVC pipes segment for

PVC pipes of any company are easily replaceable by a competitor

Technical tie-ups in all segments with reputed international

The company has to continuously update technology through

Higher EBIT margins through focus on value-added products

The business is capital-intensive

Strong balance sheet (FY13 gross debt:equity of 0.5x) vs other

Per capita plastic consumption of India is only 7kg, significantly

Higher plastic pipe demand through PVC (replacement of GI)

Supremes technology tie-ups with global players provides an

Recent entry into composite products especially composite

Increase in competition from international players: For example: the

Supremes competitive advantage would be reduced if competitors

INR depreciation can increase the product price, thereby reducing

Source: Company, Ambit Capital research

Ambit Capital Pvt Ltd

Indian plastics sector: Poised for growth

Exhibit 5: Classification of plastics by manufacturing

Poly Vinyl Chloride (PVC)

Source: Report of the Sub-group on Petrochemicals

Films and sheets, fibre and filaments pipes,

Supreme, Neelkamal Plastics, National Plastics

Supreme, Motherson Sumi, Tata Autocomp, Sintex Industries, Time Technoplast

Source: Company, Ambit Capital research

Key demand drivers for plastic products