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  • Jan 29, 2014 - Supreme Industries: High interest cost hurts profits

Supreme Industries: High interest cost hurts profits
Jan 29, 2014

Supreme Industries has announced the second quarter results of financial year 2013-2014 (2QFY14). It's a June ending company. The company has reported around 19.6% YoY growth in sales while net profits have declined by 5.6% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated total income increases 19.6% YoY during 2QFY14. During the period, Supreme sold 66,318 metric tons (MT) of polymers; down 0.1% YoY.
  • Operating profits increased 22.2% YoY, in line with healthy top line growth with margins improving by 40 bps YoY during the quarter.
  • Net profits declined 5.6% YoY despite strong performance at the operating level. Increase in interest (+63.8% YoY) and depreciation (+29.9% YoY) expenses hurt profitability.
  • The company plans to incur a capex of Rs 2.3 bn in FY14. The progress on expansion is as per schedule.
  • The board of directors have declared an interim dividend of Rs 2 per share for the fiscal under consideration.
  • The D/E ratio at the end of the quarter stood at 0.77x
Consolidated performance snapshot
(Rs m) 2QFY13  2QFY14  Change 1HFY13  1HFY14  Change
Total income  8,150 9,746 19.6% 14,326 16,797 17.2%
Expenditure  6,956 8,287 19.1% 12,285 14,418 17.4%
Operating profit (EBITDA) 1,194 1,459 22.2% 2,042 2,379 16.5%
Operating profit margin (%) 14.6% 15.0%   14.3% 14.2%  
Other income 0 7 NA 1 18 3191.9%
Interest 138 226 63.8% 253 393 55.5%
Depreciation 190 247 29.9% 376 484 28.8%
Profit before tax 865 993 14.7% 1,413 1,519 7.5%
Tax 283 326 15.4% 460 502 9.1%
Share of profit in associates 81 (40) NA 100 39 -60.9%
Profit after tax/(loss) 664 626 -5.6% 1,053 1,057 0.3%
Net profit margin (%) 8.1% 6.4%   7.4% 6.3%  
No. of shares (m)         127.0  
Basic & diluted earnings per share (Rs)         8.3  
P/E ratio (x) *         18.5  

What has driven performance in 2QFY14?
  • Supreme Industries reported 19.6% YoY growth in total income during the quarter on the back of increase in product prices. Pricing growth was in the region of 12% while volume growth was flat. The company processed 66,318 MT of polymers this quarter compared to 66,382 MT in 2QFY13. Plastic piping business registered volumes of 42,388 MT, packaging products - 12,125 MT, Industrial products - 7,747 MT and consumer products - 4,058 MT.

  • The share of value added products stood at 33.3% in 1HFY14.

    Cost break up (Consolidated)
    (Rs m)  2QFY13  2QFY14  Change
    Raw material consumed  5,376 6,513 21.1%
    Employee cost  287 338 17.8%
    Power & fuel expenses  338 344 1.8%
    Other expenditure  955 1092 14.3%
    Total expenses  6,956 8,287 19.1%

  • In line with double digit top line growth, operating profits grew at 22.2% YoY. The operating margins stood at 15% during the quarter compared to 14.6% in 2QFY13.

  • The operating margin for the plastic piping business was 13.5%, for packaging products it was 17.6%, for industrial products it was 8.9% and for consumer products it was 7%.

  • Net profits of the company declined 5.6% YoY due to significant rise in interest (+63.8% YoY) and depreciation (+29.9%) expenses. Interest expenses increased due to rising debt levels while depreciation expenses increased due to the addition to fixed assets amidst ongoing expansion plans.
What to expect?
At the current price of Rs 422 the stock is trading at a multiple of 18.5x its TTM earnings. Amidst slowdown in the industrial segment, management has cut down its growth guidance marginally. For FY14, management now expects volumes to grow by 9-10% (earlier 12%) while value growth will be in the region of 20-22%. EBITDA margins are likely to be maintained in the region of 14%. Management expects capex of Rs 2.3 bn in FY14 to expand capacity in West Bengal. Apart from that there are expansions plans lined up to increase capacities in packaging, pipe production and automation segment. However, the only worrying factor is sudden increase in D/E ratio during 2QFY14. Rising working capital requirements has led to increase in debt. Nonetheless, management stated that the debt levels are likely to subside by the end of the year.

Since our original buy recommendation in October 2012, the stock price has appreciated by roughly 45%. With industrial business slowing down and valuations turning expensive we do not expect a meaningful upside from current levels. As a result, we maintain our HOLD view on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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