Sintex Industries Ltd:: IFCI research

Clouds beginning to clear!
We believe Sintex Industries Ltd (SIL) is all set for re-rating from current levels as the short term issue of repayment of Foreign Currency Convertible Bonds (FCCB) has been resolved. From the long term perspective, we believe there is a concerted effort on the part of the management to focus on balance sheet strength and quality of earnings. We therefore initiate coverage on SIL with a BUY rating and TP of Rs91 per share.  Short term concern of FCCB repayment issue resolved: SIL is required to repay US$292mn by Mar’13. It has unutilised deposits of US $110mn and has raised funds through three modes for repayment of FCCB - Qualified Institutional Placement (QIP – Rs1.72bn/ US $31.7mn), Preferential Warrants to promoters (Rs2.1bn/US $38.5mn) and New Step down FCCB (Rs7.6bn/US $ 140mn – interest for first two years fixed at 7.5% and reduced to 3.75% for the next three years i.e. YTM of 5.37%). Due to this, the equity will be diluted by 13% in FY13, 4% in FY14 and 21% in FY16 and FY17.  Focus on quality of earnings and stable growth: During period FY07-10, SIL aggressively targeted top line growth, which affected balance sheet health and impacted cash flow once the environment turned cloudy. Realising this, SIL has shifted its focus towards quality earnings and stable growth.  Custom moulding to support growth for next two years: SIL is a domestic leader in the custom moulding / composites business. The company has a portfolio with diversified applications and has all the major global technologies available for manufacturing of composites. The management plans to leverage on acquisitions and focus on expansion of client base in India with cross selling of products and technologies in the automotive sector. We estimate custom moulding business to grow 15% YoY in FY13 and in FY14.  Focus on high growth and high return prefab business: Prefabricated structures are building structures fabricated in the factory and delivered as turnkey projects. Over the past five years, government spending on medical and public health, housing urban development and education has increased at 20% CAGR. Government focus on these social initiatives is expected to continue in the near term (FY13 and FY14) as well. We expect the prefab business to grow at 20% YoY in FY13 and FY14 respectively.  Monolithic Business: Cash flow improvement and stable order inflow: SIL introduced plastic composite based monolithic construction in India and does activity for slum rehabilitation, state housing boards etc. In the last few years due to the unearthing of multiple scams, and the resulting cautious approach of the government (from investment perspective). SIL witnessed slowdown in cash receivables and order inflows. It has therefore exercised deliberate restraint in the monolithic business to improve the working capital cycle.  Valuation: At CMP of Rs70 the stock is trading at 4.6x FY13E earnings and 5.0xP/E, 0.6x P/BV and 5.4 x EV/EBDITA of FY14E. We initiate coverage on the stock with a “BUY” rating and value the stock at 6.5x EV/EBDITA multiple of FY14 with a target price of Rs.91 per share.

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