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Sintex Industries: Margins improve due to cost controls - Views on News from Equitymaster
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  • Feb 25, 2014 - Sintex Industries: Margins improve due to cost controls

Sintex Industries: Margins improve due to cost controls
Feb 25, 2014

Sintex Industries has announced the third quarter results of financial year 2013-2014 (3QFY14). The company has reported around 2.7% YoY decline in sales while net profits have grown by 57.9% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated total income declines 2.7% YoY during 3QFY14. This was mainly due to a 42% YoY decline in the monolithic construction segment. However, other segments performed well. Prefabricated building systems (+16% YoY) and textile segment (+31% YoY) registered strong growth. Both overseas and domestic custom molding business segments registered flattish growth during the quarter. Poor performance from subsidiary Zeppelin, an infrastructure company, also hurt the overall topline performance.
  • Operating profits increased 11.3% YoY with margins showing an improvement of 220 bps YoY.
  • Net profits increased by 57.9% YoY. However, after adjusting for exchange losses net profits declined 10.0% YoY. Decline in other income (-94.6% YoY) and increase in tax expenses (+27.5% YoY) put pressure on the adjusted profitability growth.
  • The financial closure for the first phase of the spindle project is expected to close soon. The company has already acquired land for it.

Consolidated performance snapshot
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Total income 14,272 13,884 -2.7% 37,063 38,814 4.7%
Expenditure 12,074 11,437 -5.3% 31,261 32,637 4.4%
Operating profit (EBDITA) 2,198 2,447 11.3% 5,802 6,177 6.4%
Operating profit margin (%) 15.4% 17.6%   15.7% 15.9%  
Other income 36 2 -94.6% 142 102 -28.1%
Interest 312 441 41.5% 1026 1360 32.5%
Depreciation 520 595 14.5% 1507 1731 14.8%
Exchange gain/(loss) (450) (41) NM (787) (162) NM
Profit before tax 953 1,372 43.9% 2,624 3,026 15.3%
Tax 420 535 27.5% 919 1,005 9.4%
Share of profit in associates 3 11 232.7% 23 22 -3.4%
Profit after tax/(loss) 536 847 57.9% 1,728 2,043 18.2%
Net profit margin (%) 3.8% 6.1%   4.7% 5.3%  
No. of shares (m)         311.2  
Basicearnings per share (Rs)         6.6  
P/E ratio (x) *         3.0  
* On trailing 12 month basis

What has driven performance in 3QFY14?
  • The 2.7% YoY fall in Sintex's consolidated total income during 3QFY14 was largely driven by 42% YoY fall in the monolithic construction segment. Part of the decline in the monolithic segment is intentional as the company wants to focus on working capital management rather than chasing growth. However, revenues from the prefabricated buildings segment grew by 16% YoY. Revenues from the custom molding segment were relatively flat while that from the textile segment grew by 31% YoY.

    Segment-wise performance (Consolidated)
      3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
    Textiles            
    Revenue (Rs m) 1,159 1,525 31.6% 3,432 ,952 15.2%
    % share 8.1% 11.0%   9.2% 10.2%  
    PBIT margin 7.2% 13.7%   7.2% 11.6%  
    Plastics            
    Revenue (Rs m) 13,114 12,359 -5.8% 33,631 34,862 3.7%
    % share 91.7% 89.0%   90.4% 89.6%  
    PBIT margin 12.9% 13.8%   12.5% 11.8%  
    Unallocated            
    Revenue (Rs m) 36 2 -94.6% 142 102 -28.1%
    % share 0.3% 0.0%   0.4% 0.3%  
    PBIT margin NM NM   NM NM  
    Total            
    Revenue (Rs m) 14,308 13,886 -3.0% 37,205 38,916 4.6%
    PBIT margin 8.8% 13.1%   9.8% 11.3%  

  • Operating profits increased 11.3% YoY during the quarter. The operating margins stood at 17.6% during the quarter compared to 15.4% in 3QFY13. Better working capital management and cost control has led to margin improvement. Strong performance from the pre-fabs and textile segment also helped improve margins.

  • Net profits of the company grew by 57.9% YoY. However, adjusting for the exchange losses profits declined 10% YoY. Decline in other income (-94.6% YoY) and increase in tax expenses (+27.5% YoY) put pressure on the adjusted profit growth
What to expect?

At the current price of Rs 34 the stock is trading at a multiple of 3.0x its trailing twelve month earnings. While the performance of the monolithic segment improved in the last quarter (+8.7% YoY growth) the same declined by 42% YoY in this quarter. Slowing orders and increased focus to manage working capital rather than chase growth led to a fall in topline. However, the other segments performed well during the quarter. For the full year management expects top-line growth to be in the region of 5% with operating margins to be in the region of 18%.

As far as the spindle project is concerned the plans are pretty much on track. The first phase (300,000 spindles) will kick start production roughly 18 months from now. By the end of the year the company expects to spend Rs 8-10 bn towards the project. It has also categorically stated that the leverage ratio will be kept under check and equity infusion may happen if necessary for the project.

The company also plans to sell off Zeppelin, infrastructure subsidiary, which is into losses and hopes to at least break even on the sale price. The sale should happen by March 2014.

In light of these factors (renewed focus on working capital management, balance sheet strength and steps taken to improve margins) we maintain our HOLD view on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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