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Industrials August 16, 2013

Supreme Industries
Accounting: GREEN
Bloomberg: SI IN EQUITY Predictability: GREEN
Reuters: SUPI NS BUY Earnings momentum: GREEN


Supreme’s competitive advantages in the fast-growing plastic piping Nitin Bhasin
and packaging industry stem from its unmatched manufacturing and Tel: +91 22 3043 3241
distribution reach, consistent new product launches (including value-
added products) and technological tie-ups. This is validated by its FCF Tanuj Mukhija
generation and increasing RoCEs (FY13: 26% vs FY11: 20%). Its Tel: +91 22 3043 3203
competitive advantages and surging CFO (36% CAGR in FY10-13) will
provide further support to this platform (`9bn capex in FY13-16) which
will in turn lead to higher volume/revenue growth (14%/17% CAGR in Recommendation
FY13-16) and higher CFO for further product/capacity expansions. CMP: `350
Current valuations (13x FY14E EPS) do not reflect its superior plastics
Target Price (12 Months): `442
business, unrivaled financial profile and top-quality management. We
initiate coverage with a BUY and a TP of `442 (`420 for core business). Upside (%) 27
EPS (FY14): `28.1
Competitive position: STRONG Change to this position: POSITIVE
Variance from consensus (%) 6.1
Well-built competitive advantages key: Supreme has delivered superlative
adjusted RoCEs (average 22.3% in FY09-13) in a capital-intensive industry,
Stock Information
owing to its strong competitive advantages built through: (a) unmatched
manufacturing (22 manufacturing plants) and distribution reach, (b) Mkt cap: `44bn/US$721mn
technology tie-ups with renowned international players (Wavin, RPD 52-wk H/L: `380/264
Rasmussen), and (c) diverse products servicing multiple industries. These 3M ADV: `19mn/US$0.3mn
advantages are helping it gain market share from unorganised players.
Beta: 1.2
Snowball gathering momentum on a solid platform: Supreme has
BSE Sensex: 19,368
created a solid platform (sales of `34bn in FY13 vs `13bn in FY08) by: (a)
consistent modifications in its product portfolio mix to increase VAP share Nifty: 5,742
(31.7% in FY13 vs 22% in FY09), and (b) capacity expansion without putting
stress on the balance sheet. Supreme is well placed to increase its reach and Stock Performance (%)
size in the fast-growing piping and packaging segments through mega capex 1M 3M 12M YTD
(`12.3bn in FY13-16) funded by internal accruals (`21.2bn in FY13-16). 1 (1) 27 17
Strong operating cash flow generation to fund mega capex: Revenue Rel. to Sensex 4 1 18 18
CAGR of 17% in FY13-16 would be due to capacity additions in the piping and
packaging segment. Adjusted RoCEs of ~25% would sustain thanks to the Shareholding pattern (%)
strong 14% volume CAGR in FY13-16 and stable EBIT margins of ~13%.
Operating working capital will deteriorate by 5 days in FY14 due to higher
sundry creditors. Overall, Supreme will generate CFO of `21.2bn in FY13-16 30%
(~10% FY14E CFO yield), which would be sufficient to fund its growth plans.
Attractive valuation with limited downside risks, BUY, TP 442: We use , 50%
the SOTP method for our target price of `442—Plastic business: `420 (DCF),
implying 16.8X FY14E EPS and 13.7X FY15E EPS; real estate and Supreme DII, 10%
Petrochem: `22. Current valuations at 13.1x FY14E core EPS are not FII, 10%
representative of its superior competitive advantages, balance sheet capacity
and high return ratios. The stock trades at an unjustified 10% discount to Source: BSE, Ambit Capital research
Astral despite its larger size, higher RoEs and better liquidity. Key risks: Entry
of large global players and lower-than-expected volume growth. One-year forward P/E chart
Key consolidated financials (` mn, unless specified) 15
Year to June FY12 FY13 FY14E FY15E FY16E 13
Operating income 29,279 34,040 40,413 48,758 56,288 9
EBITDA 4,719 5,356 6,408 8,291 9,273 5
EBITDA (%) 16.1% 15.7% 15.9% 17.0% 16.5%







Adjusted EPS (`) 16.6 22.3 26.7 32.3 39.2
RoE (%) 33.9% 36.0% 34.3% 32.8% 31.5%
22.8% 25.6% 24.7% 24.6% 24.7% 1 yea r fo r w a r d P E
RoCE excluding real estate (%)
A ver a g e 1 yea r fw d P E ( x )
P/E (x) 21.0 15.6 13.0 10.8 8.9
Source: Company, Ambit Capital research Source: Bloomberg, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit
Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

Please refer to the Disclaimers at the end of this Report.

Supreme Industries


Supreme Industries: Multi-industry plastic processing leader……..……….. 3

Indian plastics sector: Poised for growth……………………………………..… 5

Mapping Supreme’s well-built competitive advantages………………………7

Snowball effect to gain momentum…………………………………………… 15

Mega capex to drive growth with stable RoCEs……………………………… 19

Valuations not reflective of supreme plastic business……………………… 22

Accounting analysis: Clean chit……………………………………………….. 29

Ambit Capital Pvt Ltd 2

Supreme Industries

Supreme Industries: Multi-industry
plastic processing leader
Exhibit 1: Business overview - multi-industry servicing business segments
Application/ Sales Share of
Segments Sub-segments/ Products Revenue Revenue EBIT
customers volumes VAP in
share growth share
(MT) segment
uPVC Pipes, injection moulded fittings &
Plastics handmade fittings, polypropylene random Potable water supply,
piping copolymer pipes & fittings, HDPE and CPVC irrigation, drainage and 52% 29% 52% 24%
system Pipes Systems, LLDPE Tube and Inspection sanitation, housing
Chambers, manholes
Packaging films Construction,
automobiles and other
Protective packaging products: Non-
Packaging industries for insulation
cross-linked foam packaging, cross-linked PE 21% -2% 27% 53%
products applications; CLF films 41,307
foam packaging
for covering purposes in
Cross laminated films multiple sectors
Industrial components: Customised plastic
Auto sector, consumer
parts for the automobile sector (e.g. cockpit
durable products, water
assembly) and the consumer durable sector
(plastic body for washing machines)
Casing pipes for oil and
Industrial Composite products: Cylinders and pipes
gas industry, cylinders 18% 12% 14% ~16%
products (under development) 40,033
for household use
Material handling: Heavy duty industrial
crates, fabrication facility to manufacture Soft drink companies,
customised crates, roto moulded items, agriculture and fisheries
plastic pallets
Consumer Furniture (tested for ergonomic comfort, Retail stores,
9% -3% 7% ~40%
products resilience and environmental resistance) educational institutions 19,366
Total 281,452 100% 17% 100% 31.0%

Source: Company, Ambit Capital research, Note: VAP= Value added products.

Technological collaborations across segments
Supreme Industries does not have its own R&D division to create new products.
Hence, it has entered into technological tie-ups with renowned international
players across all product categories at very low royalty and license fees. Through
technological collaborations, the company has launched new products whilst
keeping product quality ahead of unorganised players. Supreme would not have
created products such as Silpaulin and CPVC pipes without technological
assistance from other players. It is creating a new segment (composite products)
with the help of European and South African technology (Lomold) partners.
Exhibit 2: Technology partnerships
Segments Sub-segments/ Products Technology partner/ collaborator
Wavin Overseas B.V., Netherlands is a subsidiary of Mexichem. It is a
uPVC pipes and fittings, PPRC Pipes & Fittings leading player in above and below ground pipe systems for hot and
Plastics piping
cold water applications in Europe.
The technology partner is not known but competitors highlight
CPVC pipes (currently, a `8bn-10bn market)
that it is a European company. Raw material sourced from Kaneka.
Protective packaging (two-stage cross link foam for Sanwa Kako of Japan, the largest makers and patent holders of
insulation purposes) polyethylene block foam in the world.
Cross laminated films (cross line bonded film and
products RPD Rasmussen Polymer Development AG, Switzerland, is the patent
cross plastics film, the next generation with
holder of cross-laminated film. Supreme’s patent is valid until 2023.
superior properties)
Names not disclosed. Supreme currently has a tie up with a
Composite LPG cylinders German Equipment manufacturer. Apart from this German company,
Industrial there are two other companies which provide the technology.
products Lomold, South Africa is the first company to manufacture plastic
Composite drill pipes commingled with long glass-fiber into a closed mould in a cost
effective way.
Source: Company, Ambit Capital research

Ambit Capital Pvt Ltd 3

international collaborations. Opportunities Threats  Organised PVC pipes account for only 50% of the market. Belgian firm. packaging and industrial products. (22% in FY09 vs 31.  An unmatched distribution and production network—22  Our primary checks suggest that Supreme’s products are not manufacturing plants and more than 1. We India.6x) and Finolex Industries (0. with a strong presence in south and east India.  Higher EBIT margins through focus on value-added products  The business is capital-intensive and requires continuous (VAP) such as pipe fittings and its cross laminated film.5x) vs other organised competitors like Jain Irrigation (1.  Per capita plastic consumption of India is only 7kg. believe this is a lost opportunity for Supreme.  Increase in competition from international players: For example: the Supreme. thereby reducing  Recent entry into composite products especially composite demand.  Market leader in the fast growing PVC pipes segment for  PVC pipes of any company are easily replaceable by a competitor buildings and has a monopoly in cross-laminated films in India. significantly  Weak monsoon and low GDP growth may affect PVC pipe demand below the global average (of 28kg) especially in the agriculture from agriculture (30% of total PVC pipe sales for Supreme). opportunity to add new products. Aliaxis. Supreme Industries SWOT analysis Exhibit 3: SWOT analysis of Supreme Industries Strengths Weaknesses  Diversified product portfolio across segments such as pipes. acquired a majority stake in the unlisted. and infrastructure sector. cylinder can be huge opportunity in India and the Middle East.99x). Group and JM Eagle may also follow Aliaxis’ example. Other large international players like Tessenderlo players. Silpaulin.  Strong balance sheet (FY13 gross debt:equity of 0. Source: Company.  INR depreciation can increase the product price. reinvestment in gross block.  Technical tie-ups in all segments with reputed international  The company has to continuously update technology through players. Ambit Capital research Ambit Capital Pvt Ltd 4 .7% in FY13). with a better quality product and a renowned brand. due to the standard nature of the product.  Unavailability of raw material for PVC pipes and CPVC pipes can  Higher plastic pipe demand through PVC (replacement of GI) probably reduce growth.250 dealers across available due to capacity constraints especially in Chennai. and better technology pipes such as CPVC  Supreme’s competitive advantage would be reduced if competitors  Supreme’s technology tie-ups with global players provides an start innovating new products or improve distribution reach. is well placed to capture the structural shift to organised Ashirvad Pipes.

5mn tonnes by FY12. Astral Polytechnik.8 8% Extrusion 68% conduits and profiles. Polyethylene (PE) 36% 2. Engineered and specialty plastics are derivatives of styrene which exhibits superior mechanical and thermal properties. consumer durables. retail etc. In FY06-11. and Poly Vinyl Chloride (PVC) account for the bulk of plastic demand. Finolex Industries. Exhibit 6: Supreme’s key competitors in plastic processing industry Segment Companies Supreme. Plastics have several advantages over other competing materials in:  Packaged goods: Consumption of packaged goods is increasing due to lifestyle changes. increase in disposable income and urbanisation will lead to higher demand for plastics in healthcare.6 12% Industrial injection moulding. The Department of Chemicals and Petrochemicals expects capacity addition of 8. SKF Consumer products Supreme. Plastic piping system Prince Packaging products Supreme. Jain Irrigation. due to the existence of more than 23. The competitive intensity is very high in the plastic processing industry. National Plastics Industrial products Supreme. Uflex ltd. Jindal Poly. automobiles. Ambit Capital research Key demand drivers for plastic products Low per capita consumption of plastics in India (7kg vs global average of 28kg). We believe a large portion of this capacity addition will be from organised players which will have better technology and higher applications. fibre and filaments pipes.000 plastic processing units in India. packaging. Ashirvad Pipes.7% demand CAGR for PVC pipes in FY12-17. Further. Polyplex. plastics can also be classified on the basis of the manufacturing process (as shown below). price advantage of plastic vs competing packaging material and wide use in segments like drinking water and milk supply.2% over the last six years to reach 8. Motherson Sumi. Neelkamal Plastics. The industry is highly fragmented and has a large number of unorganised players. Exhibit 4: FY11 demand break-up of plastics by type Exhibit 5: Classification of plastics by manufacturing process Consumption Market Market FY06-11 Moulding Products volume share share CAGR growth (mn tonnes) Films and sheets. Plastics can be classified based as commodity. Time Technoplast Source: Company. Tata Autocomp.6 3% Roto 1% Large circular tanks such as water tanks Total 7. Sintex Industries.9 10% moulded luggage Blow 5% Bottles.9 9. leading to improvements in crop yields. Ambit Capital Pvt Ltd 5 .  Agriculture sector: Use of plastics in agriculture (like surface cover cultivation using plastic films) can conserve soil moisture and a provide favourable micro climate. household Injection 25% injection moulding and thermoware/ Poly Vinyl Chloride (PVC) 24% 1. as PVC pipes are easy to install and have a longer life.25mt by FY17. miscellaneous applications Polypropylene (PP) 34% 2.  Construction sector: Plastic PVC pipes are replacing galvanised pipes. toys and houseware Others 6% 0. engineering and specialty products. Supreme Industries Indian plastics sector: Poised for growth Plastics industry: Fastest-growing industry in India The plastics industry has expanded at a volume CAGR of 9. containers.2% Source: Report of the Sub-group on Petrochemicals Source: CIPET The Department of Chemicals and Petrochemicals. Polypropylene (PP). plastic processing capacity in India increased at a CAGR of 15%. India expects a more than 10% demand CAGR for commodity plastics and 10. Commodity products such as Polyethylene (PE).

However. In India. in the last 15 years. The next generation of pipes after HDPE pipes is polystyrene pipes. have longer life and If the price differential between are one-fifth the weight of GI pipes at similar costs. The advantage of PP-R over PVC pipes is that they are environmentally friendly. We expect this trend of PVC pipes and other superior adopting new plastic pipe technology to continue. Irrigation . However.6mn tonnes. India’s sanitation industry owing to low government spending. Supreme Industries  Auto industry: Replacement of iron and steel parts by relatively lower weight plastics helps to improve fuel efficiency of the automobile. PVC pipes are substituting GI pipes because PVC pipes are easy to install. plastic furniture etc. pursuit of education and withdrawal of women from the labour force. as they are expensive. Also. and thus they can remain bent for a longer period of time. Thus. In the developed European and North American markets. Polystyrene pipes have superior tensile strength than other common plastic pipes. their use in India is limited. The key demand driver for PVC pipes is superior performance at a lower price as compared to GI pipes. HDPE pipes unlike PVC pipes do not crack near plastic and steel joints. 10 1 Water Supreme is a market leader in PVC pipes followed by Finolex Industries. Sewage 29 Industry participants estimate total PVC pipes demand in India is 1. 12 Supreme’s main target segment is the plumbing and sewage sector unlike the general industry. an increase in urban sanitation penetration is government spending to improve India’s sanitation could lead to strong demand 50% and rural penetration is for PVC pipes. PP-R and PE pipes will be used in underpenetrated sectors. galvanised iron (GI) pipes were mainly used for hot and cold water applications in agriculture and construction. there is shortage of 22 million urban units and 54 million rural units. The PVC Supply. steel wire plants and battery manufacturing. textiles. The penetration of PVC pipes in industrial and sanitation applications is low. Plumbing . as PVC pipes are easy to install and have a longer life. HDPE pipes have higher tensile strength. then demand for new The developed countries in Europe have started adopting more advanced technologies would increase technologies such as PP-R pipes and HDPE pipes. the penetration of plastic pipes is low in the According to UNICEF. absorption of new technology: In India. paper mills. PVC pipes industry: Replacing the traditional metal PVC applications by sector Plastic pipes are the second-highest selling plastic product in India. We expect blue-collar wage growth in rural India to drive demand for entry-level consumption products like PVC pipes for housing. Further. Ambit Capital Pvt Ltd 6 . pharmaceutical. as they do not contain chlorine.4 . Thus. we believe that the plastic piping industry will upgrade to higher technology. 45 Growth avenues for Indian plastic piping sector Source: Finolex Industries We believe that there is a strong growth potential for plastic pipes in the housing sector due to housing shortage and strong replacement demand for galvanised iron (GI) pipes. Higher demand in underpenetrated industrial and sanitation sector: India has adopted PVC pipes at a rapid pace in the housing and agriculture sector (as a substitution for GI pipes). . Continuing shift to PVC from GI. galvanised steel pipes. PVC pipes have replaced Flexible Others. PVC pipes even lower at 21% are extensively used in various industries such as chemical processing. PVC (%) pipes are the largest-selling plastic pipes in the world. However. and HDPE. The wages of blue-collar workers have recorded a 15% CAGR in FY10-12 despite GDP growth slowing down by 550bps due to reverse migration. This shows that there is a large untapped opportunity for PVC pipes and newer technologies in the Indian industrial sector. such as CPVC pipes in housing plastic pipes were to decrease and other upcoming new technologies such as HDPE and composite pipes. pipes industry is highly competitive and dominated by unorganised players.

We have done a competitive mapping of Supreme’s segments namely: (a) Plastic pipe segment—PVC pipes and CPVC pipes (b) Packaging segment (c) Industrial segment (d) Consumer products segment (e) Composites segment (a) Plastic pipe: Supreme is the best placed The PVC pipes industry has consistently recorded 14% sales CAGR in FY06-11 especially for housing applications. the industry faces stiff competition from unorganised players Exhibit 7: Porter’s five forces analysis for the PVC pipes industry Bargaining power of suppliers HIGH Competition HIGH Bargaining power of buyers  The main raw material for PVC pipes is  More than 25. worrying about competition. thereby limiting the resin suppliers. However. in our opinion. (brands). New technology material is a major entry barrier for any products will substitute but will new entrant. shortage of raw Unchanged longer life. In cross-laminated films. The penetration of PVC pipes has increased due to the replacement of galvanised pipes. The demand for raw materials is due to better product quality  However. leading to stiff through raw material cost crude prices. switch between companies increasing the bargaining power of CPVC  Since VAP demand is high. consequently and better brand recognition. gain Barriers to entry MEDIUM  Shortage of CPVC pipes in the market implies that each Threat of substitution LOW  Whilst it may be easy to set up a PVC pipe manufacturing plant.682 products through an unmatched distribution network which translates into higher-than-industry growth and margins. This highlights strong resin. Supreme is an average player in the other two existing segments— Industrial and Consumer products segments. consumers can easily higher than supply.  Organised players are better demand for PVC pipes and high  The raw material for CPVC is supplied by placed than unorganised bargaining power of the only two companies—Lubrizol and players in the VAP segment industry. all PVC pipe competition in commodity increase to customers within 2-5 manufactures are price takers for PVC plastics industry days. Supreme has consistently increased its plastic piping product portfolio to 5. pipe processing companies in  The company and its peers pass PVC prices are positively correlated to India. Supreme Industries has built strong competitive advantages through an extensive manufacturing and distribution network. In our opinion. Ambit Capital research Ambit Capital Pvt Ltd 7 . Supreme has a monopoly by creating a new segment in tarpaulins. we believe it is player has the potential to  Threat of PVC pipe substitution difficult for a new player to set up a fully utilize capacity without by other product like galvanised distribution network. So. steel is low because PVC pipes are easy to install and have a  In case of CPVC pipes. creating a unique feedback loop that allows the company to consistently modify its products to meet consumer needs. Kaneka. Deteriorating take time Improving Source: Company. In our opinion. organised players are not bargaining power of individual focusing on market share companies. Supreme Industries Mapping Supreme’s well-built competitive advantages The plastic processing industry is generally viewed as a commodity industry. urbanisation and growth in the construction sector.000 plastic MEDIUM PVC resin which is in shortage in India.

but lagging in the building & 11.759* NA NA Leading player in the Borewell segment (a `8bn market). residential developers). Finolex is the largest pan-India competitor of Supreme Industries. Prince pipes established in 1973 manufactures uPVC. construction and infra segments. Nandi Pipes and Prince Pipes. Company manufactures PVC. Aliaxis. Ajay Group is a diversified engineered plastic products manufacturer with a presence across refrigeration sealing.000 factors: (1) focus on highly competitive irrigation pipes Industries 5.190* NA NA infrastructure clients. The company has recently 16. the company also manufactures CPVC pipe systems using the technology of Lubrizol. SWR pipes/fittings. Supreme’s closest pan-India competitor is Finolex in the PVC pipes segment and Astral Pipes is the largest competitor in the CPVC pipes segment. One of the three Indian partners of Lubrizol for FlowGuard pipes.2% revenues) segment vs fast-growing housing segment and (2) high margin fittings as a percentage of PVC pipe sales are less than 10%. PPR. Nearly 20- 25% of this segment’s sales come from plastic pipe fittings. LLDPE). acquired a majority stake in Ashirvad Pipes for US$150mn in Feb. Nu Drain 715 (50% of company 180. it caters largely to the agricultural segment. UPVC pipes sells across irrigation. We believe this is due to two Finolex 273 (55% of company 170. Ajay Pipes. This segment will be a major beneficiary of infra capex spending. Ambit Capital research. Source: Company. We have identified four other important unlisted players in the PVC pipes industry—Ashirvad Pipes. CPVC pipes and fittings catering to housing.745 Industries 16% systems which are finding increasing acceptance amongst revenues) institutional buyers (infra. automotive parts and extruded products. Industry.5% water/irrigation. One of the fastest-growing pipe companies in India (~44% CAGR over last four years) with the highest realisation. Finolex’s main target segment is the agriculture sector which accounts for 70% of its PVC pipes sales. It sells PE pipes in the gas and cable duct segments and for sewage & effluent disposal. Apart from UPVC pipes. Based on our dealer checks. a large global plastic pipes company.300 Jain Irrigation 406 NA for PVC pipe construction sector. Although Jain Irrigation is a large company. The 8. agricultural and Prince Pipes Unlisted 5. With a market share of 15%. a Japanese chemical company. CPVC. Ashirvad Pipes Unlisted 6. Exhibit 8: Know your competitors in the plastic piping business segment PVC pipe and Pipe Mcap related segment volume Segment EBIT Companies Brief business description and products (US$mn) revenues sales margin (` mn) (MT) Supreme manufactures a number of plastic compound pipes (PPRC. HDPE. Four-decade-old firm (mainly present in South/West India) manufacturing UPVC. whereas fittings account for more than 20% of Supreme’s sales.254 company has increased focus on CPVC pipes (60% of FY13 Astral Poly 208 (100% of company 49. HDPE. it is one of the three major PVC players in the organised market and a leader in the rural EBIT margin of 8% water & irrigation markets. The revenues) company has a tie-up with Lubrizol for CPVC raw material sourcing. It is developing its CPVC pipe offering. Prince has a strong presence in western India. Supreme Industries Supreme: Know your plastic pipe competitors Supreme is a market leader in the highly fragmented PVC pipes industry dominated by unorganised players. 2013. Finolex mainly has a presence in west and south India. Note: * FY12 revenues for Ashirvad Pipes and Prince Pipes Ambit Capital Pvt Ltd 8 . Finolex has in-house manufacturing of PVC yet its margins are more 13.495 12% sales) as their margins are better than PVC pipes. It offers CPVC Nandi Pipes Unlisted NA NA NA pipe systems in a technological collaboration with Sekusui Chemical Ltd. The company manufactures PVC and CPVC pipe systems.502 Supreme launched products like CPVC pipe systems.778 than 900bps below Supreme’s. Astral’s distribution network is mainly in west India and is now building in South India. Ajay Pipes Unlisted NA NA 12.

 Three-year average Return on Invested Capital: Supreme has the second- highest three-year average RoIC due to efficient capital allocation in fast- growing products. Other organised players like Prince Pipes and Ajay Group are currently too small in size to compete on a pan- India scale.3 10. Jain Irrigation is not in direct competition with Supreme Industries as it sells entire irrigation systems wherein PVC pipe is a component.84* CPVC and fittings Housing South India Pipes retailers CPVC. Exhibit 9: Supreme best ranked amongst peers (based on Exhibit 10) 3-year Piping Financial Product Distribution Overall average revenue size Leverage diversity network Rank RoIC and growth Supreme 2 1 2 1 1 1 Astral Polytechnik 3 2 1 2 2 2 Finolex 4 3 3 5 4 4 Jain Irrigation 5 5 5 6 5 6 Ashirvad Pipes 1 4 4 4 6 3 Prince Pipes 6 6 6 3 3 5 Source: Company. Now.65 Fittings Agriculture West India 500+ Jain PE pipes and 2 West and South 8. Huliot conducted a feasibility study to enter the Indian markets in 2009. We believe that several other large international players like Huliot plastic pipes and the Tessenderlo Group would like to enter the fast-growing Indian markets. revenue size and growth.44 Housing 700+ pipes and fittings and West India CPVC pipes and North and West Astral 18. Ambit Capital research.0 8. Based on our scorecard.22 Housing 400+ fittings India Finolex 8.7* 39. and distribution network. We have selected five parameters that we believe are the key to their performance—three-year average RoIC. Ambit Capital research. Astral Polytechnik is building its distribution reach in the niche CPVC product. PP-R and Housing and West and North Prince Pipes 7.0% 1. financial leverage. Industry.7% 0.2* 16.2% 0. Jain Irrigation and Prince Pipes are laggards.48 Agriculture 3000+ Irrigation fitting products India Ashirvad 4000 31.4%* 2.4% 0. We have assigned equal weightages to each of the five parameters.4 11. Central Supreme 23.0* 5. Finolex is focusing on the agriculture sector. a large global player with deep pockets like Aliaxis (acquired a majority stake in Ashirvad Pipes) can be a strong competitor by quickly scaling up its capacity and distribution reach. product diversity. PE. Note: *For the unlisted players. Note: Rank 1 indicates the best player on each parameter in the industry whilst rank 6 implies the worst-placed player. Supreme Industries (1) PVC pipes .3%* 0.8 18. In fact. Result: Domestic PVC pipe players are not a threat to Supreme Our competitive mapping report card implies that there is no material threat to Supreme’s market leadership in PVC pipes from domestic players. Exhibit 10: Numbers behind our scorecard 3-year FY13 pipe 3-year pipes FY13 Net Pipe Company Product Line Most important average revenue revenue debt/Equity manufacturing Distributors name beyond uPVC client RoIC (` bn) CAGR (x) plants CPVC.3 41. Supreme is the best player in the industry followed by Astral Polytechnik.9 24. we have taken only FY12 numbers from the Ministry of Corporate Affairs’ website to evaluate financial performance.6 13. PP-R North. Ashirvad Pipes and Prince Pipes.8* 6.37* fittings agriculture India Source: Company. In our opinion. which accounts for 70% of its PVC pipes sales.5 16. Finolex and Jain Irrigation despite larger turnover than Supreme have allocated capital in the less-profitable agriculture and micro Ambit Capital Pvt Ltd 9 .competitive mapping scorecard We have built a scorecard to evaluate the competitive positioning of six large organised PVC pipe players in India.

200 125 5.3x) are highly leveraged.800 75 20 10% 4. The demand for CPVC pipes has recorded a CAGR of FY11 FY12 FY13 more than 40% in the last four years.  Financial leverage: We believe stronger balance sheet will enable the company to expand through capacity expansion and acquisitions. Supreme has consistently increased its VAP contribution to the plastic piping segment revenues in the past six years by launching new fittings and PVC pipe products like CPVC. Our rank is based on the average of piping revenue size and piping revenue growth. Exhibit 11: VAP drives plastic piping revenue growth Exhibit 12: Fittings growth driven by consistent new launches 220 30% 5.22x) whilst Jain Irrigation (net debt:equity of 1. Ambit Capital research Source: Company. Supreme with market leadership and second-best growth is ranked 1. Astral has the highest growth but due to its smaller size. Ambit Capital research  Distribution network: A strong distribution network allows a company to increase the penetration of its products. Astral has the best net debt:equity (0.5x) and Price Pipes (net debt/equity of Supreme (Rs. In our opinion. 4 (2) CPVC: Prime example of Supreme’s product launches strategy 2 Supreme launched CPVC pipes (used for hot and cold water applications) in 2008. Ashirvad Pipes has the highest RoIC on a small base whereas Prince Pipes is the worst placed. resulting in lower RoIC. Supreme has 22 manufacturing plants spread across India whereas other players are concentrated in west and south India. Supreme Industries irrigation sector. Supreme has products for multiple industries such as CPVC resin in the world—Lubrizol and Kaneka. 0 with a modest capacity. agriculture and infrastructure. Astral Polytechnik has improved its RoIC on a small base due to strong demand of CPVC pipes. Supreme has developed a strong presence in the less- Fast growing CPVC pipes competitive north and east India markets with minimum delivery time and 6 without additional freight charges. Fittings account for 20-25% of sales for Supreme vs 35% for Astral and only 10% for Finolex. Lubrizol supplies CPVC resin to three Ambit Capital Pvt Ltd 10 . raw material sourcing for CPVC is the main barrier for new entrants.400 150 120 20% 5. it is ranked 3.  Product diversity: In our opinion. growth on a large base creates a platform for growth through internal accruals. Also.600 175 170 25% 5. As a result.000 100 70 15% 4. RHS) Source: Company. leading to higher-than-peer EBIT margin. Supreme has an exclusive tie-up Source: Company with Kaneka for CPVC resin supply in India.682 products in the plastic piping segments alone.600 50 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY10 FY11 FY12 FY13 Pipe mtrs sold (metres) Pipe products (nos) VAP % share in piping revenues (RHS) Pipe fittings (mn pcs. as there are only two manufactures of Astral (Rs. Thus. products catering to multiple industries provide numerous growth avenues in the fast-penetrating engineered plastics segment. We rank Supreme as rank 1 because it has a largest product portfolio with 5.800 200 5.  Piping revenue size and growth: In our opinion.

2% 0.7% 67.7% 1.7% 13.2% PBT margin 9. Silpaulin.3% Other SG&A 2.5% Employee cost 4.5% Gross margin 33.1% 0. Ajay Pipes and Ashirvad Pipes. Supreme got this patent through the merger of group company Siltap Chemicals in 2003. Astral’s interest expense as % of sales are still higher than Supreme.5% 2.6% 2.4% 14.9% EBITDA margin 13.1% 10.9% Advertising and Publicity Expense 0.3% 8.9% 1. However.0% 71.7% Tax expense 3.1% 0.7% 0. Supreme has higher power and fuel cost due to use of expensive captive power in Southern states such as Tamil Nadu. Supreme is planning to launch CPVC pipes for industrial and fire sprinkler applications and so is Astral. Whilst Astral has significantly reduced its net-debt-to-equity in FY13 (0.8% 2.2% 0.8% 3.1% 2.0% Labour charges 2.6% 3.4% 1.1% 2.297 4.5% 1.7% 71.6% 10.8% 71. Exhibit 13: Comparison of Supreme cost structure with Astral Polytechnik FY11 FY12 FY13 % of revenues unless otherwise specified Supreme Astral Supreme Astral Supreme Astral Net Income (` mn) 24.8% 12.5% 0.0% 0.0% Other income 0.5% 2.0% Depreciation 2. Ambit Capital research (b) Packaging: Silpaulin created new segment Supreme Industries has created a new segment in the tarpaulin industry through its highly successful product.6% Commissions and discounts 3.6% 3.7% 1.9% 2.1% 0.1% 11. The company has an exclusive patent with RPD Rasmussen Polymer for selling it in India and SAARC countries until 2023.0% 6.5% 1.3% 2.7% 0.7% 3.5% 8.5% 0.7% 2.5% 0.0% 0.7% 2.254 Cost of materials consumed 67.22x v/s 0.4% 2.1% 3.85x in FY12) resulting in lower interest costs.3% Interest received 0.1% 0.1% 0.5% Power and Fuel cost 4.8% 2.827 33.0% 28.5% 0.5% 2.8% 7.2% 0.1% 2.6% 2.4% 0.6% 9.0% 2.3% 0. Ambit Capital Pvt Ltd 11 .5% 14.113 28.8% Interest Expense 1. We believe Silpaulin’s product placement is perfect between HDPE and Nylon.7% 2.1% 0.4% Source: Company.0% 2.3% 28.7% 2.2% 28.9% 2.3% 2.3% 32.3% 32.6% 2.4% 11.2% 2.0% 3. Supreme’s PAT margins are similar to Astral due to higher tax expense as Astral got MAT credit entitlement in FY13.8% 1.0% Repair Expenses 0. Hence.0% 2.5% 4.2% 15.1% 10. Astral has higher advertising costs because of its national media advertising v/s low cost local media marketing strategy of Supreme Industries.3% PAT margin 6.7% 1.4% 2.3% Freight and Forwarding charges 1.1% 2.5% 1.0% 7.7% 67. Supreme has higher EBITDA/EBIT margins.9% 14.5% 1.2% EBIT margin 11.3% 1.880 8.1% 0. Further.4% 4.7% 7. Supreme Industries players in India—Astral.587 5.8% 13.6% 11. Comparing Supreme’s cost structure with Astral Polytechnik Supreme has higher gross margins as compared to Astral Polytechnik because Supreme gets cash discount on purchase of PVC resin from domestic manufacturers and better product mix (high margin Silpaulin and fittings products).

`500. Supreme Industries Exhibit 14: Silpaulin has a unique positioning . Overall. Exhibit 15: Industrial plastic products overview Exhibit 16: Supreme is an average player in the industrial segment Important % of Industry Key Competitors Clients sales Motherson Sumi. 40% Crates Pepsi Tulsi Extrusions 3 year CAGR sales growth 3 year average EBIT margin (RHS) Source: Company. Ambit Capital research Ambit Capital Pvt Ltd 12 . Nilkamal. making it highly affordable. Also. Supreme has the lowest three-year revenue CAGR amongst peers and its three-year average EBIT margins at 12. thus limiting competition from nylon films from price-sensitive buyers. Silpaulin has a longer life than HDPE. Plastics. Machino 30% 20% Tata Motors. Although Silpaulin is twice as expensive as HDPE films.7% are above Machino Plastics and Plastiblend but below Time Technoplast.high quality and value for money High Price Nylon Low Quality Silpaulin High Quality PE films Cotton Low Price Source: Company. Ambit Capital research Silpaulin is three times cheaper than nylon films. Plastiblends 5% Durables 0% 0% Supreme: Machino Time Plastiblend Industrial Plastics Technoplast Bottling Coca Cola. Competition in the industrial products segment is intense and fragmented. Ambit Capital research Source: Company. In our opinion. Time Technoplast. our dealer checks also suggest that Supreme has created a brand for Silpaulin and the demand is quite strong in India. except in/near Chennai (c) Industrial: Supreme is an average player The industrial segment services the auto industry. Sintex Industries. the advantage of operating in this segment is sales visibility but the disadvantage is limited pricing power and client concentration risk. 25% Auto Maruti Suzuki. bottling crates and consumer durable appliances. Overall. Silpaulin’s price range for small-ticket buyers like farmers is between `150. Time 15% Piaggio 20% Technoplast 15% 10% 10% Consumer 5% Whirlpool 30% Precision Pipes. 30% Precision Pipes. our analysis suggests that Supreme does not have a competitive advantage over its peers.

we have estimated long-term gross block turnover of 1. EBIT margins will consistently increase from 15% in FY15 to 18% in FY17 due to economies of scale.000/cylinder.  Composite cylinders to be priced more than twice as much as current steel LPG cylinders: Supreme’s composite cylinders will be priced around `3. In our opinion. However. Supreme Sales (Rs. although 5 5% larger in size. We agree that composite cylinders (the main focus in Supreme’s composite portfolio) have a large untapped potential market in the Middle East and India.5x for composites.  Composite drill pipes can be used in short radius oil drilling applications.2mn in 2009. composite pipes. Even the local competitor. Supreme Industries (d) Supreme shedding consumer products weight Over the last decade. composite pallet and composite auto components. However. significantly below the gross block turnover of Supreme’s other plastic products (2. Source: Company (e) Composites: High potential. To start off.6%. Further. We are not very bullish on composite drill pipes due to limited success of this product in other regions. as they break near the plastic and steel joints due to stress. Supreme is focusing on VAP 0 0% products for higher margins at the expense of lower topline growth. We 20 20% 15 15% have compared Supreme with Nilkamal (largest plastic furniture manufacturer) to 10 10% identify Supreme’s competitive positioning in this segment. The plastic furniture industry has high competition intensity from unorganised players. price-sensitive consumers could potentially avoid the lightweight advanced composite cylinders. Their main advantage over steel pipes is that they can remain bent for a long time without stress fatigue and can be used in multiple drills. the company will focus on export of composite cylinders to the Middle East.3x-2. we expect composite revenues of only `750mn in FY15 vs management guidance of `2bn. Ambit Capital Pvt Ltd 13 . Time Techoplast. In order to account for the risks involved in the composite business. it will not be easy for Supreme to enter the composites cylinder market because:  Supreme is a step behind competitors in product development: Supreme has not yet developed composite cylinders whereas large international players such as Hexagon Composites and Luxfer Gas Cylinders have been selling composite cylinders for more than a decade. As a result. the end consumer will have to bear the extra cost of replacing the steel cylinder. We believe the market has underestimated the risks involved in the composite products of Supreme Industries. the revenue contribution of consumer products to overall products revenues has more than halved from 21% in FY04 vs 8. the use of composite drill pipes has been limited. bn) Nilkamal Sales (Rs. Nilkamal.5x). high uncertainty Supreme will create a new segment in FY15 through composite products such as composite cylinders. Thus. bn) yet the margins are lower than the overall company margins. Although FY10 FY11 FY12 FY13 Supreme has increased its VAP share in the consumer segment to 40% vs 31. has lower margins than Supreme.4% in FY13. Supreme Industries has exited several low-margin consumer plastic products like mats (FY11-12). food serviceware and embossed sheets in Exiting competitive consumer FY07. has access to the composite cylinder product through the acquisition of Kompozit-Praha for US$5. This discrepancy Supreme EBIT margin(RHS) Nilkamal EBIT margin(RHS) highlights that the standard furniture business is not very profitable. In our opinion.0x-1.

the PVC pipes of one company can be easily substituted by those of any other company. truck Competitive advantage of owners and farmers. Astral and Supreme have better quality products than Prince and other unorganised players.  According to the dealers in Mumbai. better and HDPE.  The dealers have to pay for Supreme’s products in advance in Chennai. and (2) the competitive advantage of Supreme in PVC pipes. Silpaulin is sold at about `300/kg whereas HDPE is sold at quality than HDPE films but `120/kg. CPVC pipes and cross-laminated films. The product quality of organised players is better than south. The management confirmed that they are not very strong in Mumbai but they have a good network in the rest of Maharashtra. east. Also. central. reducing the pricing power of the PVC pipe manufacturer. Ambit Capital Pvt Ltd 14 . Supreme’s products are not easily available as compared to those of Prince and Astral. Silpaulin: Created a unique segment with a strong brand name  Silpaulin has been available in the Indian market for the last 27 years. Nylon is more than three times more expensive than Silpaulin. as there are only two distributors in Chennai.  The dealer margins are almost the same for each company. PVC pipes: Supreme has unmatched reach across India Competitive edge over  Customers and dealers believe that Supreme has built a moderate brand peers: Supreme has a through a better quality product and hence it charges a marginal premium presence in all the regions: to its competitors.  There are no supply-side constraints in the PVC pipes market. The buyers of Silpaulin can be classified into three segments—industries. north.  It has built a strong brand name in the market due to its value-for-money product positioning and good product quality. Supreme has the widest range of fittings products and this makes Supreme popular with customers. Supreme Industries Competitive advantages verified through dealer checks We conducted dealer checks across India to understand: (1) why customers buy Supreme’s products. Also. Silpaulin is not very expensive Silpaulin’s product life is 2-3 years which is in the middle range of the product as compared to HDPE life of nylon (10-15 years) and HDPE (1 year). CPVC pipes: Strong demand but capacity constraints  The demand for CPVC pipes is very strong across India. whilst its competitors do not have national reach  A dealer mentioned that customers can compromise on outside drainage pipes but the customers are not price sensitive for bathroom fittings as they are visible and used every day. west and unorganised players wherein some sell their products without ISI approval. Silpaulin: Cheaper than nylon and can substitute nylon  Silpaulin is placed between competitive tarpaulin products made from nylon tarpaulin applications.

Hence. The next phase from hereon will be a high-growth phase (on a high revenue base) driven by mega capex plans. leading to lower RoE.0 RoE 50% RoE placement strategy drive grow th improve (LHS.%) w ith stable RoE business 2. bn) model 60 Composites 15% 50 13% Consumer 40 11% Industrial 30 20 9% Packaging 10 7% Plastic Piping 0 5% EBIT margin FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E Source: Company. Exhibit 17: Evolution to a great business model – part 1 Phase1: First Phase2: Planted seeds for Phase3: Bore fruit from Phase4: Mega Capex 80 to drive growth with failed attempt to high growth and RoE ideal product placement 19% stable RoCE 70 improve business strategy Total Revenue 17% Revenues (Rs.5 First failed for high grow th and from ideal product MegaCapex to attempt to 3. the new strategy by the management in FY98 was to achieve pre-tax RoE of 20% by reducing interest costs to 5% of turnover by repaying debt. Exhibit 19: Restructuring measures during phase 1 to improve RoE Year Disposal/restructuring loss-making asset/subsidiary FY2000 Disposed off loss-making Premier Lighting Industries FY2000 Turnaround of Supreme Vinyl Films Limited from loss-making FY2001 Closed down Supreme Capital Management FY2001 Shut down Huntsman Supreme Source: Company. This was the first signal by the management for improving returns for shareholders.5 40% 2. Ambit Capital research Exhibit 18: Evolution to a great business model – part 2 Phase1: 60% Phase2: Planted seeds Phase3: Bore fruit Phase4: 3. Ambit Capital research Ambit Capital Pvt Ltd 15 .0 30% Capex- 1.5 Debt-to- Equity (x) 0% 0. the management not only restructured the group but also reduced capex to repay debt. Supreme Industries Snowball effect to gain momentum We analysed Supreme’s business performance over the last 15 years and found three markedly different phases of evolution.5 to-CFO 20% (x) (RHS) 1.0 (RHS) FY14E FY15E FY16E FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Source: Company. During this period. Ambit Capital research Phase 1 (FY1998-FY2001): First attempt (failed) to improve business model  In FY98.0 10% 0. Supreme’s interest cost was 10% of turnover.

Phase 4 (FY13-FY16E): Mega capex to drive growth with stable RoCEs  In our opinion. leading to an increase in the gross debt:equity again to 2. Phase 2 (FY01-06): Planted seeds for high growth and RoEs through deleveraging and product mix change  Over FY01-04.  Supreme reduced its gross debt:equity from 1.  We believe Supreme’s strong EBIT CAGR of 17% in FY12-17 will generate a cumulative operating cash flow of `20. Supreme changed its product mix (increased exposure to cross-laminated films and pipes at the expense of consumer products).  Overall. which would be sufficient to fund its mega capex plans and repay debt of `1. The company achieved its targeted D/E of 1. Composite products have a huge potential but with business risks. such as PVC.4bn in FY01-06) through internal accruals. which laid the foundation for a fourfold jump in the phase 3 post-tax RoE (10. The company plans to increase the PVC pipes capacity from 200. during this phase.4% in FY12. At the end of FY2001. Supreme Industries  However. excluding real estate assets.491mn. through a capex of `13. the company will introduce a new product segment— composite products (such as composite cylinders and composite pipes). we expect Supreme to increase the capacity of its high-demand products.9bn in FY09-12. This along with an improvement in working capital days (31 days in FY12 vs 52 days in FY08) helped the company generate a cumulative operating cash flow of ` 11. Supreme’s RoEs did not improve in FY1998-FY2001.000 tonnes by FY15.  Strong revenue growth and lower raw material prices due to decline in crude prices led to 33% EBIT CAGR. the company again targeted a debt-to-equity ratio of 1. mainly to increase the capacity of PVC pipes and fittings.6% in FY06 vs 41.0x by FY04 through consolidation of its existing business and sale of idle assets. we believe the RoCEs. RoCEs improved from 8. Supreme Industries merged Siltap Chemicals to get exclusive patent rights of its future blockbuster product—cross-laminated film. Phase 3 (FY07-12): Bore fruits of the ideal product placement strategy  The management’s product placement strategy to avoid competition with exports and to focus on fast-growing freight-intensive plastic products such as PVC pipes and Silpaulin paid rich dividends in phase 3.1x in FY06 to 0.  After deleveraging.0x in FY04. at ~25% and EBIT margins of 13-14% will remain stable in FY13-17 as capex in the existing products will supplement revenue growth. As a result. in FY04-06. thereby laying the foundation for a strong revenue CAGR of 19% in phase 3.9bn in FY13-16.  Also.1bn in FY07-12 vs `2. Supreme had a cumulative capital expenditure of more than `1.000 tonnes in FY12 to 325.0x in FY2001 from 1. Supreme Industries reduced its debt by `720m through operating cash flow and cutback on expansion capital expenditure in consumer products segment. Supreme had a huge capital expenditure in FY01 (2. CPVC pipes and Silpaulin. The company recorded sales CAGR of 19% in FY06-12.0bn in FY13-16 vs ` 5. Supreme got its product portfolio right in the previous phase.5x in FY2000.  Their VAP focused product strategy led to improvement in EBIT margins (782bps during FY06-12) and debt reduction resulted in lower interest costs. the company failed to deliver on its promises. Now.0bn by FY16.7% in FY12).2x of CFO) which it funded through borrowings. Also. To add to its troubles.4bn.5x in FY12 and tripled its capital expenditure (`8.0% in FY06 to 23.  In FY03. Ambit Capital Pvt Ltd 16 .

In sync with its product modification strategy. This unique feedback loop has helped Supreme make minor modifications to its existing product line without significant additional freight costs. Supreme plans to launch a new CPVC product for industrial applications and noise-free PVC pipes for high-rise towers. During this period. The company has built a successful feedback loop system through distributors to understand the customer’s needs and the structural changes in the industry. On the other hand. Ambit Capital research (2) Achievement of an ideal product portfolio: In the last decade. It has launched highly successful products in the piping segment such as CPVC. leading to higher-than-industry-average EBIT margins. Ambit Capital research Source: Company. According to the management. fittings products. 10% share (RHS) FY09 FY10 FY11 FY12 FY13 FY09 FY10 FY11 FY12 FY13 Source: Company.7% of total sales. fitting products account for more than 20% of its plastic piping segment vs 10% for its largest peer. value- added products (with EBIT margins higher than 17%) constitute 31. Supreme’s management has thoughtfully designed its product mix over the last 10 years by exiting commodity plastics and increasing its share of VAP (31. Exhibit 20: Rising share of VAP in piping and Exhibit 21: … consistently high revenue growth and packaging system led to…. and uPVC pipes. Supreme has the most cost-efficient distribution network in the industry. As a result. Supreme has consistently increased the capacity of high demand products like plastic pipes and cross-laminated films without losing balance sheet strength.7% as on June 2013 vs 22% in FY09). Supreme is reaping the benefits of efficient capital allocation in the following two areas: (1) Expansion of the distribution feedback loop: Supreme has strategically built 22 manufacturing plants to penetrate all the five regions in India. Supreme shut down its two consumer product manufacturing plants in Malanpur and Daman. As a result. The company plans to launch 30 new fitting products in the next quarter alone. Finolex Industries. An example of gains from the distribution feedback loop is consistent new launches in high-margin fittings products. Supreme added its blockbuster product—cross-laminated films—through a merger of Siltap Chemicals in 2003. Ambit Capital Pvt Ltd 17 . Supreme Industries Reaping rewards of efficient capital allocation We believe efficient capital allocation is the crux to building a successful plastic processing business. Supreme has moved out of low-margin commodity products such as food serviceware and BOPP film. the company has pro-actively increased its focus on PVC pipes and cross-laminated films (as can be seen from the table below). steadily increasing RoCE 35 Rsbn 40% 30% 30% 30 Consumer EBIT durables 25% 25% margin 25 30% Industrial 20% 20% (RHS) 20 products 15% 15% RoCE Packaging (RHS) 15 products 20% 10% 10% 10 Plastic piping 5% 5% Revenue 5 Growth VAP revenue 0% 0% .

Supreme has the highest RoIC amongst the listed plastic pipe manufacturers. Ambit Capital research Source: Company. RoICs above 25% and efficient working capital management have meant that Supreme has generated strong operating cash flows which are again reinvested in the business. Ambit Capital research Ambit Capital Pvt Ltd 18 . Wide 2003 Width film (+) Polypropylene random Co-polymer 2004 (-) BOPP Film pipes and fittings 2006 (-) Wide width film (-) Food Service ware and (+) material handling 2007 embossed sheets pallets (+) HDPE Pipe Systems. (+) Cross laminated film. Ambit Capital research. As a result. Exhibit 23: Supreme has the highest RoIC amongst Exhibit 24: Supreme achieved 25% sales CAGR in peers FY09-13 without stretching its balance sheet 30 60% 25 50% 20 40% RoIC (%) 15 30% 10 20% 5 10% 0 0% FY10 FY11 FY12 FY13 -10% FY10 FY11 FY12 FY13 Supreme Industries Finolex Supreme Industries Finolex Jain Irrigation Astral Polytechnik Jain Irrigation Astral Polytechnik Source: Company. CPVC Pipe 2008 systems (+) uPVC Pipes. Supreme has funded its capacity expansions without stretching its balance sheet. As a result. thereby creating a snowball effect. (-) product deletion from portfolio Rewards of efficient capital allocation: Supreme has recorded revenue CAGR of 21% in FY08-13 and its EBIT margins have increased by 820bps in FY08-13. Supreme Industries Exhibit 22: Changes in product/ revenue mix towards piping and packaging systems Year Plastic Piping System Consumer Products Industrial products Packaging Products (+) Rigid PVC film and BOPP 2002 film. Note: (+): new product addition. LLDPE Tube and 2009 Inspection Chambers 2012 (+) Manholes (-) Mats Source: Company.

5% 8. Packaging Products 20.448 Strong operating free cash will be sufficient to fund Capex (762) (3.76 2.413 48.965 6.000 tonnes by FY15.102 6.070 6.75bn in FY13.146 7.1% FY13-16.107 2.232 8.5% 11.0bn in FY13-16.5 37.2% 14. YoY growth (%) 8% -3% 8% 8% 8% Adjusted plastics EBIT 3.948 reinvestment in business. Overall.5% 11. Lower interest costs will lead to marginal Consolidated PAT margin 7.3 (`. Ambit Capital research Ambit Capital Pvt Ltd 19 .8% 12.0% 12.86 2. Supreme Industries Mega capex to drive growth with stable RoCEs We expect Supreme to increase the capacity of high-demand products such as PVC.500) (3. we believe the RoCEs.277 We expect margins to remain steady at ~13. ~25% and EBIT margins (between 13% and 14%) will remain stable in FY13-17 as capex will supplement revenue growth.0% 12.000 8.0% improvement in margins. YoY growth (%) 25% 29% 24% 24% 20% The company plans to increase PVC pipes capacity Packaging Products 7.852 2.0 30.0% 16.6 25.985 3. The company plans to further increase the PVC pipes capacity to 325.698) (2.0% 11.0% 12.865 2.872 31.190 1. Consumer products 14.0% 10.834 3.09 Source: Company.5% PBT before EO 3.119 6. We believe that Supreme will generate cumulative operating cash flow of `20.9bn.1x by FY16E. Capital Employed turnover Capital employed turnover to remain steady as mega 2.736 561 1.4% 12.0% the consumer and piping segment.148 16.228 3.0bn in FY13-16 vs `5.5% 11.7% 9.7% in Industrial products 13.33 0.0% 20.250) (3.9% 13. net debt to equity will reduce to 0.787 11.096 7. Adjusted plastic business EPS 15. Supreme has increased capacity of Silpaulin by Industrial products 5. high-potential composites segment will Consumer products 2.78 excluding real estate capex will be complemented by sales growth.474 4.0% We believe the piping segment’s EBIT margin of 16% in FY13 are unsustainable and will decline to 14.7% 14. YoY growth (%) 8% 12% 7% 11% 18% In our opinion.139 products segments.431 6.4% 13. Average interest rate 13.108 4.040 40.504 40% in FY13.1% 12.366 Net interest expense to decrease due to decrease in Net Interest Expense 548 523 452 382 283 debt.9 20.980 Strong 14% volume CAGR in FY13-16 will drive growth in net profit.394 4.501 7.) Average Working capital days We expect working capital cycle days to increase due 31 19 24 26 28 excluding cash & real estate to decline in trade payables.491 contribute only 2% of overall sales in FY16. Net Debt to Equity 0. Hence.021 1.5% Net depreciation 725 817 1.073 cumulatively by 47% in the next three years.519 4.44 0.910 20.532 4.0% 14.014 4.751 7.909 25.500) capex and repay debt.2% 14. Supreme has already incurred a capex of `3. which would be sufficient to fund its mega capex plans and repay debt of `1.0% 20.48 0.92 2. unless specified) Particulars FY12 FY13 FY14E FY15E FY16E Comments Revenues 29.439 5.288 YoY growth (%) 19% 16% 19% 21% 15% Revenue CAGR of 18% in FY13-16 to be driven by mega capex plans in plastic piping and packaging Plastic Piping Segment 13.0% in Adjusted plastics EBIT margin 12. CFO 3. Exhibit 25: Key assumptions (` mn.760 2.0% FY14. as increase in the share of the high-margin piping segment will be offset by a decline in margins in Plastic Piping Segment 13.858 2.365 6.17 0.4% 8.83 2.758 56. YoY growth (%) 24% -2% 21% 15% 13% Also.0% 20. producing surplus cash for Free Cash Flow 2.657 Adjusted consolidated PAT 2.478 9.0% 20.8% 11. CPVC pipes and Silpaulin through a capex of `13.0% 10.046 4.9bn in FY09-12.279 34. excluding real estate.4% 8.

real estate (X) (LHS) CFO (Rsbn) FCF (Rsbn) D/E (x) (RHS) RoCE (RHS) RoE (RHS) Source: Company.500 durables 3.000 16% Rsmn 16% 8.5 1.000 18% 14% durables 6.000 50 Consumer 24% 2.000 Total EBIT 0 13% margin(RHS) FY11 FY12 FY13 FY14E FY15E FY16E Revenue growth EBITDA margin(RHS) EBIT margin (RHS) Source: Company. resulting in steady capital turnover packaging segment at the expense of consumers 4. Ambit Capital research Exhibit 30: High growth on a large base will lower Exhibit 31: High RoCEs leading to sufficient CFO to fund financial gearing capex and repay debt 20 1.000 60 30% 3.000 18% Industrial 2.0 40 2.000 Packaging 12% 500 20 products 1. real estate (x) (LHS) Source: Company.000 products 12% 10% 4. Ambit Capital research Source: Company.500 products 30 2. 10% 10 - FY11 FY12 FY13 FY14E FY15E FY16E (1) 0% FY11 FY12 FY13 FY14E FY15E FY16E Working capital turnover excl. Ambit Capital research Exhibit 28: We expect 17% revenue CAGR in FY13-16 at Exhibit 29: Rising share of EBITDA from the Piping and steady EBIT margins of ~13% Packaging products segment 24% 18% 9. Ambit Capital research Source: Company. RHS) Capital employed turnover ex.0bn in FY13-16 to drive Exhibit 27: Product portfolio shift towards piping and revenue growth.000 15% Industrial 12% 5.2 .6 2 14 0.8 3 30% 16 0.5 3. Supreme Industries Financial performance—‘greatness’ depicted Exhibit 26: Mega capex of `13. Ambit Capital research Ambit Capital Pvt Ltd 20 . Ambit Capital research Source: Company.0 1.000 Packaging 8% 3.000 Systems FY14E FY15E FY16E FY11 FY12 FY13 1.5 0 Plastic piping 10 6% FY11 FY12 FY13 FY14E FY15E FY16E systems 0 0% Total sales growth (RHS) FY11 FY12 FY13 FY14E FY15E FY16E Capex (Rsmn.0 4 40% 18 0.000 14% products 6% 6% Plastic Piping 2.0 4.500 Rsbn 3.000 Consumer 7.4 20% 1 12 0.

004 1.756 848 1.3 7. Reported Cons.979 9.413 -1.572 10.549 663 1.454 EBIT margin 11.012 7.890 5.7 14.7% 11.6 Depreciation 172 171 172 211 186 190 197 291 EBIT 549 1.833 8.428 548 866 1.778 4.6 13.7 7.2 6.373 10. EPS (`) Above consensus mainly due to higher EBIT FY2014 26.494 6.481 9.487 10.2 15.9% 10.041 4.360 9.117 7.203 1.9% 12.3 9.862 4.5 3.500 54.1% consensus and management guidance of 19% YoY revenue growth FY2015 47.1 5.952 11.0% increase in the percentage of high-margin FY2015 6.7% 14.081 5.637 7.6% 16.6 19.949 8.176 8.635 Industrial products 7.8 Source: Company Ambit Capital Pvt Ltd 21 .1% 13.025 3.105 Packaging products 8.417 11.1 10.010 1.3 6.944 Net realisation per kg (`) 100 109 114 133 101 120 120 127 Net Sales 5.981 4.290 41.589 9.557 9.344 1.177 10.101 16.6 4.758 1.048 1.837 48.9% Reported EBIT (` mn) Our EBIT margin forecasts are higher than consensus estimates because we assume an FY2014 5.644 % of net sales 86% 84% 86% 81% 86% 85% 85% 83% EBITDA 711 1.956 7.387 6.1 6.4% Source: Company.6 16.507 5.718 YoY growth (%) -9% 48% 25% 54% 19% -1% 28% -2% EBITDA margin (%) 14.2% estimates FY2015 31.917 9.5 28.6 EPS 2.7 20.147 1.3 8.263 6.7 4.697 7.301 6.948 43.329 6.067 39. Supreme Industries Ambit vs Consensus Exhibit 32: Ambit vs consensus estimates Consensus Ambit Divergence Comments Revenue (` mn) Our FY14 revenue estimates are in line with FY2014 40.194 1.870 11.842 40.346 Consumer products 4.1 8.959 36. unless specified) 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 Volumes sold (tonnes) Plastic piping segment 26.3% YoY growth (%) -18% 57% 31% 56% 21% -4% 30% -6% Interest 133 142 152 121 115 138 137 147 Profit before tax 416 902 728 1.335 YoY growth (%) -31% 61% 34% 65% 32% -4% 39% -7% Tax 138 288 235 490 178 283 330 413 Adjusted net profit 326 593 548 950 390 664 758 995 YoY growth (%) -29% 43% 13% 58% 20% 12% 38% 5% Net profit margin (%) 6.1% Silpaulin and CPVC pipes to overall EBIT.685 9.0 13.972 40.5 7.0 7.947 4.935 47.044 880 1.3 37.7 14. Bloomberg.362 YoY growth (%) 6% 32% 16% 24% 23% 6% 19% 12% Total operating expenditure 4.117 9. Ambit Capital research Quarterly performance Exhibit 33: Quarterly performance of the company (` mn.150 9.5% 12.

Supreme deserves premium valuations to its peers due to its superior revenue growth and profitability ratios. Ambit Capital Pvt Ltd 22 . Exhibit 34: SOTP valuation per share (`. The key determinants of our FCF are: a) Near-term and long-term revenue growth estimates: Our 18% revenue CAGR forecasts for FY13-16 are based on capacity expansion done by Supreme in high-demand PVC pipes and Silpaulin.807 Implied Plastic processing business FY15E EV (` mn) 62. profitability (RoIC and EBIT). Our five-year revenue CAGR over FY12-17E is at 17% vs 11% over the next five years (FY17- 22E). Our ten-year revenue CAGR over FY12-22E is at 13%. After FY16. Our DCF-based valuation of `420 for the plastic processing business implies 16. generating operating cash flow of `20. because we expect growth to taper off to ~10% for its existing product portfolio. which would be sufficient to fund capital expenditure and repay debt.5 Source: Company. unless specified) Segment Equity value per share Plastic Processing 420 Real Estate 13 Supreme Petrochem 9 Supreme Industries Target Price 442 Current Share Price 348 Upside Potential 27% Implied Plastic processing business FY14E P/E 16. We prefer a DCF-based valuation for Supreme’s plastic business.8x FY14E EPS and 13. We believe main growth driver of 14% volume CAGR in FY13-16 would be increasing penetration of engineered plastic products as Supreme has moderate pricing power (4% price increase CAGR in FY13-16) in its existing products. Ambit Capital research.270 Implied Plastic processing business FY14E EV/EBITDA 9.7x FY15E EPS (adjusted EPS for the plastics business). working capital turnover and capital employed turnover. Supreme Industries Valuations not reflective of supreme plastics business We have used SOTP valuation for Supreme Industries—DCF valuation for the plastic processing business.7 Implied Plastic processing business FY14E EV (` mn) 55. Bloomberg DCF-based valuation of `420/share We believe that DCF is the best method to value plastic processing companies. our revenue growth assumptions are more moderate than FY13-16. Supreme’s perfect product portfolio positioning in the last five years created a snowball effect for operating cash flow generation. because we believe that this is the best way to value a company that is capital-intensive and on a high-growth trajectory. market value of the real estate assets and current trading share price of Supreme Petrochem. because the key value drivers will be free cash flows based on revenue growth.8 Implied Plastic processing business FY15E P/E 13.1 Implied Plastic processing business FY15E EV/EBITDA 8. resulting in a target price of `442 for Supreme Industries.9bn. We expect Supreme’s snowball to gain momentum over the next five years (FY13-16). Our DCF-based valuation drivers/determinants are as follows: Snowball effect from increasing revenue size: As mentioned earlier.

Ambit Capital Pvt Ltd 23 . d) Mega capex plans to increase size: Supreme has increased its capacity by more than 40% in Silpaulin and PVC pipes in the last two years which will drive sales.000 Packaging 10% 3.000 14% products 2. Supreme will incur a mega capex of `13.000 products 4. Supreme is investing to add high-potential new products in composite plastics like composite cylinder.000 durables 6. Overall. Ambit Capital research b) EBIT margins to be range bound: We expect a marginal decline in EBIT margins in the industrial products and piping segment because piping segment’s FY13 EBIT margins of 16% are unsustainable. leading to an increase in working capital days (excluding cash and real estate) to 24 days in FY14.. Supreme Industries Exhibit 35: Capacity expansion in PVC pipes and Exhibit 36: . Ambit Capital research Source: Company. excluding real estate. Exhibit 37: Total EBIT margin will marginally increase Exhibit 38: Segmental EBIT margins to remain steady from higher proportion of piping. Also. packaging products 9.leading to higher contribution of plastic Silpaulin will drive revenue growth… piping and packaging products in total revenue 60 30% 100% 8% 7% 6% 10% 8% Rsbn Consumer 50 Consumer 17% 16% 16% 24% 80% 19% 19% durables durables 40 Industrial 22% 21% 20% Industrial 18% products 60% 25% 21% products 30 12% Packaging 40% Packaging 20 products products 54% 56% 57% 6% Plastic piping 20% 46% 52% 10 systems Plastic piping Total sales systems 0 0% 0% growth (RHS) FY11 FY12 FY13 FY14E FY15E FY16E FY12 FY13 FY14E FY15E FY16E Source: Company.000 16% 25% Rsmn 8. Ambit Capital research c) Operating cash flows: Supreme had an efficient working capital cycle.000 Total EBIT 0 13% margin(RHS) Plastic Piping Systems Packaging products FY11 FY12 FY13 FY14E FY15E FY16E Industrial products Consumer durables Source: Company.0bn in FY13-16. Overall.000 Plastic Piping 5% Systems FY10 FY11 FY12 FY13 FY14E FY15E FY16E 1. of 19 days in FY13 due to an increase in sundry creditor days (68 days in FY13 vs 45 days in FY12).000 15% Industrial 15% 5. We believe FY13 sundry creditors days will decrease due to the current liquidity crunch market. EBIT margins will remain steady at ~13% in FY13-16. Ambit Capital research Source: Company.000 Consumer 20% 7.

Supreme is not in a cash-crunch situation and hence it has held on to its price of `15.0% 6. We have estimated that Supreme will be able to sell this by FY16. Ambit Capital research Commercial real estate .18 2.8x FY14 adjusted plastics EPS and 13.0% 12% 484 525 578 648 747 13% 420 450 488 537 602 WACC 14% 368 391 420 455 500 15% 326 344 365 391 424 16% 291 305 321 341 365 Source: Company.807 400 0 5% Less: net debt at June 2014 2. Supreme Industries Terminal growth rate of 5%: We have taken a terminal growth rate of 5% for the company post FY24 which is conservative in our opinion.900 1.0% 5.38 2. The property was developed in FY12 but due to sluggish demand in commercial real estate.25x for Supreme.35 420 Bull 2.400 25% 2.38 2. Ambit Capital research Exhibit 42: Sensitivity to average capital employed turnover of plastic business Average plastic business capital employed turnover Target Price FY12 FY13 FY14E FY15E FY16E Base 2.38 2.7x FY15 adjusted plastics EPS.4bn.907 15% 800 10% Enterprise value 55. Mumbai. Our 12-month DCF-based valuation of `420/share valuation implies 16. We believe Supreme’s beta is understated due to lower liquidity.25 2.200 Terminal value 32. Exhibit 39: FCF over FY14-24E Exhibit 40: Terminal value forms 67% of the enterprise value 2. Hence.63 468 Bear 2.34 2.241 square feet in Andheri.0% 4.600 20% 1.800 (Rs mn) 30% Particulars ` mn 2.000 PV of the forecasting period up to FY24E 22.505 FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY23E FY24E Implied equity value 53. Supreme’s revenues have never declined on a YoY basis in the last 30 years and we do not think plastic penetration will reach a level that will pull Supreme’s growth lower to 5%.53 2.0% 7. Ambit Capital research Source: Company. we have assumed beta of 1. with a value of `2. Ambit Capital Pvt Ltd 24 . Ambit Capital research Exhibit 41: Sensitivity to our WACC and terminal growth rate Terminal growth rate TP: ` 420 3.31 2.34 2.000/sq ft.302 PV of FCFF WACC (RHS) RoCE excluding real estate (post tax) (RHS) Implied equity value (` per share) 420 Source: Company.12 372 Source: Company.contributes only 3% to our target price: Supreme has ready-to-occupy commercial real estate space of 161.34 2.38 2. WACC of 14%: We assume Cost of Equity of 15% and take a WACC of 14%. more than half of the area is unsold.34 2.

8 5.5 10.5 10. N.7 4.8 2.A.9 14. N.1 5.3bn.5 5.Supreme deserves a premium due to its higher profitability Revenue Revenue EBITDA PAT margin Mcap RoE (%) P/E (x) EV/EBITDA (x) Companies (US$mn) CAGR margin (%) (%) US$ mn FY13 FY13-15 FY14 FY14 FY14 FY14E FY15E FY14E FY15E Supreme Ind* 719 627 18.3 17.4 2. Bloomberg.3 12.7bn and annual turnover of `22.0 3.7 14.A. resulting in an additional contribution of `9/share (only 3% of Supreme Industries’ current market price).4 10. Supreme is trading at a 10% discount to Astral Polytechnik on FY14E P/E and on FY14E EV/EBITDA.3 6.8 6.4 11.4 8.5 India Average 12.848 1.9 2.6 8. rest are March-ending.6 14.9 4. Supreme deserves a premium to Astral due to Supreme’s larger pipes business.7 Source: Company. We believe Supreme deserves premium valuations to its peers due to the superior RoE and better EBITDA margins. Supreme’s adjusted PAT margins are 280bps above the industry average. Supreme deserves premium valuations to peers Supreme is trading at 27%/23% premium to its plastic processing peers on FY14E P/E and FY14E EV/EBITDA.2 15. N. Supreme’s direct peer in PVC pipes for the construction and building sector is Astral Polytechnik.1 Jain Irrigation 394 904 14.1 3.2 4.2 Global Average 13.9 2.9 11.6 17.1 China Liansu 1.3 8.9 6.1 5.7bn. (c) ** Global players are December-ending (d) We have used adjusted the financial performance of plastics of Supreme Industries to compare with its peers.8 25. Ambit Capital research.3 13.7 16.3 10. we expect Supreme’s adjusted RoE to be 34. As a result.0 12.0 15.2 Global Players** Aliaxis 1.3 6. In our opinion.4 2.0 2.1 10.6 Sintex 122 934 9.3 13.5 11.A. N.7 7.1 3.9 7.057 N.5 8. In India.3 2.6 4.4 34.738 (2.8 7.0 15.A. Note (a) * June-ending companies.4 5.655 14. The remaining 10% polystyrene manufactured is used in the construction industry. N. Supreme Petrochem is a small company with a market cap of `5.7 7.0 4.5 Time Technoplast 121 331 17. We apply a 30% holding company discount to market value of Supreme Petrochem. It also exports to multiple countries in Europe and the Middle East.0 18. Tessenderlo Chemicals 881 2. twice the industry average.contributes only 2% to our target price: Supreme Industries has a 30% stake in Supreme Petrochem.5 5.726 14.5% in FY14.6 4. multiple business segments.6 Finolex Ind 237 391 9.9 11. N.1 6.6 Motherson Sumi 2.1 13.1) 9.5 6.9 10.7 5.7 21.A.9 Astral Polytechnik 202 152 18.8 9. Supreme Petrochem is the domestic market leader (with a market share in excess of 50%) in the polystyrene business. 90% of polystyrene manufactured is used in consumer durable appliances such as refrigerators and water purifiers.A. Exhibit 43: Plastic processing relative valuation .0 9.8 30.7 4. Ambit Capital Pvt Ltd 25 .4 5. Its net profit for FY12 was `0.3 7.A.258 4. (b) Market cap is as on 14 August 2013. We expect Supreme to record 18% revenue CAGR in FY13-15 vs 14% (consensus) for the industry.9 8.3 8.4 Nilkamal 24 313 14.A. larger balance sheet and higher RoEs.6 7.6 7. N.7 7.342 3.8 22.8 17.4 17.7 10. Supreme Industries Supreme Petrochem .7 2.

0 2.0 Cera Sanitaryware 107 90 24.1 Source: Company.3 9. (b) Market cap is as on 14 August 2013 (c) We have used the core plastic business’ financials of Supreme to compare with peers.0 15. Exhibit 44: Think out of the (plastic) box .8 5. Bloomberg.1 9.6 30.7 15.6 Finolex Industries 237 391 9. Astral Polytechnik.1 6.8 22.1 6. Bajaj Electricals.3 12.5 6. Note (a)* Companies are June-ending.9 10.5 15.8 Average 18. Kajaria Ceramics and Cera Sanitaryware—that are comparable to Supreme in the internal building products category (products used for internal construction in the housing industry).8 25. We have selected five key plastic processing characteristics to identify Supreme’s peers in other industries:  Industry structure: The highly competitive and fragmented industry structure is the underlying reason behind Supreme’s limited pricing power.8 6.0 26.0 18.0 9. Ambit Capital research.5 11.0 V-Guard 266 250 22.6 14.8 9.8 7. Supreme Industries Relative valuation: Let’s think out of the (plastic) box We have tried to think out of the plastic box to identify Supreme’s peers in industries which have similar characteristics.6 7.3 8.7 7.9 Astral PolyTechnik 202 152 18.7 24.  Replacement cycle: The replacement cycle of Supreme’s products is between 2 years and 10 years. Ambit Capital Pvt Ltd 26 .2 15.2 7.0 19.5 5.8 5. we have identified six peers—Finolex.1 11.Supreme is trading at a discount to peers Revenue Revenue EBITDA PAT margin Mcap RoE (%) PE (x) EV/EBITDA (x) Companies (US$mn) CAGR margin (%) (%) US$ mn FY13 FY13-15 FY14 FY14 FY14 FY14E FY15E FY14E FY15E Supreme Industries* 719 627 18.5 11.3 8.  Product ticket size: The average product ticket size is critical to understand the price sensitivity of the end buyer. larger revenue size and higher EBITDA margin implying further upside potential and rerating of Supreme Industries. we believe Supreme deserves premium valuations owing to higher RoE.6 10.3 13.4 34.2 6.5 7.7 7. rest are March-ending. After scanning the Indian mid-cap space.9 8. Supreme is trading at a discount of 15%/14% on one-year forward P/E and on one-year forward EV/EBITDA multiples to its peers.4 15.7 14.4 Kajaria Ceramics 283 296 18.9 6.7 7.1 13.  Market capitalisation: We have selected other mid-cap companies to compare with Supreme. Contrary to consensus.2 8.4 Bajaj Electricals 269 622 15. In this extended universe.1 10. V-Guard.5 12.9 8.2 11.8 19.5 10. So.9 15. we have identified products with similar product lifecycles.

the product contributed `3.  Strong balance sheet to launch new products with the help of technology tie-ups with international players: We expect Supreme Industries to generate strong cash flow from PVC pipes and cross laminated films in at least the next five years. The increase in capacity in these two high- demand products can lead to higher-than-industry volume growth for Supreme Industries. Exhibit 45: Supreme’s one-year forward P/E has Exhibit 46: Supreme is trading near its all-time high marginally corrected from all-time highs valuations backed by a strong operating performance 15 9 13 8 7 11 6 9 5 7 4 5 3 Aug-13 Aug-11 Aug-12 Nov-11 Nov-12 Feb-12 May-12 Feb-13 May-13 Aug/11 May/12 Aug/12 May/13 Aug/13 Nov/11 Feb/12 Nov/12 Feb/13 1 year forward EV/EBITDA (x) 1 year forward PE Average 1 year fwd PE (x) 1 year fwd average EV/EBITDA (x) SourceCompany. Bloomberg. Ambit Capital research . Over the last three years. Supreme’s rerating of P/E and EV/EBITDA multiples is justified. In FY13. Supreme has recorded revenue growth of 20% in FY10-13. Supreme acquired the patents for manufacturing and distribution of cross-laminated films from RPD Rasmussen Polymer Development AG. Thus. For example.  Future product modifications could increase turnover and margins: Supreme has a strong track record of introducing product modification of the existing product-line to meet consumer needs. Ambit Capital Pvt Ltd 27 . Supreme could potentially tie-up with an international player to launch a new product in the Indian market. Supreme Industries Cross-cycle valuation: Marginal correction from all-time high Whilst Supreme is trading near its all-time high on 1-year forward P/E and EV/EBITDA multiples. Switzerland. In sync with the company’s strategy. in our opinion. For example. The company could consistently launch such product modifications to increase turnover and margins. We believe there is further potential for rerating underpinned by strong revenue CAGR of 18% (on a large base) in FY13-16. maintaining RoEs consistently above 34%. Key catalysts  Higher-than-industry-average volume growth due to recent capacity expansions: Supreme has spent `3. we believe a comparison of the three-year historical cross- cycle valuations can be deceiving. Ambit Capital research Source: Company. with EBIT margins in excess of 20%. which will generate sufficient operating cash flow to fund capital expenditure and repay debt.75bn in FY13 to increase capacity in PVC pipes and cross-laminated films.7bn to the company’s topline. Supreme will launch no-noise high-rise pipes in 1QFY14 in the VAP range (above 17%).

P. acquired Ashirvad Pipes for US$150mn. we believe Supreme. Exhibit 47: Supreme Management structure Supreme Industries Directors B. if the company were to allocate its surplus cash generated from operations in commodity plastics then Supreme’s RoCE would deteriorate eventually. Finance Packaging Consumer Plants (23) Piping system Industrial products products products Source: Company Ambit Capital Pvt Ltd 28 . Taparia (Managing Director) has been instrumental in the success of Supreme Industries but Supreme has divisional organization structure responsible for day-to day running of company operations. Director S. Taparia. reducing the momentum of its snowball effect. a large player with deep pockets like Aliaxis can quickly scale up its capacity and distribution reach. VP.  Inefficient capital allocation could potentially deteriorate RoCE: In our opinion. Supreme’s strength over the last decade has been its efficient capital allocation in the expansion of fast-growing products like PVC pipes and cross- laminated films. Director N. thereby limiting their use in India. Product head . Product head - VP. In the future. Managing Director B. Trivedi. can also shift its portfolio. Aliaxis. Supreme has an independent chief officer of each manufacturing plant who manages production/operations of the plant. L. Product head - Chief Officer . Aliaxis.  Substitution of PVC pipes by HDPE pipes: HDPE pipes are technologically superior to PVC pipes because PVC joints are brittle as compared to HDPE joints. thereby increasing competitive intensity in the PVC pipes segment. Director Y. Ashirvad Pipes has CPVC raw material sourcing tie-up with Lubrizol. Whilst this a risk. P. there is a remote possibility that Mexichem might stop its technological collaboration with Supreme to avoid indirect competition with its subsidiary. V. a large international player (with a CY12 turnover of US$3. The directors have delegated marketing and selling to individual Vice President (VP) product heads of each product. VP. Bhargava. Khandwala. VP. HDPE pipes are 25% more expensive than PVC pipes.  Wavin could stop technical collaboration in PVC pipes with Supreme: Supreme’s PVC pipes technology partner is Wavin Overseas.P. Parikh. R.2bn). N. Now.  Management key man/ succession risk minimized by divisional organization structure: Whilst we agree that M. would like to increase their exposure in the fast-growing Indian markets. So. However. Ind Director VP. Georg Fischer. S. Chairman M. Supreme Industries Risks to our BUY stance  Increase in competition intensity from large international players: We do not expect a significant threat to Supreme’s market share in the PVC pipes business from local organised players such as Finolex Industries and Jain Irrigation. Taparia. JM Eagle (the largest plastic pipe company in the world). if the price advantage of PVC over HDPE were to reduce then HDPE pipes could be used as a substitute for PVC pipes. We believe that several other large international players like China Lesso Group Holdings (the largest piping company in China). Another subsidiary of Mexichem. All the VP’s and chief officers report to Directors on a quarterly basis. Director H. Taparia. Currently. given its portfolio and technological reach. a subsidiary of Mexichem. has acquired a majority stake in Ashirvad Pipes (Supreme’s competitor in PVC pipes). and the Tessenderlo Group. Product head .

GREEN FLAG Exhibit 49: DuPont Analysis RoE (%) PAT margin (%) Asset turnover (x) Financial leverage (x) Company/metric FY10 FY11 FY12 FY13 FY10 FY11 FY12 FY13 FY10 FY11 FY12 FY13 FY10 FY11 FY12 FY13 Supreme Industries 40. expansion plans. Note: (a) Financials of Tulsi Extrusions and Finolex Industries are on a standalone basis (b) Supreme is a June-ending company. Amongst its peers. 117 (23) 97 N.2 N.A.9 0. Note: (a) Financials of Tulsi Extrusions and Finolex Industries are on a standalone basis (b) Supreme is a June-ending company.8 1. 8. 1.0) 1. (7) (28) (33) N. Time Technoplast 17.4 Tulsi Extrusions 8.7 1.8 12. Ambit Capital research DuPont Analysis: In FY09-13. consensus EPS estimates for FY14 and FY15 have been revised GREEN momentum upward by 15-20%. Divergence with avg.9 0.7 5. Peers avg.2 5.9 2.A.1 1.4x in FY13).A. Earnings Over the last six months. The asset turnover and financial leverage of the company have reduced between FY09 and FY12 but Supreme still has the best asset turnover and financial leverage.9 1.8 1.8 1.A.9 N.A.5 2. 8.6 2.9 3.A. 113 Time Technoplast 94 91 84 N.A.9 7. (0. 50 Divergence with avg. (128) (126) 8 N.A.3 34. asset turnover.A. However. 1.A.9 1. 5.6 1. 21.0 N.2 1.4 N. the only concern is the higher- than-peers unclassified loans and advances as a percentage of net assets. 64 71 72 N.0 24. Exhibit 48: Supreme Industries on our forensic accounting score Field Score Comments In our accounting analysis of BSE-500 companies.8 28.A. Supreme’s cash conversion cycle remains materially better than the industry average.7 1.1 7.0 2. 1.5 N.A.1 3. other loans & advances /net worth. Cash conversion: Supreme’s CFO/EBITDA ratio has deteriorated over FY09-12 due to a sharp fall in average creditor days.8 1.3 2.A.0 2.4 3. The company has always given a detailed description and has made timely disclosures Predictability GREEN regarding its future strategy.A.6 Astral Polytechnik 26. Supreme Industries’ RoEs have been consistently above 30%. 77 Peers average (ex Supreme) 85 87 88 N. Supreme Industries emerges as the best industrial company Accounting GREEN (amongst 14 industrial companies) on account of its higher ranking on most of the parameters (such as miscellaneous expenses as a percentage of revenues. The increase in Supreme’s RoEs is due to a consistent improvement in PAT margin.8 1.7 2.2 35.6 11. 73 72 75 N. and a healthy cash flow generation profile.A.A.7 N.A. (ex Supreme) 19.8 7. 33 7 73 N.8 N. and audit fee CAGR/revenue CAGR).5 9.1 (0.3 N.4 N. 1. (91) Finolex Industries -10 15 20 N.0 17. 2.3 2.4 24.9 1. 30 Source: Ambit Capital research.A. Source: Ambit Capital research. 1.A.4 N.5 8.A. 39 47 52 N.9 N.7 N.5 4.3 1.8 7.A. Supreme has the highest RoE. expected business momentum and expected earnings performance in their annual reports and during their conference calls.0) 0. 1.3 12.0 6.5 N. 85 68 58 N.A. 37 66 14 N.6 N. Finolex Industries 24.8 1.3 12.7 2.A. (1.A.3 37.3 1.4 2.4 1.A. 39 64 72 N. 9.0 1. Ambit Capital Pvt Ltd 29 . we have classified Supreme Industries as an ’industrial company‘.4 1.2 6. a low debt:equity (0.1) N. GREEN FLAG Exhibit 50: Cash conversion cycle Cash conversion cycle (days) Average creditor days CFO pre tax/EBITDA (%) Company/metric FY10 FY11 FY12 FY13 FY10 FY11 FY12 FY13 FY10 FY11 FY12 FY13 FY09-12 Supreme Industries 7 25 21 20 57 43 39 42 70 73 87 86 79 Astral Polytechnik 49 28 18 21 94 107 106 87 71 106 114 64 100 Tulsi Extrusions 205 213 232 N.A. 0.6 N.A. Supreme Industries Accounting analysis: Clean chit Supreme Industries follows sound accounting practices and emerges as a strong player on most of our accounting checks.9 3. Supreme has started paying in cash for raw materials (like PVC) to avail cash discounts.A.A.3 21.7 1.1 0. (78) (62) (67) N.5 N.9 N.3 1.A.4 1.A.3 1.A. a tight working capital cycle. Source: Company.A.A.9 N.8 23.1 1.2 N.A. 1.0 14.5 8.

1) (0.2 0. Similarly. Time Technoplast 5.6 N. RED FLAG Exhibit 51: Unclassified loans and advances to net assets Unclassified loans and advances to net assets (%) Companies FY11 FY12 FY13 Supreme Industries 13.2) N.4 0.3 0.2 0. Finolex Industries 5. Divergence with average (0. Ambit Capital research.3 0.9% -0.3 0. Invisible restatement analysis Supreme’s summation of FY13 quarterly reported numbers. Ambit Capital Pvt Ltd 30 . as miscellaneous expenses form less then 0.0% 0.A.7 13.3 0. Peer group average (ex Supreme) 0. Note: (a) we have not taken loans and advances for FY09 and FY10 due to the new accounting standard. Source: Company.A.A. Further.3 0.2 Astral Polytechnik 0. are broadly in line with the FY13 annual revenue and net profit disclosed in the annual report.5 0. for most peers.4 N. (c) Supreme Industries is as on June ending Miscellaneous expenses as a percentage of revenues Supreme’s miscellaneous expenses as a percentage of revenues are among the lowest vs its peers and have remained stable in FY09-13.3% 0.4 . Note: (a) Financials of Tulsi Extrusions and Finolex Industries are on a standalone basis and the rest is consolidated.1 1.4 0. Company. Finolex Industries 0. Source: Ambit Capital research. the quarterly and annual sales and PAT numbers are in sync with the annual report. GREEN FLAG Exhibit 53: Invisible restatement Companies Sales deviation PAT deviation Supreme Industries -0.A. Divergence with average 10.5 3.9 N.2 N.A.8 7.5 N.6 N.7 N.5% 1. it is not a cause for concern.A.A.2 0.A.2 Astral Polytechnik 2.3 Tulsi Extrusions 0.3 1.2) (0.2 9.0% Source: Company. unclassified loans and advances in FY11 and FY12 are not comparable to FY09 and FY10. GREEN FLAG Exhibit 52: Miscellaneous expenses as a percentage of revenues Company Misc expenses as % of revenues FY10 FY11 FY12 FY13 Supreme Industries 0. (b) Tulsi Extrusions and Finolex Industries financials are on a standalone basis and the rest is consolidated. (b) Supreme Industries is a June–ending company.7 6. Peer group average (ex Supreme) 3. Time Technoplast 0. (b) Supreme Industries is a June-ending company.5% of revenues.3 0. Ambit Capital research.1% Astral Polytechnik -0.0% Time Technoplast 0.0 13.3 0. both in terms of sales and net income. N.3% Finolex Industries 0. Supreme Industries Unclassified loans and advances as a percentage of net assets: Supreme’s unclassified loans and advances are the highest in the industry but this proportion has marginally declined from FY11.0% 0.A.A.8 1.8% Tulsi Extrusions 2.9 N. Note: (a) Financials for Tulsi Extrusions and Finolex Industries are on a standalone basis and the rest is consolidated.2 Tulsi Extrusions 0.

617 3.1% 22.194 2.277 11.107 2.477 6.489 Adjusted PAT/ Net profit 2. - Total assets 11.878 4.907 Interest expenditure 548 523 452 382 283 Non-operating income 28 (2) 30 32 33 Adjusted PBT 3.520 4.994 4. Supreme Industries Balance sheet Year to June (` mn) FY12 FY13 FY14E FY15E FY16E Shareholders' equity 254 254 254 254 254 Reserves & surpluses 5.589 Deferred tax liability 812 840 907 907 907 Total liabilities 11.098 Cash & equivalents 142 144 239 486 1.613 2.279 34.015 EBITDA 4.872 Provisions 1.797 CWIP 262 338 330 350 350 Investments 916 887 1.536 10.068 18.031 2.108 4.395 Other current assets 19 19 19 Total current assets 6.327 13.027 5.291 9.668 5.284 5.394 10.684 34.014 2.967 8.547 Source: Company.366 EBIT 3.536 1.467 47.454 3.700 2.130 Debtors 1.079 2.150 1.547 Gross block 12.474 4.744 growth 31.052 Debt 5.140 4.330 1.753 13.002 18.3% 18.751 7.657 Tax 1.785 16.394 4.548 21.456 3.196 1.342 6.302 Miscellaneous 16 7 .223 6.7% 15.6% 15.411 8.617 10.492 11.101 7.054 6.3% 22.834 3.005 40.014 4.719 5.706 1.790 11.327 13.798 Net block 7.5% Depreciation 725 817 1. .613 Net current assets 2. Ambit Capital research Income statement Year to June (` mn) FY12 FY13 FY14E FY15E FY16E Operating income 29.228 11.451 16.357 1.323 975 1.713 8.916 Current liabilities 2.980 Source: Company.524 Loans & advances 1.660 2.737 13.9% 17.273 EBITDA margin 16.881 2.040 40.387 7.170 3.660 6. Ambit Capital research Ambit Capital Pvt Ltd 31 .203 3.758 56.1% 15.702 8.356 6.9% 21.539 5.417 7.712 2.021 1.817 3.021 12.288 growth 18.413 48.098 1.798 Total net worth 5.491 11.098 1.7% 20.785 16.001 6.190 1.965 6.6% 16.028 2.002 18.007 14.529 1.560 28.412 2.3% Share of associates 93 217 223 230 237 Adjusted Consolidated net profit 2.408 8.848 Inventory 3.089 4.089 3.6% 29.538 7.742 Current liabilities and provisions 3.779 4.0% 16.4% Operating expenditure 24.

3% 32.524) Net change in cash 2 95 247 644 456 Closing cash balance 142 237 484 1.5% Source: Company.9% 36.3 0.014 4.489) Change in net working capital (36) (198) (786) (725) (886) Cash flow from operations 3.5 EV/EBITDA (x) 10.698) (2.5% 33.448 Purchase of fixed assets (762) (3.632) 1.6 13.470) (3.0 10.751 7.046 4.4% 8.965 6.6% 24.8 18.3 5.250) (3. - Net borrowings (1.2 0.8% 25.3 39.187 .2% 8.6 22.8% 31. .0% 16. - Interest Income 30 28 . Ambit Capital research Ambit Capital Pvt Ltd 32 . Supreme Industries Cash flow statement Year to June (` mn) FY12 FY13 FY14E FY15E FY16E PBT 3.0 7.475 4.3% 8.0 15. .613) (2.627) (2.0% Net debt: equity (x) 0.0% 35.948 Source: Company.190 1.219) (3.0 4.9 2.365 6.865 2.9% 35.102 6.1% 15.1 14.8 RoCE 22.8 8.0% 34.1 9.0% Net profit margin 7.757 348 1.1 2.874) (324) (1.3% 14. .9 Source: Company. Ambit Capital research Ratio analysis Year to June FY12 FY13 FY14E FY15E FY16E EBITDA margin 16.0 30.9% 17.519 4.366 Net Interest Expense 548 523 452 382 283 Other Income (25) 3 326 698 517 Tax (1. 30 32 33 Cash flow from investments (643) (3.0 3.8 2.500) Investments 8 1 .128 1.6% 24.5 37.357) (1.500) (3.4% 8.7 Gross block turnover (x) 2.7% 15.6% 14.6 25.2 Book value per share (`) 55 69 87 111 138 Dividend per share (`) 6 8 9 12 13 P/E (x) 21. (500) (500) Dividends paid (664) (960) (1.9 20.9 2. Ambit Capital research Valuation parameters Year to June (` mn) FY12 FY13 FY14E FY15E FY16E Adjusted EPS (`) 15.3 26.648) (2.852 2. .657 Depreciation 725 817 1. - Dividend income 81 41 .5% EBIT margin 13. .3 Reported EPS (`) 16.5 16.167) (1.6 4.5 5.7% RoE 33.7 32.8% Dividend payout ratio 31.467) Issuance of equity . - Others .4 0.196) (1. .6% 13.194) (2.1 Working capital turnover (x) 17.3% 13.584 Free cash flow 2.8 2.7% 24.5 0. .6 13.3% 33.742) Interest paid (578) (552) (452) (382) (283) Cash flow from financing (2.114) (1.9 P/BV (x) 6.021 1.239) (2.

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