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Indian Plastic IndustryGrowth story to unfold; multiple levers at work

December 29, 2015

Sector Report

2

Sector Report – Indian Plastic Industry

Table of Contents

Page No.

Summary 3

Investment rational and outlook 3

Out take and analysis 4

Valuation and recommendation 5

Astral Poly Technik - Plumbing the long-term future growth (CMP Rs - 439; TP - Rs520; 18% upside)

Finolex Industries - Waiting in the wings (CMP - Rs297; TP - Rs410; 37% upside)

Nilkamal - Sitting Pretty… (CMP - Rs1,226; TP - Rs1,595; 30% upside)

Supreme industries - Signed, Sealed and Delivered (CMP – Rs680; TP - Rs865; 27% upside)

Indian Plastic Industry: Journey so far... 6

Type of plastics 13

Indian Piping industry 17

Company Section

Astral Poly Technik 27

Finolex Industries 37

Nilkamal 47

Supreme industries 59

Disclaimer 70

Disclosures 71

COMPANY

REPORT

December 29, 2015

Indian Plastic Industry

Growth story to unfold; multiple levers at work

SECTOR

REPORT

Summary

We believe the structural story of Indian plastic industry is likely to remain robust over the next three to five years, due to favorable market

conditions, increasing scope of plastic application (automobiles, consumer and electronic appliances) and changing consumer preference towards

plastic products. In addition, low per capita consumption, strong replacement demand and huge opportunity under agriculture and construction

sector, indicates a multiyear growth story of plastic industry. Based on our analysis, we believe the industry is yet to realize its full potential,

which would play out well for the well organised players that we analysed. We initiate coverage with a positive bias on Astral Poly Technik,

Finolex Industries, Nilkamal and Supreme Industries.

Investment rationale and outlook

Indian plastic industry at a glance Plastics – One of the fastest growing industries in India (highly fragmented), has showcased phenomenal growth (11% CAGR) in the past decade

as the scope of plastic application increased significantly across major sectors due to their multiple benefits. It has outpaced the GDP growth by

1.5x on an average on a long term basis while the growth has been double the pace during better times. The top 100 players account for just

20% of the industry turnover. The industry also consumes recycled plastic, constituting about 30% of total consumption. Despite being an

industry dominated by unorganised players (70% of the industry size), the organised players outpaced them in terms of growth through constant

innovation and regular introduction of niche products thereby gradually increasing market share. The current per capita plastic consumption of

10kg v/s world’s 27kg, is an indication of the massive growth potential, which would propel India’s plastics consumption to new levels.

Structural drivers of sustainable growth for plastic industry We believe the Indian plastic industry (piping & other products) is well poised to see secular growth story over the long run, given the manifold

drivers such as (1) Government thrust on improving water infrastructure through centre & state sponsored programmes under irrigation

facilities and water linking projects (2) Increasing usage of plastic (v/s metals, wood products) across major sectors such as agriculture,

construction sector, household/electronic appliances and automobiles (3) Low per capital consumption in large population base of India (10kg

v/s world’s 27kg) (4) Strong replacement demand of plastic pipes over GI pipes (5) Infrastructure push – “Housing for all 2022, Toilets for all and

development of 100 smart cities”. Lastly, possibility of GST rollout in the coming years would bring cheers for the organised players.

Opportunities galore; bright future for well capitalised players Our analysis suggest that the players with healthy market share with niche product offerings, strong presence through distribution network and

brand image along with the continuous focus on product innovation and new launches would benefit the most. In addition, any positive

development on GST rollout could reduce the pricing gap between organized and unorganized players and renders the organized players’ pricing

equally attractive. This would shift consumer attention and preference towards quality branded products and help to gain market share from

unorganised players. We believe well established organised players such as Astral Poly, Finolex Industries, Nilkamal Limited and Supreme

Industries have a potential to grow faster than competitors and industry. Hence, we initiate the sector with a positive bias.

Table: Consolidated financial projections

Particulars Revenues (Rs mn) EBITDA (Rs mn) Adjusted PAT (Rs mn) EPS (Rs)

FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E

Astral Poly Technik 18,210 21,896 27,150 2,341 2,948 3,716 1,190 1,586 2,072 9.9 13.2 17.3

Finolex Industries 26,729 29,354 32,830 4,518 5,158 5,951 2,185 2,827 3,371 17.6 22.8 27.2

Nilkamal 20,898 23,175 26,241 2,340 2,668 3,114 1,073 1,291 1,575 71.9 86.5 105.6

Supreme Industries 45,648 52,880 63,956 6,944 7,968 9,544 3,405 4,105 5,136 26.8 32.3 40.4

Source: Company; IDBI Capital Research

Table: Valuation

Particulars CMP

(Rs)

Target

Price (Rs) Reco

P/E (x) RoE (%) RoCE (%)

FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E

Astral Poly Technik 439 520 BUY 44.2 33.2 25.4 17.0% 18.5% 20.1% 22.1% 24.4% 27.2%

Finolex Industries 297 410 BUY 16.9 13.0 10.9 25.2% 27.5% 27.8% 26.0% 28.3% 30.9%

Nilkamal 1,226 1,595 BUY 17.0 14.2 11.6 18.8% 19.1% 19.6% 23.9% 25.3% 27.5%

Supreme Industries 680 865 BUY 25.4 21.0 16.8 25.9% 26.5% 27.8% 28.5% 31.0% 34.0%


4


Our take and analysis

The stocks under our coverage have sustainable business model

Our stock universe consists of well capitalised players in highly competitive fragmented plastic industry with

each of the companies having a healthy market share, strong brand image and niche product segments, which

gives visibility and confidence to bet on the long term growth story. One interesting fact is that most of the

players have outpaced the industry growth at a double pace.

Wide distribution network; leading towards continuous product innovation

All the four companies are well established with strong product portfolio and ability to launch new innovative

and value added products in a timely manner, which adds significant value to their existing product-mix to

sustain and compete with rivals. The plastic industry is a combination of product innovation (in terms of design,

shape, attractiveness) and continuous new launches and the organised players are likely to benefit due to the

high advance technology, strategic tie-ups and better product-mix.

Continuous efforts to improve balance-sheet; Sufficient cashflow to entertain capex and repay debt

Table: Capex + Debt repayment = Enough cash cushion

Particulars Average (FY12 to FY15) D/E Ratio (x)

Operating cashflow Capex FY12 FY15

Astral Poly Rs880 mn Rs780 mn 0.4 0.2

Finolex Ind Rs2200 mn Rs720 mn 1.5 0.7

Nilkamal Limited Rs1050 mn Rs490 mn 0.8 0.3

Supreme Industries Rs4210 mn Rs1960 mn 0.5 0.5


Strong proven track record; potential to create shareholder’s wealth

The stocks under our coverage universe are backed by well qualified strong management team and good

corporate governance. In recent years, they have significantly ramped up capacities without leveraging their

balance-sheets (infact strengthened by repaying debt) and have accelerated earning performance through

various routes (organic/inorganic). Despite the tough economic conditions and subdued demand, these

companies have managed to sustain earning growth, margin profile and return ratios, reflecting the

management capability. Looking at the huge opportunities about to unfold in plastic industry, we believe these

companies have strong growth potential to create the shareholders wealth in the long run.

GST implementation – a value kicker for organised players

The implementation of the GST, in the coming years, could reduce the pricing gap between organized and

unorganized players and render the organized players’ pricing equally attractive. This would shift consumer

attention and preference towards quality branded products and help to gain market share from unorganised

players. Further, unorganised players are currently out of the tax net and enjoying lower costs by evading taxes,

which is likely to be diminished sharply post GST introduction and the market share of the organised players

would increase significantly.

Figure: Revenue CAGR (FY15-18E) Figure: PAT CAGR (FY15-18E)

Source: IDBI Capital Research Source: IDBI Capital Research

15%

10%

24%

11%

0%

5%

10%

15%

20%

25%

30%

Supreme Ind.Finolex Ind. Astral Poly. Nilkamal

(Re

ven

ue

CA

GR

)

18.0%

60.0%

35.0%

46.0%

0%

10%

20%

30%

40%

50%

60%

70%

Supreme Ind.Finolex Ind. Astral Poly. Nilkamal

(PA

T C

AG

R)


5

Valuation and recommendation

Astral Poly Technik (TP - Rs520; 18% upside)

Market reach and dominant position in organised CPVC product market will enable Astral to sustain the existing

leadership position in the domestic market and also help to exploit significant growth opportunities in the

coming years. A huge replacement demand, lower per capita plastic consumption in India and ongoing capacity

expansion plan along with the recent acquisition in adhesive business (asset-light model) would help the

company to report revenue and earnings CAGR of 24% and 35% respectively in FY15-18E. Currently, the stock is

trading at 33x/25x its FY17E/FY18E earnings respectively (against 5 years average P/E of 31x). We assign a 28x

P/E (considering superior brand image, healthy market share in CPVC market and competitive advantage over

peers) on its FY18E earnings, which translates the price target of Rs520 with a limited upside of 18% from

current level. Hence, we initiate our coverage on the stock with a BUY rating.

Finolex Industries (TP - Rs410; 37% upside)

With structural changes in business model, backward integration in place and shifting focus towards PVC pipe

manufacturing (B2C model) by capacity expansion in coming years, we expect the company to register a low

double-digit revenue growth (10% CAGR) while earnings are expected to increase substantially at 60% CAGR

during FY15-18E (mainly due to margin expansion and reduction in debt level). Currently, the stock is trading at

a P/E of 13/11x its FY17/18E earnings per share (at a steep discount to peers). We believe, the company should

command better valuation based on changing fundamentals, stability in earnings along with healthy free cash

flow generation and return ratios. Hence, we initiate our coverage on the stock with a BUY rating and a price

target of Rs410 (P/E of 15x on FY18E EPS).

Nilkamal Ltd. (TP - Rs1595; 30% upside)

Nilkamal passed through rough patches in recent years owing to lower capacity utilisation, loss in retail division

and levered balance sheet, which were affecting the overall financial performance. However, improving

fundamentals on the back of pick-up in volume growth, better operating leverage coupled with expected

synergy from retail business would help the company not only to accelerate profitability but also would help to

command better valuation broadly in line with the competitors. Currently, the stock is trading at 14x/12x its

FY17E/FY18E earnings (against a 3 years average P/E of 11x). Hence, we recommend BUY rating on the stock

and initiate our coverage with a price target of Rs1,595 on SOTP basis (30% upside).

Supreme industries (TP - Rs865; 27% upside)

Supreme's leadership position across all verticals, strong track record, consistency in financial performance and

sound management track record along with the sustainable margin profile and return ratios gives us confidence

to bet on the long term growth story. The company’s effort to continuously look for capacity expansion, healthy

cashflow generation and decent balance sheet in the highly competitive plastic industry along with the focus on

CPVC products would result into consolidated revenue and earning CAGR of 15% & 18% in FY15-18E,

respectively. At CMP, the stock trades at 21x/17x its FY17E/FY18E earnings (below 3/5 years average P/E of

22x/20x). Hence, we initiate the stock with a BUY rating on a SOTP basis for the target price of Rs865, an upside

of 27% from current level (21x FY18E EPS + Rs17/share stake in Supreme Petrochem).

6


Indian Plastic Industry: Journey so far...

Though India has highly populated country, it is still behind (U.S., China and Europe) few countries in plastic

consumption, as the per capita plastic consumption is just 10kg as of now (27kg world average); however,

approximately 30% of the plastics consumed in India are recycled. The Indian plastic market is very much

fragmented with a presence of over 30,000 companies, most of which are small to medium in size; however, the top

100 companies account for only 20% of the industry turnover. Gujarat is the leading plastics processing hub,

accounting the largest number of plastics manufacturers, with over 5,000 plastics firms. During 2000-11, Indian

plastic industry witnessed phenomenon growth of over 11% CAGR (v/s 3-4% globally). However, gloomy outlook,

depreciating rupee, rising commodity prices & slowdown in major plastic consuming sectors restricted the growth

pace in previous few years. One interesting fact is that it has outpaced the GDP growth by 1.5x on an average of long

term basis while grew at a double pace during better times. The low level of per capita plastics consumption in India

(10kg v/s world’s 27kg) is indicative of the massive growth potential of the plastic industry.

Globally, USA consumption has reached saturation level, while China’s higher levels of consumption are primarily

due to exports. India has the advantage of high population and is expected to maintain high economic growth. This

should propel India’s plastics consumption to new levels in coming years. In short, Indian plastics industry is yet to

realize its full potential & advantage of high population.

Diagram: Plastic: Value addition along the Petrochemical Chain



7

Structure of plastic industry

Diagram: Plastic industry value chain


The entire chain in the Plastic industry can be classified into (A) manufacturing of Polymers and is called

“upstream” and (B) conversion of polymers into plastic articles and is known as “downstream”. The domestic

upstream companies such as RIL, Indian Oil Corporation Ltd (IOC), Haldia Petrochemicals, BPCL and the Gas

Authority of India Ltd (GAIL) are the major producer of polymers in India while the downstream plastic

processing industry is highly fragmented and consists of micro, small and medium units. It is comprises of three

broad segments viz. Injection moulding, Blow moulding and Extrusion and caters to the requirements of a wide

array of applications like packaging, automobile, consumer durables, healthcare, etc.

Polymer (plastic) scenario & trend in India

Plastics, a material of the new generation, have been growing up faster than was expected. It registered rapid

growth in 1970s, 1980s and 1990s growing at the rate of 2-2.5 times the GDP growth. There is a strong relation

to polymer growth with GDP as it permeate the entire spectrum of daily use items and cover almost every

sphere of life like clothing, housing, construction, furniture, automobiles, household items, agriculture,

horticulture, irrigation, packaging, medical appliances, electronics and electrical etc. If we look at the history,

significant capex has been done by major petrochemical players due to rising demand across industries and

growing preference of usage over metals, wood products etc. 1990s witnessed rapid growth in capacity with

the entry of major domestic players in Polyvinyl Chloride (PVC) and subsequently in Polypropylene (PP) &

Polyethylene (PE). During the period, most of the polymer capacity additions through commissioning of new

plants and debottlenecking of existing facilities in India have essentially been to meet rising demand. The

demand witnessed 16% & 10% CAGR during 1991-01 and 2001-11, respectively. Since then, the scope for

application of plastics increased significantly and more and more sectors in the economy started using plastics

on account of their multiple benefits.

Table: GDP growth to petrochemical growth

Years GDP growth Polymer growth Import duty

1990-95 5.0% 12.9% 50%+

1995-00 6.5% 14.6% 40%

2000-04 5.9% 5.8% 15%-45%

2005-12 8.7% 10.9% 5%-12.5%

2012-17E* 8.0% 10.6% 5%-7.5%

2017-22E** 9.5% 10.4% 0%-5%

Source: PlastIndia, *12th Plan, **13th Plan

8


Though the industry has expanded along with expansion of diverse applications areas such as packaging,

extrusions, blow mouldings and industrial mouldings for automobiles, telecommunications, white goods, the

lower volume growth due to subdued economic environment, muted demand and negative consumer

sentiments restricted the plastic consumption during 2011-15 to 5% CAGR. But again, the opportunities are

opening up (due to strong infra push, uptick in industrial capex cycles and better consumer spending) with the

expansion and sophistication of food processing, automobiles, entertainment electronics and appliances.

Besides these, industry’s contributions towards vital areas such as rural electrification, telecommunication,

horticulture, medicare, apart from a perceptible change in living styles and standards, would also keep the

demand of polymer (plastics) intact.

As the polymers have found uses in all spheres of life with demand for better materials, greater functional

utility, more economical packaging and versatile and durable all-weather products, the gradual pick-up in

investment cycle, consumer spending and increasing use of plastic for packaging in FMCG, Pharma products

would drive the consumption of polymer to the tune of 20mn tonnes from 12.4mn tonnes in 2015-20E (to grow

at a 10% CAGR).

Figure: India - Polymer capacity trend Figure: India - Polymer demand trend

Source: PlastIndia, EMIS Source: PlastIndia, EMIS

Major polymer based raw materials

A variety of plastic raw materials are produced to meet the requirement of different sectors. The polymeric

materials categorised as commodity, engineering and specialty plastics. Commodity plastics comprise of

Polyethylene (PE), Polypropylene (PP), Polyvinyl Chloride (PVC) and Polystyrene while engineering exhibit

superior mechanical and thermal properties, which includes styrene derivatives (PS/EPS & SAN/ABS),

polycarbonate, Polymethyl methacrylate and polycarbonates etc. Major plastic materials like PE & PP are

derived from ethylene and propylene respectively while other PVC, PS & Acrylonitrile Butadiene Styrene (ABS)

and PC are produced from benzene, butadiene and other feedstocks.

Fig.: Demand break-up of polymer by types Fig.: Break-up of major polymer mfng. capacity

Source: PlastIndia 2015 Source: PlastIndia 2015

0.9

3.3

4.8

10.4

15.2

0

2

4

6

8

10

12

14

16

90-91 00-01 05-06 13-14 17-18E

(mn

MT)

0.9

3.9

6.2

10.3 11.312.4

16.5

20.0

0

5

10

15

20

25

90-91 00-01 05-06 10-11 13-14 14-15 17-18E19-20E

(mn

MT)

PVC28%

PP24%

HDPE20%

LLDPE18%

LDPE5%

PS3%

Others2%

0.2

1.0

1.8

4.1

1.3

0.6

1.5

0.6

2.0

3.1

5.0

1.4

0.6

2.5

0

1

2

3

4

5

6

LDPE LLDPE HDPE PP PVC PS PET

(mn

to

nn

es)

2013-14 2017-18E


9

Figure: Key polymer supplier in India

2013-14 (10.4mn tonnes)

2017-18E (15.2 mn tonnes)

Source: PlastIndia 2015

India – key raw material imports

India is overall deficit in PE, PVC and engineering plastics, which are imported to cater the unmet domestic

demand. The major import source countries are Saudi Arabia, Qatar, UAE, Korea, USA, Singapore, Thailand,

Germany, Spain and Malaysia.

Fig.: Major polymer imports (mn tonnes) Fig.: Country-wise polymer imports

Source: IDBI Capital Research Source: IDBI Capital Research

Polymer – user industry penetration

India holds immense potential for use of plastic in Agriculture and Infrastructure. Packaging industry in India

has seen a strong penetration of plastics as compared to global standards. However, agriculture sector hasn't

yet explored the benefits of plastics to a large extent. Global average for plastics demand in agriculture is ~8%

while India has substantially lower at only 2%.

Figure: Penetration level

Source: FICCI Report

RIL, 47%

Haldia, 11%

IOC, 12%

GAIL, 5%

HMEL, 4%

Others, 21%

RIL, 43%

Haldia, 7%

IOC, 8%GAIL, 6%

HMEL, 3%

OPal, 9%

MRPL, 3%

Others, 21%

PVC, 1.2

LDPE, 0.3

LD/LLDPE, 0.5

HDPE, 0.4

PP, 0.4

EVA, 0.1

S.Arabia, Qatar,UAE36%

Korea15%

Taiwan12%Singapore

5%

USA5%

Thailand4%

China4%

Others19%

35%

25%

17%15%

8%

43%

21%

16%18%

2%

0%

10%

20%

30%

40%

50%

Packaging Infra Auto Others Agri

Global average India

10


Table: Growth Driver of Polymer Industry

Packaging Automotive Appliances Agriculture–

Plasticulture Infrastructure

Polymers

consumption in

Packaging – 5.2 MT

(2011) to reach 10

MT by 2020

1)USD155 bn, 2nd

fastest growing

market, 2) Polymer

penetration 70kg

(Passenger vehical,

3) Polymer

consumption 0.3 MT.

1)$10Bn, Growing at 15%,

2)Washing Machines

(Semi Auto) largest

penetration ~15kg,

3)Polymer consumption

~0.23 MT.

Plasticulture – The

emerging sector in

India

Infrastructure in 2020 –

Polymer Consumption

expected to touch 5 MT

>60% of the

polymers

consumed in India

are used for

Packaging

applications

Increasing

penetration per

vehicle is the key for

future growth.

Increase penetration of

Appliance will drive the

polymer consumption

growth

Growing awareness

will drive

consumption growth

in Agriculture Sector.

Polymers playing a

pivotal role in

Infrastructure

development

Key sectors Key Growth drivers Key Growth drivers Key Growth drivers Key Growth drivers

Food, Processed

foods

Low vehicle

penetration

Low penetration level in

India Green houses

Building and

Construction

FMCG items Rising income levels Untapped rural market Crop / Fruit covers Mega highway projects

Cosmetics Growing middle class Faster replacement cycle Drip irrigation Rural electrification

projects

Source: IDBI Capital Research

Downstream industry: Methods of plastic processing

To manufacture finished products, polymers are processed through various types of techniques namely

extrusion, injection moulding, blow moulding and roto moulding. Extrusion process is the most commonly used

process in India and accounts for ~64% of total consumption by downstream plastic processing industries.

Various products manufactured through these processes are highlighted in the following table.

Table: Techniques & consumption pattern

Particulars Products Plastic Consumption Processing

Technology Characteristics

Extrusion

Films and Sheets, Fiber and Filaments

Pipes, Conduits and profiles,

Miscellaneous applications

64% 28%

Continuous;

uniformly solid or

hollow, complex

cross sections,

wide tolerances

Injection

Moulding

Industrial Injection Moulding,

Household Injection, Moulding and

Thermoware/ Moulded luggage

32% 64%

Complex shapes

of various sizes,

thin walls, good

dimension

accuracy

Blow

Moulding

Bottles, containers, Toys and

Housewares 4% 8%

Hollow, thin-

walled parts and

bottles of various

sizes

Source: Plastmart India


11

Diagram: Forming and Shaping Processes for Plastics, Elastomers, and Composite Materials

(TP = Thermoplastics; TS = Thermoset; E = Elastomer)

Source: Manufacturing, Engineering & Technology, fifth edition, Industry report

Table: Comparative production characteristics of moulding methods

Moulding methods Equipment/tooling cost Production

Rate Economical quantity

Extrusion M-L VH-H VH

Injection moulding VH VH VH

Rotational moulding M M-L M

Blow moulding M H-M H

Compression moulding H-M M H-M

Transfer moulding H M VH

Thermoforming M-L M-L H-M

Casting M-L M-L L

VH- Very High, H- High, M-Medium, L-Low

Source: Industry report

12


Table: No. of machines and new machine additions expected…

Categories Total no. of machines till date New additions expected

CAGR 2001 2010 2014 2015 2017E 2018E 2024E

Injection Moulding 31020 51598 76810 78298 6450 7250 14500 12%

Blow Moulding 4843 7300 9450 11200 600 660 1250 11%

Extrusion 15905 25938 33090 36138 1925 2200 3950 11%

No. of machines 51768 84836 119350 125636 9025 10110 19700 12%

Source: PlastIndia 2015, Industry report

As shown in the above table, more than 33,000 new machines were installed in the domestic processing sector

during the 2001-10. Consequently, processing capacity more than doubled from ~8.2mn tonnes in 2001-02 to

~19.2mn tonnes in 2009-10, adding additional capacity of ~11mn tonnes during the decade with investments of

over Rs100 bn. The total no. of machines addition growth was nearly 7% CAGR during 2001-14 while the

installed capacity and polymer consumption grew by 10% CAGR over the same period.

Figure: Installed capacity trend across categories.....

Source: PlastIndia

2.00.5

5.78.2

5.2

0.9

13.1

19.2

10.4

1.4

21.1

32.9

0

5

10

15

20

25

30

35

Injection Moulding Blow Moulding Extrusion Total Capacity

(mn

to

nn

es)

2001 2010 2014


13

Type of plastics

The plastics industry comprises thermoplastics (covers 70% of plastic market) and thermosets. Thermoplastics are

generally defined as plastics which soften when heated. Thermosets in contrast are completely infusible and are

generally made from two reactive components which harden or “cure” during the reaction. The thermoset resins

market is approximately one third of the size of the thermoplastics market. The thermoplastics industry is divided

broadly into (1) commodity (2) engineering plastics while Thermoset materials include unsaturated polyesters (UP)

and phenol-formaldehyde (PF), which is used in end use markets, include plywood adhesives, furniture/bedding,

building & construction, automotive, consumer products and electronics.

Commodity plastic

Commodity plastics are generally characterized by low price and properties not suitable for durable, demanding

applications without the use of additives, reinforcing fillers, fibers or polymer blends. It is used in high volume

and wide range of applications, such as film for packaging, photographic and magnetic tape, clothing, beverage

and trash containers and a variety of household products where mechanical properties and service

environments are not critical. Such plastics exhibit relatively low mechanical properties and are of low cost. It

comprising of Polyethylene (PE), Polypropylene (PP), Polyvinyl Chloride (PVC) and Polystyrene account for bulk

of the plastic consumption in India. Commodity plastics are used for consumer goods (i.e. food storage), are

more readily available and generally have lower mechanical properties. 80%-85% of all thermoplastics are

commodity, balance are engineered.

Diagram: Usage of commodity plastic in different segments

Source: PlastIndia

Table: Usage in product-line

Polymer Application in different products

PE Bread bags, Frozen food bags, Grocery bags, Milk, Water, Juice container, toys, Liquid detergent bottles

PP Gasoline tanks, chemical tanks, luggage, battery cases, ropes, fibers or filaments, Consumer products

PVC Plumbing products/ hardware, outdoor signs, food packaging, shampoo bottles

Source: Commodity thermoplastic industry report

Engineering plastic – Substantial growth potential

Engineering plastics are much more robust in their properties and more expensive. Typically, they are used in

niche and demanding applications in contrast to the large volume single-use markets occupied by commodity

plastics. The engineering plastic product has a significant potential and offer tremendous opportunities on

account of wide range of applications in different sectors. It comprises of Acrylonitrile butadiene styrene (ABS),

Polyethylene terephthalate (PET), polycarbonates (PC) and a range of polyamides or nylons. Engineered plastics

used for durable goods, have better mechanical properties or “special” property.

Untapped opportunities exist for metal replacement in cars, trucks, consumer appliances as well as other

applications. Automotive industry is the major end user (43% of total engineering plastic), followed by

packaging and electronic industry in India. According to Ken research, Indian engineering plastic has

considerably enhanced at a healthy CAGR of 25% in FY09-14 and further to grow at a 21.7% CAGR in FY14-19E,

due to its ability to replace traditional materials such as metal, woods which is used in various end user

industries (possess features of good chemical resistance, high dimensional stability and heat tensile strength).

In Asia pacific, India is likely to see strong growth of 21.7% CAGR against China (15% CAGR in FY13-18E) and

Japan (1.7% CAGR in FY13-18E).

14


Table: Players offering industrial niche products

Players Products

Supreme Industries Plastic parts & bodies, Crates, pallets, racks, bins, Composite cylinder & pipes

Time Technoplast Drums, containers, Polyethylene Terephthalate (PET) sheets, road barriers

Precision Pipes Weather strips, Body Side Moldings, Roof Trims, Windshield Moldings

Sintex Industries Ltd. Injection Molding, Gas Assist Injection & Blow Molding, Vacuum Forming

Machino Plastic Injection moulded automotive such as bumpers, instruments panels, grills etc


Fig.: India- Engineering plastic market size trend Fig.: India - Engineering plastic end user industry

Source: Ken Research, EMIS Source: Ken Research, EMIS

The major engineering plastic products consumed by auto component and electronics in India, which is

expected to grow at a CAGR of 16% to USD4,751 bn (from USD 2,262bn) and 18.5% to USD77.2bn (from

USD33bn) in FY14-19E, respectively (Source: Automotive component manufacturer association of India,

Electronic industry association of India).

Region-wise plastic consumption in India

Western India has traditionally been the largest consumer of plastics (accounting 47% of total consumption) in

India followed by Northern region. Western region comprises of Maharashtra, Gujarat, and the union

territories of Daman and Diu & Dadra and Nagar haveli along with Madhya Pradesh and Chhattisgarh while

northern area comprises of J&K, Himachal Pradesh, Punjab, Haryana, Uttarakhand, Rajasthan, UP, Delhi, and

NCR region.

Fig.: India - Plastic consumption by region Fig.: Overall plastic consumption by industry

Source: FICCI, Knowledge paper Source: EMIS

1014 16

1924

30

36

44

52

0

10

20

30

40

50

60

FY11 FY12 FY13 FY14 FY15 FY16EFY17EFY18EFY19E

(USD

bn

)

Automotive & transports

43%Electrical & electronics

applications23%

Consumer & appliances

15%

Industrial machinery

10%

Packaging Industry

6%

Others3%

47%

23%

21%

9%

0% 10% 20% 30% 40% 50%

West

North

South

EastAgriculture

20%

Packaging25%

Electricals12%

Houseware8%

Footware10%

Buildings10%

Others15%


15

Table: Main end-user markets for the polymer and plastics industry

End-user market Examples of products

Agriculture/horticulture Sheeting and twine for agricultural purposes

Automotive/transport Car parts, body panels, interior trim dashboard and elements of power-train

Construction/civil/industrial Drainage systems, double glazing profiles, guttering, waterproofing

Electrical/electronic Consumer goods, white goods, TV, computer and telephone components

Leisure Toys, sports equipment

Medical equipment/devices Drug delivery (catheters), sterile packaging

Packaging Food, Beverage, Pharma, wrapping film

Source: SQW Ltd/Rapra technology Ltd.

India – Huge untapped potential waiting…

Fig.: Per capita plastic consumption Fig.: Plastic Consumption by geographies

Source: CIPET; *Excl-Japan Source: CIPET; *Excl-Japan

Observation: Here, what we noted is that few polymer based raw materials are widely used across the

industries for various purposes. The major material such as PVC is the most largely used, followed by PP in India.

Both these materials have higher proportion of usage in Indian piping and automotive/consumer segments,

respectively. For instance, around 75% of PVC is consumed by pipes & fittings and the rest 25% by films, sheets,

wires, footwear in India while PE/PP has seen over 65% usage in automotive component/ consumer appliance

segments.

Based on these, here in our thematic report, we have here tried to touch up on the upcoming opportunities in

highly concentrated PVC based pipes & fitting segments and the available tremendous opportunities in different

plastic user sectors on account of wide range of applications.

109

65

45

10

3227

0

20

40

60

80

100

120

USA Europe China India Brazil World avg.

(kgs

)

N.America, 26

%

Western

Europe, 23%

Japan, 7%

Others, 14%

Asia*, 30%

16


Polyvinyl Chloride (PVC) market and statistics in India

Figure: PVC resin manufacturer in India


Fig.: PVC consumption by products Fig.: PVC consumption by segments

Source: RoyPlastech Source: RoyPlastech

0.65

0.270.23

0.09 0.085

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

RIL Finolex Ind Chemplast DCW Shriram Grp

(mn

to

nn

es)

Pipes, 71%Profiles, 3%

Calender, 7%

Wires & cables, 7%

Films, 5%

Footwear, 2%

fittings, 3% Others, 2%

Water supply, 44%

Irrigation, 28%

Sewerage, 12%

Plumbing, 12%

Flexible, 4%


17

Indian Piping industry

The Indian pipes business has been growing rapidly since the past several years mainly due to increasing demand for

pipes in the irrigation sector and construction industry. Among the several varieties of pipes

(PVC/CPVC/SWR/Rigid/Agri/PE/PP) available in the market, the demand for plastic pipes such as PVC, CPVC in

particular, is on a rise significantly due to (1) Gaining popularity of plastic pipes over traditional/GI pipes (2) Huge

replacement demand (3) Flexibility in terms of transportation, less corrosive and long lasting life (25 years v/s 8-10

years of GI pipes) and lastly (4) Easy installation and competitive price in nature (20-25% cheaper over GI pipes).

Other types of pipes, like steel pipes and ductile iron pipes also have major demand. Nationwide infrastructural

development, urbanization, government’s focus on real estate, irrigation to drive the demand. Construction and

agricultural growth has been identified as major factors facilitating the growth of the pipes industry in the country.

Table: Pipes characteristic comparison

Polymer

Critical properties

Strength

(hoop)

Operating

temp. Pros & Cons Applications

UPVC 500-600 60-70 Very convenient but poor

quality solvent cement fails

Water supply, agri pipes,

SWR, Chem. Plants, Bore wells, Ducts

HDPE 350-400 90-100 Cumbersome, need special tools,

power dependent

Water supply, Gas, Effluents,

Sprinkler irrigation, large drains

LLDPE 300-350 80-90 Dripped can be fitted mainly drip irrigation laterals

CPVC 500 90-100 Very convenient but poor quality

solvent cement fails Hot water systems

PPR 300 100-110 Cumbersome, need special tools Hot water systems

Source: Royalplast

PVC piping segment

PVC piping industry in India is segmented into Rigid/Agriculture PVC, UPVC/flexible PVC and chlorinated PVC

pipes. PVC pipes and fittings market in India has grown at a CAGR of 12.5% during the period from FY09-14.

Production capacity for chlorinated PVC pipes and fittings have grown at a stupendous CAGR of 30.1% during

the period FY09-14 and are further expected to grow at a CAGR of 32.1% during FY14-19E. Although, CPVC

pipes and fittings contributed just ~10% to the overall production capacity in FY15, it is the fastest growing

segment of the PVC pipes and fittings industry in India. Irrigation and water supply together accounted for

more than 70% of the market revenue in FY15.

Diagram: History of PVC pipe

Source: RoyPlastech

18


Table: PVC pipe industry and market opportunities

PVC pipe

industry Market size Growth

Organised:

Unorganised Usage Applications Margins

Agriculture/

Rigid pipe Rs135 bn 10-12% 50:50 Farm land

Agriculture,

Irrigation Low

UPVC/SWR/

Drainage Rs 65 bn 15-20% 70:30 External

Residential,

Government projects,

Commercial

Better

CPVC Rs 2.5 bn Over 20% 70:30 Internal Residential,

Commercial, plumbing Best


The current piping industry size is Rs225 bn, of which Agri/Rigid PVC pipes constitutes 60% of the market

(growing at 10-12% CAGR) while UPVC/SWR/Drainage pipes accounts for 30-32% of overall industry size. The

remaining 8-10% of the industry is concentrated by fastest growing CPVC piping segment (over 20% CAGR).

Opportunities ahead: In the past few years, the government of India has initiated many new projects and

investments in the irrigation sector. The focus of the government is on rural water management, which will be

fulfilled only when there will be proper infrastructure for the transportation of water to the end-user. This

factor will remain as one of the major drivers for the growth of PVC pipe industry in the country along with the

expansion of housing sector and increasing replacement demand for CPVC. The PVC pipes and fittings market in

India is projected to register strong growth of 15% CAGR in FY15-19E and is expected to reach Rs391 bn in FY19E

as compared to Rs225 bn in FY15.

Table: Major pipe manufacturers in India

Companies Product offerings Capacity (tonnes) Business profile

Supreme

Industries PVC/CPVC pipes 300000

PVC pipes, HDPE, CPVC, fittings. Fittings contributes 30%

of total pipe business

Jain Irrigation MIS/PE/PP 100000+

Market share of 15% in organised market with presence in

rural water/Irrigation segment. Presence in gas, cable

duct, sewage & effluent disposal segment and entering

into CPVC segment.

Finolex

Industries Agri/Rigid/CPVC pipes 280000

Sells 70% pipes to irrigation/agri sector and 30% to

construction segment. Entered into CPVC market. Fitting

contributes 6-7% to overall revenues

Astral Poly CPVC/UPVC 100000

Fastest growing company with the technology tie-up with

Lubrizol to manufacture CPVC pipe systems. Enjoying

highest realization and brand name in CPVC

Ajay Ind.

Corp. CPVC/UPVC NA

Delhi based small player of CPVC,UPVC products;

Technology license cancelled in 2013 by Lubrizol

Ashirvad

Pipes CPVC/UPVC 20000

Banglore based manufacturer of UPVC, CPVC, SWR

pipes/fittings. Only the company after Astral having

Lubrizol technology for flowguard. Leading player in the

borewell segment.

Prince Piping

System SWR/Drainage/PVC/CPVC 165000

Mumbai based company - Prince is king in SWR, GI and

Agri pipes across India. Strong presence in projects, real

estate developers, Industries. Entered into CPVC pipe

business in 2013. Well accepted brand in pipe market.

*NA-Not Available


Few players such as Ajay Industrial Corporation and Astral Poly have started offering SWR/drainage pipe in

recent years to increase the product range and market opportunity.


19

Table: Players with key focus areas

Region Players States

West Astral, Finolex, Prince pipes, Supreme, Jain, Paras group, Dutron Maharashtra, Pune

South Astral, Finolex, Supreme, Ashirwad pipes, Nandi pipes, Prince pipes A.P., Karnataka and Kerala

North Finolex, Supreme, Ajay Ind. Corp., Prince pipes, Vectus U.P., Haryana, Madhya Pradesh

East Finolex, Supreme, other local players Odisha


Agriculture/Rigid pipe segment – Opportunity continues

Though India holds one of the largest agricultural land in the world and create significant piping demand (over

60% of overall PVC piping industry), it covers only 44% of land under irrigation (out of total 157.35 mn hectares)

while remaining land is still dependent on natural water (rain fed). The Indian agriculture piping industry is

highly fragmented due to presence of large chunk of players, giving tough competition both on product

offerings and pricing terms. In addition, the main reason of low yield or margins in this segment is due to the

less proportion of fitting in usage, compare to plumbing segment. There are few organised players operating

with significant presence through wide distribution network, strong quality product portfolio. The Finolex

industry is a leader in PVC piping segment, followed by Supreme Industries, Jain irrigation, kisan moulding

among others.

Plastics are playing a major role in managing the water resources. The various applications of plastics in

water management includes plastic rain water collection tanks, pipes, profiles; waste water applications

(waste water treatment plants); plastic pipes for water transportation (PVC, HDPE, LLDPE, PP, FRP) etc.

Plastic products in water management are being used as compared to various alternate competitive

materials like metal, cement, due to light and weight durability, rust free, smoother surface etc.

Ministry of Water Resources is responsible for laying down policy guidelines for water conservation. PVC

pipes and fittings having BIS certification is being used in various water/sewerage transportation

applications in various private/government supplies.

The Government of India has launched various programs in the agriculture sector to focus on water supply,

which will only be fulfilled with effective use of pipelines. The thrust on bringing more area under irrigation (by

linking rivers for ensuring optimal water resources) to improve farm yield and production through minimal

water consumption would drive the demand.

The recent initiatives by the NDA government:

Government’s focus on increasing irrigation opportunity in non rain-fed areas through the Rs500 bn

allocated to PMKSY (2016-20E).

Increased allocation of agriculture loan and investments in rural infrastructure to Rs8.5 lakh crore.

Plumbing pipes – A future lies here

Though the plumbing segment (SWR/Drainage/CPVC/UPVC) constitutes nearly 30% of PVC piping segment in

India, it is getting strong traction and growing faster due to the inherent features, widely accepted products

across plumbers, architect community. Strong replacement demand, gaining popularity over GI pipes, high

durability and easy installation made it more prominent product in recent years. The branding awareness and

better quality product-mix helped the organised players to eat the market share of unorganised players.

The various applications of plastics in building/ construction includes PP cut fibres for concrete structures,

materials handling equipment, fencing, PVC windows and doors, pipes for hot and cold plumbing, PVC pipes for

soil & waste drainage/rain water harvesting/electrical conduits, water and septic tanks, furniture, PVC/PC/FRP

roofing, wire and cables etc.

Key growth drivers: Government initiatives under the program of “Housing for All by 2022” to provide 20 mn

houses in urban areas and 40 mn houses in rural areas and create “100 smart cities” would surge the demand

of building materials products. Further, huge replacement demand and shifting preference towards branded

plastic pipes would keep the demand intact in the long run.

20


CPVC pipe – gaining popularity day by day

There are 3 leading polymers which are used for hot water piping systems in construction:

Chlorinated PVC – Most popular in India

PPR (Random Poly Propylene Copolymer) – Used extensively in China, Far East and Europe

Polybutadiene – Floor embedded Hot Water heating systems in cold climates like North America and

Europe.

How CPVC Pipes have evolved in India?

CPVC opens the market for hot water systems in plumbing and hot, corrosive liquids in Chemical Plants, which

was previously shut to PVC. Though the major property improvement of CPVC over PVC is increase in heat

resistance, the mechanical properties and chemical resistance are still comparable. The maximum operating

temperature of PVC is 60C and softening point is 70C, for CPVC, it is 85C-100C respectively, due to which it is

widely accepted.

Features of CPVC pipe

CPVC is one of the safest polymers from the flammability hazard point of view.

The chlorine content may go up to 70% in some grades of CPVC. It does not need any additional fire

retardant additives and no flammable plasticisers are used in its compounding.

Only the Fluorinated Polymers like PTFE have better flammability performance.

Table: Hot Water Pipe System Comparison – CPVC product over others

Features CPVC GI Copper PP-R

Leakage

Leakfree installation for

the entire life span of the

piping system

Leakfree provided carried

out by highly trained

manpower

Always susceptible to

leakage from day one of

installation

Relatively leak free

provided high degree of

skilled man power is

employed

Thermal

expansion

Lower, leads to less pipe

expansions, less looping

and offsets.

Although thermal

expansion is lower, the

stresses induced are far

greater.

Although thermal

expansion is lower, the

stresses induced are far

greater.

Higher expansion

requires more

looping/offsets

Range of

fittings

Wide fitting range makes

layout easier and

compact for the

architects, consultants

and builders, end users

etc

Limited range of fittings

involves frequent

cutting/welding to

achieve the desired

layout

Limited range of fittings Nominal fitting range

Special

Tools

Simple cutter or Hex- saw

blade and CPVC solvent

cement is adequate for

100% leak-proof joint and

satisfactory plumbing.

Needs special tools like

metal cutting flame torch,

solder, flux etc. to carry

out the desired plumbing

Needs heavy tools for

pipe cuttings, threading

Needs special electrical

heater to achieve the

desired hot welded joint.

Any failure can result in

poor plumbing

Source: RoyPlastech

The increased awareness of CPVC products both within and outside the country gives a boost to the

replacement demand for various products. In many old constructions where metallic pipes need to be replaced

because of the problems of corrosion, scaling and rusting, CPVC pipes and fittings are used. The increasing

brand consciousness amongst the builders, architects, plumbers and consumers helped most of the CPVC pipe

manufacturer to grow at a faster rate in recent years.

CPVC pipe market in India

Few players standing tall in highly competitive industry: There are large number of players operating under

this segment such as Astral Poly, Ashirwad pipes, Ajay Industrial Corporation, Supreme Industries, Prince piping,

Superflow, Paras, Dutron, Nandi pipes and Waterflow and many more. Among these, Astral poly and Ashirwad

are the leader in CPVC product market and enjoying higher premium prices over others. Superior product

portfolio, continuous new innovative product launches, higher spend on branding and promotional activities

helped them to achieve pioneer position in highly competitive segment. Their products are also widely

accepted by the end-users.


21

Long standing relationship with raw material suppliers –a key feature: As the availability of key raw material –

CPVC resin is a constraint in India, most of the players have entered into long term arrangement with foreign

suppliers (renewing agreements in every three years). There are few players such as Lubrizol Corporation (U.S.),

Kaneka and Sekisui Chemical Co (Japan), Arkema of France and various Chinese players. Astral poly and

Ashirwad with Lubrizol, Supreme with Kaneka.

Organised players continue to gain share: Increasing awareness amongst end-users, quality product offerings

and strong distribution network helped most of the large players to improve the market share (Organised

market share increased from 50% to now 70%). In CPVC market, the three major players cover 70% of the total

market value, due to quality product offering (Astral enjoys 3o-35% market share). The recent cancellation of

technical license with Ajay Industrial Corporation by Lubrizol would help to capture market share to other big

players such as Astral poly and Ashirwad pipes.

It’s a game of high share of fittings; better margins: Plumbing products finds application in building,

commercial, malls and construction segments, where the usage of fittings are higher compared to agriculture

segments, which helps the company to generate better margins. As per the industry, the usage of pipes and

fittings in plumbing segment are 65:35 with an operating margin of 7-8%: 25%, respectively.

Shifting focus towards branded premium products: In recent years, the CPVC market has seen tremendous

traction of shifting preference towards branded premium products (inspite of price differentiation of 30-40%).

Our channel check suggests that strong branding and regular product campaigning through plumbers meet

(educating them about the products along with small prizes, gifts to encourage them) and wide distribution

network helped few players to pocket a wallet share and create a strong reputation in the customer’s eyes.

Astral and Ashirwad (flowguard players) are the preferred brand now a day at project, architect and plumber’s

community. It is widely accepted in the end-user industry while non-flowguard players such as Supreme

Industries is well placed with its quality product-mix, reasonable product prices compared to other unorganised

players (for those quality conscious consumers wants to stick with medium range products).

Strong replacement demand: CPVC pipes have seen strong demand in construction industry due to its best

features of carrying hot water without any damage to the pipes. Around 50% of CPVC pipe demand comes from

replacement (over GI pipes through renovation and refurbishment of house) while new construction prefers to

install PVC/CPVC pipes.

Table: Piping players key matrix

Players CPVC presence Distribution reach Promotions Frequency of product launches

Astral Poly 100% Very strong High Excellent

Ashirwad pipes 100% Strong Medium Good

Ajay Ind. Corp. 100% Average Average Medium

Supreme Ind. 15% Strong Medium Good

Finolex Ind. 10% Medium Medium Medium

Prince pipes 43% Very strong High Excellent

Source: IDBI Research Capital

Observation: Among these, Astral poly and Ashirwad are the leaders in CPVC products and enjoy premium

pricing power. In addition, both of them have strong raw material back-up supply through technical

collaboration with Lubrizol (US – world’s best quality raw material supplier). As per the industry sources, they

are directly associated with Lubrizol since a decade and sharing healthy relationship but they have to renew

their agreement in every three years for the raw material procurement.

Astral Poly, a listed player today has wide range of portfolio in pipes and fittings. The company continues its

endeavours to increase its operational efficiency and its innovativeness by bringing out new value added

products in the market thereby building sustainable competitive edge over others. The main thrust is on

product innovation and diversification. Its strategic alliance with Speciality Process LLC, USA, continues to play a

significant role in its growth.

22


Plastic moulded furniture business and material handling industry

The furniture market in India has historically witnessed a prolific boom in the country. There were a number of

factors which have led to a growth in furniture demand in the Indian households in the last few years. The

growing economy of the country has encouraged the spending capacity of the people, which in turn has

impelled the sales of branded furniture items in the market. The growing phase of infrastructure and real estate

markets has also augmented the demand for furniture products in the country. In the organised retail segment,

the market is occupied by leading companies, such as Godrej Interio, Home Centre, Home Décor, Nilkamal,

Wimplast, Durian Furniture and Style Spa among others, which have over the years grabbed significant

positioning in the domestic market. Furthermore, the entry of international brands and increasing brand

awareness amongst Indian inhabitants in the recent years has led to the emergence of furniture retailing in

India.

The furniture market in India is highly fragmented (85% unorganised) with majority of the revenue being

generated from the local players. The unorganised sector, which includes onsite carpenters, independent

furniture manufacturers and domestic retailers have accounted for majority of the furniture market revenue in

the country. In the recent years, moulded plastic furniture has been widely purchased by the households in

India. In order to cater to the rising requirements of online shopping in the country, a number of companies

have stepped a foot in the online channel of furniture market and increased their presence in tier II & III cities.

For instance, leading offline retailer of readymade furniture products named @home, which is a flagship brand

of Nilkamal has launched its online shopping portal for the exclusive range of @home furniture, furnishings and

home décor items.

Plastic moulded furniture has virtually exploded in the Indian scenario and from a stage of infancy the field has

risen to almost 70 million in volume, consuming almost 170 kilo tonne of polypropylene material. The

popularity of plastic furniture has grown since it offers features unavailable in conventional wooden and metal

furniture, such as easy maintenance, light weight, durability and various attractive features (such as shapes,

designs). Plastic furniture is essentially based on composition of polypropylene (PP) which contains hopolymer

to provide rigidity and copolymer to lend impact. There exist around 30 producers of PP chairs in India though

30% of the top producers corner almost 75% of the market share. Nilkamal Plastics and Supreme Industries

reign as the market leaders in this field. Plastic moulded furniture could be labelled as environment friendly

since it contributes immensely in saving forests. The prices of plastic furniture have reduced over the years and

a simple plastic chair is available at a price of Rs300-400, whereas a value-added luxurious chair which would

cost around Rs1,500-2,000 (Source: Plastemart).

The moulded plastic furniture business is rapidly expanding across the world including India. Now a day, it is

widely accepted both in home furnishing and institutional/corporate offices while increasing no. of malls,

capacity expansion plans by corporate, shifting focus towards usage of plastic crates, pallets, computer trolleys

against steel products will fuel the demand for plastic material handling products (from steel-made materials to

plastic-made materials due to inherent nature of flexible transportation particularly in FMCG, pharmaceutical

and auto sectors).

Figure: Furniture market in India

Source: Industry Report

360540

650 710888

1109

1387

1733

2167

2708

0

500

1000

1500

2000

2500

3000

FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E

(Rs

bn

)


23

The Indian retail industry is estimated to grow at a compounded annual growth rate (CAGR) of 8.4% between

FY15-20E while organised retail market is likely to witness a strong CAGR of 23.6% by FY20E (Source: Deloitte,

E&Y). At the same time, the Indian furniture market grew at a CAGR of 17.2% during FY08-13, which is expected

to see 25% CAGR growth in FY13-18E.The furniture market is estimated to be worth more than Rs2,167 bn

(moulded furniture market is Rs20 bn).The organised sector is growing at about 30% CAGR. The furniture

segment comprises 65% of the home market and 35% of institutional demand.

RM pricing trend

Fig.: Crude Oil price trend Fig.: PVC price trend

Source: Bloomberg Source: Bloomberg

Fig.: Polypropylene (PP) price trend Fig.: Polyethylene (PE) price trend


0

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24


Table: Financial performance of stocks under our coverage in FY15 (Rs mn)

Particulars Revenues EBITDA (%) PAT (%) P/E D/E RoE RoCE Fixed A/O

Astral Poly Technik 14,290 11.8% 5.9% 62 0.2 13.7% 17.4% 3.9

Finolex Industries 24,761 8.6% 3.3% - 0.7 6.0% 9.0% 2.8

Nilkamal 18,946 8.2% 2.7% 30 0.3 9.6% 13.7% 6.2

Supreme Industries 42,552 15.7% 7.3% 26 0.5 25.7% 27.9% 4.0 Source: Company, IDBI Capital Research

Valuation: 2 year forward P/E chart of stocks

Fig.: Astral Poly Technik Fig.: Finolex Industries


Fig.: Nilkamal Fig.: Supreme Industries


0.00

100.00

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ar-0

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Company Report – Thermax

Company Section

This page is intentionally left blank

COMPANY

REPORT

Summary

Astral Poly Technik Ltd. (Astral), an extremely well capitalised PVC piping player, has created superior position in the Indian plumbing market with its strong distribution channels, strategic tie-ups (technology) and wide range of products for home and industrial applications. During FY12-15, it reported revenue/earnings CAGR of 35%/24% respectively and maintained its EBITDA margin and RoE (barring FY2015) over 14% and 30%, respectively. Going forward, it’s leadership position in the CPVC market, capacity expansion, huge replacement demand along with operational efficiency (due to easy raw material access from Lubrizol’s Gujarat plant) and synergy from adhesive entities would accelerate the revenue/earnings pace (24%/35% CAGR in FY15-18E). It has recently entered into Agri piping/SWR drainage system to grab the upcoming opportunities under government’s various programs. It diluted 6.5% equity to fund the acquisition in FY15, which would be EPS accretive and generate strong cashflow due to asset light model. The stock currently trades at P/E of 33x/25x its FY17/18 EPS (v/s 5 years average P/E of 31x). Initiate with a BUY (TP of Rs520; 18% upside).


50% capacity expansion by FY18; opportunity galore Astral – a leader in CPVC pipe with an overall market share of 30-35% is adding 50,000MT capacity (an increase of 50%) in the next 2-3 years, to grab the opportunity of increasing usage of PVC/CPVC products on the back of shifting preference towards branded products and huge replacement demand. It is continuously focusing on innovative product launches through strong promotional activities. Being a leader with strong B2C model and extensive distribution network – over 700 distributors and 23,000 retail points, we believe Astral will get first-mover advantage.

Synergy through new acquisitions; adhesive business to add flavour The entry into adhesive and sealant industry by two recent acquisitions with an intention, (1) to diversify revenue stream (de-risking dependency on piping business), (2) bring more synergy in product offerings and (3) leverage their strong distribution channels and geographic reach to push its existing products in the untapped markets (north & east India and neighboring countries) would improve cash flow generation and return ratios (due to asset light model). It is almost doubling its Resinovo capacity upto 45,000MT by FY17 (additional revenue potential of Rs4 bn projected) as the management is quite hopeful to get strong traction in the coming years.

Better operating performance - Low RMC to accelerate earnings and ratios A key RM supplier - Lubrizol’s CPVC compounding plant in Gujarat (operational by Jan 2016) will feed 60% of raw material (for CPVC) requirement, thus, will eliminate currency risk fluctuation and reduce the working capital (low inventory days due to easy availability). In addition, better capacity utilization due to economic recovery and synergy from cost savings would improve OPM (nearly 200bps by FY18) and increase the earnings by 35% CAGR in FY15-18E.

New acquisition is EPS accretive despite 6.5% equity dilution; free cashflow to improve The acquisition of Resinova (by diluting 5.3% earlier+ 1.2% recently) would be EPS accretive due to asset light model and higher returns. Resinova is now 100% wholly owned subsidiary for Astral. Post current dilution (Nov 15), the equity capital would increased to Rs11.97 mn, while EPS would see acceleration from the first year of consolidation (20% incremental earnings post dilution).

Negligible debt level; strong traction in return ratios ahead

It is well placed to fund the required capital expenditure (capex) without much leveraging balance

sheet, due to better working capital management (inventory days to reduce further) and sufficient

free cash flow generation. In addition, better capacity utilisation, improvement in margins (due to

low/stable RMC) along with lean D/E ratio (0.2x) would help to showcase healthy return ratios.

December 29, 2015

Astral Poly Technik Ltd.

Plumbing the long-term future growth

CMP Rs439

Target Price Rs520

Potential Upside/Downside +18%

Relative to Sensex

Source: Capitaline

BUY

Nifty: 7,925; Sensex: 26,034

Sector Plastic Building Material

Bloomberg / Reuters ASTRA IN / ASPT.BO

Shares o/s (mn) 120

Market cap. (Rs mn) 52,710

Market cap. (US$ mn) 793

3-m daily average vol. 3,672

Key Stock Data

52-week high/low Rs534/311

-1m -3m -12m

Absolute (%) 6 5 13

Rel to Sensex (%) 6 3 18

Price Performance

Promoters 60.0

FIIs/NRIs/OCBs/GDR 20.0

MFs/Banks/FIs 5.5

Non Promoter Corporate 2.2

Public & Others 12.3

Shareholding Pattern (%)

COMPANY

REPORT

Table: Financial snapshot (Rs mn)

Year Revenue EBITDA EBITDA (%) Adj. PAT EPS (Rs) P/E (x) EV/EBITDA (x) RoE (%) RoCE (%)

FY15 14,299 1,683 11.8 847 7.1 62.1 32.0 18.1 21.7

FY16E* 18,210 2,341 12.9 1,190 9.9 44.2 23.1 17.0 22.1

FY17E 21,896 2,948 13.5 1,586 13.2 33.2 18.2 18.5 24.4

FY18E 27,150 3,716 13.7 2,072 17.3 25.4 14.3 20.1 27.2

*YoY not comparable due to consolidation of adhesive business in FY15 for 5 months only


80

90

100

110

120

130

Sep

-14

Oct

-14

No

v-14

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-15

May

-15

Jun

-15

Jul-

15

Au

g-15

Sep

-15

Oct

-15

No

v-15

Dec

-15

ASTRA Sensex

28

Company Report – Astral Poly Technik Ltd.

Investment Rationale

Strong foothold in Indian PVC and plumbing market

Astral, a one of the leading PVC manufacturers in India, has created superior position in the Indian PVC and

CPVC piping Industry (30-35% overall market share) with its strong distribution channels, enhancement of

product portfolio and technical expertise in the CPVC (plumbing) market. It has established a huge presence

(both in retail and institutional segments through distributors) by offering a wide range of plumbing, PVC pipes

and fittings for Indian home and industrial application markets. It operates with more than 700 distributors and

more than 23,000 dealers in India. During FY12-15, it reported revenue and earnings CAGR of 35%/24%

respectively, while maintained its earnings before interest, tax, depreciation and amortisation (EBITDA) margin

and return on equity (RoE; except FY15) over 14% and 30%, respectively (in spite of higher raw material prices

and currency fluctuation). FY15 was a one-off year in which it witnessed pressure at operating level (inventory

loss and promotional expenses), resulting into significant contraction in margins. However, eliminating these

one-off expenses, we believe the company has still reported decent performance (in margin terms). With a

revival in the industrial activities, a constant focus on creating strong brand value through various promotional

activities and innovation in product ranges (particularly in the plumbing market), we believe the company to

see strong traction in revenue performance and therefore, we expect 24% revenue CAGR over F15-18E.

Figure: Consolidated revenue and EBITDA margin trends


Capacity expansion on the anvil; huge opportunity ahead

In recent years, the growing demand of Astral’s product-line (PVC/CPVC products used in construction and

housing) coupled with the expanded capacity has benefited the company to report a robust top-line growth. It

has doubled the capacity from 48,000 metric tonne (MT) in FY2011 to over 102,000MT by FY2015 (brownfield

expansion at its Hosur plant by doubling its capacity of 7,000MT). In short, it plans to add 50,000MT capacity

(including new Greenfield capacity of 20000MT at Neemrana, Rajashthan by FY17) in the next 2-3 years. The

increasing popularity of usage of PVC/CPVC pipes (against GI pipes) due to light weight, easier installation,

lower pricing and zero corrosive features would keep the demand for plastic piping products intact. Further, a

strong focus in the B2C (retail market) through extensive distribution network, large acceptance in housing

segments (projects) along with huge replacement demand and lower penetration in India leave a huge scope

for growth. Lastly, the government’s thrust to “Create 100 smart cities”, “Toilet for all” and “housing for all

mission by 2022” would create incremental demand of its products.

Figure: PVC capacity trend Figure: Revenue-mix trend

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

5,846 8,253 10,732 14,299 18,210 21,896 27,150

14.5% 14.2% 14.5%

11.8%12.9% 13.5% 13.7%

0.0%

5.0%

10.0%

15.0%

20.0%

0

5,000

10,000

15,000

20,000

25,000

30,000

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

(Rs

mn

)

Revenues (Rs mn) EBITDA (%)

65

,49

6

77

,21

2

97

,16

4

10

2,3

71

11

2,3

71

13

2,3

71

15

2,3

71

020,00040,00060,00080,000

100,000120,000140,000160,000

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6E

FY1

7E

FY1

8E

(MT)

5,846 8,253 10,73212,52113,88316,68120,908

00

01,778 4,321

5,208

6,235

0

5,000

10,000

15,000

20,000

25,000

30,000


(Rs

mn

)

Piping Adhesive


29

Key drivers : An investment of about Rs5 mn crore would be required over the next few years for various

initiatives including Housing for All (Rs2.25 mn crore), urban infrastructure development (Rs1.65 mn crore),

urban sanitation (Rs620 bn) and building smart cities, which would keep the pace of building material products

demand high over the next five years.

Higher volume game; realisation to see moderate growth

In recent times, PVC prices have declined significantly on the back of softening crude oil prices, which

restrained distributors to build the inventory level and buy it. Further, subdued demand as well as slowdown in

the real estate sector has dampened the demand for PVC/SWR/drainage pipes. At the same time, the prices for

CPVC products have been moderated but not in-line with PVC products, due to a strong replacement demand

(supported the prices to a certain extent). We believe this would in fact help the CPVC players to improve

volume growth and surge an opportunity to capture market share by offering the quality products at

reasonable prices. Astral is perfectly placed due to new product launches, strong brand image and large

preference over other players (both in plumbing and architect markets). Recently, the company has entered

into manufacturing of Agri/Rigid pipes, SWR/drainage pipe to expand its offerings horizontally and improve

product-mix. It has also launched conduit pipes (used in electrical work) few month back and targeting to add

100+ products every year to its overall existing portfolio (2500 products). We expect volumes to grow at a 17%

CAGR (v/s management guidance of 20%) over FY15-18E.

Figure: Piping division–Volume and revenue trend


Entry of Lubrizol (USA) in India; easy access to raw material

Astral is the first licensee of Lubrizol Technology (USA) for its FlowGuard (RM) to manufacture CPVC products in

India. It has 12 years of healthy relationship (with Lubrizol) to procure a key raw material and also has a joint

venture with Specialty Process LLC, USA (manufacturing CPVC plumbing systems since 26 years) to manufacture

and market the most advanced CPVC plumbing systems in India. Its major raw material supplier, Lubrizol (USA),

is currently putting up the plant in India (50000 MT at Dahej, Gujarat), which is expected to be operational by

January 2016. Once the plant would be commissioned, it is expected that Astral will get the raw material (60%

of CPVC compound requirement from local market) at a cheaper rate on regular basis (reduce transportation

costs, inventory days and currency risk fluctuation). Initially, Lubrizol will fetch 15000MT of raw material, which

would eventually increase upto 25000MT with the stabilsation of plant.

Figure: EBITDA income to grow by 30% CAGR during FY15-18E


5,8468,253

10,73212,521

13,88316,681

20,908

0

5,000

10,000

15,000

20,000

25,000

0

20,000

40,000

60,000

80,000

100,000

120,000

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6E

FY1

7E

FY1

8E

(Rs m

n)

(MT)

Volumes (MT) Revenues (Rs mn)

8461,172

1,558 1,683

2,341

2,948

3,716

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


(Rs

mn)

30


Back-to-back acquisitions – Strong entry in adhesive product range

After acquiring Seal IT Services Ltd, UK (at Rs440 mn), a manufacturer of various types of adhesive products, it

also acquired Resinova Chemie Ltd (76% stake) for Rs2128 mn and the balance on 2nd November 2015, at

consideration of Rs730 mn (allotted 1.3 mn [email protected]). Post this, Resinova is now become 100% wholly

owned subsidiary of Astral. Resinova is the manufacturer of adhesives and sealants with 50 branded products,

over 600 stock keeping units (SKUs), 750 distributors and 3,00,000 retail outlets spread across India while Seal

IT (UK) has customer base of 1800+. Two acquisition in short span of time in adhesives and sealant business

indicates the management thrust to strengthen its product offerings in new business lines. It will also help

Astral to offer its existing products by leveraging Resinova’s strong distribution network in the market and

enhance the product portfolio. We believe the combination of strong brand name, wide geographic reach and

asset-light model would help Astral not only to strengthen its position in adhesive and sealant industry, but will

help to bring synergy in technology assistance, margin profile and growth prospects.

Table: Subsidiaries

Subsidiaries Stake Applications

Advanced Adhesives Ltd 85% Solvent cement - to join PVC/CPVC pipes

Seal IT Services Limited, UK 80% Adhesives, bitumen, aerosols, building chemicals, cleaners, Construction

adhesives, tapes, water-based sealants, wood glues

Resinova, India 100% Auto adhesives, brush making industry, construction chemicals, sanitary

adhesives, rust removers, hardware, electric insulators


Industry : Adhesive, Sealants and building chemical in India

The current industry size in India is Rs1000 bn and growing at 15% CAGR, due to strong demand from wood

work, packaging, construction and automotive industries. The per capita consumption in India is quite is just

stands at 0.2/kg as against Germany (9.4/kg), U.S.(9.1/kg), Japan (6.4/kg) and lastly China (1.5/kg). The

continuous urbanization and increasing construction activities creating demand of adhesives & building

chemical businesses.

Table: Resinova performance (Rs mn)

Resinova Chemie

Particulars FY13 FY14 FY15 FY16E FY17E FY18E

Revenues 1,400 1,725 2,029 2,333 2,613 2,927

EBITDA 98 127 166 215 261 299

Margin (%) 7.0 7.4 8.2 9.2 10.0 10.2

PAT 59 75 93 130 162 187

Margin (%) 4.2 4.3 4.6 5.6 6.2 6.4


Our discussion with the management suggests that post 100% acquisition of Resinova; it is now looking to spend

Rs200 mn towards capacity expansion (5000MT in FY16 and 15000MT in FY17 (in Ahmedabad)), which would

bring total capacity to the tune of 45000MT by FY17 end. The current debt stands at Rs100 mn as against

negligible cash balance while it does not intend to increase capacity in Seal IT, however, spent Rs40 mn towards

backward integration (for raw material - Silicon powder). It is also expecting to ramp up the capacity utilization

from current 30% to 50-60% by FY18.

Table: Seal IT performance (Rs mn)

Seal IT Services Ltd.

Particulars FY13 FY14 FY15 FY16E FY17E FY18E

Revenues 1,170 1,330 1,501 1,681 1,934 2,166

EBITDA 80 79 110 145 170 195

Margin (%) 6.8 5.9 7.4 8.6 8.8 9.0

PAT 48 46 66 76 92 108

Margin (%) 4.1 3.4 4.4 4.5 4.8 5.0



31

Enjoying strong brand reputation; comprehensive product range

Astral has recently entered into Agri piping/SWR drainage system to grab the upcoming opportunities under

government’s various programs. It has created a niche for its PVC/CPVC products in the Indian plumbing segment

(largely well accepted in plumbing and building projects). Over the years, it has spent a lot of money on various

promotional activities (Salman Khan as a brand ambassador), enhancement of distribution reach for branding

and geographical reach. With a concept of providing a one-stop source for all the plastic piping systems, the

company is offering various products, such as CPVC and PVC fittings, flanges and valves from Spears (USA),

solvent cements (adhesive solutions) for joining pipes and fittings from IPSC (USA), underground speciality

fittings from Hunter (UK) and CPVC & PVC plastic pipes of a larger diametre from Harvell Inc (USA). Further, it

has recently launched new products, such as Blazemaster (fire sprinkler system pipes), bendable pipes (mix of

aluminium and CPVC) and PVC borewell pipes (column pipes) which would help to accelerate the pace of

volume growth going forward.

Diagram: Product Portfolio


Strategic tie-ups in place; long-term vision

Astral is the licencee of four products from Lubrizol Technology (USA) and also has a joint venture with

Specialty Process LLC, USA to manufacture and market the most advanced CPVC plumbing systems in India. In

addition, it has tie-ups for plastic pipe fittings and valves and is an exclusive distributor of Wavin AS low-noise

systems in India. We believe the company’s strategy to grow through organic /inorganic routes, ability of

delivering high quality products and long-term vision of the management would generate healthy return for

shareholders, thus making a case for long-term investment.

Better margin profile; proven track record of the management

The company’s ability to pass on the rising cost to end consumer due to brand premiumisation and quality

product offering helped to sustain the margins in recent years (inspite of higher crude oil prices and currency

depreciation). In short, a strong management team with long-term vision has helped the company to register

decent margins and return ratios during tough time. It has also outpaced the industry growth and competitors

both at top-line and bottom-line performances, indicating management’s capability and track record to add to

the shareholders wealth over a long run.

32


Resinova’s acquisition with the cost of 6.5% equity dilution still EPS accretive

Astral raised Rs2,408.8 mn in November 2014 at a price of Rs402.52/share by issuing 5.9 mn shares (diluted

5.3% stake) to fund its Resinova’s acquisition (74% stake) while the balance 24% has been acquired in

November 2015 (further diluted 1.2% stake) at a consideration of Rs730 mn. We believe the equity dilution is

likely to be earnings per share (EPS) accretive. Post current dilution (Nov 15), the equity capital would increased

to Rs11.97 mn, while EPS would see acceleration from the first year of consolidation (20% incremental earnings

post dilution).

Negligible debt level; strong traction in return ratios

It is well placed to fund the required capital expenditure (capex) without much leveraging balance sheet due to

better working capital management (inventory days to reduce further) and sufficient free cash flow generation.

In addition, better capacity utilisation, improvement in margins (due to low/stable RMC) along with lower debt-

equity (D/E) ratio (0.2x) would help to showcase healthy return ratios and give enough cash cushion.

Figure: D/E ratio and interest coverage ratio trends Figure: Return ratio trend


Table: Free cashflow to improve (Rs mn)

Particulars FY12 FY13 FY14 FY15 FY16E FY17E FY18E

NOPLAT 409 711 797 831 1,150 1,604 2,095

Add : Depreciation 138 181 213 364 392 414 458

Cash from Operations 547 892 1,011 1,195 1,542 2,019 2,552

Less: Capital Expenditure (669) (716) (859) (3,438) (1,495) (985) (1,086)

Less: Change in working cap 67 (372) (475) (306) (666) (564) (867)

Less: Dividend (29) (29) (36) (47) (59) (79) (104)

Free Cash Flow to Firm (84) (226) (359) (2,596) (678) 390 496


Table: Quarterly trend (Rs mn)

Particulars Q1FY15 Q2FY15 Q3FY15 Q4Y15 Q1FY16 Q2FY16 Q3FY16E

Revenues 271 322 303 375 387 420 455

YoY growth (%) 25 19 14 11 43 30 50

EBITDA 39 39 29 46 51 52 57

Margin (%) 14.4 12.3 9.6 12.3 13.1 12.4 12.6

PBT 29 26 13 31 36 32 44

Adjusted PAT 20 24 14 22 26 25 29

Margin (%) 7.3 7.3 4.8 5.7 6.6 6.0 6.3

Adjusted EPS (Rs) 1.6 2.0 1.2 1.8 2.1 2.1 2.4


0.4

0.30.3

0.20.2

0.1

0.1

1012

16

9

13

20

30

0

5

10

15

20

25

30

35

0.0

0.1

0.1

0.2

0.2

0.3

0.3

0.4

0.4


D/E Interest coverage ratio

30% 30%

37%

18% 17% 18%20%

28%

32%36%

22% 22%24%

27%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0%

10%

20%

30%

40%

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6E

FY1

7E

FY1

8E

RoE RoCE


33

Valuation

Bright outlook; initiate with a BUY

Market reach and dominant position in organised CPVC product market will enable Astral to sustain the existing

leadership position in the domestic market, as well help to exploit significant growth opportunities in the

coming years. A huge replacement demand, lower per capital plastic consumption in India and ongoing capacity

expansion plan along with the recent acquisition in adhesive business (asset-light model) would help the

company to report revenue and earnings CAGR of 24% and 35% respectively in FY15-18E. Currently, the stock is

trading at 32x/24x its FY17E/FY18E earnings respectively (against 5 years average P/E of 31x). We assign a 30x

P/E (considering superior brand image, healthy market share in CPVC market and competitive advantage over

peers) on its FY18E earnings, which translates the price target of Rs520 with an upside of 18%. Hence, we

initiate our coverage on the stock with a BUY rating. We believe that the integration of newly acquired

adhesive business and better than expected performance could act as a key catalyst for re-rating in the coming

years.

Key risks

Delay in pick-up in volumes and raw material availability (as anticipated from Lubizol’s upcoming Gujarat plant)

could affect financial performance and valuation.

Any price fluctuation in PVC (crude oil derivative) may affect operating performance and margin profile.

34


About the Company

Astral Poly Technik manufactures and markets chlorinated poly vinyl chloride (CPVC) plumbing system in India. Its

product applications include plumbing for hot and cold water, plumbing for cold water, sewage waste and rain

water, underground application, fire sprinklers, flush tanks, drains and waste traps, and industrial. The company’s

FlowGuard pipes and fittings are made from the speciality plastic, chemically known as CPVC. It operates with four

manufacturing plants, seven depots across northern, western and southern India. It has a strong customer base

including corporate houses, hospitals, academic institutions, hotels and resorts, government organisations,

industries and construction houses. It enjoys superior brand name in CVPC pipes and fitting products and is largely

accepted by its customers.

Figure: Region-wise revenue mix Figure: Product-wise revenue mix

Source: Company, IDBI Capital Research Source: Company, IDBI Capital Research

Table: Tie-ups and collaborations

Companies Country Products

Lubrizol USA Four product licences - Corzan, Bendable Composite , Blaze Master and FlowGuard

IPS Corporation USA Technological collaboration for solvent cement

FIRST Italy Distributor of indoor and outdoor bathroom fittings

Wavin Netherland Exclusive distributor of Wavin AS low-noise systems in India

SPEARS USA Tie-up for plastic pipe fittings and valves

Source: Company, IDBI Capital Research

West & South, 75%

North & East, 25%

PVC, 45%CPVC, 55%


35

Financial summary

Profit & Loss Account (Rs mn)

Year-end: March FY15 FY16E* FY17E FY18E

Net sales 14,299 18,210 21,896 27,150

Growth (%) 33.2 27.3 20.2 24.0

Operating expenses (12,616) (15,869) (18,948) (23,434)

EBITDA 1,683 2,341 2,948 3,716

Growth (%) 8.1 39.1 25.9 26.0

Depreciation (364) (392) (414) (458)

EBIT 1,319 1,948 2,534 3,258

Interest paid (150) (146) (127) (109)

Other income 14 20 24 24

Pre-tax profit 1,095 1,742 2,431 3,174

Tax (313) (592) (827) (1,079)

Effective tax rate (%) 28.6 34.0 34.0 34.0

Net profit 759 1,109 1,586 2,072

Adjusted net profit 847 1,190 1,586 2,072

Growth (%) (18.7) 40.5 33.3 30.7

Shares o/s (mn nos) 120 120 120 120

Balance Sheet (Rs mn)


Net fixed assets 3,693 4,065 4,636 5,265

Investments - 730 730 730

Other non-curr assets 2,144 2,144 2,144 2,144

Current assets 5,816 7,040 8,517 10,638

Inventories 2,656 3,261 3,893 4,687

Sundry Debtors 2,327 2,894 3,419 4,240

Cash and Bank 115 122 312 608

Loans and advances 701 747 876 1,086

Total assets 11,653 13,979 16,028 18,776

Shareholders' funds 6,188 7,833 9,339 11,308

Share capital 118 120 120 120

Reserves & surplus 6,069 7,707 9,214 11,182

Total Debt 1,387 1,487 1,287 1,087

Secured loans 1,213 1,264 1,094 924

Unsecured loans 174 223 193 163

Other liabilities 180 185 222 275

Curr Liab & prov 3,733 4,267 4,954 5,859

Current liabilities 3,643 4,171 4,832 5,716

Provisions 90 96 122 143

Total liabilities 5,300 5,940 6,463 7,221

Total equity & liabilities 11,653 13,979 16,028 18,776

Book Value (Rs) 52 65 78 94

*YoY not comparable due to consolidation of adhesive business in FY15 for 5 months only


Cash Flow Statement (Rs mn)


Pre-tax profit 1,095 1,742 2,431 3,174

Depreciation 364 392 414 458

Tax paid (264) (592) (827) (1,079)

Chg in working capital (306) (666) (564) (867)

Other operating activities 280 - - -

CF from operations (a) 1,169 876 1,455 1,686

Capital expenditure (855) (765) (985) (1,086)

Chg in investments (2,591) (730) - -

Other investing activities 7 - - -

CF from investing (b) (3,438) (1,495) (985) (1,086)

Equity raised/(repaid) 2,359 590 - -

Debt raised/(repaid) 314 100 (200) (200)

Dividend (incl. tax) (47) (59) (79) (104)

Chg in minorities - - - -

Other financing activities (255) - - -

CF from financing (c) 2,371 631 (279) (304)

Net chg in cash (a+b+c) 102 12 190 296

Financial Ratios


Adj EPS (Rs) 7.1 9.9 13.2 17.3

Adj EPS growth (%) (18.7) 40.5 33.3 30.7

EBITDA margin (%) 11.8 12.9 13.5 13.7

Pre-tax margin (%) 7.7 9.6 11.1 11.7

RoE (%) 18.1 17.0 18.5 20.1

RoCE (%) 21.7 22.1 24.4 27.2

Turnover & Leverage ratios (x)

Asset turnover 1.5 1.4 1.5 1.6

Leverage factor 2.0 1.8 1.7 1.7

Net margin (%) 5.9 6.5 7.2 7.6

Net Debt/Equity 0.2 0.2 0.1 0.0

Working Capital & Liquidity ratios

Inventory days 68 65 65 63

Receivable days 59 58 57 57

Payable days 77 75 72 70

Valuations


PER (x) 62.1 44.2 33.2 25.4

Price/Book value (x) 8.5 6.7 5.6 4.7

PCE (x) 43.4 33.2 26.3 20.8

EV/Net sales (x) 3.8 3.0 2.4 2.0

EV/EBITDA (x) 32.0 23.1 18.2 14.3

Dividend Yield (%) 0.0 0.0 0.0 0.0

COMPANY

REPORT

Summary

Finolex Industries Ltd. (FIL), the flagship company of the Finolex Group, is the largest manufacturer of

PVC pipes & fittings and second largest PVC resin manufacturer with a healthy market share, wide

product range and strong distribution network across India. In recent years, FIL had witnessed margin

erosion, volatility in earnings and significant forex losses (due to currency fluctuation). However, (1)

Shift in business model with the support of full backward integration; (2) Increasing share of piping

business & high margin fittings; (3) Government thrust to focus agriculture productivity through

various programs; (4) Expansion in northern & eastern agriculture concentrated areas; (5) Margin

expansion along with a gradual debt reduction would give impetus to FIL’s performance. Comfortable

liquidity and lean capex cycle would accelerate the earnings growth. We expect revenue and earnings

CAGR of 10%/60% respectively during FY15-18E. The stock is currently trading at 13x/11x its FY17/18E

EPS (steep discount to peers). Initiate with a BUY (TP of Rs410; an upside of 37%).


A tilt towards B2C model will be margin accretive

FIL is on the verge to see better days ahead on the back of transformation in the business model

(B2B to B2C), continuous focus to increase revenue share of PVC pipes (from 46% in FY11 to 68% in

FY15 and further upto 80% by FY18) and high margin fitting products. This would not only mitigate

the risk of earnings volatility but also improve margin profile and return ratios. We believe FIL would

immensely benefit due to its backward integration gain (over 58% captive usage; targeted 90% post-

PVC pipe expansion by FY18), flexible technology and margin expansion.

Ongoing capacity expansion; healthy growth visible

A steady increase in capacity in PVC pipes business (by 90,000MT to 3,40,000MT till FY18), immense

opportunity under irrigation (currently 44% only) will help to improve volumes. In addition,

implementation of various agri schemes (Rs500bn allocated to PMKSY), focus on river linking

projects and higher agriculture investments by government would support revenue growth. It plans

to increase share of fittings (high margin products) from 7-8% to 12% in the next couple of years.

Expanding geographical reach; new launches continuous

FIL is strengthening its position in the untapped northern and eastern markets by opening four

warehouses and ramping up distribution network (added exclusive 20 dealers and 300 outlets in

Q2). It has 95% exclusive dealers and targeting to add 100-110 dealers every year to increase the

footprint by leveraging Finolex brand and new product launches (100+ products) every year.

Fully integrated player; uptick in margins and ratios

Being only a fully integrated Indian player with a flexible technology to use both EDC/VCM routes to

manufacture PVC resins, it is well placed to showcase earnings CAGR of 60% in FY15-18E mainly due

to anticipated increase in spread between EDC-PVC prices (a key RM – EDC capacity to increase by

FY2016), debt reduction (D/E 1.5x in FY12 to 0.7x in FY15 to 0.3x FY18). The EBITDA margins are

likely to remain firm over 17% (v/s 13% earlier) and RoE above 25% (v/s 20%) in the coming years.

Improvement in financials visible; free cashflow to improve

No major capex in the near future (particularly in the highly capital intensive business of PVC resin)

along with better working capital management (shorten the buyers credit days; policy of making

delivery against full payment to dealers) will improve the free cash flow (by 25% CAGR in FY15-18E),

which would provide stability to the business and give sufficient cash cushion.

December 29, 2015

Finolex Industries Ltd.

Waiting in the wings

CMP Rs297

Target Price Rs410


Relative to Sensex

Source: Capitaline

BUY

Nifty: 7,925; Sensex: 26,034


Bloomberg / Reuters FNXP IN / FINX.BO

Shares o/s (mn) 124




Key Stock Data


-1m -3m -12m

Absolute (%) (1) 15 14

Rel to Sensex (%) (1) 14 19

Price Performance

Promoters 52.5


MFs/Banks/FIs 5.3




COMPANY

REPORT



FY15 24,761 1,790 7.2 822 6.6 44.8 23.5 10.4 7.9

FY16E 26,729 4,518 16.9 2,185 17.6 16.9 9.1 25.2 26.0

FY17E 29,354 5,158 17.6 2,827 22.8 13.0 7.8 27.5 28.3

FY18E 32,830 5,951 18.1 3,371 27.2 10.9 6.6 27.8 30.9


70

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FNXP Sensex

38

Company Report – Finolex Industries Ltd.


Transition in business strategy will be margin accretive

FIL is the second largest manufacturer of PVC resin after RIL and is a leading PVC pipe manufacturer with a fully

integrated plant in India (a market share of 25% in the organised market and that of 12% in the overall PVC

market). It entered into a new growth arena through a transition in the business model (shift in focus from a

pure commodity player to a PVC pipe manufacturer) which is expected to mitigate the risk of volatility in its

earnings, provide stability, boost the margins and return ratios. It has managed to increase the revenue share of

the PVC pipes from 46% in FY11 to 68% in FY15 and is further planning to increase the contribution up to 80%

by FY18. The shifting of the business model from a B2B company to a B2C company is expected to take the

company to a new growth orbit in the next couple of years, in terms of revenue growth and margin accretion.

Fig.: Revenue mix - PVC resin & PVC pipes & fittings Fig.: EBITDA margin trend


Capacity expansion in PVC pipes to drive revenue growth

The management has clearly indicated its intention to increase the focus towards PVC pipe segment (to become

a fully integrated PVC manufacturer), given the fact of low per capita consumption, government’s thrust on

agriculture to increase cultivated areas under irrigation facility (currently 44%) through various programs to

focus on water supply (by canalisation; linking rivers to farms) for improving the farm yield (Rs500 bn allocated

to PMKSY). Further, replacement of galvanised iron (GI) pipes to PVC pipe due to long lasting life, low corrosion

and flexibility will give impetus to the consumption of PVC products in India. On the back of these, it has

recently added 20,000 metric tonne (MT) capacity in Gujarat (FY15) and is planning to further increase the

capacity upto 340,000MT by FY18. It intends to increase its product mix in PVC pipe segment by leveraging its

Finolex brand. It plans to increase share of fittings (high margin products) from 7-8% to 12% in the next couple

of years. We believe the leadership position in the agriculture pipe business, strong presence in rural market

through wide distribution channels (500 dealers and 15,000 retailers) along with shifting focus towards high-end

products would lead the company on high growth trajectory.

Figure: PVC pipe capacity (MT)


45% 46%

33% 30% 26%

46%51%

63% 64%68%

9%3% 4% 7% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

FY11 FY12 FY13 FY14 FY15

PVC resin PVC pipes & fittings Others

10.0% 10.3%

12.2%13.3%

7.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

FY11 FY12 FY13 FY14 FY15

180,000210,000

230,000250,000

280,000310,000

340,000

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000



39

Fully integrated player; benefit to accrue from lower EDC prices

Being the only Indian player having fully integrated and flexible technology to use both EDC/VCM route to

manufacture PVC resins, it is perfectly placed to take the advantage of anticipated increase in spread between

EDC-PVC prices, on the back of significant capacity addition in the international market in the next two years;

(currently players delaying expansion due to lower crude), which will keep the global EDC prices under pressure

and will benefit the company to enjoy the delta spread. Our interaction with the management suggest that once

the crude price will stabilized or will start reversal trend (upward journey), the players will build or expand the

EDC manufacturing capacity (Saudi Arabia, Middle East, Qatar and U.S.). Currently, it uses both EDC-VCM-PVC

and VCM-PVC routes. It is using 58% of its PVC resin for captive consumption which is expected to increase upto

90% (post capacity expansion in PVC pipe segment by FY18).

Figure: PVC, EDC & VCM price trend Figure: Spread (EDC-PVC) trend


Uptick in margins visible; better RoE & RoCE ahead

On account of stability in operations along with declining EDC prices, we believe the company will report better

earnings before interest, tax, depreciation and amortisation (EBITDA; low raw material cost [RMC]) and net

profit margin (due to the initiative to reduce debt burden) going forward. Further, no major capital expenditure

(capex) in the near future (particularly in the highly capital intensive business of PVC resin) along with better

working capital management (lower buyers credit days; policy of making delivery against full payment to

dealers) will improve the free cash flow and return ratios (return on equity [RoE] and return on capital

employed [RoCE]) substantially in the next couple of years.

Figure: RoE and RoCE trend Figure: D/E and interest coverage ratio trend


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PVC EDC VCM

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23%20%

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16%

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8%

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31%

0%

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RoE RoCE

1.5

1.0

0.8 0.70.5

0.40.3

1.9

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40


Table: FCF to improve substantially (Rs mn)

Particulars FY12 FY13 FY14 FY15 FY16E FY17E FY18E

NOPLAT 1,097 1,491 1,861 712 2,684 3,061 3,572

Add : Depreciation 755 544 623 587 571 656 698

Cash from Operations 1,852 2,035 2,484 1,299 3,255 3,717 4,270

Less: Capital Expenditure (683) (1,180) (705) (312) (535) (734) (591)

Less: Change in working cap (372) (55) (985) 378 (456) (746) (1,046)

Less: Dividend (44) (43) (78) (98) (87) (113) (135)

Free Cash Flow to Firm 754 757 717 1,266 2,177 2,124 2,498


Risk of forex exposure reduced substantially; financial stability ahead

The company was earlier exposed to significant risk of a foreign exchange (forex) loss (marked-to-market

*MTM+) on account of its huge exposure to foreign denominated buyers’ credit or bank loans and inconsistent

hedging policy that had adversely affected its earnings and return ratios. However, during FY13, FIL took the

initiative to hedge its forex position (70% currently) and shortened the buyers’ credit days (almost 90 days v/s

360 days earlier) to improve the working capital cycle. This would provide stability to the business and improve

the profitability in future.

Expanding presence in other areas; increasing distribution network

FIL has a strong footprint in both western and southern markets on account of their proximity to its

manufacturing facility (95% exclusive dealers). It is now tapping the northern and eastern markets (adding 4

warehouses), where the concentration of agriculture takes place. Over the decade, FIL has increased the supply

value chain by expanding the dealers’ network and leveraging its brand name. The company is now introducing

new variants (total product portfolio 2800 including 800 fittings; targeting 100+ new products every year) to

improve product offerings in these areas.

Table: Region-wise agri concentrated players

Region States Revenue share Agri Players

West Maharashtra, Pune 45% Finolex, Prince Pipes, Supreme, Jain

South Andhra Pradesh, Karnataka and Kerala 30% Finolex, Supreme, Nandi, Prince

North Uttar Pradesh, Haryana, Madhya Pradesh 20% Finolex, Supreme, Kriti

East Odisha 5% Finolex, Supreme, other local players



41

Other investments and land bank

FIL has comfortable liquidity, supported by investments in liquid mutual funds, available of approximately with

70 acres of surplus land in Pune (approximate value of Rs7,000 mn) and 600 acres of unutilised seafront land at

Ratnagiri, Maharashtra (worth Rs960 mn). That is about 20% of FIL’s market capitalisation. This land can be

monetised in future to repay the debt. However, the management is not willing to sell off the land parcel (until

it gets a premium valuation) due to generation of sufficient cash flow to fund both capex plans (no major capex

ahead) and debt repayment (targeting Rs100cr debt repayment).

Figure: Revenue & EBITDA margin trend Figure: PAT margin and EPS trend


10.3%

12.2%13.3%

7.2%

16.9%17.6%18.1%

0.0%

5.0%

10.0%

15.0%

20.0%

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Revenues (Rs mn) EBITDA (%)

6.1 11.0 19.3 6.6 17.6 22.8 27.2

3.6%

6.3%

9.8%

3.3%

8.2%

9.6%10.3%

0.0

5.0

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8.0%

10.0%

12.0%


EPS PAT (%)

42


Valuation

Cheap valuation; Strong upside of 37% - Initiate with a BUY

With structural changes in business model, backward integration in place and shifting focus towards PVC pipe

manufacturing (B2C model) by capacity expansion in coming years, we expect the company to register a low

double-digit revenue growth (10% CAGR) while earnings are expected to increase substantially at 60% CAGR

during FY15-18E (mainly due to margin expansion and reduction in debt level). Currently, the stock is trading at

a P/E of 13/11x its FY17/18E earnings per share (at a steep discount to peers). We believe, the company should

command better valuation based on changing fundamentals, stability in earnings along with healthy free cash

flow generation and return ratios. Hence, we initiate our coverage on the stock with a BUY rating and a price

target of Rs410 (P/E of 15x on FY18E EPS).

Key risks

Monsoon factor: Any slowdown in the agri pipes demand due to weak monsoon could hurt the farmer’s

sentiments and impact the volume growth.

Margin spread: Narrowing spread between EDC-PVC prices and fluctuations in foreign exchange rates could

adversely affect financial performance.


43

About the Company

Incorporated in 1981, FIL, the flagship company of the Finolex Group, is the second largest polyvinyl chloride (PVC)

resin player (after Reliance Industries Ltd [RIL]) with a state-of-the-art facility. It is also the largest manufacturer of

PVC pipes and fittings in India with a captive power plant of 43MW. It offers a wide range of PVC pipes and fittings

for diverse applications, largely agricultural and plumbing, through a pan-India network of over 500 dealers and

15,000 direct and indirect retail outlets. It mainly caters to the rural markets (the agriculture segment) of India.

Some of the group companies include Finolex Cables and Finolex Plasson Industries. There is a cross-holding

between the companies. Finolex Cables holds a 32.4% stake in FIL while FIL holds a 14.5% stake in Finolex Cables

and a 46% stake in Finolex Plasson Industries.

Figure: Segment-wise revenue mix Figure: Region-wise revenue mix

Source: Company, IDBI Capital Research Source: Company, IDBI Capital Research

Table: Manufacturing units & product portfolio

Segments Location Capacity Application

PVC Resin Ratnagiri, Maharashtra 272,000MT

Suspension grade: Pipes, wires and cables, films and sheets, profiles

Emulsion grade: Artificial leather, conveyor belt covers, protective clothing

like car upholstery

PVC pipes

& fittings

Ratnagiri, Maharashtra

Urse (near Pune)

Masar, Gujarat

100,000MT

100,000MT

50,000MT

Rigid PVC pipes: Water supply, agriculture, irrigation, and mining borewells,

industrial effluents. Plumbing pipes: CPVC for housing and residential

segment, SWR for drainage system and column pipes for pumping water

efficiently

Total capacity 250,000MT


PVC Resin, 26%

PVC pipes & fittings, 68%

Others, 5%

Western, 45%

Southern, 30%

Northern, 20%

Eastern, 5%

44


FIL’s journey so far

PVC Resin manufacturing process


• Incorporated as a PVC pipe manufacturing entity

• Ventured into PVC resin segment by installing 130,000MT (EDC route) at Ratnagiri1981-94

• Set up new PVC pipe facility at Ratnagiri

• Expanded PVC resin capacity by 130,000MT (VCM route)1999-06

• Introduced sewerage pipes & plumbing pipes commisioned power plant at Ratnagiri

• Change in management (Mr Prakash Chhabria takes over as executive chairman from Kishan Chhabria)

2007-12

• Commenced new unit in Baroda by 30,000MT (PVC pipes) & 10,000MT (PVC resin)

• Masar capacity expanded by 20,000MT; introduced column pipes2013-14

EDC

(0.3MT Ethylene+ 0.7MT Chlorine = 1MT EDC)

VCM

(0.82MT EDC + 0.23MT Ethylene = 1MT VCM)

PVC Resin

(1MT VCM = 1MT PVC Resin)


45

Financial summary


Year-end: March FY15 FY16E FY17E FY18E

Net sales 24,761 26,729 29,354 32,830

Growth (%) 0.9 7.9 9.8 11.8


EBITDA 1,790 4,518 5,158 5,951

Growth (%) (45.2) 152.4 14.2 15.4

Depreciation (587) (571) (656) (698)

EBIT 1,203 3,947 4,501 5,253

Interest paid (598) (588) (558) (509)

Other income 202 214 214 213

Pre-tax profit 808 3,573 4,158 4,957

Tax (330) (1,143) (1,331) (1,586)


Net profit 478 2,429 2,827 3,371


Growth (%) (65.7) 165.9 29.4 19.2

Shares o/s (mn nos) 124 124 124 124



Net fixed assets 8,782 8,745 8,823 8,715

Investments 1,246 1,246 1,246 1,246

Other non-curr assets - - - -

Current assets 8,565 9,156 10,025 11,306

Inventories 5,587 5,720 6,231 6,922

Sundry Debtors 487 586 643 720

Cash and Bank 123 178 215 382

Marketable Securities 551 668 734 821

Loans and advances 1,818 2,005 2,202 2,462

Total assets 18,593 19,148 20,094 21,268


Share capital 1,241 1,241 1,241 1,241


Total Debt 5,871 5,121 4,371 3,571

Secured loans 1,837 1,280 1,093 893

Unsecured loans 4,034 3,840 3,278 2,678

Other liabilities 1,107 893 873 843

Curr Liab & prov 3,735 3,698 3,718 3,699


Provisions 393 536 541 545



Book Value (Rs) 64 76 90 106




Pre-tax profit 808 3,573 4,158 4,957


Tax paid (392) (1,143) (1,331) (1,586)

Chg in working capital 378 (456) (746) (1,046)

Other operating activities 660 (214) (20) (30)

CF from operations (a) 2,041 2,331 2,718 2,993

Capital expenditure (307) (535) (734) (591)

Chg in investments 480 (118) (66) (87)


CF from investing (b) 221 (652) (799) (678)

Equity raised/(repaid) - - - -

Debt raised/(repaid) (923) (750) (750) (800)

Dividend (incl. tax) (980) (874) (1,131) (1,348)

Chg in monorities - - - -


CF from financing (c) (2,451) (1,624) (1,881) (2,148)

Net chg in cash (a+b+c) (189) 55 37 167

Financial Ratios


Adj EPS (Rs) 6.6 17.6 22.8 27.2

Adj EPS growth (%) (65.7) 165.9 29.4 19.2

EBITDA margin (%) 7.2 16.9 17.6 18.1

Pre-tax margin (%) 3.3 13.4 14.2 15.1

RoE (%) 10.4 25.2 27.5 27.8

RoCE (%) 7.9 26.0 28.3 30.9




Net margin (%) 3.3 8.2 9.6 10.3






Valuations


PER (x) 44.8 16.9 13.0 10.9


PCE (x) 26.2 13.4 10.6 9.1

EV/Net sales (x) 1.7 1.5 1.4 1.2

EV/EBITDA (x) 23.5 9.1 7.8 6.6

Dividend Yield (%) 0.0 0.0 0.0 0.0

COMPANY

REPORT

Summary

Nilkamal Ltd. (NIKL) is one of the largest manufacturers of plastic furniture and different products with

pan-India presence, strong brand image and product portfolio. After passing through a rough patch in

FY10-14 (due to loss in retail division and high debt level), the company is again back on the right track

with the various restructuring exercises, cost rationalisation in retail division and debt reduction. It is

now set to witness better operating leverage, synergy in its retail business and improvement in plastic

business volumes, which would boost earnings by a 46% CAGR in FY15-18E (due to 350bps margin

expansion and significant debt reduction in FY15), while RoE to touch close to 20% by FY18 (v/s 10% in

FY15). With no major capex and better working capital management, the possibility of significant free

cash flow generation persists. The stock is trading at 14x/12x its FY17/FY18 EPS (v/s 3 years average

P/E of 11x). Initiate with a BUY on SOTP basis (TP of Rs1,595; a upside of 30%).


Dominant player in plastic furniture business

NIKL has a unique business model with pan-India presence and 1,500 distributors, 20,000 retailers, 60 warehouses and 42 branches. It dominates the material handling (market share of 45-50%) and moulded furniture markets (market share of 35-37%) with more than 2,000 products. Its wide distribution network, superior product portfolio, strong brand image and diversified client base are the key features. The company is expected to see a strong earnings performance, led by a pick-up in plastic volumes, turnaround in retail division and significant debt reduction in FY15.

@home on the front-foot; better days ahead

After several years of dismal performance, @home is set to see better days due to the company’s cautious approach, reduction in cost along with closure of sick units. It turned 17 stores (out of total 19) into profitable business at operating level (v/s 13 in FY12). With better consumer sentiments, entry into e-commerce furniture sale (through Snapdeal/Jabong) and increasing online shopping preference, the retail division would be able to absorb fixed cost proportion to a great extent and see the bottom-line in the positive territory. Being one of the largest organised home furnishing players, it will be an eye-catching business for MNCs, which could unlock the value ahead.

Foray into e-commerce platform; rollout of scalable model

NIKL has started selling products through Snapdeal/Jabong to reach small towns and rural areas and simultaneously expanding its footprint in tier-2 cities to penetrate middle-income group. We believe the increasing e-commerce penetration, online shopping culture and direct door-to-door service through rollout of “Nilkamal home-ideas” model would accelerate the performance in a bigger way.

Better operating leverage; healthy margin and return ratios ahead

With stable RMC, turnaround in retail business along with improvement in plastic volume growth, the consolidated EBITDA would grow at a CAGR of 26% in FY15-18E (with over 350bps margin expansion till FY18), while significant debt reduction (nearly 35% in FY15) and positive earnings from retail division (FY17) would boost earnings and return ratios.

Strong earnings visibility; FCF to improve

We expect consolidated earnings to grow at 46% CAGR on account of (1) significant debt repayment in FY15; (2) better working capital management; (3) margin expansion; and (4) strong turnaround in retail division both at operating and PAT level by FY17. Furthermore, a low capex during FY16-18E (3 years average capex of Rs680 mn v/s operating cashflow Rs1320 mn) and better operating leverage would lead to a substantial improvement in free cash flow (FCF) generation.

December 29, 2015

Nilkamal Ltd.

Sitting Pretty…

CMP Rs1,226

Target Price Rs1,595


Relative to Sensex

Source: Capitaline

BUY

Nifty: 7,925; Sensex: 26,034


Bloomberg / Reuters NILK IN / NKML.BO

Shares o/s (mn) 15




Key Stock Data

52-week high/low Rs1,312/375

-1m -3m -12m

Absolute (%) 27 29 158


Price Performance

Promoters 64.1


MFs/Banks/FIs 1.6




COMPANY

REPORT

Table: Consolidated Financial snapshot (Rs mn)


FY15 18,946 1,562 8.2 505 33.8 36.2 12.6 10.0 13.1

FY16E 20,898 2,340 11.2 1,073 71.9 17.0 8.2 18.8 23.9

FY17E 23,175 2,668 11.5 1,291 86.5 14.2 7.0 19.1 25.3

FY18E 26,241 3,114 11.9 1,575 105.6 11.6 5.9 19.6 27.5


50

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NILK Sensex

48

Company Report – Nilkamal Ltd.


Dominant player in Indian material handling and moulded plastic furniture businesses

Nilkamal is one of the largest manufacturers of plastic crates offering a wide and an eclectic range of products

to various industries in India. Significant presence in various sectors with more than 2,000 products in its

portfolio and 60 warehouses across India along with a giant market share in material handling division (more

than 45-50% market share) and moulded plastic furniture business (nearly 35-37% market share), Nilkamal is

likely to benefit over a long run. India is witnessing a shift towards plastic products due to its inherent long

lasting nature, less corrosion and flexibility across many sectors. In addition, the low per capita plastic

consumption in India is indicative of the massive growth potential of the plastic industry. Moreover, there has

been a shift in focus from steel-made materials to plastic-made materials due to inherent nature of flexible

transportation particularly in FMCG, pharmaceutical and auto sectors. Hence, we believe a player like Nilkamal

is a key beneficiary to capitalise the huge scope under Indian plastic material handling and furniture product

industry.

Diagram: Product portfolio


Figure: Revenues – Plastic division (Rs mn)


Outlook: According to Food Corporation of India, there are a total no. of 1000 mn crates under usage in various

sectors. Further, increasing no. of malls, capacity expansion plans by corporate, shifting focus towards usage of

plastic crates, pallets against steel products will fuel the growth, going forward. Being a market leader in both

moulded plastic division & material handling segment, we expect the company’s plastic division’s revenue to

grow at a CAGR of 11% in FY15-18E.

12,22013,500 14,365

15,80617,190

19,081

21,693

0

5,000

10,000

15,000

20,000

25,000



49

Figure: Retail Sector: Category wise split of consumption in India


@home division–Back on track since inception; gaining momentum

NIKL operates with @me-A perfect one-stop solution store for home planning, with finest quality furniture, soft

furnishing, home accessories and a plethora of services to enhance the indoor and outdoor spaces. In India, it is

one of the largest organised players (other players are Home Centre of Biyani Group and Hometown of Lifestyle)

with around 16,000-17,500 square feet area of space across big metro cities (majorly tier-1). It is currently

operating with 19 stores to provide a wide range of products in moulded furniture segment. It provides various

products, such as chairs, dining tables, trolley, school benches, ready-to-assemble furniture, corner cabinets etc.

During FY10-14, it witnessed tremendous pressure due to a slowdown in retail industry on the back of gloomy

economy and uncertain consumers’ sentiment, resulted into loss at operating as well as net levels. However,

various cost-saving measures, restructuring initiatives and cautious approach helped to turnaround 17 stores

into profitable in FY14. It closed two loss-making stores to reduce cost burden (amortised losses in FY15

resulting to a significant net loss). It has launched its own customer loyalty solution on a mobile-based CRM

platform, an in-store radio to enhance the shopping experience and a hassle free and simplified interest free

EMI scheme to increase the footfalls and attract more customers. The company does not intend to open new

stores in the FY16 and continue to focus towards cost rationalisation to improve profitability. It has appointed

consultant to restructure the retail business for better growth prospects and to decide the future roadmap.

Industry: The Indian retail industry is estimated to grow at a compounded annual growth rate (CAGR) of 8.4%

between FY15-20E while organised retail market is likely to witness a strong CAGR of 23.6% by FY20E (Source:

Deloitte, E&Y). At the same time, the Indian furniture market grew at a CAGR of 17.2% during FY08-13, which is

expected to see 25% CAGR growth in FY13-18E.The furniture market is estimated to be worth more than

Rs2,167 bn (moulded furniture market is Rs20 bn).The organised sector is growing at about 30% CAGR. The

furniture segment comprises 65% of the home market and 35% of institutional demand.

59.5%

5.4%

1.2%

3.4%

9.9%

5.2%

3.0%

1.2%

3.0%

3.7%

4.3%

2.0% 3.4% Food & grocery,

Out-of-home food (catering services),

Books, music & gifts

Entertainment

Clothing, textiles & fashion accessories,

Jewellery

Watches

Footwear,

Health, beauty care services

Pharmaceuticals

Consumer durables, home appliances/equipments

Mobile Handsets, accessories and services

Furnishings, utensils, furniture-home & office,

50


Figure: Indian retail Industry; share of organised market to grow up…


Figure: Indian underpenetrated retail market – huge potential

Source: IBEF; Company; IDBI Capital Research

Figure: Indian furniture industry


Outlook: Facilitating consumers with several benefits, such as wide & quality product range, home décor ideas,

easy finance options, warranty and after sales service will help the company to boost revenue growth. In

addition, any positive reforms in foreign direct investment (FDI) in retail, improvement in macro factors and

consumer spending is likely to bode well for the company. Being one of the largest organised players in the

Indian furniture space, we believe the company’s retail division will remain in limelight to attract foreign players

in the Indian home furnishing segment (in listed space). We believe, its revenues will pick up momentum by

H2FY16 and expects the company to register revenues of Rs2340mn/Rs2550mn/ Rs2830mn in FY6E/FY7E/FY18E,

respectively.

278 321 368 424 518 869 1,300

3.3% 4.1%5.2%

6.7%8.0%

10.0%

20.0%

0%

5%

10%

15%

20%

25%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

2004 2006 2008 2010 2012 2015P 2020E

(US$

bn

)

Indian Retail Industry (US$ bn) Growing share of organised retail market

8

20

30

36

80

85

92

80

70

64

20

15

0 10 20 30 40 50 60 70 80 90 100

India

China

Indonesia

Brazil

UK

US

Organised (%) Unorganised (%)

30

55

0

10

20

30

40

50

60

2015 2020E

US$

bn


51

Figure: Sqft area and revenue per sqft/month trend Figure: No. of stores and revenues trend


Nilkamal home ideas–Growing presence in small cities

Along with the concentration in most populated and high consumer spending cities, it is simultaneously

expanding its footprint in tier-2 cities, small towns and rural areas to penetrate its products. It owns 22 stores

(majorly in the southern and western areas) with an average square feet area of 3,000-5,000. The management

is progressing well as its products got strong traction in the middle-income group and is further planning to

spread the model across India.

Presence across multiple industries with strong customer base and distribution channel

The company consistently enhances its product portfolio by introducing new value-added products to create a

strong brand value. With pan-India distribution reach through 1,500 distributors, 20,000 retail points, 60

warehouses and 42 branches, Nilkamal is showcasing well established footprint to capture the untapped

material handling and moulded furniture market (more than 25,000 customers). Strong presence across all

segments through 350 sales people, door-to-door service and risk-averse business model is a key feature of the

company. It caters to various sectors like automobile, pharmaceutical, engineering, electrical, logistics, textiles,

supermarkets, electronics, retail, food & beverages agriculture, seafood, hospitality & catering and other allied

businesses.

Table: Peer comparison

Particulars Units Nilkamal Ltd. Supreme Ind.

Material handling Market share % 45-50% 15%

(Injection moulding, Products Nos. 1800 150

crates, pallets Revenue share 0 48% 16%

automobile parts) Capacity MT 100,240 60,000

Utilisation rate % 60% 62%

Revenues Rs mn 9006 6490

Moulded furniture business Market share % 35-37% 13%

Revenue share

36% 7%

Focus

Tier 1-2 cities Tier 2-3 cities

Products (SKUs)

200+ 250-230

Showrooms Nos. 19 0

Model

Owned Franchisee

Area Sqft 16,500-17,500 1,000-2,500

Capacity MT - 28,000

Revenues Rs mn 6800 2760


451 505 542 515 560 575 575

0.35 0.34 0.34 0.34 0.350.39

0.44

0.0

0.1

0.2

0.3

0.4

0.5

0

100

200

300

400

500

600

700


Revenue per sqft/month (Rs) Sqft area (mn)

20 19 19 19 20 22 25

1,9132,039

2,188 2,1752,343

2,5482,833

0

500

1,000

1,500

2,000

2,500

3,000

0

5

10

15

20

25

30


No. of stores Revenues (mn)

52


Forayed into e-commerce platform for product offering

Nilkamal has entered into the e-commerce segment to attract more customers’ attention towards its products.

The basic idea is to display all @home products online and make it available through their own web portal and

other leading portals for customers’ convenience. @home’s digital presence can also be felt with the various

social media marketing initiatives conducted. This step will further reduce marketing expenses as well as help to

increase awareness about brand equity and offer wide market coverage, particularly in tier-2 and tier-3 cities. It

has recently started selling products through Snapdeal and Jabong. We believe with increasing online shopping

preferences, improving consumer sentiments and strong brand recall will help the company to increase its

presence across India, which would not only increase the revenues but also help to reduce the dependency on

supply-chain and marketing activities. During Q2FY16, it witnessed tremendous response and traction, led to

124% jump in online sales (though the proportion was miniscule).

Strategic alliances at international level; improving subsidiaries/JV performance

In recent years, the company has entered into joint venture (JV) with international players to manufacture

metal storage systems and is also supplying plastic products to hospitality industry. Currently, it is a sole dealer

in India for automated storage and retrieval systems, manufactured by Hanel Buro-und Lagersysteme, Germany

and is also working with Plastic Omnium Systems Urbains S.A, France, to supply high-end plastic waste bins to

municipalities, supermarkets, multiplexes, housing colonies etc. It also exports to Europe, USA, the Middle East,

Far East, Africa and Asia. The performance of subsidiaries/JV is continuously showing improvement both at

operating and earnings levels, which would further help to enhance consolidated financial performance.

Table: Strategic tie-ups with 5 international players

Nilkamal BITO Storage Systems P. Ltd JV with BITO Lagertechnic (Germany) for manufacturing

metal storage systems

Hanel Gmbh, Germany Tie-up for supply of vertical automatic storage and retrieval systems

CAMBRO Manufacturing Company, USA JV with CAMBRO for hospitality products suited for

large restaurants and hotels

Conteyor Multibag Systems NV, Belgium Manufacture of textile partitions for crates and metal

racks products

Plastics Omnimum Systems, France Supply of international standard waste bins of all sizes


Mattresses business–Asset-light model; small but scalable opportunity

During FY12, the company had forayed into mattresses business with a full range of rubberised coir, foam and

innovative spring mattresses. The current industry size in India is estimated to be around Rs60,000 mn, with a

growth potential of 15% p.a. In recent years, the industry has witnessed shifting trend from cotton to coir to

poly urethane foam and is rapidly picking up towards growth in demand for spring mattresses. Nilkamal has

launched mattresses in the southern part of the country and received tremendous response from the trading

community. As of now, it has appointed over 1,000 retail counters to scale up the business operations and is

planning to cover tier-2 and tier-3 cities where the visibility and opportunities persists. We believe the scalability

and rising demand of mattresses products in coming years will augur well for the company as this business has

significant potential to grow at a faster speed with the operating profit margin (OPM) of 14-16% due to inherent

feature of asset-light model.

Better operating leverage; strong earnings visibility with low D/E

The stable key raw material prices, turnaround in retail business along with improving plastic volume growth

would play an important role in margin expansion. Consequently, the benefit would further flourish at

consolidated earnings, which would grow by 46% CAGR on account of (1) the benefit of significant debt

reduction in FY15 (Rs1000 mn); (2) better working capital management; (3) improvement in margin profile; and

(4) strong turnaround in retail division both at operating and profit after tax (PAT) level by FY17. These would

ultimately lead to a substantial improvement in free cash flow generation.


53

Table: Cash conversion cycle

Particulars


Inventory days

70 70 66 56 52 51 49

Receivable days

51 53 49 48 48 47 47

Payable days

51 48 51 46 44 43 43


Figure: D/E ratio & interest coverage ratio trend Figure: Trend of return ratios



Particulars Q1FY15 Q2FY15 Q3FY15 Q4Y15 Q1FY16 Q2FY16 Q3FY16E

Revenues 419 460 421 490 458 482 469

YoY growth (%) 7 9 11 6 9 5 11

EBITDA 29 31 31 49 52 50 51

Margin (%) 6.9 0.0 0.0 0.0 11.3 10.5 10.9

PBT 8 10 12 32 37 37 35

Adjusted PAT 5 7 8 22 25 26 25

Margin (%) 1.3 1.5 2.0 4.4 5.5 5.3 5.2

Adjusted EPS (Rs) 3.7 4.6 5.7 14.6 17.0 17.3 16.5


0.80

0.82

0.56

0.33

0.24

0.170.10

2.92.0 2.5

3.0

7.8

9.610.3

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9


Debt/Equity ratio Interest Coverage ratio

30%

9%10% 10%

19% 19% 20%

30%

11%13% 13%

24%25%

27%

0%

5%

10%

15%

20%

25%

30%

35%


ROE ROCE

54


Valuation

Re-rating candidate; initiate coverage with a BUY rating

Nilkamal passed through rough patches in recent years owing to lower capacity utilisation, loss in retail division

and levered balance sheet, which were affecting the overall financial performance. However, improving

fundamentals on the back of pick-up in volume growth, better operating leverage coupled with expected

synergy from retail business would help the company not only to accelerate profitability but also would help to

command better valuation broadly in line with the plastic processing players. Currently, the stock is trading at

14x/12x its FY17E/FY18E earnings (against a 3 years average P/E of 11x). Hence, we recommend BUY rating on

the stock and initiate our coverage with a price target of Rs1,595 on SOTP basis (30% upside).

Table: SOTP Valuation

Division Particulars Method of Valuation

Plastic division P/E FY18 EPS (Rs) 94

Multiple (x) 15

Value per share 1,410

Retail division Capital employed (Rs mn) Book value (P/BV 1x) 1,000

no. of shares 15

Value per share 67

Subsidiaries & JV P/E FY18 EPS (Rs) 10

Multiple (x) 12

Value per share 120

Price target 1,595

CMP 1,226

Upside/(Downside) 30%


Key risks

Raw material prices: Any fluctuation in crude oil prices (crude derivatives) could affect operating performance of the company.

Economic condition: Weak macro sentiment and lower consumer spending could affect the performance of retail business.


55

About the Company

Incorporated in 1985 and headquartered in Mumbai, Nilkamal Limited (NIKL) is a market leader in moulded plastic

products. It has established a strong network distribution channels with significant scalability and ventured into

lifestyle furnishing retailing business with @home, a home solution store in 2005. Currently, it operates with 19

stores in 11 cities with around 3.35 lakh sqare feet (sqft) area. The company is well known for its products in

domestic as well as international markets. It is presently active in (a) plastic material handling business; (b) moulded

plastic furniture business; (c) furniture retail play, @home.

Figure: Stand-alone – Revenue mix (FY15)


Table: Region-wise manufacturing facilities

Region Products

West

Kharadpada, Silvassa Material handling products and OEM products for customers, such as defense,

automobile manufacturer etc.

Vasona, Silvassa Manufacturing of moulded furniture & material handling crates.

Sinnar- Nashik (Maharashtra) Manufacture crates for fruits & vegetable industries.

North

Greater Noida (Uttar Pradesh) Manufacturing of moulded furniture & material handling crates.

PHASE II, SAMBA (Jammu &

Kashmir) Manufacture crates. Insulated boxes and other products

South

Pondicherry (Union Territory) Manufacturing unit for moulded furniture system and material handling products

East

Barjora (West Bengal) Catering to moulded furniture & material handling crates division.

Overseas operation

Nilkamal Eswaran Plastics Pvt. Ltd.,

Sri Lanka Moulded furniture & material handling crates.


Material Handling

50%Moulded Plastic Furniture

38%

Retail Business @ HOME

12%

56


Diagram: Products


Plastic storage drawer

Plastic shelf

Plastic cabinets Plastic racks

Plastic chairs


57

Financial summary



Net sales 18,946 20,898 23,175 26,241

Growth (%) 8.1 10.3 10.9 13.2


EBITDA 1,562 2,340 2,668 3,114

Growth (%) (0.6) 49.8 14.0 16.7

Depreciation (574) (539) (551) (545)

EBIT 988 1,801 2,117 2,570

Interest paid (325) (230) (220) (249)


Pre-tax profit 708 1,617 1,943 2,370

Tax (196) (534) (641) (782)


Net profit 513 1,083 1,302 1,588


Growth (%) 7.3 112.5 20.3 22.0

Shares o/s (mn nos) 15 15 15 15



Net fixed assets 3,072 3,055 3,246 3,489

Investments 3 3 3 3

Other non-curr assets - - - -

Current assets 6,633 7,408 8,290 9,422

Inventories 2,924 2,989 3,238 3,533

Sundry Debtors 2,498 2,748 2,984 3,379

Cash and Bank 212 434 706 847

Marketable Securities 46 46 46 46

Loans and advances 911 1,149 1,275 1,574

Total assets 9,708 10,466 11,539 12,913




Total Debt 1,712 1,487 1,246 875

Secured loans 1,712 1,487 1,246 875

Unsecured loans - - - -


Curr Liab & prov 2,527 2,555 2,721 3,036


Provisions 321 321 321 321



Book Value (Rs) 351 414 491 586




Pre-tax profit 708 1,617 1,943 2,370


Tax paid (196) (534) (641) (782)

Chg in working capital 124 (526) (443) (675)

Other operating activities (140) - - -


Capital expenditure (54) (522) (742) (787)

Chg in investments - - - -

Other investing activities - - - -

CF from investing (b) (54) (522) (742) (787)



Dividend (incl. tax) (76) (129) (155) (158)


Other financing activities - - - -

CF from financing (c) (1,073) (354) (395) (529)

Net chg in cash (a+b+c) (57) 221 272 141

Financial Ratios


Adj EPS (Rs) 33.8 71.9 86.5 105.6

Adj EPS growth (%) 7.3 112.5 20.3 22.0

EBITDA margin (%) 8.2 11.2 11.5 11.9

Pre-tax margin (%) 3.7 7.7 8.4 9.0

RoE (%) 10.0 18.8 19.1 19.6

RoCE (%) 13.1 23.9 25.3 27.5




Net margin (%) 2.7 5.1 5.6 6.0






Valuations


PER (x) 36.2 17.0 14.2 11.6


PCE (x) 17.0 11.3 9.9 8.6

EV/Net sales (x) 1.0 0.9 0.8 0.7

EV/EBITDA (x) 12.6 8.2 7.0 5.9

Dividend Yield (%) 0.0 0.0 0.0 0.0

COMPANY

REPORT

December 29, 2015

Supreme Industries Ltd.

Signed, Sealed and Delivered…

CMP Rs680

Target Price Rs865


Relative to Sensex

Source: Capitaline

BUY

Nifty: 7,925; Sensex: 26,034


Bloomberg / Reuters SI IN / SUPI.BO

Shares o/s (mn) 127


Market cap. (US$ mn) 1,299


Key Stock Data


-1m -3m -12m

Absolute (%) 6 11 11


Price Performance

Promoters 49.7


MFs/Banks/FIs 7.4




COMPANY

REPORT



FY15 42,552 6,662 15.7 3,117 24.5 27.7 13.6 27.7 30.0

FY16E* 45,648 6,944 15.2 3,405 26.8 25.4 12.9 25.9 28.5

FY17E 52,880 7,968 15.1 4,105 32.3 21.0 11.1 26.5 31.0

FY18E 63,956 9,544 14.9 5,136 40.4 16.8 9.2 27.8 34.0

*FY changing from June to March in FY16


80

90

100

110

120

Sep

-14

Oct

-14

No

v-14

Dec

-14

Jan

-15

Feb

-15

Mar

-15

Ap

r-15

May

-15

Jun

-15

Jul-

15

Au

g-15

Sep

-15

Oct

-15

No

v-15

Dec

-15

SI Sensex

Summary

Supreme Industries Ltd. (Supreme) is one of the largest manufacturers of plastic pipes with significant

presence across all division with a healthy market share, strong distribution network and pan India

manufacturing presence (25 plants). Strong track record, consistency in operations & better dividend

payout are the inherent feature of the company. During FY12-15, it increased the capacity across

categories without leveraging much, which was quite encouraging and commendable. It is well poised

for growth in the coming years due to (1) Sustainable business model (2) Better volumes on back of

ongoing capacity expansion and gradual economic recovery (3) Continuous new launches (80%

branded products) (4) Enhancement of supply chain & increasing share of high margin value added

products and (5) Opportunity under infrastructure spending on irrigation areas, drainage, and

sewerage systems. We expect consolidated revenue/earning CAGR of 15%/18% in FY15-18E while

margins and return ratios to climb higher. Currently, the stock is trading at P/E of 21x/17x its FY17/18E

EPS (v/s 3 years average P/E 22x). Initiate with a BUY on a SOTP basis (TP of Rs865; 27% upside).


Sustainable business model

Supreme’s diversified revenue streams; strong presence with healthy product portfolio across four

verticals and multi location facilities gives it a competitive edge to capture the better growth and

easy accessibility to new markets. It is well placed with over 2450 channel partners, 12000+

products (80% branded) and 25,000 retail customers with commendable market share across all

divisions. The continuous focus on technology innovation, better working capital and assets

utilization is reflecting in its healthy balance-sheet (D/E 0.5x), strong operating cashflow (grew by

19% CAGR in FY12-15) and return ratios (consistently maintained over 25%).

Ambitious expansion plan; long term visibility persists

Supreme has envisaged a capex of Rs15 bn for 50% capacity addition till FY19 across major verticals

(4,45,000 MT to 6,50,000 MT) to explore the long term opportunities. The leadership position,

healthy product-mix in various plastic usage segments (piping, packaging, material handling and

moulded furniture) and strong distribution channels (exclusive dealers) and focus on new product

launches (adding 650-700 every year) would drive 14% CAGR volumes growth in FY15-18E.

Moreover, any positive development in composite cylinder business i.e. International order inflow

& domestic government policy on usage of composite LPG cylinder could act as a key catalyst (huge

opportunity ahead if implemented).

Piping/packaging segments – a growth engine

As a second largest organized PVC pipe player, Supreme is targeting to add 1,00,000 MT gradually to

the existing 3,00,000 MT till FY18. It’s strong presence in PVC pipe market (10% market share) with

superior product portfolio (6500 product-line), increasing share of CPVC products (growing fast with

better margins) and capability of introducing new product variants in highly competitive piping

segment (adding 500+ in FY16) will boost volume growth while under the packaging segment, it

enjoys strong market share in most of the product categories with marquee client list and has a

direct access to latest technology through strategic tie-up with global player to manufacture various

patented products (incl. silpaulin). Moreover, the focus on premium furniture products and reviving

industrial activities would support the growth.

60

Company Report – Supreme Industries Ltd.

Margins to pick-up; return ratios to remain healthy

Though recent volatility in raw material prices (resulted into Inventory losses; decline in realization), it somehow

managed to keep consolidated EBITDA margins (on annual basis) within a tight range of 14-15%. Despite the

contribution of real estate project is likely to be negligible, it would maintain EBITDA margin (core plastic business)

over 14% due to lower raw material costs, increasing share of value added products (from 23.3% in FY10 to 34.2% in

FY15 and further over 35%) and better operating leverage. Consequently, margins and return ratios would increase at

a steady level.

Decent balance sheet; Sufficient cashflow to entertain capex

The funding of mega capex plan is likely to be visible without leveraging much due to better earning visibility (18%

CAGR in FY15-18E), decent operating cashflow & lean debt level, which would provide sufficient cushion for any

future borrowing options.


Well diversified business; strong foothold across verticals

Supreme Industries Limited (Supreme), a second largest manufacturer of plastic pipes after finolex industries

and have a significant presence in industrial product segments (15% market share after Nilkamal Ltd). It also

operates in packaging segment particularly in cross laminated film products (100% share), which is gaining

tremendous traction in the market (niche and high margin product). In short, it is only the player in plastic

industry with significant presence across all division with healthy market share, wide distribution network and

pan India manufacturing presence, which is de-risking the business operations during tough environment. As

the “Supreme” brand is well recognized and accepted in the plastic industry due to its quality products and

competitive prices, it is set to deliver healthy financial performance (after a subdued FY14/FY15) on a

sustainable basis in the coming years. Moreover, any positive development on composite cylinder business

particularly in India would add more flavor. The product restructuring exercise, the underlying strength and

potential of each business segment makes it well positioned to deliver stellar performance going forward.

Table: Business segments

Business Vertical Positioning Estimated Market size

(Rs mn)

Supreme’s share

in FY15 (%)

Plastic Piping System Leadership 225,000 9.50%

Consumer Products 2nd largest player 29,000 9.75%

Industrial Products One of the major player 16,000 15.00%

Packaging Products Major player

EPE Foam 6,000

Air Bubble Film 3,500

Cap Cell 3,300

XLPE 900

EPE Foam 34%

Air Bubble Film 15%

Cap Cell 22%

XLPE 56%


Ambitious expansion plan; sufficient fund to entertain capex giving visibility

The company has ambitious plan to spend Rs15000mn during FY16-19E to increase the capacity across all

segments (upto 6,50,000 MT). It aims to constantly increase channel partners (currently 2,450+), enhance

product folio, focus on technology upgradation & innovation and production of new varieties of fittings (value

added products). Despite of muted performance in recent years, it managed to increase the capacity in most of

the categories steadily without leveraging much, which was quite encouraging and commendable. The decent

operating cashflow & unlevered balance-sheet (D/E 0.5x) gives it enough cushion to raise the fund, if required.

However, we believe better working capital management, healthy operating cashflow (average Rs4490mn v/s

capex of Rs2040mn in FY16-18E) along with sales proceeds from “Supreme Chambers”- a real estate project

(Rs1250mn revenue potential) would help to meet major portion of fund through internal accruals & would not

act as a major constraint for any future expansion plan.


61

Fig.: Total Capacity addition trend (MT) Fig.: Capex v/s operating cashflow trend


Plastic piping segment – on the verge of picking up

Being a second largest manufacturer of plastic pipes (9.5% overall and 14% of share in organized piping market)

in India, Supreme has shown 17% revenue CAGR in FY12-15. Strong presence with wide range of portfolio of

over 6500 products for a usage in 22 different application systems with more than 726+ channel partners

(added 128 in FY15) and over 25,000 retail counters enabled it to report healthy revenue during tough period. It

currently contributes 50% to company’s overall top-line revenues with an EBITDA margin in the range of 13%-

15%. It offers PVC, CPVC, HDPE pipes, of which PVC pipe constitutes major proportion of revenues followed by

CPVC pipe. Though the volume growth was into single-digit 7%/9% in FY14/FY15 on the back of subdued

demand and margin erosion due to volatility in PVC prices (low realization; inventory losses), we believe (1)

gradual pick up in infrastructure spending on irrigation areas, drainage, and sewerage systems, (2) capacity

expansion, (3) huge replacement demand and increasing penetration, (4) Increasing contribution of value added

products through new product launches (500+ new products in FY16) (6) increasing affordability towards

branded products due to narrowing pricing gap between organised and unorganized players would shift the

preference towards branded products and thus improve volumes (15% CAGR in FY15-18E).

Fig.: Volume & Revenue trend Fig.: EBITDA & margin trend


Packaging industries - Well poised for growth

It is a turnkey packaging solution provider with direct access to latest technology and innovations (tie-up with

global player). It is only the Indian company to have the technology to manufacture Patented Cross laminated

film products (100% market share) under brand name- “Silpaulin” (1/7th weight of conventional cotton

tarpaulin; high strength-to-weight ratio). It manufactures (a) Protective packaging products (PE foam, bubble

wraps, cross linked foam), (b) cross laminated films and (c) performance films (extruded plastic sheets used for

packaging). The significant presence across industries, marquee client lists and sole right to manufacture &

market product (cross laminated XF films) in India, Africa, South Asia and East Asia (except Japan & Mongolia),

gives competitive edge in the highly fragmented packaging industry. As it contributes 22% of total revenues

(over 18% EBITDA margin), we expect healthy performance given the strong distribution channel, leadership

position across most of the product categories (over 20% market share). Hence, we expect volume and revenue

growth of 12% & 16% CAGR in FY15-18E.

0

100,000

200,000

300,000

400,000

500,000

600,000

FY11 FY12 FY13 FY14 FY15 FY16EFY17EFY18E

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY11 FY12 FY13 FY14 FY15 FY16EFY17EFY18E

(Rs

mn

)

Capex Operating cashflow 1

51

,26

4

17

5,5

13

18

7,9

51

20

4,2

64

23

4,5

00

26

6,4

00

31

1,6

00

0

5000

10000

15000

20000

25000

30000

35000

40000

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6E

FY1

7E

FY1

8E

(Rs m

n)(M

T)

Volumes (MT) Revenues (Rs mn)

13.4%

16.1% 15.0%13.3%13.3%13.3%13.5%

0.0%

5.0%

10.0%

15.0%

20.0%

0

1000

2000

3000

4000

5000

6000


EBITDA (Rs mn) margins (%)

62


Table: Packaging product details

Category Products Clients/Industry

Protective

Packaging

Division

Thermoplastic PE foam sheets and profiles, cross-linked

and blended PE foams (block & extruded), air bubble

films, customized products like corrosion resistant, anti-

static, UV resistant and metal laminated foam

Sports goods, electronics, white goods, textiles,

transport, healthcare, toys, insulation to prevent

from transit damages like breakages, scratches,

dents, abrasions and corrosion.

Packaging

Films

Extruded plastic packaging films up to 7 layer multi

films. Food items, largely edible oil (~40% of revenues

from the segment)

HUL, Ruchi Soya Industries Ltd, Adani Wilmar Ltd,

Cargill Oil (for the Gemini refined oil products), etc

Cross-

laminated

Films

Technical collaboration with Rasmussen Polymer

Development AG, Switzerland to manufacture cross

laminated XF films

Agriculture, Industrial applications, and for covering

purpose


Figure: Volume & Revenue trend Figure: EBITDA & margin trend


Industrial division – muted performance but gradual recovery ahead

It is one of the major player in manufacturing industrial products & second largest player in material handling

products (markets share of 15%) with 202 channel partners after Nilkamal. Supreme derives 16% revenues from

this segment with an EBITDA margin of 11%-13%. It manufactures dashboards, bumpers, grills, Air-conditioner

grills, Washing machine, Tub and Components, Cabinets for electronic items, Water purifier, crates, bins, pallets

and supplies products to Auto players, Consumer durable as well as FMCG companies. It has dedicated plants to

provide customized products to prestigious clients with 6 manufacturing sites at different locations. The

clientele includes blue chip companies such as Hindustan Motors, Ashok Leyland, Mahindra, Tata Motors,

Maruti, Exide, Hitachi, Panasonic, Whirlpool, Videocon, Samsung, Coca Cola India, HUL, Reliance Retail, PepsiCo

India. It is a major supplier of plastic parts to Tata motors at Jamshedpur plant & Samsung (India) for plastic

requirements ranging from television sets to computers while in soft drinks segment, it meets 70% of Coca Cola

& 60% of Pepsico India’s requirement. Further, it is the sole supplier for complete plastic requirement of

washing machine model “Radiance” for Whirlpool India Ltd. This segment has witnessed pressure both in

volumes and value terms in past few quarters due to slowdown in demand of consumer products, which we

believe will continue during FY16, hence, we expect volumes and revenues CAGR of 11% & 13% during FY15-

18E, respectively.

53

,50

0

53

,50

0

56

,50

0

56

,50

0

61

,50

0

61

,50

0

61

,50

0

0

2000

4000

6000

8000

10000

12000

14000

16000

48,000

50,000

52,000

54,000

56,000

58,000

60,000

62,000

64,000

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6E

FY1

7E

FY1

8E

(Rs m

n)(M

T)

Installed capacity(MT) Revenues (Rs mn)

20.9%

20.3%

18.2%18.5%

18.2%

19.0%19.2%

16.5%

17.5%

18.5%

19.5%

20.5%

21.5%

0

500

1000

1500

2000

2500

3000


EBITDA (Rs mn) margin (%)


63

Figure: Volume & Revenue trend Figure: EBITDA & margin trend


Furniture segment - High focus on value added products would be margin lucrative

Being a second largest manufacturer of moulded plastic furniture (market share of 9.75%); it is well positioned

in Premium furniture segment (such as, plastic chairs, stools, sofa sets, Centre tables & trolley, dining tables

office furniture etc) through 684 channel partners. After a dismal performance in recent year due to the

subdued volume growth and low margins, the company has restructured the product mix and shifted focus

towards premium furniture (earlier commodity furniture) by introducing various value added products (trimmed

product portfolio), which has resulted into significant margin expansion in FY15. It has started romoting

products through e-commerce and focusing to increase exports in a big way. It now plans to tap tier 2-3 cities by

offering franchise model (currently 350+) with the focus to serve households, institutions and offices. As the

moulded plastic furniture is gaining traction over steel, metals made furniture, the company is focusing more to

introduce various high margin value added products (12 new products), which would increase volume/revenue

CAGR to 12%/16% in FY15-18E, respectively.

Figure: Volume & Revenue trend Figure: No. of franchise trend


Increasing contribution of value added products

The thrust to launch and increase the contribution of high margin value added products (including fittings) along

with the major share of branded products (80% product portfolio) would help to improve margin profile. During

FY09-15, the share of value added products increased from 21.6% to 34.2%, which would further increase over

35% to improve the margins and bring efficiency at operating level.

60

,00

0

60

,00

0

63

,00

0

63

,00

0

63

,00

0

65

,00

0

65

,00

0

57,000

58,000

59,000

60,000

61,000

62,000

63,000

64,000

65,000

66,000


Installed capacity(MT)

38

,32

5

39

,79

3

33

,62

0

37

,47

0

40

,09

3

44

,50

3

51

,17

9

0

2000

4000

6000

8000

10000

0

10,000

20,000

30,000

40,000

50,000

60,000

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6E

FY1

7E

FY1

8E

(Rs m

n)(M

T)

Volumes (MT) Revenues (Rs mn)2

8,0

00

28

,00

0

28

,00

0

30

,00

0

34

,00

0

34

,00

0

34

,00

0

0

1000

2000

3000

4000

5000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6E

FY1

7E

FY1

8E

(Rs m

n)(M

T)

Installed capacity (MT) Revenues (Rs mn)

253

303328

353375

397 419

0

50

100

150

200

250

300

350

400

450


64


Table: Segment-wise – share of value added products

Segments Revenue share of value added products

FY14 FY15 Targeted FY20

PVC pipe 27.7% 30.3% 30.0%

Consumer furniture 48.6% 47.6% 65.0%

Cross laminated films 100.0% 100.0% 100.0%

Protective packaging 31.7% 30.4% 45.0%

Composite cylider - 100.0% 100.0%

Others 1.6% 2.5% -

Total 32.3% 34.2% Over 35%


Strong product portfolio; multiple plant location across India

Composite cylinders – a next big leap

The newly ventured composite cylinder segment with an capacity of 4,50,000 cylinders p.a. (Rs1000 mn capex

Halol, Gujarat) has passed test of EN & ISO standard & got an approval from Petroleum Explosives & Safety

Organization (PESO) for its 6 new varieties (5Kg, 10KG, 15KG, 20KG etc) composite cylinders. The company is

trying to negotiate with few Korean companies to get an export orders. However, the discussion is on

preliminary stage. The Indian government is planning to invite tenders in March 2016 for composite cylinders

and will review the demand prospects and perception of the participants (including global players). Any positive

outcome would be a big booster for the company as the cylinder industry operates with 200 mn (nos) and

adding 17 mn every year, which would open the new growth avenue. As per the management, the company has

a sufficient land bank to increase the capacity by 3x to the existing one. Currently, the facility is not contributing

revenues to the company. In addition, it has also introduced composite pipes and CPVC fire sprinkler system.

We have not considered revenues from this segment in our estimates.


65

Inherent feature: business transparency, strong past record & dividend paying company

Supreme is constantly reviewing its business operational to improve margins & cashflow generation. It has

Rs175cr of foreign currency loan, which is fully hedged to mitigate the currency risk while it covered 30-40% of

working capital loan. Supreme gets clean credit (without letter of credit) sometimes to procure raw materials

from its suppliers (CPVC Resin – Kaneka, Japan and PVC Resin - Reliance, GAIL, IOC) due to strong relationship. It

has maintained EBITDA margins with the Return on Equity (RoE) of above 30% over the past 5 years (barring

FY14 & FY15). Growing revenues and profit year on year, and strong ROCE and ROE, reflect the company's

leadership position in the sectors of its presence. Moreover, it has maintained consistency in market share with

multiple product offerings in the highly competitive markets.

Figure: D/E ratio trend Figure: ROE & ROCE trend


Supreme Chambers – real estate project

Out of the saleble area of 2,82,835 sqft, it already sold 2,12,286 sqft for a consideration of Rs3387 mn till date.

The remaining area of 63,868 sqft (excluding 6,681 sqft for company use) is likely to fetch Rs1250 mn in the

coming years.

Supreme Petrochemical Ltd. (SPL)

Supreme & R.Raheja group owns each 29.99% stake in SPL. Being the largest Indian manufacturer of polystyrene

with the installed capacity of 2,72,000 TPA, it has state-of-the-art facility located at Nagothane, Raigad spread in

333 acres. It also manufactures compounded Polymers, having annual capacity of 30,000TPA. It is also the

largest exporter of PS from India, exporting to over 80 countries. For the stake of 29.99% in Supreme Petrochem

Ltd, we have arrived at a value of Rs.17 per share (post 30% holding company discount).


Particulars Q1FY15 Q2FY15 Q3FY15 Q4Y15 Q1FY16 Q2FY16E

Revenues 760 1066 1152 1278 773 1096

YoY growth (%) 8 9 15 0 2 3

EBITDA 81 129 198 258 91 128

Margin (%) 10.7 0.0 0.0 0.0 11.8 11.7

PBT 33 80 147 212 49 86

Adjusted PAT 22 53 96 141 32 57

Margin (%) 2.9 5.0 8.3 11.0 4.1 5.2

Adjusted EPS (Rs) 1.7 4.2 7.6 11.1 2.5 4.5


0.50.5

0.50.5

0.4

0.30.2

7.38.7

6.49.1

11.0

15.4

20.8

0.0

5.0

10.0

15.0

20.0

25.0

0.0

0.1

0.2

0.3

0.4

0.5

0.6

FY1

2

FY1

3

FY1

4

FY1

5

FY1

6E

FY1

7E

FY1

8E


33% 34%

29% 28%

26% 26%

28%

35% 35%

32%

30%

28%

31%

34%

24%

26%

28%

30%

32%

34%

36%

38%


ROE ROCE

66


Valuation

Reasonable valuation; initiating with a BUY

Supreme's leadership position across all verticals, strong track record, consistency in financial performance and

sound management track record along with the sustainable margin profile and return ratios gives us confidence

to bet on the long term growth story. The company’s effort to continuously look for capacity expansion, healthy

cashflow generation and decent balance sheet in the highly competitive plastic industry along with the focus on

CPVC products would result into consolidated revenue and earning CAGR of 15% & 18% in FY15-18E,

respectively. At CMP, the stock trades at 21x/17x its FY17E/FY18E earnings (below 3/5 years average P/E of

22x/20x). Hence, we initiate the stock with a BUY rating on a SOTP basis for the target price of Rs865, an upside

of 27% from current level (21x FY18E EPS + Rs17/share stake in Supreme Petrochem).

Key Risk

Raw material price fluctuation and delay in pick up in volumes could impact revenue and operating performance and

thus margin profile of the company.


67

About the Company

Founded in 1942 with headquarter in Mumbai, Supreme Industries Limited (Supreme) is one of the largest

manufacturer of plastic pipes in India with an annual capacity of 3,00,000MT. Leadership position in most of the

product categories, diversified revenue streams & large product portfolio across four verticals coupled with multi

location facilities are the key features of the company. It has a significant presence in the Indian plastic industry

(over 49 years) under present management & consistently paying dividend since past 2 decades. Currently, it has 25

plants situated across India with strong distributional channels and over 12000+ products across various business

segments. It has presence in composite cylinders & pipes and bathroom fittings as well.

Table: Segmental information

Business Vertical

(FY15)

Revenue

contribution (%)

EBITDA

(%) Product Portfolio Targeted Customer Segment

Plastic Piping

System 50% 13%

UPVC Pipes, Injection

Moulded fittings, Handmade

fittings, Polypropylene

Random, Co-polymer Pipes &

Fittings, HDPE Pipe Systems,

CPVC Pipes Systems, LLDPE

Tube and Inspection

Chambers

· Potable Water Supply

· Irrigation, plumbing, bore-well

· Drainage & Sanitation

· Housing, Water harvesting

Consumer Products 7% 15% Furniture · Retail Stores , Households

· Educational Institutions

Industrial Products 22% 12%

Industrial Components Auto Sector, Industrial users

Material Handling Products

(Crates, Pallets & Dustbins)

Electronic Household Appliances

Water Purification - filters

Soft Drink Companies

Agriculture & Fisheries

Packaging Products 16% 18%

Specialty Films

Protective Packaging

products

Cross Laminated film

products

Composite products - LPG Cylinders · Retail Stores , Households


68


Diagram: Technical collaboration across all verticals


•Tie-up with Wavin, Netharland for UPVC pipes, fittings etc

•Tie-up with European players for CPVC pipes & fittings and also with Kaneka, Japan for RM

Plastic pipes

•Technical Collaboration with German manufacturer & other 2 players for Composite pipes & Cylinders

Industrial Products

•Tie-up with Rasmussen Polymer development , Switzerland for Cross laminated films in protective packaging

•Tie-up with Sanwa Kako, Japan for 2 stage foam & PE Tech, Korea for cross linked foam

Packaging products

•Faom Partner, Switzerland for reticulated PU Foam

•Kumi Kasai Co.Ltd, Japan for automotive Components

•Industrie Polieco MPB Srl, Italy for Sewerage Systems

Other tie-ups


69

Financial summary



Net sales 42,552 45,648 52,880 63,956

Growth (%) 7.4 7.3 15.8 20.9


EBITDA 6,662 6,944 7,968 9,544

Growth (%) 13.1 4.2 14.8 19.8

Depreciation (1,390) (1,405) (1,472) (1,559)

EBIT 5,273 5,538 6,496 7,986

Interest paid (580) (502) (423) (384)


Pre-tax profit 4,718 5,082 6,126 7,666

Tax (1,600) (1,677) (2,022) (2,530)


Net profit 3,224 3,405 4,105 5,136

Adjusted net profit 3,117 3,405 4,105 5,136

Growth (%) 13.6 9.2 20.6 25.1

Shares o/s (mn nos) 127 127 127 127



Net fixed assets 11,323 11,789 12,327 13,006

Investments 1,209 1,209 1,209 1,209

Current assets 11,038 11,903 13,662 16,805

Inventories 4,647 5,259 6,181 7,503

Sundry Debtors 2,380 2,751 2,898 3,504

Cash and Bank 1,818 1,734 2,031 2,714

Loans and advances 2,179 2,145 2,538 3,070

Total assets 23,570 24,902 27,198 31,020




Total Debt 5,898 4,955 4,206 4,033

Secured loans 2,329 1,635 1,683 1,613

Unsecured loans 3,569 3,320 2,524 2,420


Curr Liab & prov 4,662 4,893 5,271 5,928


Provisions 1,657 1,657 1,657 1,657



Book Value (Rs) 95 111 132 159

*FY changing from June to March in FY16




Pre-tax profit 4,718 5,082 6,126 7,666

Depreciation 1,390 1,405 1,472 1,559

Tax paid (1,422) (1,677) (2,022) (2,530)

Chg in working capital 765 (718) (1,084) (1,803)

Other operating activities 550 - - -


Capital expenditure (1,936) (1,872) (2,009) (2,238)

Chg in investments 10 - - -


CF from investing (b) (1,859) (1,872) (2,009) (2,238)



Dividend (incl. tax) (1,197) (1,362) (1,437) (1,798)



CF from financing (c) (2,596) (2,305) (2,185) (1,971)

Net chg in cash (a+b+c) 1,545 (85) 298 682

Financial Ratios


Adj EPS (Rs) 24.5 26.8 32.3 40.4

Adj EPS growth (%) 13.6 9.2 20.6 25.1

EBITDA margin (%) 15.7 15.2 15.1 14.9

Pre-tax margin (%) 11.1 11.1 11.6 12.0

RoE (%) 27.7 25.9 26.5 27.8

RoCE (%) 30.0 28.5 31.0 34.0




Net margin (%) 7.3 7.5 7.8 8.0






Valuations


PER (x) 27.7 25.4 21.0 16.8


PCE (x) 19.2 18.0 15.5 12.9

EV/Net sales (x) 2.1 2.0 1.7 1.4

EV/EBITDA (x) 13.6 12.9 11.1 9.2

Dividend Yield (%) 0.0 0.0 0.0 0.0

70


Notes

Dealing (91-22) 6637 1150 [email protected]

Key to Ratings

Stocks:

BUY: Absolute return of 15% and above; ACCUMULATE: 5% to 15%; HOLD: Upto ±5%; REDUCE: -5% to -15%; SELL: -15% and below.

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Research Analyst or his/her relative’s may have financial interest in the subject company. IDBI Capital Market Services Limited or its associates may have financial interest in the subject company.

Research Analyst or his/her relatives does not have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of

publication of Research Report : IDBI Capital Market Services Limited or its associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the

month immediately preceding the date of publication of Research Report. The Subject Company may have been a client during twelve months preceding the date of distribution of the research

report.

Price history of the daily closing price of the securities covered in this note is available at nseindia.com and economictimes.indiatimes.com/markets/stocks/stock-quotes.


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