Sintex Industries (SINT IN, INR 162, Upgrade to Buy): Edelweiss

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Sintex Industries (SINT IN, INR 162, Upgrade to Buy)

Sintex Industries’ (SINT) management recently clarified its stance on its investments in power assets and O&G subsidiary. Management intends to take investments in the O&G subsidiary off SINT’s balance sheet in the next 12-15 months itself (versus 2-3 years earlier), and SINT will not make any material investment in this business. Management reiterated that SINT’s investment in power will be only to meet its internal power requirements. Promoter interests in power assets remain a separate venture.   

n  O&G subsidiary to go off SINT’s books sooner than expected

In FY10, SINT’s 100% subsidiary, Sintex Oil & Gas, won three inland type S-Blocks under the NELP-VIII offer. Management had indicated then that it would move this investment off SINT’s balance sheet as and when permitted (likely within 2-3 years). However, now the management intends to take this investment off SINT’s balance sheet in the next 12-15 months itself. SINT’s total investment in this subsidiary is thus likely to be miniscule (versus INR 1 bn indicated earlier).

n  Management reiterates the rationale for investment in power assets

Management stated that SINT will be investing ~INR 1.0-1.4 bn in a power SPV to meet its rising power requirements (expected to rise to ~100 MW in the next three years from ~78 MW currently). SINT will be finalising one of the following three options in the next one year for the same: (1) group captive power plant scheme; (2) upgrading its captive plant of 37 MW in Kalol; or (3) a dedicated transmission line connected to the grid. Promoter interests in power assets remain a separate venture and SINT will not be making any investments in the same.

n  Outlook and valuations: attractive; upgrade to ‘BUY’ 

In Q2FY11, we had downgraded Sintex to ‘HOLD’, owing to concerns on rising working capital requirements and investments in unrelated business. With the management clarification allaying our concerns on the latter, and given our positive outlook on the core business growth (estimate FY11-13 earnings CAGR of 22%), we believe current valuations at 9.8x FY12 and 8.3x FY13 offer an attractive entry point for investors. We, therefore, upgrade the stock to ‘BUY’ from ‘HOLD’.