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UBS Investment Research
Sintex Industries
R etain favourable outlook
Event: Q1 FY12 results slightly ahead of UBS-e and in line with consensus
Sintex Industries (SINT) posted favourable PAT growth of 19.9% YoY, supported
by high revenue growth (22.2% YoY; high monolithic growth of 57.4% YoY and
custom moulding reported 16.3% YoY growth) and lower employee/other costs
supporting an EBITDA margin increase to 17% in Q1 FY12. Interest costs were
41% higher YoY at Rs350m on higher cost of debt, capitalisation of three new
plants and charges of Rs26.7m related to the ONGC case.
Impact: retain favourable outlook; marginal cut in estimates on interest
We expect 20.1% PAT growth post our marginal cut in estimates on higher interest
cost assumptions. We retain our strong outlook on monolithic/prefabs and custom
moulding benefitting from an industrial recovery, new client additions and new
plants commissioned. We expect Q3/Q4 performance to be better. 75-80% of raw
material is pass-through. Maintenance of working capital and management intent
to increase shareholding is encouraging, in our view.
Action: reiterate Buy with a Rs240 price target
We reiterate our Buy rating on SINT and our price target of Rs240. We think an
improving growth trajectory, a better balance sheet and positive free cash flow
from FY11E onwards should support stock performance. Higher earnings
momentum expected by management in Q3/Q4 FY12 should support a re-rating.
Valuation: current valuations are attractive
We base our price target for SINT on our sum-of-the-parts methodology. Our price
target implies 11.3x PE on FY13 estimates.
Key takeaways from the conference call
Management highlighted the strong performance of the building products
segment driven by growth in monolithic (c57.4% YoY) and prefabs (7.6%
YoY). While the monsoons may limit Q2 FY12 execution on prefabs,
management indicated robust performance of prefabs in Q3/Q4.
Customer moulding grew 16.3% YoY and this growth is likely to continue,
supported by the new Chennai plant and addition of new customers.
EBITDA margins were: 1) Prefabs—20.5%; 2) Tanks—8.3%; 3)
Monolithic—18%; 4) Textiles—21.5%; and 5) Custom Moulding—16.3%.
Management expects margins to improve through the next few quarters, as
Q1 is typically a weaker quarter.
Interest costs were 41% higher YoY in Q1 FY12 at Rs350m because of: 1)
higher cost of borrowing; 2) charges of Rs26.7m relating to the ONGC
dispute—this relates to buying of Administered Price Mechanism (APM) gas
in 1970s and subsequent judgement in parts; expect adhoc provision in some
quarters, in future; and 3) capitalisation and interest on three plants (two in
India and one in international subsidiary).
The tax rate in Q2 FY12 will be similar to that of the first quarter, and will
recede in Q3/Q4 FY12 as production and prefab execution scale up from the
Dadri plant, which has tax incentives.
Management maintained its strong growth guidance for FY12, supported by
a Rs30bn order book in monolithic and prefabs orders from Bihar/Uttar
Pradesh. It expects margins to be sustainable.
Working capital and debt is broadly maintained QoQ. The capex outlook is
Rs10-11bn over the next three years and management expects capex
intensity to ease after around two years, as the base expands. Monolithic
capex is spent on equipment, pumps, generators, site management facilities,
and HR, and capex is cRs200-300m on an average monolithic site, which has
a ticket size of Rs700m. As we understand, this capex is for incremental
monolithic sites.
ROCE improvement is likely to be gradual as capex intensity eases and
balance sheet size reduces (potential FCCB redemption). The long-term
target is to improve to historical levels of 18-20%.
No plans currently to utilise FCCB proceeds.
Depending on FCF availability with the controlling shareholders,
management plans to increase shareholding by a similar amount as last year
(~4%) in the next one to two years.
Sintex Industries
Sintex started its textile business in 1955 with a composite textile mill in Kalol,
Gujarat. The company established its plastics division in 1975 for the
manufacture of one-piece moulded polyethylene water storage tanks. It
expanded its product offering in the plastics division in the late 1980s to include
plastic extruded sections for partitions, false ceilings and plastic doors, and
injection moulding products. Sintex's subsidiaries have 22 manufacturing
locations. The manufacturing facilities for its plastics divisions are all in India -
in Kalol, Kolkata, Daman, Bangalore, Nagpur, Baddi, Salem and Bhachau.
Statement of Risk
We believe intensifying competition because of low/moderate entry barriers is a
risk in the building products segment, and monolithic construction margins
could be affected by new competitors in the low-cost housing segment. Other
risks are fall in working capital discipline, slowdown in the industrial recovery
globally and India and unrelated investments or ventures.
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