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Sintex: Cautious optimism as of now

Nov 19, 2009

We recently had a research meet with the management of Sintex Industries to get a sense of the situation in the industry and its expectations for the future. We also got an opportunity to visit the company's plant near Ahmedabad. Here are the key extracts of our meeting.

Business conditions: Sintex 2QFY10 performance had nothing to cheer. The company recorded 3% decline in sales while profits were down 32%. The management has attributed this to lower raw material prices, which the company passed on to its clients in the form of lower rates. The company however maintained a good growth in volumes. Anyways, Sintex gained in operating margins what it lost in terms of sales. Helped by lower raw material costs, its margins remained flat at 18% during the quarter.

The management has lowered its guidance for FY10 to 5% (sales growth) and 15-20% (profits growth). This takes into account the weak performance during the first half. The company though has a big Rs 15 bn backlog to execute in its monolithic construction business. After Gujarat, it has now won a couple of orders for low cost housing from the state governments of Tamil Nadu and Maharashtra.

In terms of pressure points, it sees the telecom shelter business and its US subsidiary (Wausaukee) to face tough times over the next 2-3 quarters. Sales at Nief Plastics (France) are also likely to remain at last year’s levels. On the other hand, strong performance is likely to continue in the monolithic construction, auto components, and prefab (non-telecom) businesses.

Capex: The management expects to spend around Rs 9 bn in capex during the years FY10 to FY13. A large part of this capex will come in the prefab and monolithic construction businesses. Importantly, Sintex will make these investments with return expectations of around 18-20%. This is similar to what the company has earned from its past investments as well. We see these as fair assumptions.

Key risks: The management sees a prolonged global economic slowdown as the biggest risk to its growth. Slow growth in investments in the telecom sector where it supplies prefab shelters also worries the management. Another worry is that new opportunities like cold storages are appearing very slowly.

What to expect?
At Rs 240, the stock is trading at 9 times our projected FY12 EPS. This we believe makes the stock attractive for long-term investors. We maintain our view on the stock from a 2 to 3 years perspective.

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