Investment Idea...

Supreme Petrochem Ltd.

CMP Rs 31/-

Target [6 months] 50/-

BUY.

RESULT UPDATE

Results for half year ended - Dec.09, are better then expected and

going by first half profit of Rs 27.11 Crs [against loss of Rs 45.74 Crs]

we estimate [on conservative basis], full year profit to be around Rs

97 Crs, giving an EPS of Rs 10/-.[better then our expected EPS of

around Rs 9/-]. We also expect increased dividend to around 18-20%

this year, making it good for dividend yield also. BUY.

Investment Argument

• The company manufactures polystyrene, Speciality

Polysterene, Expanded Polysterene [XPS] and

Expandable Polysterene [EPS].

• They are common plastic inputs used for making various

Packaging products, insulation boards, toughned

plastic parts for consumer electronic gadgets and high

tech components for automobiles etc.

• Company has entered in to MOU with Nova Chemicals

of USA for producing CUP grade EPS beads, with

arrangements to sell back to Nova, as also to selected

countries. This is a restricted high technology product, and

if all goes well, company will setup 20,000 MTs capacity by

June 2010.

• Company is also setting up SEZ for Plastic processing

in Raigarh, Maharashtra and a minor port nearby.

• Last year's performance of company was poor due to tight

availability of key input -styrene monomer, high volatiltity

and falling trend in input prices, leading squeezed margins.

• Now, with improved supplies and stable prices of key

input, the margins have improved from Q-4, and they are

likely to remain so.

• With economic activity picking up, the demand for

company's products will grow at a healthy pace. We expect

company to report significant improvement in

performance in current year.

• The stock is available at 3X of our expected earnings for

2010 and looks attractive for investment. Buy with target

of Rs 55 in 12 month's time frame.

Background

The company manufactures polystyrene [2,72,000], Speciality Polysterene

[25,000], Expanded Polysterene [XPS] [5,000] and Expandable Polysterene

[EPS]. It is the leader in Polystyrene business in the Indian market place with more

than 50% market share and is also the largest exporter of Polysterene from India

to more than 80 countries. Its exports are also significant.

It will expand the capacity of the speciality Polysterene products further to

50,000 Mts [from 25,000 Mts] in next couple of years. These are used in Alloys/

Blends/ Compounds/ Masterbatches of polymers and mainly in auto/autocomponents

segment. Company has achieved TS-16949 certification, which is

pre-requisite for product uses in automobile segment.

XPS board plant is one of its kind with green technology, these boards are used

as an important insulation medium for residential or commercial buildings, thus

saving on air-conditioning and electricity. Company is developing Insulation as

total value added solution to be offered to retail as well as institutional clients.

The company has taken over management control of Shin Ho Petrochemical

(India) ltd, and existing player in Expanded Polystyrene (EPS) in Chennai, with

an installed capacity of 6,000TPA. Capacity expansion for the same is under

progress.

Company has entered in to MOU with Nova Chemicals of USA for producing

CUP grade EPS beads, with arrangements to sell back to Nova, as also to

selected countries. This is a restricted high technology product, and if all goes well,

company will setup 20,000 MTs capacity by June 2010.

The main inputs are Styrene Monomer and PBR. Styrene Monomer prices are

directly linked to the crude prices which are steady now and the availability is also

comfortable, with the new capacities going on stream in the current year in Kuwait,

Saudi Arabia and Iran.

Company is also setting up SEZ for plastic processing in Raigarh and a minor

port nearby.

Risks and concerns

The key input Styrene monomer is also fully imported and prone to price volatility.

As key input is fully imported and exports are also significant, so forex

fluctuations/management is another risk.

Result Update & Recommendation

Results for the company for H-1 ended Dec.'09 were in line with our expectations

and company reported profit of Rs 27.11 Crs [against loss of 45.74 Crs]. In

second half last year company made profit of Rs 65 Crs. Now looking to improved

utilization and reducing interest cost, if we assume a very modest profit Rs 70

Crs in second half, the total PAT for full year will be Rs 97 Crs. In this case,

we think, stock can show EPS of Rs 10/- for full year and looks underpriced.

Company may also give good dividend of 18-20% and in that case yield will also

be very good at current prices. BUY….BUY

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