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Sintex Industries (SNTX.BO, Buy, add to Conviction List)
Strong execution continues – attractive valuations and cash returns; risk of non-core investments
low
We reiterate our Buy rating on Sintex, and add it to our Conviction Buy List, as the company has continued to
deliver good execution (+20% revenue growth for the past 6 consecutive quarters) and is trading at attractive
valuations, in our view.
Despite higher raw material costs over the past few quarters, better cost management and improved utilization
at overseas custom molding subsidiaries, helped deliver a 200bp improvement in EBITDA margins in FY11.
Capex investments made by the company over the past three years (about $350mn) should continue to drive
faster sales growth and improvement in margins through operational leverage, in our view.
We see the company’s exposure to the EU/US through its foreign custom molding subsidiaries as the
primary risk to our forecasts – 24% of sales and 18% of EBITDA for this year.
We build in 8% growth for Sintex’s foreign businesses this year vs. company guidance of 12%-13%. We also
build in a reduction in margins in the segment by 150bp vs. the company’s expectations of flat segmental
margins on the back of slower growth.
Sintex has made announcements to undertake investments in the power generation sector. Although this
investment would be non-core in nature, the company intends to build this capacity largely for internal
consumption. We see this as a concern but see limited impact on valuations given the relatively modest size
of such planned investments.
Catalyst
(1) New order wins and continued execution in its monolithic business; (2) India’s continued spend on social
infrastructure – especially through increased allocation in the upcoming budget; (3) stronger-than-expected
recovery in growth and margins of overseas custom molding subsidiaries in FY12E.
Valuation
We lower our 12-month target price on Sintex to Rs225 (from Rs236) as we roll it forward by 6-months to an
average of 10X average FY12E and FY13E EPS (vs. 11X earlier), which is in line with its historical median P/E
multiple and now implies 56% upside potential. We lower our FY12-FY14 EPS estimates on Sintex by 3%-4%
on the back of slower growth.
The stock currently trades at a 12-month forward P/E of 6.5X, at a 39% discount to its 5-year median and at a 35%
discount to MSCI India, implying attractive valuations.
Key downside risks
(1) Prolonged slowdown in telecom infrastructure and international auto business segments, (2) execution
delays in its monolithic segment, and (3) volatile raw material prices
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