Portfolio (Unlocked): We Exit Supreme Petrochem From the Long Term Portfolio for 3x in Three Years

We are exiting Supreme Petrochem in long term portfolio. The stock has gone to a very high level since we bought it in September 2015 at 110 (Read post here). As of today, the stock has given us 3x returns at about 312, but we did exit 25% of our position at 401 and therefore got some of our cost out. It’s been a very good multi-bagger, but it’s time to move on.

The fundamentals have changed and doesn’t seem attractive, hence the exit. We have already sold 25% of holding in April last year at Rs 401 (Read post here).
We will be recording exit price at 312.
Note: Sell 50% today and spread the rest over the course of next week, if the stock falls below Rs 300. We will be recording today’s price for complete exit.
Results Are Showing Declining Trend
The initial bet on the stock was based on the growth story and industry turnaround, and the growth in EPS/XPS as strong, stable products for multiple applications. While the company hasn’t shown a major move there yet, they did venture into SMMA (a transparent hard plastic that can be used in mixer jars and a bunch of other products). This has only recently started.
The last few quarters of results have shown the financial trend reversing. Supreme Petro released results for year ending FY18. Revenues have declined by 3.46% YoY and also seen a contraction in margin by 289 basis points YoY. The EBITDA margins stood at 9.45% last year versus 6.56% for the reported quarter.
Much of this is because of crude prices rising. They are large manufacturers of polystyrene, and related products and the input is monomers which will get expensive as crude prices rise.
On a bottomline, profit have come down by 35% YoY and currently stands at Rs 115 Crs. FY18 EPS stands at 12.03 versus 18.59 Last year. This takes the current price of Rs. 310 to a 26 P/E and we believe that at this price the company might not be attractive to hold. We bought in at a P/E of 10-12 and it has been a reasonable bet at that price. At 400 it was a little too expensive for fresh purchases, but we decided to hold in case the results were great – but in two quarters since, the results were lacklustre.
But there are good points – the company has no debt, it’s paying a dividend of Rs. 3.5 and has very little capex required. It is also a well managed company, and has a small float. The growth could still come from the EPS/XPS story playing out – and from the venture into SMMA. However, we feel here that the fundamentals today show that the risk-reward equation suggests much higher risk at this price today. So we’ll exit and move into other stocks.
We are exiting with a return of 206% (inclusive of 25% exit at Rs 401) over a period of 2 years and 7 months. Which if translated is equivalent to 6.63% returns every month!


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