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Sintex Industries: Plastics on an overdrive - Views on News from Equitymaster
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Sintex Industries: Plastics on an overdrive
Jul 13, 2007

  • Standalone and consolidated topline up 34% YoY and 48% YoY respectively.
  • Plastic division leads topline growth with 63% YoY higher sales

  • Operating margins contract marginally, largely owing to higher raw material costs

  • Standalone and consolidated net profits grow 50% YoY and 54% YoY respectively; higher other income props net profit margins.

  • Acquires 81% stake in the US based Wausaukee Composites for US$ 20.5 m.

Financial performance snapshot
  Standalone Consolidated
(Rs m) 1QFY07 1QFY08 Change 1QFY07 1QFY08 Change
Sales 2,238 3,000 34.0% 2,317 3,435 48.2%
Expenditure 1,851 2,473 33.6% 1,913 2,854 49.2%
Operating profit (EBDITA) 387 527 36.2% 404 581 43.8%
Operating profit margin (%) 17.3% 17.6%   17.4% 16.9%  
Other income 65 121 85.6% 67 123 83.6%
Interest 79 120 51.5% 80 125 57.3%
Depreciation 100 130 29.4% 101 132 30.2%
Profit before tax 273 399 46.2% 291 448 54.0%
Minority interest - -   3 8 148.6%
Tax 68 93 36.3% 74 110 49.1%
Profit after tax/(loss) 204 306 49.5% 214 330 54.3%
Net profit margin (%) 9.1% 10.2%   9.2% 9.6%  
No. of shares         111.9  
Diluted earnings per share (Rs)*         12.9  
P/E ratio (x)*         22.6  
* On a trailing 12-month basis

What is the company’s business?
Sintex Industries Limited (Sintex) 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 1QFY08?
Plastics on an overdrive: Sintex’s plastics business (78% of quarter’s consolidated revenues) led Sintex’s topline growth during 1QFY08. The segment’s consolidated sales grew by 63% YoY (44% YoY growth in standalone plastic sales). Strong performance of this segment was led bye robust sales in the prefabricated structures (prefab) and custom molding businesses. 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 quarter. This business largely benefited from the strong expansion carried on by Indian mobile services companies, which led to a ramp up in demand for plastic shelters used under the telecom towers.

Also, revenues from the prefab contract from Gujarat Urban Development Company, which Sintex had won in 4QFY07, also seemingly aided the segment’s sales during 1QFY08. As a matter of fact, the project size is around Rs 7.5 bn and it is to be executed over a period of three years.

Segment-wise performance
(Rs m) 1QFY07 1QFY08 Change 1QFY07 1QFY08 Change
Textile revenue 653 753 15.3% 653 753 15.3%
% share 29.1% 24.8%   28.1% 21.6%  
PBIT margin 12.1% 16.0%   12.1% 16.0%  
Plastic revenue 1,592 2,289 43.8% 1,672 2,726 63.0%
% share 70.9% 75.2%   71.9% 78.4%  
PBIT margin 13.7% 16.1%   14.1% 15.5%  

As for the textiles business, sales grew by 15% YoY (since Sintex’s consolidated revenues include only the plastic – Zeppelin – business currently, there is no difference in textile segment’s standalone and consolidated sales figures). This growth in the textile segment was seemingly due to continued strong performance from the company’s readymade garment fabric (RMG) business, where volumes have been growing at a strong pace over the past few quarters.

Higher raw material costs dent operating margins: The marginal 50 basis points (0.5%) contraction in Sintex’s consolidated operating margins was a result of higher raw material costs, which increased from 62.3% of sales in 1QFY07 to 65.6% of sales in 1QFY08. Even staff costs recorded a marginal increase as percentage of sales during 1QFY08. Higher raw material costs were a result of high global crude prices (which are the base for manufacture of plastic resins and granules used in making plastic products).

Higher other income boosts net profits: Apart from the strong growth in topline, the substantial growth (84% YoY) in Sintex’s other income aided the company’s consolidated bottomline, which surged by 54% YoY during 1QFY08. A marginal decline in the effective tax rate also aided the net profitability during the quarter.

US acquisition: In line with its plans to ramp up presence in the plastics space, Sintex (through its US subsidiary, Sintex Holding Inc.) acquired an 81% stake in the US based Wausaukee Composites Inc., which is an established player in the medical imaging, mass transit, industrial/agricultural equipment, wind energy, commercial furnishings, recreation and corrosion-resistant materials handling sectors. The cost of this acquisition was US$ 20.5 m.

What to expect?
At the current price of Rs 292, the stock is trading at a price to earnings multiple of 22.6 times its trailing 12 months earnings. We had recommend a ‘Buy’ on Sintex in September 2006 at Rs 180 with a 2-year target price of Rs 290, which has already been breached. The company’s robust performance in the plastics division and sustained growth in textile business has helped matters for the stock during this period. We shall soon take a re-look at our long-term growth estimates for the company before reviewing our recommendation on the stock.

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