Sintex: Slowdown in the offing

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.