Buy Sintex Industries Limited - BP Equities

The Sintex group is one of the leading providers of plastics and niche textile-related products in India. With global footprints spanning 9 countries, Sintex has a strong presence in the European, American, African, and Asian markets including countries like France, Germany and USA. In the textile division, the company manufactures high-value, yarn-dyed structured fabrics, corduroy and items relating to home textiles. In the plastic division, the company manufactures the following: storage solutions for water, oil and fuel; prefabricated structures, monolithic structures, industrial custom moulded products, consumer custom moulded products and interiors products.

Investment Rationale

Monolithic Business-Short term pain but long term gain

Sintex's monolithic business is witnessing a temporary slowdown due to government inefficiencies regarding payment delays and inaction on passing of orders which has prompted the company to moderate its execution of existing orders. However this will help the company to conserve its cash and also reduce its working capital days as monolithic business is more working capital intensive than capital intensive. We believe that Sintex's strong order book of ~ Rs 30 bn which is to be executed over the next two years and government's continued thrust on various low cost housing schemes for low and middle income groups would provide this business strong growth momentum in the long run.

Robust growth in prefabrication business

The company's prefab business witnessed a decline in the last two years due to a slowdown in BT shelter business (telecom). However we expect the company to achieve ~19% CAGR over FY11-FY14E on the back of government's increased spending on social welfare programmes like National Rural Health Mission and Sarva Shiksha Abhiyan which are the key growth drivers for this business. Sintex enjoys high margins (~18-20%) in this business and we believe with utilizations expected to reach optimum levels in FY13 the company would be able to sustain ~19% margins going forward.

Custom Mouldings to benefit from synergies due to foreign acquisitions

The company's custom moulding business grew at 26% CAGR over FY08-FY11 as the use of composites in place of metals grew substantially. The company has increased its geographical presence and tapped new markets and clients via its overseas subsidiaries which has helped augment its revenues and margins. We believe that as more processes are transferred to India and as more composites from India are supplied overseas synergies would be achieved which would help expand margins going forward.

Valuation & Outlook

The company currently is facing pressure due to slowdown in its monolithic and custom moulding business, high working capital days and issues regarding its FCCB repayment. However we believe all these issues are short term in nature and the stock price has already factored in these issues. We expect the company's revenues to grow at 9% CAGR on a conservative basis. At CMP the stock is trading at 6.3x FY13E P/E and 5.2x FY13E EV/EBITDA. We initiate coverage on Sintex Industries Ltd with a BUY rating and have arrived at target price of Rs 122 which implies ~27% upside from the current levels. We have valued the stock at 8x FY13E EPS which is ~33% discount to its long term average P/E. (We had issued a pre-initiating coverage report on 19th Jan 2012 when price was Rs 73 with a target price of Rs 95).

Source : Equity Bulls

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