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Sintex Industries: ‘Prefab’ricating growth! - Views on News from Equitymaster

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Sintex Industries: ‘Prefab’ricating growth!
Oct 10, 2006

Performance summary
Sintex Industries Limited (Sintex), a leading player in the plastic and structured fabrics businesses, has reported strong results for the second quarter and half year ended September 2006. For 2QFY07, revenues have grown by 43% YoY, contributed by robust performances from both its business divisions. Savings in input component, staff and other costs have aided operating margin expansion of 300 basis points. Consequently, net profits have risen by 90% YoY for the quarter. The results are very much in line with our full year estimates for FY07.

Financial performance: A snapshot…
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Sales 1,784 2,543 42.5% 3,251 4,781 47.1%
Expenditure 1,466 2,012 37.3% 2,680 3,864 44.2%
Operating profit (EBDITA) 318 530 66.7% 571 917 60.7%
Operating profit margin (%) 17.8% 20.9%   17.6% 19.2%  
Other income 60 55 -8.4% 85 120 41.1%
Interest 74 91 22.4% 142 170 19.4%
Depreciation 75 102 36.9% 148 202 36.8%
Profit before tax 229 392 71.1% 366 665 81.9%
Tax 66 83 24.7% 58 151 161.9%
Profit after tax/(loss) 163 310 89.9% 308 514 66.9%
Net profit margin (%) 9.1% 12.2%   9.5% 10.8%  
No. of shares         111.3  
Diluted earnings per share (Rs)*         10.1  
P/E ratio (x)*         18.8  
* On a trailing 12-month basis

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 1HFY07 plastic revenues), pre-fabricated structures (56%) 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 (27% of 1HFY07 textile revenues) and Indian companies like ITC Wills and Pantaloons, and has benefited from the same in the past. It is also Asia’s largest manufacturer of corduroy fabrics. During the period between FY03 and FY06, Sintex grew its topline and bottomline at compounded rates of 25% and 57% respectively.

What has driven performance in 2QFY07?
Of prefabs and fabrics: Strong growth in the high-value prefab business of plastics and higher realisations in the structured fabric segment of textiles has aided Sintex’s overall topline performance during 2QFY07. The plastics business reported topline growth of 40% YoY and 48% YoY during 2QFY07 and 1HFY07 respectively, very much in line with our full year estimates for FY07. Within the plastic segment, the star performer was the prefab structures business, where sales increased by 141% YoY during the quarter. Strong bookings and execution of orders from South and North Indian states aided the performance of the prefab business. At the end of September 2006, the prefab order backlog stood at Rs 3 bn, almost equal to the (prefab) business’ full year revenues in FY06. During the quarter, the company has also done well on the BT shelter (used by telecom companies) front, where the synergies with Zeppelin Mobile Systems (which was acquired by Sintex earlier this year) have led to higher order bookings.

As for the custom molding business, growth was lacklustre mainly on account of heavy monsoons in the country, which saw the company’s clients going slow on their orders, especially on the electricals front.

In the plastics business, we are particularly enthused about Sintex’s track record with respect to innovation and identifying new usage opportunities. Strong growth in the prefab segment also seems on the back of a wider spread of the company’s manufacturing capacities, which has reduced set up time as well as costs.

Segment-wise performance…
  2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Textiles            
Revenue 570 769 34.8% 1,043 1,422 36.3%
% share 30.9% 30.1%   31.4% 29.7%  
PBIT margin 15.5% 15.3%   15.6% 13.9%  
Plastics            
Revenue 1,274 1,782 39.9% 2,274 3,374 48.4%
% share 69.1% 69.9%   68.6% 70.3%  
PBIT margin 16.9% 19.8%   14.9% 16.9%  
Total*            
Revenue 1,844 2,551 38.3% 3,317 4,796 44.6%
PBIT margin 16.5% 18.5%   15.1% 16.0%  

As far as the textiles business is concerned, strong 14% YoY increase in blended realisations combined with a 6% YoY higher volumes, has helped revenues grow by 35% YoY during 2QFY07. Growth has been especially strong in the ‘Collection’ segment, which is largely made up of business from Canclini. In this sub-segment, while volumes have grown by 51% YoY, realisations have inched up by 11% YoY. Importantly, another positive to have arisen out of the strong growth from Canclini is the fact that realisations here are significantly higher then those earned from sales in the domestic market. Against domestic realisations of Rs 111 per metre in 2QFY07, realisations from Canclini’s sales stood at Rs 253 per metre.

Value-adds aid margin expansion: Strong growth from prefabs (plastics) and Canclini (textiles) has helped Sintex perk up its profitability during the quarter. As a matter of fact, against segmental average EBIDTA margins of 17% for plastics and 25% for textiles, the prefab and Canclini businesses earn EBIDTA margins of 20% and 30% respectively. Thus, a higher contribution of revenues from these sub-segments going forward, will further aid the company’s overall profitability. As far as the performance for 2QFY07 is concerned, based on cost heads, decline in input components, staff and other costs has aided the 300 basis points (3%) expansion in operating margins. The first half operating margin performance is better than our FY07 estimates and, as such, we might have to revise upwards the same.

It boils down to the bottomline: The combination of a strong topline growth and expansion in operating margins has helped Sintex post robust 90% YoY and 67% growth in bottomline for 2QFY07 and 1HFY07 respectively. Consequently, net margins have increased at a sharp rate for both the periods. In fact, the 1HFY07 net margins of 10.8% are what we have projected for FY07 as a whole. Now, considering the strong performance of the first half, we might have to upgrade our FY07 profit number for Sintex.

What to expect?
At the current price of Rs 190, the stock is trading at a price to earnings multiple of 10 times our estimated FY09 earnings. This, we believe, makes it an attractive proposition for long-term investors. The company has high innovative content and deep domestic and global relationships working in its favour in both the divisions of textiles and plastics. This acts as entry barriers for new players and provides the company with competitive advantages against the existing ones. Based on these factors, we maintain our positive view on the stock from a long-term perspective.

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