Unlocking Value of ‘Realty’ Key Growth Driver for Supreme

Mumbai-based plastic goods maker Supreme Industries faced a temporary phase of margin pressure as raw material costs shot up during the March 2011 quarter. Overcoming this and a few other challenges, the company went on to post a respectable profit growth for the March 2011 quarter. The scrip, however, took little notice of the results and maintained its level.
It was mainly the strong sales growth that enabled Supreme Industries to post a 12.2% consolidated net profit growth to . 48.3 crore during the March 2011 quarter. The challenges that the company faced included margin pressure, no sales from its commercial building, a fall in other income and rising interest pressure. Still, the 29% revenue growth aided by a 32% volume growth and a 50% jump in its share in Supreme Petrochem’s profits propped up the bottomline.
Rising crude oil prices and the disaster in Japan led to a spurt in the company’s raw material prices, which it couldn’t immediately pass on. As a result, the operating profit margin shrank 180 basis points to 12.6%. With its . 275-crore capex plan for FY11 continuing and no revenues coming from property sales, the interest burden soared 60% to . 12.9 crore. The company’s debt-equity ratio rose to 0.93 by end-December 2010 from 0.72 in June 10.
Considering the strong demand for its products and a robust volume growth, the margins are expected to return to normal levels for the June 2011 quarter.
The company has constructed a 10-storey commercial complex with 2,75,000 sq ft saleable area on its land in Andheri. So far, it has sold around 40,000 sq ft for . 60 crore, which translates into an average price of . 15,000 per sq ft. The company expects to sell off the remaining property by end-2011 and realise . 350 crore.
Since the stock split in October 2010, the share price of Supreme Industries has remained in a tight range disregarding the strong bearish sentiments in the first couple of months of 2011. Between January and February 2011, when the Sensex lost over 13%, the Supreme scrip actually gained slightly. The scrip is trading at a price-to-earnings multiple (P/E) of 10.5, considering its consolidated net profit for trailing 12 months.
While the strong 20% plus volume growth continues to support the company’s steady growth, unlocking the value in commercial property remains a key growth driver for the company in coming quarters.