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Sintex: Profitability takes a hit - Views on News from Equitymaster

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Sintex: Profitability takes a hit
Jul 10, 2008

Performance summary
  • Consolidated sales more than double in 1QFY09, aided by acquisitions during the previous year; standalone sales are up 37% YoY. Plastic division leads growth during the quarter.
  • Operating margins for the consolidated entity drop to 11%, from almost 17% in 1QFY08. Substantially higher staff costs and purchase of traded goods leads to this contraction in margins during the quarter.

  • Consolidated net profits surge 71% YoY during 1QFY09, led by strong topline performance and substantially higher other income.



Financial performance snapshot
  Standalone Consolidated
(Rs m) 1QFY08 1QFY09 Change 1QFY08 1QFY09 Change
Sales 3,000 4,108 36.9% 3,435 7,148 108.1%
Expenditure 2,473 3,576 44.6% 2,854 6,363 123.0%
Operating profit (EBDITA) 527 532 0.8% 581 785 35.1%
Operating profit margin (%) 17.6% 12.9%   16.9% 11.0%  
Other income 121 258 112.8% 123 380 209.1%
Interest 120 105 -12.8% 125 175 39.9%
Depreciation 130 152 17.1% 132 304 131.0%
Profit before tax 399 533 33.7% 448 686 53.4%
Minority interest NA NA   8 3 -67.8%
Tax 93 96 2.9% 110 119 8.3%
Profit after tax/(loss) 306 437 43.0% 330 565 71.4%
Net profit margin (%) 10.2% 10.6%   9.6% 7.9%  
No. of shares       111.9 136.5  
Diluted earnings per share (Rs)*         18.6  
P/E ratio (x)*         15.7  
* On a trailing 12-months basis

What has driven performance in 1QFY09?
  • The 108% YoY growth in Sintex’s consolidated topline was largely driven by growth in the plastics division (89% of total sales), which clocked a sales growth of 137% YoY during the quarter. However, it is important to note that Sintex acquired four companies in this division during the previous fiscal (FY08), which makes the numbers incomparable. On a standalone basis, plastic division sales grew by 44% YoY.

    Further, during the first quarter, Sintex was under the process of acquiring the business of Digvijay Communications through its subsidiary, Zeppelin Mobile Systems. The management believes that this acquisition will play a vital role in assisting Zeppelin penetrate the telecom infrastructure space in Central India especially in the states of Madhya Pradesh and Chhattisgarh.

    While the plastic division’s building material business grew sales by 36% YoY during the fiscal, it was the 515% YoY growth in sales of custom molding products that really pumped up the overall performance. The strong numbers from the custom molding business were largely due to the consolidation of performances of Wausaukee Composites, Bright Autoplast and Nief Plastic, which Sintex had acquired during the fiscal (details shown in the table below).

    Segment-wise performance
      Standalone Consolidated
    (Rs m) 1QFY08 1QFY09 Change 1QFY08 1QFY09 Change
    Textile revenue 753 829 10.1% 753 829 10.1%
    % share 24.8% 20.1%   21.6% 11.4%  
    PBIT margin 16.0% 14.6%   16.0% 14.6%  
    Plastic revenue 2,289 3,288 43.6% 2,726 6,457 136.9%
    % share 75.2% 79.9%   78.4% 88.6%  
    PBIT margin 16.1% 13.4%   15.5% 10.4%  
    *Performance of Bright AutoPlast, Nief Plastics and Wausaukee are for 4, 6 and 9 months period respectively in FY08. Source: Sintex Press Release

    As for the business of monolithic construction (part of the building materials segment), the company has an order backlog of Rs 15 bn to be executed over a period of next 2 years. As a matter of prudence, it is not taking in further orders for this segment as deliveries will remain tight over the next 2-3 years.

    Performance of acquired companies
    Co. Acquired When Business Consideration (Rs m) 1QFY09 sales (Rs m) FY08 sales (Rs m)*
    Nero Plastics, US Dec-07 Custom molder of low and medium volume structural plastic and composite components 188 Included in Wausaukee's sales Included in Wausaukee's sales
    Nief Plastic, France Oct-07 Manufacturer of auto parts 1,902 2,207 3,845
    Bright Autoplast, India Sep-07 Auto components and consumer durable components 1,466 322 404
    Wausaukee Composites, US Jun-07 Manufacturer of composite plastic components sectors such as medical imaging, mass transportation, electrical components, auto components and engineering plastics 820 471 1,032
    Source: Company

    As for Sintex’s textiles business, sales grew by 10% YoY during the quarter. This growth was largely owing to the strong performance of the company’s Collections business, where Sintex supplies to two large design houses in Europe.

  • Despite the strong growth in sales, Sintex recorded an almost 6% YoY contraction in its operating margins during 1QFY09. This was owing to higher staff costs as also on account of purchase of traded goods (this cost item was not there in the 1QFY08 numbers). Importantly, the company’s raw material costs declined from 66.6% of sales in 1QFY08 to 52.5% in 1QFY09, thus sparing the pressure on margins. The management has indicated that the company has booked some preliminary costs in its monolithic business, and the commensurate revenues from which have not yet been accounted for, thus impacting margins. For FY09 though, it expecte margins to remain near the last fiscal's levels.

  • The contraction in operating margins during 1QFY09 could not take the steam off Sintex’s consolidated bottomline performance. The same grew by 71% YoY during the fiscal, also aided by a 209% YoY rise in other income (largely operational income) and a sharp decline in effective tax rate (from 25% in 1QFY08 to 17% in 1QFY09).

What to expect?
At the current price of Rs 292, the stock is trading at a multiple of 9.3 times our estimated FY10 earnings, which we believe makes it attractive for long-term investment perspective. The management has estimated the company's topline and bottomline to grow by 60-65% YoY and 70-72% YoY respectively during FY09. While the topline number is higher than our estimates of 56% YoY, the bottomline growth is exactly same as our expectations. As such, we do not believe there is a need to revise our forward estimates for the company. However, we shall maintain some caution on the profitability front.

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