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Sintex: Slowdown in the offing - Views on News from Equitymaster

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Sintex: Slowdown in the offing

Jan 12, 2009

Performance summary
  • Consolidated sales grow by 33% YoY during 3QFY09 and 69% YoY during 9mFY09. Growth largely aided by acquisitions during the previous year. Plastic division leads growth during the quarter.
  • Operating margins contract by 1.4% YoY and 2.7% YoY during the quarter and nine-month period respectively. Decline in 3QFY09 margins largely due to higher staff costs and inventory losses.
  • Net profits rise by 21% YoY during the quarter and 56% YoY during the nine-month period.
  • Overall performance in line with our estimates.

Consolidated financial performance snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Sales 6,153 8,202 33.3% 13,539 22,826 68.6%
Expenditure 5,112 6,929 35.5% 11,075 19,291 74.2%
Operating profit (EBDITA) 1,041 1,273 22.3% 2,464 3,534 43.4%
Operating profit margin (%) 16.9% 15.5%   18.2% 15.5%  
Other income 57 252 340.4% 205 715 247.9%
Interest 224 255 14.0% 492 615 25.1%
Depreciation 211 315 49.2% 475 933 96.6%
Profit before tax 663 954 44.0% 1,703 2,701 58.6%
Minority interest 3 9   19 12 -36.9%
Tax 74 237 218.4% 327 578 76.7%
Profit after tax/(loss) 585 708 21.1% 1,357 2,111 55.5%
Net profit margin (%) 9.5% 8.6%   10.0% 9.2%  
No. of shares       120.7 136.5  
Diluted earnings per share (Rs)*         22.4  
P/E ratio (x)*         7.1  
* On a trailing 12-months basis

What has driven performance in 3QFY09?
  • Sintex grew its consolidated sales by 33% YoY during 3QFY09. This was largely led by strong performance of the plastics division, which recorded a growth of 83% YoY. However, it is important to note that Sintex acquired four companies in this division during the previous fiscal (FY08) and one in this fiscal (Digvijay Communications), which makes the numbers incomparable. The plastic division’s sales growth on a standalone basis was remarkable as well at 40% YoY.

    While these growth figures give a good first impression, the fact is that the company is facing slowdown in some of its sub-segments. Its BT-shelter business for telecom companies is once such pressure points which is witnessing slowdown in demand considering that clients are going slowly in their tower expansion plans. The electrical business in international markets is also feeling some pain of slowdown. Sintex however draws some respite from the monolithic construction business, where the current orders in hand will keep it occupied till May 2010.

    Here, the company has an order backlog of Rs 14 bn to be executed by the end of next fiscal. While the company had talked in the past of not booking any fresh orders so as to focus on existing projects, the fact is that there are almost no new projects that are coming for discussion in this space. As for Sintex’s textiles business, sales grew by a sedate 2% YoY during the quarter.

    Segment-wise performance

    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Textile revenue 930 945 1.7% 2,520 2,661 5.6%
    % share 15.1% 11.5%   18.6% 11.7%  
    PBIT margin 21.8% 20.7%   18.4% 17.3%  
    Plastic revenue 5,224 7,254 38.9% 11,019 20,165 83.0%
    % share 84.9% 88.5%   81.4% 88.3%  
    PBIT margin 12.6% 10.6%   14.8% 12.3%  
    Source: Company

  • Sintex’ operating margins contracted by 1.4% YoY and 2.7% YoY during the quarter and nine-month period respectively. Decline in 3QFY09 margins was largely due to higher staff costs and losses on high cost investors that the company was keeping with itself (given that raw material costs have declined considerably).

  • Due to contraction in operating margins, Sintex’s net profit performance has been muted as compared to the topline performance. Net profits for 3QFY09 have grown by 21% YoY. Growth for 9mFY09 stands at 56% YoY.

What to expect?
At the current price of Rs 160, the stock is trading at a multiple of 5.1 times our estimated FY11 earnings. Given that the management has indicated of slowdown in some of its businesses (like BT shelters, as discussed above), we shall lower our estimates for the company.

The management has also reported that one of Sintex’s European subsidiaries, Geiger Technik, is on the verge of bankruptcy. Sintex had started the process of acquiring this company in August 2008 and has paid around Euro 7 m for the same for a 10% stake so far. The management has indicated that if Geiger were to go bankrupt, Sintex will lose the entire amount that it has invested so far. Alternately, if the company (Geiger) revives from bankruptcy and the German government were to call bids again, Sintex will be in a position to pick up the remaining 90% stake at a valuation lower than the Euro 35.6 m that was finalised earlier.

We maintain our positive view on Sintex from a 2 to 3 years perspective, notwithstanding the concerns that might impact its performance in the next term.

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