Key Rating Drivers & Detailed Description

Strengths:

Diversified revenue

Supreme produces plastic-based products for piping systems (accounted for 66% of revenue in fiscal 2022), industrial goods (16%), consumer goods (5%) and packaging products (13%). Catering to a diverse end-user profile mitigates the risk of slowdown in any segment or industry. Furthermore, revenue is supported by the increasing contribution of value-added products (38% during fiscal 2022), which have operating margin of over 17%.

Healthy market position across business segments

Supreme has an established track record and strong market position in each segment it operates in, backed by its widespread distribution network and the ability to introduce new products. Collaboration with international manufacturers has strengthened the product development capabilities and translated into strong revenue growth along with above-average profitability. The company has over 4,300 distributors and 28 plants across the country. Supreme has commenced commercial production from new greenfield plants at Assam, Tamil Nadu and Odisha. Strong country-wide presence reduces freight cost and lead time for products to reach customers.

Robust financial risk profile

Financial risk profile is marked by a comfortable net worth, nil debt, healthy liquidity and strong debt protection metrics. Net worth is expected to be over Rs 4,200 crore as on March 31, 2023, with steady growth in cash accrual and nil gearing. Debt protection metrics were marked by net cash accrual to adjusted debt and interest coverage ratios of more than 150 and 300 times, respectively, for fiscal 2022. Expected annual net cash accrual of more than Rs 700 crore should suffice to fund the capital expenditure (capex) and working capital in the absence of any long-term debt.  Dividend payout is expected to range between 30-50% of profit after tax.

Weakness:

Susceptibility to intense competition and volatility in raw material prices

Prices of key raw materials, polyvinyl chloride, high-density polyethylene and polypropylene remain susceptible to movement in crude oil prices and foreign exchange rates, though Supreme has the ability to pass on any price fluctuations to consumers. With a large raw materials component in revenues (forming about 65-70%), the company also remains exposed to volatility in input prices, as particularly seen in fiscal 2023. Further, the plastic processing industry is highly fragmented, especially in commoditised segments such as plastic furniture. However, Supreme efficiently mitigates such pressure by offering value-added products and has been able to maintain a healthy market share across segments.

Annexure – List of entities consolidated

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