Sell Sintex Industries - Nirmal Bang

Performance Sharply Below Expectations

Following weak monolithic order execution and poor demand at its overseas subsidiaries, Sintex Industries (SIL) reported dismal 4QFY12 revenue/operating profit, down 30.1%/44.7% YoY, respectively, and sharply below our/consensus estimates. We expect monolithic order execution to remain weak in 1HFY13 too and demand outlook for overseas subsidiaries, Wausaukee and Nief, to remain challenging. We reduce our FY13 net sales/EBITDA/PAT estimates by 21.9%/22.8%/25.7%, respectively, and introduce our FY14 estimates. Redemption of US$225mn FCCB through new ECB loan would increase interest costs in FY14 and limit PAT CAGR to 4.4% over FY12-14E. Although, SIL is trading at the lower end of its valuation band at 4.4x/4.7x FY13E P/E and EV/EBITDA, there are no near-term triggers to lift valuation. We retain our Sell rating on the stock with a revised target price of Rs52, valuing it at 4.4x FY13E EV/EBITDA.

Execution challenges continue: Following political and other issues coupled with a dire need to control working capital, SIL's monolithic division faced severe headwinds. Its 5 out of ~17 operating sites are facing severe execution challenges, hurting building product revenue by ~34% in 4QFY12. Weak demand at the US-based Wausaukee and France-based Nief accelerated problems following which consolidated revenue declined 30.1% YoY to Rs10,237mn, 22.3%/23% lower than our/Bloomberg estimates, respectively. We expect execution headwinds at the monolithic division, SIL's main growth engine, to continue in 1HFY13 also and thereby report flat growth in FY13.

Lower growth, high uncertainty: Following flat growth in the monolithic division and subdued demand at overseas subsidiaries, consolidated net sales (after reporting flat growth in FY12) would grow by a mere 6.1% in FY13E. With the redemption of FCCB tentatively with ECB, high growth in sales/EBITDA at 10.2%/12.3%, respectively, in FY14E would be negated by high interest costs, at 36.3%. We expect net profit to show a mere 4.4% CAGR over FY12-14E at Rs3,849mn. SIL is planning to redeem FCCB through un-hedged ECB/foreign debt, but its overseas subsidiaries are not witnessing significant cash flows. Hence, interest/principal repayment of debt has to be financed through cash flows of Indian operations, making the company vulnerable to currency volatility post FY13 too.

Our estimates versus actual performance

The company continues to face problems at its monolithic division. Currently, it is executing projects at ~17 sites out of which five sites (two in Andhra Pradesh, two in Karnataka and one in Bihar), accounting for order size of ~Rs3bn, are facing problems - political and other issues. Following weak order execution by the monolithic division its building product division's revenue declined ~34% YoY to Rs5.3bn. Following execution challenges faced by the monolithic division and slowdown in the custom moulding division, SIL underperformed our revenue estimate by 22.3%. On the back of better margins in the textile division, operating margin was up by 47bps compared to our estimate. Following weak sales, operating profit at Rs1,600mn was lower by 19.9% from our estimate of Rs1,998mn. As the company reported audited numbers for FY12 and 4QFY12 numbers were derived from FY12 and 9MFY12 results, costs below the operating line are not comparable. Depreciation and interest costs were lower by 28.3% QoQ and 32.7% QoQ, respectively, mainly on account of this. With lower depreciation and interest costs, the company reported adjusted net profit of Rs908mn, which was in line with our estimate of Rs886mn for 4QFY12.

Change in earnings estimates

Unlike the management commentary during 3QFY12 that poor execution by the monolithic division (29.8% of FY11 sales) is short-term in nature and should get resolved from 4QFY12 onwards, the company continues to face problems at its monolithic division. We expect the situation to remain challenging in 1HFY13 also. At present, the company is executing projects at ~17 sites out of which five sites (two in Andhra Pradesh, two in Karnataka and one in Bihar) are facing problems - political and other issues. SIL has witnessed increase in receivables from these sites, but in order to control its working capital requirement, execution has been slowed down at these sites. The company has also removed slow moving orders from its order book and as a result, the order book of its monolithic division shrunk from Rs30bn in 3QFY12 to ~Rs27bn in 4QFY12. We expect the monolithic division to report flat revenue in FY13 also. Its overseas subsidiaries, Wausaukee and Nief Plastic, contributing 23% to revenue, are facing poor demand on account of the US/EU crisis. Nief's leading segments, automotive and electric, contributing 70% to its sales, witnessed decline in revenue in FY12.

Apart from Schneider, new client addition at Bright Auto Plast is taking a longer time. Also, we expect the domestic automobile segment's volume growth to taper down and as a result, Bright Auto Plast's growth rate is expected to moderate to 15% in FY13E from over 20% in FY12.

Following weak execution of monolithic orders and subdued performance of Wausaukee and Nief, we reduce our FY13 net sales estimate by 21.9% to Rs47,264mn. Following under-utilisation of capacity and higher overheads, margins of the monolithic division and Nief would be under pressure in FY13 also and reduce our operating margin estimate by 18bps to 16.0%. Following lower sales and weak margin, we lower our net profit estimate by 25.7% to Rs3,735mn.

We also introduce our FY14 estimates and expect SIL to report 10.2% growth in revenue at Rs52,067mn with better execution of monolithic orders. On the back of better execution, the company would be able to control its overhead costs at the monolithic division and the margin should improve to 16% in FY14E from 15% in FY13E. We expect that with higher outsourcing from India, Nief and Bright Auto Plast would register improvement in operating margin. As a result, consolidated margin is expected to improve by 31bps to 16.3% in FY14E. We expect its operating profit to grow at a healthy pace of 12.3% at Rs8,491mn in FY14E.

We expect redemption of its US$225mn FCCB in March 2013. The company has ~US$110mn cash on its books and it is planning to take a loan of US$30mn in the books of its overseas subsidiaries and raise ECB of US$110-120mn in its own books. SIL was routing interest/premium on FCCB through its balance sheet but as post March 2013 the FCCB loan would be replaced with ECB, interest costs on ECB would come in P&L account and as a result, interest costs would increase by 36.3% in FY14E. Following high interest costs, net profit is expected to grow by a mere 3.0% to Rs3,849mn in FY14E.

As per the management, the ECB loan would lie un-hedged and carry a interest rate of 7% per annum. In addition, its overseas subsidiaries are not witnessing significant cash flows and as a result both the loan taken on subsidiaries' books (in dollar terms) and ECB loan would have to be paid via cash flows of Indian operations, which would make SIL vulnerable to currency fluctuations post FCCB redemption (in March 2013) also. The company's stock is trading at the bottom of its valuation band of 4.4x/4.7x FY13E PE and EV/EBITDA. However, subdued revenue/net profit CAGRs of 8.1%/4.4%, respectively, over FY12-14E coupled with uncertainty over forex gain/loss due to currency volatility associated with dollar liabilities (post FY13 also) would dent its already low valuation.

Source : Equity Bulls

Keywords