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Supreme Industries: Not so supreme!
May 6, 2014

Supreme Industries has announced the third quarter results of financial year 2013-2014 (3QFY14). It's a June ending company. The company has reported around 9.5% YoY growth in sales while net profits have declined by 23.1% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated total income increases 9.5% YoY during 3QFY14. During the period, Supreme sold 72,349 metric tons (MT) of plastic goods; down 3.2% YoY.
  • Operating profits fell 4.3% YoY, despite healthy top line growth due to 16.5% YoY and 12.5% YoY increase in raw materials and employee cost respectively.
  • Net profits declined 23.1% YoY due to 41.1% YoY and 30.1% YoY rise in interest and depreciation expenses.
  • Supreme's plans to incur a capex of Rs 2.3 bn in FY14 have been curtailed in light of the ensuing slowdown concerns. Now the management expects to spend Rs 1.7 bn towards capex this fiscal.

Consolidated performance snapshot
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Total income 9,177 10,052 9.5% 23,503 26,849 14.2%
Expenditure 7,833 8,766 11.9% 20,118 23,184 15.2%
Operating profit (EBITDA) 1,343 1,286 -4.3%  3,385 3,665 8.3%
Operating profit margin (%) 14.6% 12.8%   14.4% 13.6%  
Other income 1 4 515.6% 1 22 1727.9%
Interest 137 194 41.1% 390 587 50.4%
Depreciation 197 256 30.1% 573 741 29.3%
Profit before tax 1,010 840 -16.8% 2,423 2,359 -2.6%
Tax 330 285 -13.5% 790 787 -0.4%
Share of profit in associates 79 29 -62.9% 179 68 -61.8%
Profit after tax/(loss) 758 583 -23.1% 1,812 1,640 -9.5%
Net profit margin (%) 8.3% 5.8%   7.7% 6.1%  
No. of shares (m)         127.0  
Basic & diluted earnings per share (Rs)          12.9  
P/E ratio (x) *         21.3  
* On trailing 12 month basis

What has driven performance in 3QFY14?
  • Supreme Industries reported 9.5% YoY growth in total income during the quarter on the back of increase in product prices. Pricing growth was in the region of 9% while volumes declined by 3%. The company sold 72,349 MT of plastic goods this quarter compared to 74,779 MT in 3QFY13.

    Cost break up (Consolidated)
    (Rs m) 3QFY13 3QFY14 Change
    Raw material consumed 6,005  6,997 16.5%
    Employee cost 308 347 12.5%
    Power & fuel expenses 363 349 -4.0%
    Other expenditure 1157 1074 -7.2%
    Total expenses 7,833 8,766 11.9%

  • Despite double digit top line growth, operating profits declined 4.3% YoY. The operating margins stood at 12.8% during the quarter compared to 14.6% in 3QFY13. Escalation in raw material prices has been the main reason for deteriorating margins. While the company passes on the escalation, the effect is visible with a lag. Further, the entire burden is not passed on to the end consumer. Both these factors have resulted in margin erosion during the quarter.

  • Net profits of the company declined 23.1% YoY due to significant rise in interest (+41.1% YoY) and depreciation (+30.1%) expenses. The net margins of the company stood at 5.8% compared to 8.3% in 3QFY13.
What to expect?
At the current price of Rs 457 the stock is trading at a multiple of 21.3x its TTM earnings. Amidst slowdown in the industrial segment, management has further cut down its growth guidance. For FY14, management now expects volumes to grow by 6% (earlier 9-10%) while value growth will be in the region of 16-18% (earlier 20-22%). The capex guidance has also been curtailed to Rs 1.7 bn from Rs 2.3 bn earlier in light of the slowdown worries. However, EBITDA margins are likely to be maintained in the region of 14%.

Since our original buy recommendation in October 2012, the stock price has appreciated by roughly 58% amidst strong financial performance. However, over the last 2 quarters the bottomline performance has deteriorated with the company registering de-growth in profits. Management has also trimmed its guidance and capex plans over slowdown worries and rising raw material prices. A substantial rise in D/E in 2QFY14 also indicated that managing working capital has become a cause of concern.

While Supreme has a well diversified portfolio, we believe that clocking historical growth rate will be difficult for the company in the near future. Further, valuations in excess of 20x TTM earnings are not cheap either. As a result, we recommend investors to book profits in the stock and SELL the same at current levels.

Please note that with this we close our position on the stock. It was also a part of our Top 5 Buy list once. Since then the stock has gained 43%. So, overall while the investors have made a healthy return on the stock, current risk reward ratio is not favorable. As a result, we recommend investors to book profits.

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