Supreme Industries: Growing in an organised manner
A beacon to other family run companies and one hopes it will see many more eventful years to come
A company run on sound lines
The immediate thought that comes to mind after purveying through its annual report and accounts is that Supreme Industries ranks supreme in its product lines - well almost. According to Capital Market magazine the company with the highest revenues by far under the heading of Plastic Products is Jain Irrigation. Supreme checks in at No. 2. The name plate of the company does not give any clue as to what this 70 year old makes and markets, but that is really not the point. The way I see it, it must rank as an icon among the many family run enterprises that dot the Indian corporate landscape - and going ahead at full throttle at that. More to the point, it is in the ability of the promoter family to keep the company functional under one large umbrella inspite of the considerable passage of time -and in not having to meet the same fate as that of other family run companies of similar vintage. The Taparia family which controls the board by virtue of its majority shareholding presents an image of a unified group. The family directly owns 49.6% of the voting stock. But non residents and OCBs or overseas corporate bodies - who presumably represent the interests of the family - hold another crucial 0.59%. Including this bit of the apple pie, the family gets to lord over 50% of the voting stock. This represents a dicey holding pattern - but nevertheless. The holding of the management is enacted through several closely held companies.
Besides the chairman B L Taparia, there are four other family members donning the surname Taparia who have seats on the company's board of directors. (In other words they also get to control the composition of the board consisting of nine members). Of this number, three members are employed by the company in their capacity as managing director or as executive directors. The chairman of the board on his part makes do with a minor honorarium. The three executive directors however make up for this lapse. The combined remuneration of the four family members accounts for 12% of the total compensation package of Rs 1.1 bn during the latest financial year. But full marks to the top gun for keeping all the family members cemented to the knittings.
For those who are not fully clued in, the company both manufactures and also trades in finished products. But the latter line of activity is more of an afterthought. It is primarily in the field of plastics and makes a host of value added items from the base material. Its output consists of five products groupings-plastic piping system, consumer products, industrial products, packaging products and composite products. That is to say it produces Polyvinyl chloride (PVC), High-density polyethylene (HDPE) , Linear low-density polyethylene (LLDPE) and polypropylene pipe fittings and systems, injection moulding fittings, furniture, and plastic components for the automotive industry, material handling systems, flexible packaging film products, cross laminated film products, LPG gas cylinders, and composite pipes. That makes for a whole host of products. And apparently for logistical purposes, the products are manufactured out of 19 factories spread over nine states and two union territories. The state of Maharashtra has the maximum number of units numbering six. The two union territories are Puducherry and Silvassa.
A snapshot of its financials
A snapshot of the performance highlights of the past 10 years makes for gripping reading. The production of processed polymers - as the company calls it - has risen in each year over the last ten years barring one year. The quantum of production rose from 91,913 metric tonnes in 2002-03 to 2.45 lac tonnes in 2011-12. Rupee sales on the other hand rose in each year over that of the preceding year. The value of sales rose from Rs 7.9 bn in the base year to Rs 32.2 bn in the latest year. Total income inclusive on other income did a similar over the ten year period. More importantly the pre-tax profit rose even more magnificently over the decade with the profit taking a leap in faith in 2006-07 and 2008-09. Put differently the total income net of excise rose 327% over the base year. But the pre-tax profit rocketed 1,817% over the same period. It may be noted that the other income quotient has quite some role to play in propping up the bottom-line in the latter part of the decade. In 2010-11 it accounted for 16.5% of pre-tax profit, with its share falling marginally to 14% in the latest year. The bulk of this other income constitutes a curious head of receipt called Industrial promotion subsidy.
The paid up capital over the decade rose from Rs 131 m to Rs 254 m (of the face value of Rs 2 each) - that implies a 1:1 bonus issue of shares along the way. (The company also bought back and extinguished 22.1 lakh shares of Rs 10 each in 2008-09).This would have helped the management to accentuate its hold over the voting stock to a like extent by using company generated funds. The reserves and surplus rose far more dramatically from Rs 1.7 bn to Rs 6.1 bn after adjusting for the bonus issue. The company apparently sticks to a steady policy of paying out around 36% of post tax profits as dividends to its shareholders. Over 90% of the reserves and surplus is made up of general reserves, with securities premium reserves constituting almost the entire balance reserves.
From the looks of it, it also looks like some sort of a capital intensive operation. The gross block at year end amounted to an impressive Rs 12.5 bn which in turn supported gross revenues from operations of Rs 29.6 bn. That makes for a year end ratio of 2.3:1 on a rough reckoning in favour of revenues. In the last two years the company has added Rs 3.4 bn to its fixed assets base. So it is imperative on the part of the company to generate cash from its operating activities-or resort to additional debt to pay for the gross block addition.
Drastic pruning of debt
The company has drastically pruned debt during the year. At year end the outstanding debt fell to Rs 3.5 bn from Rs 5.14 bn previously. This was due to the net effect of several factors. On the one hand the company resorted to a much higher cash generation of Rs 2.9 bn from operations against Rs 1.7 bn previously. This gain was also due to the fact that while the revenue from operations rose 20%, the biggest item of expenditure by far - the rise in the cost of materials consumed rose at a marginally lower pace of 19.4% to Rs 19.6 bn. (The cost of materials consumed includes purchase of finished goods valued at Rs 1 bn against Rs 858 m previously). The other big item of expenditure at Rs 4.2 bn and categorised under 'Other Expenses' rose even more softly by 12.5% as did the employee payouts. The ability to control cost increases led to better margins. Besides, the low inventory levels on the one hand coupled with a reduction in inventory holdings by Rs 314 m on higher sales, would have led to better cash flows. In line with this trend was the fall in trade receivables relative to rupee sales. Importantly enough the company is able to sell cash down which shows its hold over its trade debtors. Significantly, the trade payables in either year end were maintained at a higher level than the trade receivables. The current assets and current liabilities almost cancel out each other in value terms.
With a higher level of cash generation from operations, and the significantly lower outflow of cash from investing activities as compared to the preceding year, the company was able to pare debt drastically. It may be noted that the cash outflow on the purchase of fixed assets fell sharply to Rs 810 m from Rs 2.6 bn previously. (In the cash flow statement that the company has prepared - the cash flow from investing activities reveals a net cash inflow in both the years when actually it should read as a net cash outflow. The net figures should be denoted in parenthesis and not as shown). The year- end cash is kept at the bare minimum in either year. Such a definitive management of funds points to a very professionally run company.
No lateral investments
It also helps that the company has not given birth to a plethora of siblings as a means of a 'diversification effort'. As a matter of fact it only boasts non- current investments of Rs 336 m at year end, the same as in the preceding year. Almost the entire investment is in an associate company called Supreme Petrochem Ltd. The extent of its holding in this company is not known. But the auditor's report of the consolidated accounts states that the company does possess a foreign subsidiary and that they did not carry out the audit of this sibling. Judging from its very brief financials it is not a company of any significance. But still it is not known what the name of this sibling is and in which manner the stake holding in the sibling is held - unless I am missing out on some essentials here.
The company does not hold any cash in the form of debt investments. Attempting to make a buck or two by rolling over debt funds is the bÍte noir of India Inc. The only group company in which it has a stake is Supreme Petrochem - an associate company. It also boasts investments in the form of bits and ends in non group companies. The other income schedule reveals that it received dividend income of Rs 81 m during the year. This income can only pertain to its associate company. In which event it would amount to a judicious return on its equity stake in the associate.
From the looks of it this is a company which has a firm grip over its environment. The share would definitely rank as an investment for the long term. The share price oscillated from a high of Rs 238 to a low of Rs 160 during the financial year.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.