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Sintex Industries: Plastics lead the way - Views on News from Equitymaster
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Sintex Industries: Plastics lead the way
Jan 10, 2007

Performance summary
Sintex Industries Limited (Sintex), a leading player in the plastic and structured fabrics businesses, has announced yet another quarter of strong performance. For 3QFY07, the company’s sales and net profits have grown by 35% YoY and 27% YoY respectively. Topline growth has particularly been on the back of strong performance of the plastics business, which has benefited from the consolidation of Zeppelin Mobile Systems, a leading player in the telecom shelter industry. However, despite the strong growth in revenues during the quarter, operating margins have contracted by 100 basis points, largely on the back of rise in raw material costs. Sintex’s performance during the nine-month period has been relatively better on all accounts, especially with operating margins expanding by 50 basis points.

Consolidated financial performance: A snapshot…
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Sales 2,103 2,846 35.4% 5,354 7,830 46.2%
Expenditure 1,711 2,345 37.1% 4,391 6,381 45.3%
Operating profit (EBDITA) 392 501 27.9% 963 1,449 50.5%
Operating profit margin (%) 18.6% 17.6%   18.0% 18.5%  
Other income 53 67 26.5% 138 189 37.0%
Interest 66 115 74.2% 208 286 37.4%
Depreciation 75 105 39.5% 223 310 38.7%
Profit before tax 304 348 14.7% 670 1,042 55.7%
Tax 100 87 -12.8% 158 247 56.5%
Minority interest - 2   - 7  
Profit after tax/(loss) 204 259 27.4% 512 788 54.1%
Net profit margin (%) 9.7% 9.1%   9.6% 10.1%  
No. of shares         111.7  
Diluted earnings per share (Rs)*         10.7  
P/E ratio (x)*         20.4  
* On a trailing 12-month basis

What is the company’s business?
Sintex Industries Limited is a dominant player in the plastic and textile business segments. The Company manufactures a range of plastic products at its 8 plants across India. These broadly fall under the categories of water storage tanks (16% of 9mFY07 plastic revenues), pre-fabricated structures (47%) and industrial custom molding (37%). In the textile business, the company is focused on niche offerings, possessing specialisation in men’s structured shirting in the premium fashion category wherein it enjoys leadership position in India. The company has a long-lasting relationship with international design majors like Canclini (32% of 9mFY07 textile revenues) and Indian companies like ITC Wills and Pantaloons, and has benefited from the same in the past. Sintex is also Asia’s largest manufacturer of corduroy fabrics. During the period between FY03 and FY06, Sintex grew its topline and bottomline at compounded rates of 25% and 57% respectively.

What has driven performance in 3QFY07?
Plastics steal the show: The 41% YoY growth in Sintex’s plastics revenues was what drove the company’s consolidated performance during 3QFY07. Plastics now form around 71% of the company’s total revenues (67% in 3QFY06). Within this segment, robust performances were recorded by both the prefab and custom molding businesses. On the other hand, the water tank business reported a 23% YoY decline in sales, much in line with the management’s reducing focus on the same (considering is lower profitability vis-à-vis prefab and custom molding businesses).

As a matter of fact, in May 2006, Sintex had acquired a 74% stake in Zeppelin Mobile System India Ltd. (ZMSIL), the Indian subsidiary of the German Zeppelin Mobile Systeme GmBH. Consolidation of this business also aided the performance of the plastics business during the stated periods. As a matter of fact, ZMSIL designs and commissions polyurethane foam based shelters and structures for the telecom sector and features amongst the top two telecom shelter manufacturers in India. The company is a preferred supplier to some of the big telecom players in India like Bharti Airtel, Reliance, Hutch and Idea. Since Sintex is a strong player in the telecom shelter business in India, we expect this acquisition to give the company greater headroom to emerge as an Indian leader in the BT shelters business.

The company is also said to be looking for another acquisition internationally, mainly for new technology and processes in the areas of prefabs, BT shelters and plastic auto components. Towards funding this acquisition, Sintex had recently raised US$ 50 m through an FCCB issue (listed in Singapore). As we had reported in the past, Sintex aims to take over a company in the US or Europe, keep it there for development, designing, and sales point, and bring most of the manufacturing and value addition to India. Considering that labor costs in manufacture of prefabs and auto components varies at high levels of 18% (locally) to 34% (globally) of total costs, Sintex will be able to provide cost effective proposition to the clients it gets through this acquisition.

Segment-wise performance…
  3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Revenue 720 836 16.1% 1,763 2,258 28.1%
% share 33.4% 29.3%   32.2% 28.7%  
PBIT margin 20.3% 20.0%   14.5% 16.1%  
Revenue 1,433 2,020 40.9% 3,707 5,612 51.4%
% share 66.6% 70.7%   67.8% 71.3%  
PBIT margin 15.6% 14.2%   14.2% 15.8%  
Revenue 2,153 2,855 32.6% 5,470 7,870 43.9%
PBIT margin 17.2% 15.9%   14.3% 15.9%  
* Excluding unallocated items

As for the textiles business, growth during 3QFY07 was largely a result of strong performance from the company’s readymade garment fabric (RMG) business, where volumes surged by over 206% YoY. However, owing to this, the realisations dropped to Rs 117 per meter (Rs 141 per meter in 3QFY06). On an overall basis, this, the RMG business recorded a sales growth of 156% YoY during 3QFY07.

As for the other business of ‘Collection’, which is largely made up of business from Canclini, while volumes declined by 53% YoY, realisations were up 11% YoY to Rs 289 per meter (Rs 260 per meter in 3QFY06). The management had earlier indicated that 3QFY06 was surprisingly very strong for the business due to robust ‘Christmas’ led demand in Europe. Since the same performance has not been recorded in 3QFY07, the effect has been seen in lower volumes.

Higher raw material costs dent margins: Despite strong growth in revenue, Sintex’s operating margins took a 100 basis points (1%) hit during 3QFY07. This was largely on the back of strong upsurge in raw material prices, which, as a percentage of sales, increased from 56.5% of sales in 3QFY06 to 62.7% of sales in 3QFY07. All the other major cost heads witnessed declines as percentage of sales, thus paring the margin pressure inflicted by higher input costs.

We had outlined the input cost pressure in an earlier analysis of the company. However, as the company focuses on products with greater value addition and consequently better realisation and margin profiles, the pressure is likely to ease out over a period of time. Any volatility in the prices of cotton and yarn (for textiles) and plastic resins and granules (for plastics), might however impact profitability going forward. This has been duly factored in our estimates for the company.

Apart from contraction in operating margins, higher interest and depreciation charges have impacted Sintex’s net profits during 3QFY07. The same have grown at a lesser rate than the growth in Topline. For the none-month period, however, on the back of improvement in operating margins, net profit growth has outperformed growth in Sintex’s consolidated topline growth. The company is expected to marginally outperform our FY07 earnings estimates.

What to expect?
At the current price of Rs 218, the stock is trading at a price to earnings multiple of 11.5 times our estimated FY09 earnings. This, we believe, makes it an attractive proposition for long-term investors. We are particularly enthused by the company’s high innovative content and deep domestic and global relationships, thus maintaining our positive rating on the stock from a 2-3 year perspective.

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