JPMorgan: Sintex -Buy;Balance Sheet Concerns Addressed, Raise TP to Rs475

Sintex management hosted Q2FY11 earnings conference call on 12th Oct.
Management addressed concerns about the balance sheet and reiterated
FY11E guidance of 30% revenue growth and 18-19% EBITDA margins.
• Balance sheet related concerns partially addressed: 1) Management
stated that Sintex will reduce its stake to a minority investor in the oil & gas
subsidiary and its cumulative investments over next 4-5 years would be
capped at Rs1B. 2) Cash balance in the escrow account for M&A has
declined to Rs3.5-4B in Sep-10 from Rs5.29B in Mar-10, which we expect
will be utilized for a potential acquisition in the monolithic segment
expected in 2HFY11. 3) Working capital would continue to increase on
account of rising contribution from the monolithic business.
• Monolithic business to be gradually moved into the new infrastructure
subsidiary: According to management, a separate subsidiary would 1)
allow the parent and the subsidiary to bid separately for the same project 2)
would enable booking of revenues on percentage completion basis and
would reduce revenue volatility and 3) and going forward, would allow it to
capture any potential fiscal benefits available to the infrastructure sector.
• Earnings revision: Management has guided at 30% revenue growth and
17%-18% EBITDA margins in FY11E. Order book for monolithic business
has increased by Rs5.4B to Rs26B in 2Q. Textiles business recovery has
been much sharper than expected (25% yoy growth in 2Q), while custom
molding business had grown at 24%. Prefab business was a bit muted on
account of extended rainfalls, but is expected to be made up in 3Q. We raise
our FY11E-FY13EPS estimates by 5%-12%, factoring in higher growth and
margins for textiles and custom molding segments.
• Raising price target: We maintain OW rating and increase our TP to Rs475
on account of our earnings revision, maintaining our 12x FY12E target P/E
multiple. The stock is currently trading at 10.7x FY12E P/E, an 11%
discount to its historical average. Key risks include rising dependence on
govt. orders, slowdown in Europe, expensive acquisitions, and rising
working capital.