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Sintex Industries: Well-rounded performance

May 17, 2007

Performance summary
Sintex Industries Limited (Sintex), a leading player in the plastic and structured fabrics businesses, had recently announced strong results for the fourth quarter and full year ended March 2007. For FY07, the company has reported standalone sales growth of 31% YoY on the back of strong performance from its plastics division. Further, stock related adjustments and marginally lower staff costs have helped the company expand its operating margins by 240 basis points (2.4%). The effect of the same has been seen on the bottomline, which has grown at a strong rate of 42% YoY for the fiscal. While Sintex’s FY07 revenues are less than 1% lower than our estimates, on the back of better than expected operating margins, its net profits have outperformed our estimates by 8%. The board has recommended a dividend of Rs 0.96 per share (dividend yield of 0.5%).

Financial performance snapshot
  Standalone Consolidated
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change 4QFY07 FY07
Sales 3,180 3,649 14.7% 8,534 11,178 31.0% 3,823 11,653
Expenditure 2,700 2,882 6.7% 7,087 9,005 27.1% 3,045 9,426
Operating profit (EBDITA) 480 766 59.7% 1,447 2,173 50.1% 778 2,227
Operating profit margin (%) 15.1% 21.0%   17.0% 19.4%   20.4% 19.1%
Other income 160 80 -50.0% 298 267 -10.4% 80 269
Interest 83 127 53.4% 291 410 40.9% 129 415
Depreciation 84 109 30.1% 311 415 33.2% 110 420
Profit before tax 473 611 29.0% 1,143 1,615 41.3% 619 1,661
Minority interest - -   - -   (0) 7
Tax 65 74 13.8% 223 309 39.0% 79 326
Profit after tax/(loss) 409 537 31.4% 920 1,306 41.9% 540 1,328
Net profit margin (%) 12.8% 14.7%   10.8% 11.7%   14.1% 11.4%
No. of shares         111.9     111.9
Diluted earnings per share (Rs)         11.7     11.9
P/E ratio (x)         16.8     16.5

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 (17% of FY07 plastic revenues), pre-fabricated structures (52%) and industrial custom molding (31%). 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 (27% of FY07 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.

What has driven performance in FY07?
Plastics lead the way: Sintex’s plastics business (72% of FY07 standalone revenues) was the chief contributor to the company’s strong topline performance during FY07. This segment reported sales growth of 33% YoY during the fiscal, led by strong showing in the prefabricated structures (prefab) and custom molding businesses. While the former grew sales by 46% YoY during the fiscal, the latter recorded a 30% YoY growth. On the other hand, the water tank business reported a 6% YoY growth in sales, despite the fact that the management has clearly indicated of its intentions of reducing focus on the same (considering its lower profitability vis-à-vis prefab and custom molding businesses).

In the prefab space, the fourth quarter saw Sintex entering into an agreement with the Gujarat Urban Development Company (GUDC), for construction of 50,000 EWS quarters with monolithic construction technology (housing solutions designed by Sintex to address mass and low cost housing needs) in Ahmedabad, Baroda, Rajkot and Surat. The project size is around Rs 7.5 bn and is to be executed over a period of three years. At the end of March 2007, Sintex’s order backlog in the prefab segment stood at Rs 12 bn (almost 3 times the segment’s FY07 sales).

Zeppelin Mobile Systems, a leading player in the designing and commissioning of polyurethane foam based shelters and structures for the telecom sector (features amongst the top two telecom shelter manufacturers in India), which Sintex had acquired in May 2006, recorded strong performance during the fiscal. The company earned revenues of Rs 469 m and operated at 11% PBIT margins. 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.

Segment-wise performance (Standalone)
  4QFY06 4QFY07 Change FY06 FY07 Change
Textile revenue 731 923 26.2% 2,494 3,180 27.5%
% share 23.6% 25.0%   29.1% 28.3%  
PBIT margin 18.6% 31.3%   15.7% 20.6%  
Plastic revenue 2,360 2,761 17.0% 6,067 8,049 32.7%
% share 76.4% 75.0%   70.9% 71.7%  
PBIT margin 11.0% 13.2%   13.0% 15.0%  

As for the textiles business, the 28% YoY growth in sales during FY07 was largely a result of strong performance from the company’s readymade garment fabric (RMG) business, where volumes surged by around 37% YoY. Over that, the company recorded a 9% YoY increase in realisations (Rs per meter) from this segment. On an overall basis, the RMG business recorded a sales growth of 49% YoY during FY07.

As for the other business of ‘Collection’, which is largely made up of business from Canclini, while volumes declined by 14% YoY during the fiscal, realisations were up 3% YoY. Sales from this business declined by 11% YoY during FY07. The decline in volumes has been on account of change in policy to exclude those volumes that have not been produced by Sintex and have been rather bought from external vendor and packed by the company so as to offer the entire package to the customer.

Capex schedule: Of the Rs 4.4 bn capex that the company had outlined a year back, it spent Rs 1.2 bn in FY07 and expects to spend the remaining Rs 3.2 bn over the next three years. The company is expanding its textile and plastic manufacturing capacity during this period, the description of which is as follows:

  • Textiles: Sintex current textile manufacturing capacity stands at 21 m metres (mm). The company plans to take this to 29 mm, in two phases. In phase 1, the annual capacity of the division has been expanded to 24 mm in FY07, at a cost of Rs 700 m. In phase 2, the capacity will be increased by another 5 mm, to 29 mm, at a cost of Rs 800 m. Apart from these, Sintex is also setting up a new garmenting facility to be commissioned by September 2007, at a cost of Rs 350 m. Large part of the company's planned capacity expansion will be towards serving the requirements of Canclini and other international design houses (like the one in UK, as described earlier). The company also aims to increase focus on high end and high growth segments like cotton silk, cotton linen and high value corduroy.

  • Plastics: In the plastics division, Sintex plans to spend Rs 1.1 bn towards expanding its prefab structure capacity and Rs 700 m towards increasing its electrical accessory manufacturing capacity (part of the custom molding business). During FY07, Sintex spend Rs 500 m of the abovementioned (Rs 1.1 bn) plastic capex towards expanding capacity in electrical accessory business as well as the prefab business.

Funding of expansion in the plastics business will be done through internal accruals. Textile division's expansion will be funded through borrowings under the Technology Upgradation Fund (TUF) scheme. The TUF scheme offers a subsidy of 6% on existing interest rates. We expect these expansions, both in the plastic and textile businesses, to help Sintex establish a deeper footprint in both the domestic and international markets. The company's relationships with global majors like GE, Cummins and Canclini will enable it to reap significant advantages from this capacity addition in both the business segments.

Stock adjustments aid margins: Stock related adjustments as also lower staff costs (both as percentage of sales) helped Sintex earn operating margins of 19.4% during FY07 (17% in FY06). The margin expansion would have been higher but for the rise in raw material costs, from 59.8% of FY06 sales to 62.2% of FY07 sales. PBIT margins of the plastics division improved from 13% in FY06 to 15% in FT07. This was mainly brought about by sale of high value products as also great utilisation of the northern and southern manufacturing facilities of the prefab segment.

Margins expansion aids bottomline: The expansion in operating margins has had its effect on Sintex’s bottomline, which surged ahead by 42% YoY during FY07.

What to expect?
At the current price of Rs 212, the stock is trading at a price to earnings multiple of 11.2 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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