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Buy Supreme Industries, target Rs 1,242: SMC Global Securities

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SMC Global Securities has a buy call on Supreme Industries with a target price of Rs 1,242.

The current market price of Supreme Industries is Rs 1,095.

Time period given by the brokerage is 8-10 months when Supreme Industries price can reach the defined target.

Investment rationale by the brokerage-

Supreme Industries offers a wide range of plastic products in moulded furniture, storage & material handling products, XF films and products, performance films, industrial moulded products, protective packaging products, composite plastic products, plastic piping system and petrochemicals.

Plastic pipes segment contributes around 54 per cent of total sales, followed by industrial 20 per cent, packaging 16 per cent, consumer 7 per cent and others including composite cylinders.

The comprehensive range of offerings has reduced dependency on anyone end-user industry.

The company has plans to increase the capacity to seven lakh tonnes by FY 2021 from the current capacity of five lakh tonnes. Most of the capex undertaken will be to make high value-added products that are expected to give operating profit margins of more than 17 per cent.

On the developmental front, a new plant to manufacture Industrial Components at Rajasthan has commenced commercial production during September 2018. Capacity at Roto Moulded products at Malanpur and at Kanpur has become operational. The Production of Furniture and Roto Moulded production at Telangana unit has also gone into production during Q2 FY19. The production of Foam products at the plant is expected to start in the quarter ending March 2019.

Post stabilisation of the goods and services tax regime, there is a steady formalisation of the economy, allowing capturing a higher market share. Also, prices of crude oil have come down and the rupee is showing some appreciation. As a result, prices of polymer, raw material for plastics producers, have come down from the high levels.

These developments should help in improving the profit margins going forward. Moreover, lower raw material prices are expected to reduce the requirement of working capital.

Risk: High competition in the industry and threat from substitute products & technology.

Valuation: Strong fundamentals and competitive advantages place Supreme Industries in a favourable position to bank on the robust long-term industry prospects.

Substitution of materials by plastic products for various applications and growth in key end-user industries are likely to drive the consumption of plastic products in India.

A diversified, innovative product basket with wide distribution reach across the country, a strong balance sheet and an experienced management team will bore well for the company.

We expect the stock to see a price target of Rs 1,242 in 8-10 months time frame on an expected P/Ex of 27.92 and FY20E EPS of 44.49.

Source: Economic Times