Sintex Industries:: Nirmal Bang

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Weak Corporate Governance To Cap Valuation
Sintex Industries (SIL) clarified on 17 November 2011 that it has received a
power EPC order from Shirpur Power, sponsored by its promoter. To fulfill the
ambition of its promoter, SIL tried to diversify in unrelated power and oil & gas
ventures in FY10, but following the concerns raised by investors, the promoter
decided to set up the power plant in his personal capacity. But SIL’s arm
accepting the power EPC order from Shirpur Power and hiding this information
from investors for four months has led to a corporate governance issue.
Factoring in the order win, we revise our FY13 revenue/EBITDA/PAT estimates
by 4.8%/1.1%/0.3%, respectively, but due to corporate governance issue we
downgrade SIL to Hold from Buy with a revised TP of Rs96 (from Rs167 earlier).
Sintex kept large order win a secret since a long time: In a clarification issued on
17 November 2011, SIL stated that Sintex Infra Projects or SIPL (a100% subsidiary)
received a Rs7bn order from Shirpur Power. As per information on the Department of
Heavy Industries’ web site, SIPL sub-contracted 2x150MW BTG (boiler, turbine and
generator) order worth Rs7bn to Bharat Heavy Electricals in July 2011. The delay in
making public the information regarding SIPL getting the order raises a serious
corporate governance issue. However, as per our interaction with SIL management,
total value of the order received by SIPL relating to the 2x150MW EPC project was
~Rs11bn out of which BTG order worth Rs7bn was sub-contracted to BHEL, while the
Balance of Plant (BoP) work would be executed by SIPL along with its arm Durha
Construction.
Related party transaction raises concerns over corporate governance: SIL’s
promoter and his relatives are shareholders of Sintex Power, one of the sponsors of
Shirpur Power. Receipt of such large order by SIPL, SIL’s arm, from Shirpur Power
raises the issue regarding related party transaction, particularly when SIPL has not
executed any power EPC job. Majority of established EPC/BoP players like BGR
Energy, Larsen & Toubro etc are facing dearth of orders, as the new order pipeline of
the power sector has dried up and competition intensified. In such a scenario, we are
not bullish about SIL’s entry into the power EPC business. Following aggressive
bidding at Rs37/MW, we expect SIL to report lower margin on this order. In addition,
due to the group company’s transaction, prospects of favourable working capital terms
can’t be ruled out, which might elongate SIL’s working capital cycle.
Valuation: Factoring weak corporate governance and other factors, SIL has declined
20% in the past three days and 40% in the past three months. It is trading at the lower
end of its valuation band at 4.1x/3.7x FY13E P/E and EV/EBITDA, below the sevenyear
median of 8.9x/6.6x Following weak corporate governance we expect the stock’s
valuation to remain caped and downgrade it to Hold with a revised TP of Rs96 (from
Rs167) valuing it at 3.9x EV/EBITDA (40% discount to its median of 6.6x).