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Sunday, April 12, 2009

Sintex Industries ltd:-A good hot bet

Scripscan:Sintex Industries ltd
Institutional Holding* 58.3%
Dividend Yield: 0.9%
M-Cap:Rs 1,574.5 cr
CMP: Rs 115.35

Story:Sintex Industries (SIL), which is having a healthy business in India, has taken up the acquisition route to expand geographically. The company has already acquired seven companies in two years and is looking out for more. Innovative product offering, healthy financials and zest for inorganic growth make the company attractive for long-term investors.

Business:Sintex Industries has two main divisions - textiles and plastics. Under the textiles division, the company sells high-end structured fabric to the international and domestic ready-made garment manufacturers. In the plastics division, the company manufactures pre-fabricated building materials, monolithic structures, custommoulded products and composites. These are high-end plastic products that are used in industries such as automobiles, electricals, construction and telecom.SIL’s pre-fabricated building materials and monolithic construction material are in great demand in low-cost housing projects, rural schools and healthcare shelters. The company and its subsidiaries put together have 35 plants spread across India, the US and Europe.Nearly 45% of the company’s consolidated turnover comes from building materials such as pre-fabs and monolithics, 40% comes from custom-moulded and plastic composite products, while the remaining 15% is accounted for by textiles. Textiles and construction materials are businesses conducted by Sintex on a standalone basis, while the subsidiaries manufacture moulded products.

Growth Drivers:The company raised $225 million in early 2008 through FCCBs and Rs 750 crore by way of qualified institutional placement and issue of warrants to promoters to fund its growth plans. However, due to the subsequent turmoil in the financial markets, acquisition plans could not fructify. The company is carrying around Rs 1,600 crore of cash. Out of this, it will spend around Rs 300 crore on organic growth in FY2010 and the remaining on acquisitions.SIL also spent around Rs 300 crore during FY09 on expanding capacities. For the building materials, the company has gone from a single plant two years back to five plants today. It is planning to add further capacities at these plants. When the company launched its building materials business a couple of years back, it bagged orders worth over Rs 1,700 crore. The current capacities are now capable of executing around Rs 800 crore of orders per annum, which will enable the company to book further orders in the second half of FY2010. At present, the unexecuted order book stands at around Rs 1,300 crore.

Financials:In last five years, SIL’s PAT has risen at a cumulative annual growth rate of 57.3% and net sales grew at 38.8%. Its debtto-equity ratio jumped to 1.3 in FY08 due to the issue of FCCBs. For the last ten years, the company’s operating cash flows have always remained positive. The December 2008 quarter witnessed a fall in operating margins, mainly due to inventory losses. The company reported a 21% growth in profit on the back of 30% higher sales.

Valuations:At the current market price, the scrip is trading at 5.2 times trailing 12-month earnings. We expect the company to report a net profit of Rs 352 crore for FY 2010, which translates to a forward price-toearnings multiple of 4.5 on current equity. If we assume full conversion of outstanding FCCBs (conversion price: Rs 584) and equity warrants with the promoters (conversion price: Rs 452), the P/E would work out to 6.2 on a fully diluted basis.

Concerns:The inorganic growth strategy of the company has inherent risks with regard to integration. SIL’s latest attempt at acquisition - Greiger Tech in Germany - has filed for bankruptcy and SIL may lose its initial investment of 7 million if it fails to emerge out of bankruptcy. The company’s overseas subsidiaries are facing pressure on sales and margins due to the economic slowdown. Lastly, the promoters’ holding in the company has dropped below 30% and a large chunk of it has been pledged out.

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