CRISIL’s ratings on the debt instruments of The Supreme Industries Ltd (Supreme) continue to reflect Supreme’s healthy and diversified revenue profile, supported by increasing contribution from value-added products, and improving financial risk profile. These rating strengths are partially offset by the susceptibility of the company’s operating profitability to volatility in raw material prices and competitive nature of the industry.

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of Supreme, its wholly owned subsidiary Supreme Industries Overseas (FZE), and its associate company Supreme Petrochem Ltd (Supreme Petrochem). The investment in the associate has been recognised as per the equity method.

Supreme’s business risk profile is supported by its diversified revenue streams, which help mitigate the adverse impact of a slowdown in any one of its product segments. The company operates in the plastic piping systems, industrial goods, consumer goods, and packaging products segments, and has strong market positions in most of these businesses. It also has healthy operating efficiencies. Supreme’s plants are located near major markets. The company has a low operating-cost structure, and collaborations with international manufacturers.

Supreme’s financial risk profile is adequate and improving, supported by increasing cash generation. The company has planned capital expenditure (capex) of Rs.10 billion over a period of five years from 2010-11 (refers to financial year, July 1 to June 30) to 2014-15. The company has expended a capital of about Rs.2.6 billion during 2010-11 and plans to expend a capital of about Rs.2 billion during 2011-12. The capex is expected to be mainly funded through internal accruals and expected future cash accruals. CRISIL also expects Supreme’s future cash accruals to be supported by the proceeds from the sale of commercial real estate project at Andheri in Mumbai (Maharashtra). Hence, CRISIL believes that Supreme will maintain its capital structure and healthy debt protection metrics over the medium term.

However, Supreme’s operating profitability is moderately susceptible to volatility in prices of its key raw materials—poly vinyl chloride resin, polyethylene, and polypropylene; the prices of these commodities are linked to movements in crude oil prices. The plastics industry is also highly competitive and fragmented, with a large unorganised segment. The company is taking initiatives to enhance the share of the high-margin speciality products in its portfolio, to moderate the impact of volatility in input prices as well as peer pressure.

Outlook: Stable

CRISIL believes that Supreme will continue to benefit over the medium term from its diversified revenue profile and its strong market position. The outlook may be revised to ‘Positive’ if there is a significant improvement in Supreme’s financial risk profile, driven most likely by more-than-expected improvement in the company’s liquidity and capital structure. Conversely, the outlook may be revised to ‘Negative’ if there is a steep decline in Supreme’s business volumes and profitability, or deterioration in the company’s capital structure because of larger-than-expected debt-funded capex.