HDFC Bank Investment Advisory Group June 30, 2017

Indian Plastic Processing Industry

Sector Update

Introduction
The Indian plastics industry employs over 4 mn people right from polymer manufacturing unit to
plastic processing units. The entire chain in the Plastic industry can be classified into two parts
namely “Upstream” segment, which includes manufacturing of polymers (raw material) and
“Downstream” segment that includes conversion of polymers into plastic articles. While the
upstream polymer manufacturers have consolidated over the years to remain globally competitive,
the downstream plastic processing segment is still highly fragmented and consists of micro, small
and medium units. The micro, small and medium plastic processing units (~75-80% of the total
plastic processing units) contribute just about 25% of polymer consumption. The industry also
consumes recycled plastic, which constitutes about 30% of the total consumption.
In India, a variety of plastic raw materials is produced to meet requirements of different sectors,
which are categorized into Commodity, Engineering and Specialty plastics. Commodity plastics
comprise of Polyethylene, Polypropylene, Polyvinyl Chloride and Polystyrene while engineering
exhibit superior mechanical and thermal properties, and include styrene derivatives (PS/EPS &
SAN/ABS), polycarbonate, poly methyl methacrylate, etc.
The polymers are processed through various types of techniques namely extrusion, injection
moulding and blow moulding in order to manufacture the finished products. Extrusion process is
the most commonly used process in India and accounts for ~65% of total processed output by
downstream plastic processing companies. This process is followed mainly for the production of
Films & Sheets, Fibres & Filments Pipe and other miscellaneous applications. Injection molding is
the second most popular process accounting for ~30% of the processed output and is used for
Industrial Injection Moulding, Household Injection Moulding and Thermoware/Moulded luggage.
Blow molding process, used for manufacturing Bottles, containers, Toys and Housewares, and
Roto moulding, used for manufacturing large circular tanks such as water tanks, both accounts for
the remaining ~5% of the processed output.
The industry produces and exports a wide range of plastic products and raw materials like, plastic-
moulded extruded goods, polyester films, moulded / soft luggage items, writing instruments, plastic
woven sacks and bags, polyvinyl chloride (PVC), packaging, consumer goods, sanitary fittings,
electrical accessories, laboratory/medical surgical ware, tarpaulins, laminates, fishnets, travelware,
and others.
As per Federation of Indian Chambers of Plastic Processing in India (MMTPA)
Commerce and Industry (FICCI) report on 22.0
Sustainable Infrastructure with Plastics,
February 2017, the plastic processing industry
13.4
has grown at a CAGR of 11% from Rs 350 bn. in
FY05 to Rs 1000 bn. in FY15, in value terms. In
volume terms, the plastics processing industry 8.3

grew at a CAGR of 10% in volume terms from

8.3 million metric tonnes per annum (MMTPA) in
FY10 to 13.4 MMTPA in FY15. Going ahead, it
FY10 FY15 FY20
expects industry to grow at a CAGR of ~ 10.5% Source: FICCI report on Sustainable Infrastructure with Plastics

from FY15 to FY20 to reach 22 MMTPA.

Factors determining the growth in the Plastic Industry
The plastic industry is growing steadily over the past few years. There are host of factors that are
likely to determine the demand growth for the industry going forward. Some of the factors are
mentioned below.

 Low penetration level to drive the growth for Plastic Industry

The plastic products are widely used in daily use items and cover almost every sphere of life like
clothing, housing, construction, furniture, automobiles, household items, agriculture, horticulture,
irrigation, packaging, medical appliances, electronics and electrical etc. However, the per capita
consumption of plastic products in India is well below the global average and also average
consumption for Asian peer like China. India’s plastic product consumption stood at 12kg/person in
2016 as compared to global average of 27kg/person and 45kg/person in China. While the
packaging industry in India has seen strong penetration level (~43%) of plastic as compared to
global levels (~35%), agriculture (2% vs 8% global average) and infrastructure (21% vs 25% global
average) is yet to meet the global average. The current low per capita consumption level of plastic
products in India as compared to global average indicates huge untapped opportunity over the long
term for majority of plastic players.
Per capita plastic products consumption Polymer utilization by application (2015)
120 109 (Kg/person, 2016) 50%

100 40%

80 30%
65
60
45 20%
40 35
27 10%

35%
43%

25%
21%

17%
16%

15%
18%

8%
2%
20 12
0%
0 Packaging Infrastructure Auto Others Agriculture
USA Europe China Brazil World India Global Average India
Source: FICCI report on Potential of Plastic Industry in Northern India, April 2017 Source: FICCI report on Potential of Plastic Industry in Northern India, April 2017

 Higher government focus on infrastructure sector to drive demand for plastics

As per the 12th Five Year Plan, India had committed USD 1 trillion in upgrading its ageing
infrastructure like Power, Telecom, Roads, Irrigation, Railways, Oil & Gas and others. Moreover,
the Reserve Bank of India (RBI) has notified 100% foreign direct investment (FDI) under automatic
route in the construction development sector. In addition with the government’s renewed focus on
providing clean water for drinking and improving sanitation facilities through the construction of
individual household toilets, cluster toilets and community toilets under Swachh Bharat Mission.
PVC and Chlorinated polyvinyl chloride (CPVC) plays important role in the sustainable
management of these sectors through various products like pipes, wires & cables, water proofing
membranes, wood PVC composites, food and medicinal packaging. The huge allocation to
infrastructure sector, higher focus on water management and on improvement in sanitation facilities
provide huge growth potential for plastic manufacturer like Supreme Industries, Finolex Industries
etc which has significant presence in these areas.
 Expected improvement in Agriculture productivity due to higher use plastic to drive
growth
In the past few years, the government has launched various programs for the agriculture sector
focusing on increasing irrigation, farmer’s income and production. The monsoon plays a very vital
role for the growth in agriculture sector in India. Only 47% of sown area under Irrigation
Historically, the agriculture sector gets severely 200 47% 50%

impacted whenever there was a below monsoon

150 45%
rainfall as out of total sown area of 140 mn
hectares (mha) only ~66 mha is reported as 100 40%
irrigated land as of FY13 (Source: Ministry of 34%
Agriculture & Farmers Welfare report on State of 50 35%

Indian Agriculture 2015-16). The government 0 30%

has increased the allocation to Pradhan Mantri 1990-91 2003-04 2008-09 2009-10 2010-11 2011-12 2012-13
Krishi Sinchai Yojana (PMKSY) by 27.9% YoY in Net area sown
(Proj.) (Proj.) (Proj.) (Proj.)
Net Irrigated area
(Proj.)

the Union Budget 2018 in order to increase the Irrigated land % of total area Sown
Source: Ministry of Agriculture and Farmers Welfare
land under irrigation. Apart from this, the
government has been increasing its allocation to various rural related schemes. The lower level of
irrigation and increased government allocation is likely to be one of the major drivers for the growth
of PVC pipe industry in the country.
In addition, as per the recent FICCI report, India has a limited plastic usage with a per capita
consumption of plastics in agriculture of 1 kg against a global average of 32 kg (and about 100 kg
in the United States). Moreover, it suggests that higher usage of plastic in agricultural activities like
water conservation, irrigation efficiency, crop protection, including farm output practices like crop
storage and transportation is likely to increase the yield upto 50-60%, water savings upto 60-70%
and fertilizers savings upto 30-40%. It also helps in soil conversion and reduction in post-harvest
losses. Given the low usage of plastic in agriculture and government’s focus on improving the
productivity and farm income, plastic industry in India is likely to see huge demand from agriculture
sector in near future.
 Reforms in Housing sector to augment plastic demand
The demand for plastic products in India is also likely to see strong improvement driven by series of
government reform initiatives in housing sector. Over the past few years, the government is
announcing various schemes to incentivize homebuyers. The government has announced Housing
for All by 2022 under which it targets to provide 20 mn houses in urban areas and 40 mn houses in
rural areas. The government has also announced Atal Mission for Rejuvenation and Urban
Transformation (AMRUT) to provide basic services to households and to build amenities in cities
with the focus to provide access to a steady supply of tap water and sewerage facilities to every
household. Shortage of housing in India coupled with lack of proper water management system in
slums indicates a huge demand for plastic products like piping, plastic bottles, furniture, long
mattress etc. that in turn is likely to boost revenue growth for plastic processing industry.
 Improvement in market share to boost revenue growth for organized players
The plastic processing industry is highly fragmented with over 25000 processing units mainly
comprising of micro, small and medium enterprises. As per the Supreme Industries’ Presentation,
the unorganized players in plastic piping segment contribute around 40% of the total revenue while
organized players contribute about 60%. As per industry experts, the share of unorganized players
is gradually reducing over the past few years. These unorganized players were severely impacted
during the demonetization phase recently due to lack of currency note as there business used to
run majorly on cash. Higher cash transaction was also resulting in lower billing and in turn resulting
in lower taxes allowing them to sell their products at cheaper prices and thus taking away the share
from organized players. However, with the implementation of Goods and Services Tax, these
unorganized players are likely to come under tax net and resulting in reduction in price differential
between organized and unorganized players. This is likely to be positive for organized players like
Supreme Industries, which has around 15% market share of organized market, as the consumer
may prefer branded products by paying marginally higher price resulting in improvement in market
share for organized players.
 Revenue growth and EBITDA margin highly correlated to crude oil prices
The key raw materials for plastics like PVC, polyethylene, and polypropylene are highly linked to
crude oil prices. While the fall in crude oil prices were impacting the revenue growth for plastic
processing companies like Supreme Industries, Finolex Industries and Astral Poly, EBITDA margin
for these companies witnessed an improvement as the pass thorough of lower prices happens at a
lag which enable companies to gain on margins. Moreover, companies like Supreme Industries
have started focusing on increasing the contribution on value added products like premium
furniture having higher margins to reduce the volatility arising from crude oil prices. Crude oil prices
are on declining trend for past two to three years and are closer to their historical low levels that
helped in EBITDA margin expansion. A sharp upmove in the crude oil prices may pose a threat to
companies that are having low contribution from value added products as a result may see
pressure on margins.
25.0 120.0
25.0
Correlation between Crude Oil and Revenue growth 120.0 Correlation between Crude Oil and EBITDA margin
20.0 100.0
20.0 100.0
15.0 80.0
(in USD/bbl)

80.0 15.0
(in USD/bbl)

(in %)
(in %)

10.0 60.0
60.0
5.0 10.0
40.0
40.0
0.0
5.0 20.0
-5.0 20.0

-10.0 0.0 0.0 0.0

201406

201409

201412

201503

201506

201509

201512

201603

201606

201609

201612

201703
201303
201306
201309
201312
201403
201406
201409
201412
201503
201506
201509
201512
201603
201606
201609
201612
201703

Finolex Cables Supreme Inds. Astral Poly Crude Oil Average Finolex Cables Supreme Inds. Astral Poly Crude Oil Average (RHS)
Source: Bloomberg, Capitaline Source: Bloomberg, Capitaline
  Peer Comparison
Sales EBITDA PAT EBITDAM ROCE ROE Debt/
Companies CMP PE
CAGR (%) CAGR (%) CAGR (%) (%) (%) (%) Equity
FY12-17 FY12-17 FY12-17 FY17 FY17 FY17 FY17 FY17
Astral Poly 687.0 26.5 25.9 30.9 13.9 20.5 17.5 0.3 55.1
Wim Plast 1590.0 12.2 17.6 16.4 23.0 27.7 18.5 0.0 39.3
Supreme Inds 1224.9 8.8 10.1 12.2 17.1 31.2 25.4 0.2 36.3
Jain Irrigation 103.3 5.3 3.2 0.8 14.1 9.1 4.2 0.8 31.4
Nilkamal 1882.0 5.2 6.3 13.9 11.1 21.9 16.0 0.1 22.9
Time Techno 159.6 12.5 10.7 11.5 14.7 14.6 11.4 0.5 23.1
Finolex Inds 603.0 6.0 20.8 41.3 19.8 21.9 15.0 0.0 21.1
Source: Capitaline, BSE India, Note: FY17 numbers are based on Ind AS, CMP as on 30 June 2017

Overall View: As per FICCI report, the plastic processing industry is expected to grow at a
CAGR of ~ 10.5% from FY15 to FY20 to reach 22 MMTPA. This is likely to be on the back of
low per capita consumption of plastic products in India, which is likely to improve as the
use of plastic increases agriculture sector and allied activities in order to improve
productivity. Moreover, demand for plastics is also likely to get boost from the increased
focus of the government in infrastructure sector and various reform announcements in
housing sector. In addition, the implementation of GST is likely to be positive for the sector
as it may improve the market share of organized players. While the crude oil prices are
currently trading at lower levels helping plastic companies to maintain their margins in near
future, any sharp uptick in crude oil price may pose a threat on margins for these
companies. However, we remain positive on long-term potential of the Plastic Processing
industry on the back of low penetration level and huge untapped opportunity size. In our
model portfolio, we have Hold rating on Supreme Industries that is likely to be the
beneficiaries of upcoming growth opportunity arising in the industry given its well-
diversified product portfolios, strong market share and superior return ratios as compared
to peer companies.
Supreme Industries Ltd. CMP: Rs.1225, Mkt Cap: Rs.155.60 bn

Background
Supreme Industries Ltd. is engaged in production of plastic products. The Company operates in two
segments: Plastics and Construction. The Company offers a wide range of plastic products with a variety of
applications in Moulded Furniture, Storage and Material Handling Products, XF Films and products,
Performance Films, Industrial Molded Products, Protective Packaging Products, Plastic Piping System,
Composite LPG Cylinder and Petrochemicals. The Company’s products include molded furniture, material
handling products, petrochemicals F films and products (SILPAULIN), performance films, industrial molded
products, protective packaging products, plastic piping system and bathroom fittings.

Key Details Shareholding Pattern (%) on 31 March 2017

52 week H/L(Rs) 1244/780 Promoter 49.70
Book Value (Rs) YTD 122 Institutions 28.93
FV (Rs) 2.0 Public 21.37
PE (X) (TTM) 36.3 Total 100.00
Dividend Yield (%) 1.1

Valuations and Chart

PE (X) 1400 Daily closing price for last 3 years of Supreme Inds.
FY17 FY18E FY19E 1200

36.3 32.3 26.0 1000

800
600
400
200
0
Jun-14

Nov-14

Jun-15

Nov-15

Nov-16

Jun-17
Dec-15
Oct-14

Jul-15

Jul-16

Oct-16

Apr-17
Apr-15

Sep-15

Feb-16

May-16
Aug-14

Aug-16
Jan-15
Mar-15

Mar-16

Jan-17
Mar-17
Source: Bloomberg

Earnings Summary
Y/E Sales Growth EBITDA Margin Net Profit EPS Growth P/E Div. Yield
31-Mar Rs Bn (%) Rs Bn (%) Rs Bn Rs % X %
FY16A^ 29.6 NA 4.6 15.6 2.3 17.3 NA 70.8 0.6
FY17A 44.6 50.7 7.6 17.1 4.3 33.7 94.8 36.3 1.2
FY18E 52.9 18.7 8.6 16.2 4.8 37.9 12.4 32.3 0.8
FY19E 65.0 22.9 10.3 15.9 6.0 47.0 24.2 26.0 0.8
^FY16 is 9 months year ending in March 2016
View: Supreme Industries is one of the leading player in plastic processing industry with well
diversified product portfolio ranging from plastic piping (~15% market share of organized market),
consumer product (furniture – 10.5% market share), packaging products, industrial products (Material-
handling products – 13.5% market share) and composite product. While the volume growth in FY17
was below expectation but management improved their guidance for FY18 to 12-15% and expects
company to benefit from GST implementation, government reforms like affordable housing for all,
doubling of farmer income by 2022 and increased spending on irrigation, drinking water, sewage and
drainage networks. Further, the company’s focus on increasing the share of value added products,
low per capita consumption of plastic in the country and expected boost in composite LPG Cylinder
demand provides huge revenue growth opportunity for the company. We remain positive on the back
of strong product mix, consistent earnings growth and healthy ROE of over 25%. We have rolled over
our earnings to FY19 and currently have a Hold rating on the stock with the target price of Rs.1334
based on PE multiple of 27x (three year average multiple) FY19E EPS of Rs.47 adding Rs.64 for stake
in Supreme Petrochem. Any earning/target price revision would depend on the volume and revenue
growth for the company, implementation of Goods and Services Tax, change in the value of Supreme
Petrochem and changes in general business momentum.
#Note: FY16 is a 9months year ending in March 2016 as company changed accounting year to March end from June end.
 Rating Interpretation
Rating Expected to
Buy Appreciate more than 10% over a 12 to 15 month period
Hold Appreciate below 10% over a 12 to 15 month period
Under Review Rating under review
Exit Exited out of the Model Portfolio
Disclaimer: This communication is being sent by the Investment Advisory Group of HDFC Bank Ltd., registered under SEBI
(Investment Advisors) Regulations, 2013
This note has been prepared exclusively for the benefit and internal use of the recipient and does not carry any right of reproduction or
disclosure. Neither this note nor any of its contents maybe used for any other purpose without the prior written consent of HDFC Bank
Ltd, Investment Advisory Group. In preparing this note, we have relied upon and assumed, without any independent verification,
accuracy and completeness of all information available in public domain or from sources considered reliable. This note contains certain
assumptions and views, which HDFC Bank Ltd, Investment Advisory Group considers reasonable at this point in time, and which are
subject to change. Computations adopted in this note are indicative and are based on current market prices and general market
sentiment. No representation or warranty is given by HDFC Bank Ltd, Investment Advisory Group as to the achievement or
reasonableness or completeness of any idea and/or assumptions. This note does not purport to contain all the information that the
recipient may require. Recipients should not construe any of the contents herein as advice relating to business, financial, legal,
taxation, or other matters and they are advised to consult their own business, financial, legal, taxation and other experts / advisors
concerning the company regarding the appropriateness of investing in any securities or investment strategies discussed or
recommended in this note and should understand that statements regarding future prospects may not be realized. It may be noted that
investments in equity and equity-related securities involve a degree of risk and investors should not invest any funds unless they can
afford to take the risk of losing their investment. Investors are advised to undertake necessary due diligence before making an
investment decision. For making an investment decision, investors must rely on their own examination of the Company including the
risks involved. Investors should note that income from investment in such securities, if any, may fluctuate and that each security’s price
or value may rise or fall. Accordingly, investors may receive back less than originally invested. Neither HDFC Bank nor any of its
employees shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost
profits arising in any way from the information contained in this material. This note does not constitute an offer for sale, or an invitation
to subscribe for, or purchase equity shares or other assets or securities of the company and the information contained herein shall not
form the basis of any contract. It is also not meant to be or to constitute any offer for any transaction. HDFC Bank and its affiliates,
officers, directors, key managerial persons and employees, including persons involved in the preparation or issuance of this material
may from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein. HDFC
Bank may at any time solicit or provide commercial banking, credit, advisory or other services to the issuer of any security referred to
herein. Accordingly, information may be available to HDFC Bank, which is not reflected in this material, and HDFC Bank may have
acted upon or used the information prior to, or immediately following its publication.
HDFC BANK neither guarantees nor makes any representations or warranties, express or implied, with respect to the fairness,
correctness, accuracy, adequacy, reasonableness, viability for any particular purpose or completeness of the information and opinions.
Further, HDFC BANK disclaims all liability in relation to use of data or information used in this report which is sourced from third parties.

Disclosures:
Research analyst or his/her relatives or HDFC Bank or its associates may have financial interest in the subject company in ordinary
course of business. Research analyst or his/her relatives does not have actual/ beneficial ownership of 1% or more securities of the
subject company at the end of the month immediately preceding the date of publication of research report: HDFC Bank or its associates
may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding
the date of publication of research report. Research analyst or his/her relatives or HDFC Bank or its associates may have other
potential / material conflict of interest with respect to any recommendation and related information and opinions at the time of
publication of the research report. Subject company may have been client of HDFC Bank or its associates during twelve months
preceding the date of publication of the research report. HDFC Bank or its associates may have received compensation from the
subject company in the past twelve months. HDFC Bank or its associates may have managed or co-managed public offering of
securities for the subject company in the past twelve months. HDFC Bank or its associates may have received compensation for
investment banking or merchant banking or brokerage services from the subject company in the past twelve months. HDFC Bank or its
associates may have received compensation for products or services other than investment banking or merchant banking or brokerage
services from the subject company in the past twelve months. HDFC Bank or its associates has not received compensation or other
benefits from the subject company or third party in connection with the research report. Research analyst has not served as an officer,
director or employee of the subject company. Neither research analyst nor HDFC Bank has been engaged in market making activity for
the subject company. Three year price history of the daily closing price of the securities covered in this note is available at
www.nseindia.com and www.bseindia.com.