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Sintex Ind.: Acquisitions drive plastics
Oct 8, 2007

Performance summary
  • Consolidated sales grow 46% in 2QFY08, 47% during the half-year period.

  • Plastic division leads topline growth with 61% YoY higher sales during 1HFY08. However, results not really comparable due to two acquisitions made during this fiscal.

  • Higher staff costs leads to marginal contraction in operating margins during both 2QFY08 and 1HFY08.

  • Net profits grow 40% YoY and 46% YoY in 2QFY08 and 1HFY08 respectively

  • After the acquisition of the US based Wausaukee Composites during 1QFY08, Sintex acquires the automotive products business of India based Bright Brothers Ltd. during the second quarter.

    Financial performance snapshot

    (Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
    Sales 2,667 3,894 46.0% 4,984 7,329 47.1%
    Expenditure 2,123 3,109 46.5% 4,036 5,963 47.7%
    Operating profit (EBDITA) 544 785 44.4% 948 1,366 44.1%
    Operating profit margin (%) 20.4% 20.2%   19.0% 18.6%  
    Other income 55 83 49.9% 122 206 68.4%
    Interest 92 143 55.5% 171 268 56.3%
    Depreciation 103 132 27.3% 204 263 28.8%
    Profit before tax 403 593 47.0% 694 1,041 49.9%
    Minority interest 2 8 276.8% 5 15 197.7%
    Tax 86 143 66.3% 160 253 58.2%
    Profit after tax/(loss) 316 443 40.3% 529 772 46.0%
    Net profit margin (%) 11.8% 11.4%   10.6% 10.5%  
    No. of shares         118.4  
    Diluted earnings per share (Rs)*         13.3  
    P/E ratio (x)*         27.6  
    * 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 eight plants across India. These broadly fall under the categories of water storage tanks (10% of 2QFY08 plastic revenues), pre-fabricated structures (62%) and industrial custom molding (27%). 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 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 2QFY08?
    Acquisitions supplement growth in plastics: Sintex’s plastics business (79% of 2QFY08 consolidated revenues) was again the lead growth driver for Sintex. The segment recorded sales growth of 61% YoY during 2QFY08. While the company’s core plastic business of prefab structures (62% of 2QFY08 sales) grew 67% YoY in sales, it was the custom molding business that saw a real ramp up during the quarter. This segment, duly helped by the two acquisitions that Sintex made during the first half, grew sales by 102% YoY during 2QFY08.

    As a matter of fact, in 1QFY08, Sintex had acquired the US based Wausaukee Composites Inc., 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. Then in 2QFY08, the company made its second acquisition in the custom molding space, that of Bright Brothers, where it acquired the automotive products business of the latter for a consideration of Rs 1.5 bn.

    Bright Brothers, which has bases in Chennai, Sohna, Pune, Pithampur and Nasik, has a strong presence in auto components which includes various body parts, instrument panels, console, trims, ultra sonic welding, hot plate welding and spray painting. The company also manufactures plastic components for the consumer durable industry. We believe that this acquisition shall help Sintex establish a strong presence in the domestic plastic auto component market. The acquisition, which is earnings accretive, will add strongly to Sintex's consolidated performance going forward. As a matter of fact, Bright Brothers recorded net sales of Rs 483 m (around 6% of Sintex’s plastics sales) for FY07 and operated at EBIDTA margins of 10% (Sintex has acquired only the automotive products business of the company, numbers for which are not known).

    Segment-wise performance

    (Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
    Textile revenue 769 838 8.9% 1,422 1,591 11.8%
    % share 28.7% 21.4%   28.4% 21.5%  
    PBIT margin 15.3% 16.9%   13.9% 16.5%  
    Plastic revenue 1,909 3,070 60.8% 3,592 5,796 61.3%
    % share 71.3% 78.6%   71.6% 78.5%  
    PBIT margin 19.1% 17.9%   16.7% 16.7%  

    As for Sintex’s textiles business, sales grew by 9% YoY during 2QFY08 and 12% YoY during 1HFY08. 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. This business recorded growth of 25% YoY during 2QFY08, led by 14% YoY increase in realisations and 10% YoY growth in volume sales. As far as the readymade garments business is concerned, sales grew 8% YoY during the quarter. This was a result of 7% YoY increase in realisations and 1% YoY growth in volume sales.

    Higher staff costs pare operating margins: Despite the strong growth in sales, Sintex recorded a marginal 20 basis points (0.2%) contraction in its operating margins during 2QFY08. This was owing to higher staff costs as also on account of stock related adjustments. Importantly, the company’s raw material costs declined from 61% of sales in 2QFY07 to 58% in 2QFY08, thus paring the pressure on margins.

    Margin contraction, higher tax rate impacts net profits: Sintex’s net profits grew at a marginally lower rate than its topline during 2QFY08. This was on account of the contraction in operating margins as also the rise in effective tax rate. The tax rate for the company increased from 21% in 2QFY07 to 24% in 2QFY08.

    What to expect?
    At the current price of Rs 366, the stock is trading at a multiple of 13.2 times our estimated FY10 earnings, which we believe is fair. Considering the strong growth in the plastics segment, we shall have to marginally revise upwards our topline estimates for the company for FY08. On an overall basis, we maintain our positive view on the stock from a long-term perspective, expecting the company to sustain strong growth in the plastics business while maintaining stability in the textile segment performance.

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