Rating Rationale
April 02, 2019 | Mumbai
The Supreme Industries Limited
Rating outlook revised to 'Positive'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.1760.8 Crore
Long Term Rating CRISIL AA/Positive (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.200 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the long-term bank facilities of The Supreme Industries Limited (Supreme) to 'Positive' from 'Stable' and reaffirmed its 'CRISIL AA' rating. CRISIL has reaffirmed its 'CRISIL A1+' rating on the company's short-term bank facilities and commercial paper.

The outlook revision is driven by improvement in the company's business risk profile led by strengthening presence in the domestic market backed by wider distribution network and expected increase in number of manufacturing facilities. The company has a strong market position across multiple segments in the plastic products industry, and high-margin, value-added products make a healthy contribution of around 35% to revenue.

The ratings factor in robust financial risk profile, supported by strong capital structure (estimated gearing of 0.1 time as on March 31, 2019) and debt protection metrics (estimated net cash accrual to adjusted debt ratio and interest coverage of 1.5 times and over 30 times, respectively, for fiscal 2019). These strengths are partially offset by susceptibility to volatility in raw material prices and to intense competition.

Operating performance remained steady in the first nine months of fiscal 2019 with revenue growth of 14% and volume growth of 6% over the corresponding period of the previous fiscal. Operating profitability declined marginally to 13.2% due to intensifying competition in the packaging segment because of entry of new players offering lower prices. Revenue is expected to grow 10-11% annually over the medium term, backed by steady demand in the plastic piping segment on account of replacement demand and substitution of galvanized iron pipes, along with government initiatives in housing and irrigation. This is expected to be complemented by a gradual shift towards the organized market as a result of the rollout of goods and services tax and introduction of E-way bill. Operating margin is expected at 14-14.5% over the medium term backed by healthy share of value-added products. Furthermore, in the absence of any large, debt-funded capital expenditure (capex), the financial risk profile should remain robust, supported by healthy cash accrual, and improvement in capital structure and debt protection metrics. Moderate dividend payout of 40-45% of profit after tax is expected to constrain net cash accrual at around Rs 450 crore.

Analytical Approach

CRISIL has combined the business and financial risk profiles of Supreme and its wholly-owned subsidiary, Supreme Industries Overseas FZE due to strong operational linkages. CRISIL has moderately consolidated associate company Supreme Petrochem Ltd (Supreme Petrochem) and joint venture, Kumi Supreme India Pvt Ltd. CRISIL has factored in Supreme's income from real estate as part of non-operating income. This is because manufacturing of plastic products, rather than real estate, constitutes the core operations.

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Diversified revenue: Supreme operates in the plastic-based products for plastic piping systems (55% of revenue in the first nine months of fiscal 2019), industrial goods (17%), consumer goods (7%), packaging products (19%), and composite product segments, which cater to several end-user industries, mitigating the risk of slowdown in any one product segment and industry. Furthermore, revenue is supported by increasing contribution of value-added products (36% for fiscal 2018), which have operating profitability of over 17%.
 
* Healthy market position across business segments:
Supreme has an established track record and strong market position in each segment it operates in, backed by its widespread distribution network and ability to introduce new products periodically. Its proven product development capability benefits from collaborations with international manufacturers, resulting in strong revenue growth and above-average profitability. The company has over 3,300 channel partners, supported by 25 plants across the country. Three more plants are under construction and are expected to be completed by fiscal 2020. Strong country-wide presence helps reduce freight cost and lead time for products to reach the customers.

* Robust financial risk profile: The financial risk profile is supported by comfortable networth, low gearing, and strong debt protection metrics. Networth was Rs 2,002 crore as on September 30, 2018, with steady growth in cash accrual. Interest coverage was around 30 times for the first nine months of fiscal 2019. Expected annual net cash accrual of around Rs 450 crore should suffice to fund capex requirement (Rs 400-450 crore annually) and debt obligation.
 
Weakness
* Susceptibility to volatility in raw material prices and to intense competition
Supreme is susceptible to volatility in prices of key raw materials, polyvinyl chloride (PVC), high-density polyethylene, and polypropylene, which are affected by change in crude oil prices and foreign exchange rates. Furthermore, Supreme has to maintain large raw material inventory (raw materials constituted 69% of operating income in the first nine months of fiscal 2019), and volatility in input prices impacts working capital management. The plastic processing industry is highly fragmented, especially in commoditised product segments, such as plastic furniture. However, Supreme has differentiated itself by offering value-added products and maintained healthy market share across segments.
Liquidity

Supreme has robust liquidity, with annual cash accrual of Rs 450 crore over the medium term, against nil debt obligation. Bank line of Rs 1,760 crore was utilised moderately over the 12 months through December 2018, and cash and bank balance of Rs 37 crore as of March 2018 cushions liquidity. Moderate capex of Rs 400-450 crore annually is expected to be funded through internal accrual. Dividend payout of 40-45% of net profit should constrain accretion to liquid reserves. Working capital requirement is moderate with receivables and inventory estimated at 28 days and 63 days, respectively, as on March 31, 2019.

Outlook: Positive

CRISIL believes Supreme's business risk profile will improve over the medium term led by increasing share of value-added products and supported by diversified revenue and strong market position across segments. The financial risk profile is expected to remain robust in the absence of long-term debt which should help sustain strong debt protection metrics. Capex is likely to be funded through internal accrual.

Upside scenario:
* Sustained increase in scale of operations and improvement in operating margin led by growth of value-added product portfolio
* Efficient working capital management and sustenance of financial risk profile.

Downside scenario:
* Weakening of capital structure because of large, debt-funded capex or acquisition
* Stretch in working capital cycle.

About the Company

Supreme, India's leading processor of plastics, was incorporated in 1942. It offers a wide and comprehensive range of plastic products. It operates in various segments such as plastic piping systems, cross laminated films and products, protective packaging products, industrial moulded components, moulded furniture, storage and material handling products, performance packaging films and composite, and liquefied petroleum gas cylinders. It has 25 manufacturing facilities across India.

For the nine months ended December 31, 2018, consolidated profit after tax (PAT) was Rs 324 crore on net sales of Rs 3,991 crore, compared with a PAT of Rs 253 crore on net sales of Rs 3,495 crore in the corresponding period of the previous fiscal.

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs Cr. 4990 4443
Profit After Tax (PAT) Rs Cr. 432 430
PAT Margin % 8.7 9.7
Adjusted debt/adjusted networth Times 0.14 0.18
Interest coverage Times 30.75 24.21

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs Cr) Rating Assigned with Outlook
NA Cash Credit NA NA NA 261 CRISIL AA/Positive
NA Cash Credit^ NA NA NA 100.0 CRISIL AA/Positive
NA Cash Credit & Working Capital Demand Loan NA NA NA 50 CRISIL AA/Positive
NA Overdraft NA NA NA 65 CRISIL AA/Positive
NA Working Capital Demand Loan@ NA NA NA 125 CRISIL AA/Positive
NA Letter of Credit & Bank Guarantee NA NA NA 500.7 CRISIL A1+
NA Letter of Credit## NA NA NA 92 CRISIL A1+
NA Letter of Credit$ NA NA NA 100 CRISIL A1+
NA Letter of Credit NA NA NA 317.1 CRISIL A1+
NA Commercial Paper NA NA 7-365 days 200 CRISIL A1+
##Fully interchangeable with buyer's credit
^Fully interchangeable with working capital demand loan, buyer's credit and letter of credit
@Fully interchangeable with letter of credit and buyer's credit, interchangeable with Rs 25 crore of bank guarantee
$Fully interchangeable with packing credit in foreign currency and buyer's credit
 
Annexure - List of Entities Consolidated
Name of company Extent of consolidation Rationale for consolidation
Supreme Industries Overseas FZE Full Wholly owned subsidiary
Supreme Petrochem Ltd Moderate 29.99% stake
Kumi Supreme India Pvt Ltd Moderate 20.67% stake
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  200.00  CRISIL A1+      03-04-18  CRISIL A1+  30-11-17  CRISIL A1+    --  -- 
            31-01-18  CRISIL A1+           
Short Term Debt  ST              17-02-17  CRISIL A1+  30-03-16  CRISIL A1+  CRISIL A1+ 
Fund-based Bank Facilities  LT/ST  601.00  CRISIL AA/Positive      03-04-18  CRISIL AA/Stable  30-11-17  CRISIL AA/Stable  30-03-16  CRISIL AA/Stable  CRISIL AA/Stable 
            31-01-18  CRISIL AA/Stable  17-02-17  CRISIL AA/Stable       
Non Fund-based Bank Facilities  LT/ST  1159.80  CRISIL A1+      03-04-18  CRISIL A1+  30-11-17  CRISIL A1+  30-03-16  CRISIL A1+  CRISIL A1+ 
            31-01-18  CRISIL A1+  17-02-17  CRISIL A1+       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 261 CRISIL AA/Positive Cash Credit 250 CRISIL AA/Stable
Cash Credit & Working Capital demand loan 50 CRISIL AA/Positive Cash Credit & Working Capital demand loan 50 CRISIL AA/Stable
Import Documentary Credit 150 CRISIL A1+ Import Documentary Credit 150 CRISIL A1+
Letter of Credit## 92 CRISIL A1+ Letter of Credit# 192 CRISIL A1+
Letter of credit & Bank Guarantee 500.7 CRISIL A1+ Letter of credit & Bank Guarantee 735.8 CRISIL A1+
Overdraft 65 CRISIL AA/Positive Overdraft 65 CRISIL AA/Stable
Working Capital Demand Loan@ 125 CRISIL AA/Positive Letter of Credit 318 CRISIL A1+
Cash Credit^ 100 CRISIL AA/Positive      
Letter of Credit$ 100 CRISIL A1+      
Letter of Credit 317.1 CRISIL A1+      
Total 1760.8 -- Total 1760.8 --
#Fully interchangeable with buyer's credit, Rs 50 crore interchangeable with working capital demand loan/foreign currency loan
##Fully interchangeable with buyer's credit
^Fully interchangeable with working capital demand loan, buyer's credit and letter of credit
@Fully interchangeable with letter of credit and buyer's credit, interchangeable with Rs 25 crore of bank guarantee
$Fully interchangeable with packing credit in foreign currency and buyer's credit
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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