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Re-laying the Building Blocks
With a buoyant order book, including a robust stream of government orders
and an excellent execution track record, Sintex Industries’ building products
division should register a 26.6% CAGR and account for 76.4% of incremental
sales over FY11-13. Strong operating free cash flow of Rs4.3bn and RoCE
improvement by 249bps to 16.1% over FY11-13 due to high net sales growth
of 17.6% supported by balance sheet discipline and $225mn FCCB
redemption calls for a re-rating of the stock. We assign a Buy rating to it
with a SOTP-based TP of Rs224 (6.6x FY13 EV/EBITDA), 24% up from CMP.
Government spending to up building products division’s revenue by 26.6%:
Sintex’s building products division, which accounted for 48.6% of FY11
consolidated sales, derives 65-70% of its revenue from state and central
government orders under their respective social schemes. Allocation towards
these schemes has showed a 17.2% CAGR over FY07-12 to Rs542bn. Its
monolithic division has a strong order book of Rs30bn, 2.25x its FY11 sales of
Rs13,360mn, to be executed over a period of 22 months. We expect this division
to grow 26.6% over FY11-13 to Rs35bn and be a key revenue driver, contributing
76.4% to incremental consolidated revenue of Rs17.2bn. On the back of building
products division, the consolidated net revenue should witness a 17.6% CAGR,
which would improve the RoCE by 203bps.
Balance sheet discipline and FCCB redemption to improve RoCE: Ex-cash
working capital increased to 41.7% in FY10 from 20.2% in FY09, while cash
deposit in escrow account stood at Rs3.5bn in FY10. The company has liquidated
all such non-core investments in FY11, reducing ex-cash working capital to 27.9%.
We expect Sintex to maintain balance sheet discipline and increase sales by
17.6% CAGR, which would generate positive operating free cash flow of Rs4.3bn.
Out of $225mn FCCB proceeds, $165mn remains unutilised, thereby putting
pressure on the return ratios. We expect the redemption of FCCBs by March
2013, which would improve the RoCE by 136bps over FY11-13.
Valuation: At CMP, the stock is trading attractively at 8.9x/7.6x FY12/13E EPS of
Rs20.38/Rs23.84, below the 7-year median of 11.4x, and at EV/EBITDA of
6.7x/5.6x FY12/13E, which is lower than its 7-year median of 7.2x. Strong
operating free cash flow of Rs4.3bn and RoCE improvement by 249bps to 16.1%
over FY11-13 due to high net sales growth of 17.6% supported by balance sheet
discipline and FCCB redemption of $225mn calls for a re-rating of the stock. We
assign a Buy rating to it with a SOTP-based TP of Rs224.
Valuation
Sintex had witnessed a re-rating of its stock during FY04-08 on the back of healthy improvement in RoCE to
12.7% in FY08 from 9.8% in FY03, supported by healthy profitability CAGR of 57%. The stock witnessed a
surge in PE multiple from 5x to 20x and EV/EBIDTA multiple from 6x to 14x during the same period. On
account of a structural shift in its business model towards working capital-intensive business, the unutilised
FCCB sum and higher loans and advances, the RoCE declined to 8.3% in FY10 (13.6% in FY11) from 12.7%
in FY08 which led to a de-rating of its stock and it traded in a PE band of 8-10x and EV/EBITDA band of 6-8x
over FY09-FY11. At the current market price, the stock is trading attractively at 8.9x and 7.6x FY12E EPS of
Rs20.38 and FY13E EPS of Rs23.84, below the 7-year median of 11.4x, and at EV/EBITDA of 6.7x/5.6x
FY12/13, which is lower than its 7-year median of 7.2x. The company divested/liquidated its non-core
businesses/investments, improved working capital discipline and as a result the RoCE improved from 8.3% in
FY10 to 13.6% in FY11. We expect it to improve by 249bps to 16.1% over FY11-FY13 on the back of strong
net sales growth and redemption of FCCBs. Of the $225mn FCCB proceeds, $165mn is unutilised, thereby
putting pressure on the return ratios. FCCBs are due for conversion in March 2013 and we expect the
company to redeem FCCBs as the conversion price of Rs246 and the break-even price of Rs354, both are
higher than our target price. In case FCCBs are converted into equity shares, the company will have a better
control over utilising this money. Due to higher capex of Rs24.4bn over FY07-11 and also higher working
capital, free cash flow was negative until FY10. Working capital discipline and improved focus on core
business led to positive operative free cash flow, although it was a small sum, in FY11. We expect this trend
to continue in FY12 and FY13 and the company would have operating free cash flow of Rs4.3bn over FY11-
13. Sintex is poised for a strong re-rating, just like it happened during FY04-08.
Sintex operates in different segments which enjoy different valuations and as a result we valued the stock
based on SOTP-based multiple, valuing each of its divisions at a premium/discount to competitors. We valued
its building products division at 6.4x EV/EBITDA, at a premium over construction industry average of 5.1x due
to higher margins, better order execution skills and a strong order book. We valued its custom moulding
division at 7.5x EV/EBIDTA, in line with automobile ancillary industry’s leader, and we valued textile business
at 7x EV/EBIDTA in line with textile peers. We thus arrived at a final valuation of Rs224 for Sintex. We haven’t
considered conversion of FCCBs into our valuation. In case FCCBs are converted into equity shares, our
target price increases to Rs226. At our TP of Rs 224, the stock is valued at 11x/9.4x FY12/13E PE and
8x/6.6x FY12/13 EV/EBIDTA. We assign a Buy rating to the stock.
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