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Sintex: Staring at slowdown - Views on News from Equitymaster

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Sintex: Staring at slowdown
Mar 5, 2009

Yesterday, we met the management of Sintex Industries to get their view on the current environment and how the company is placed to bear the brunt of slowdown in its business segments. Here are the excerpts of the meeting. On the overall environment: Sintex’s management has maintained that the overall business environment remains utterly challenging. While commodity prices have come down, the fact that the company is passing on the benefits of the same to customers has meant that realisations are under pressure. Apart from that, volumes have also come under pressure. The company foresees the impact of the same on its business as sales are expected to remain flat or at best grow by 5% in FY10 while profits are expected to grow by 15% to 20% on the back of margin expansion (due to fall in raw material prices). Most of the subsidiaries (Nief, Wausaukee, Bright Brothers) are expected to witness flat to declining performance during the coming fiscal. During the current year, on the back of less troublesome first half, sales and profits are expected to grow at a rate of 35% apiece.

On the monolithic constriction segment: This is Sintex’s fastest growing business and the management expects growth to remain robust in FY10 as well. It estimates revenues from this segment to grow by around 60% in FY10 on the back of execution of pending government orders. Another of Sintex’s leading segment of prefab is expected to clock growth of 25% to 30% during FY10 (excluding the BT shelter business which is expected to remain under pressure on account of slow pace of expansion by telecom companies). This growth in the prefab business is expected to come on account of capacity expansion and forays into newer geographies (Indian states).

On Geiger’s bankruptcy: One of Sintex’s European subsidiaries, Geiger Technik, had recently filed for 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. Sintex will not be providing for the potential loss of Euro 7 m (amount that it has paid so far for Geiger) till the final outcome of the bankruptcy proceedings is clear by the middle of this year.

On promoters pledging shares: It was recently reported that one of Sintex’s promoter – BVM Finance Pvt. Ltd. – had pledged 66% of its total shareholding in the company (around 15% of Sintex’s total share capital). As indicated by the management, BVM Finance is a promoter’s group company and had pledged shares to part-pay for the warrants that it had applied for in Sintex. Out of BVM’s total investment of Rs 1,700 m through the promoter warrant issue, around Rs 500 m was by way of loans from pledging of shares.

On capex and funding: Given the tight situation, Sintex is going slow on its expansion plans. The company will be expending around Rs 2 bn as capex during the current year and Rs 1.5 bn in FY10. The company is fully funded for its expansion projects by virtue of its significant fund raising in FY08, which includes the FCCBs (of US$ 225 m), private placement of equity shares, and promoter warrants – the total fund raising being around Rs 18 bn. Out of this, the entire FCCB proceeds, which were earmarked for overseas acquisitions, are now lying in the overseas branches of some Indian banks. Given the macro situation, Sintex is unlikely to go in for any major acquisitions in the near term and as a result. The company currently has a debt of around Rs 18 bn in its books (including the FCCB) and cash of Rs 16.5 bn.

What to expect?
At the current price of Rs 86, the stock is trading at a multiple of 4 times our estimated (revised) FY10 earnings for the company. Post the management meeting and given the broader concerns cited by them, we have lowered our sales and profit estimates for the company. While sales estimates have come down from 23% (CAGR between FY08 and FY11) to 17%, profit estimates are down from 18% to 12%. Subsequently we have also lowered our target price for the stock by around 20%.

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