Sintex Industries - FCCB Repayment Leads To Equity Dilution - Nirmal Bang

In order to repay US$291mn of foreign currency convertible bonds or FCCBs (including the premium), Sintex Industries (SIL) raised Rs2,031mn by issue of warrants to promoters (30mn shares, 11.1% equity dilution) and Rs1,748mn though QIP (qualified institutional placement) (26.5mn shares, 9.8% equity dilution) and US$140mn though fresh FCCBs (101.8mn shares, 37.5% equity dilution). The company, which was able to raise US$140mn though new FCCBs at a mere 15% premium to reference market price (Rs65.74), has to provide high YTM (yield to maturity) of 5.37% and coupon rate of 7.5% for the first two years. Equity dilution to the tune of 58.4% (considering conversion of new FCCBs) is likely to exert further pressure on the already low RoE, thereby capping stock valuation. We have retained our Sell rating on SIL with a revised target price of Rs63 (from Rs68 earlier) valuing the stock at 5x FY14E EV/EBITDA.

Equity base rises by 58.4%: In order to repay FCCBs, SIL issued 30mn warrants to promoters and also raised Rs1,748mn via the QIP route by issuing 26.5mn shares at Rs65.9. As per today's press release, SIL also raised US$140mn though new FCCBs at Rs75.6/share. Fund infusion by way of warrants/QIP/FCCBs totaling Rs11,473mn (~US$209mn) results in equity dilution (see Exhibit 2) of 58.4% (11.1%/9.8%/37.5%, respectively, on an equity base of Rs271.1mn).

Change in our estimates: We have already factored in the impact of 30mn warrant issue in our 2QFY13 result update and we have now modified our estimates to factor in QIP and FCCBs. We have retained our revenue/EBITDA estimates for FY13E/FY14E, respectively. Following infusion of Rs1,748mn/Rs7,694mn via QIP/FCCB routes, respectively, we have cut our interest cost estimates by 16.9% for FY14E, thereby increasing adjusted PAT estimates by 5.0% to Rs4,107mn. However, with 42.6% equity dilution (after factoring in warrant issue) on account of QIP/FCCBs, we have cut our EPS estimates by 30.6%/26.4% to Rs8.6/Rs9.6 for FY13E/FY14E, respectively.

Elevated working capital requirement leaves no room for a re-rating: SIL was planning to repay its FCCBs by conserving cash through reducing capex, controlling working capital requirement and taking additional debt through ECB or other means. However, SIL was not able to conserve cash through any of these measures, forcing it to raise money via equity dilution. SIL has already incurred capex of Rs1bn in 1HFY13. It witnessed a rise in working capital requirement, as a percentage of sales, at 45.2%/49.6% in FY12/1HFY13, respectively, from 29.4% in FY11. SIL witnessed deterioration in its working capital position in 1HFY13 even after an 18.7% decline in sales at its working capital-intensive monolithic division. Though SIL trades at the bottom end of its valuation parameters, at 6.7x/5.1x FY14E PE and EV/EBITDA, we don't expect its re-rating following elevated working capital requirement, poor free cash flow and low return ratios.

Source : Equity Bulls

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