Sintex: Marginally lower than estimates:: Kotak Sec

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Sintex (SINT)
Others
Marginally lower than estimates. Sintex’s 1QFY12 EBITDA at Rs1.89 bn was a little lower
than our estimates at Rs1.96 bn. PAT grew 20% yoy on account of higher tax rate (27% versus
18% in 1QFY11). We make the following observations on the quality of the earnings growth of
the company in the last few years: (1) The growth is led by rapid expansion of balance sheet, (2)
in our opinion it would be difficult for the company to generate cash flows going forward even if
the growth rate slows down, and (3) The business (SA) is generating very low asset turns on
incremental capex. We retain SELL with a 12-month target price of Rs170.


1QFY12 EBITDA marginally lower than estimates; PAT miss due to higher tax rate yoy
Sintex’s 1QFY12 consolidated revenues at Rs11 bn (+22% yoy; -24% qoq) were in line with our
estimates. Marginal underperformance in the building products segment was mitigated by
outperformance in the custom moldings division. PAT at Rs946 mn (+20% yoy; -43% qoq) was
lower versus our estimate at Rs1.06 bn due to higher tax rate (27% versus 18% in 1QFY11).
EBITDA margins in the monolithic segment came in line with our estimates at 18%; historically,
the margins have been above our estimates. Order book in the segment at Rs30 bn is almost flat
versus Rs29 bn reported in 4QFY11.
Earnings growth led by rapidly expanding balance sheet
We make the following observations on quality of earnings growth in the last few years.
�� Earnings growth is led by expansion of the balance sheet. As per our estimates, in
FY2008-11 (three years), for every Rs100 of incremental sales (SA entity), the company has
deployed Rs170 of incremental capital (capex+working capital) (Exhibit 4).
�� It would be hard for the company to generate cash flows even if growth slows down.
We compute that it may be difficult for the company to generate operating cash in the SA
entity even if the revenue growth rate were to slow down to 8-10%.
�� Low asset turns: In FY2008-11, the company (SA) generated asset turn of one on its
incremental capex (Exhibit 4). It is possible that the company might generate incremental
revenues without much increase in capex, but we would like to see some improvement before
taking a positive view.
We retain our SELL rating with a target price of Rs170
We are leaving our earning estimates unchanged and retain SELL rating with a target price of
Rs170 (at 10X FY2013E adj. EPS). We adjust the earnings for the impact of O/S FCCBs assuming
an interest rate of 6% (P&L doesn’t reflect the actual interest expense) of the face value of FCCBs.