Sintex - Improving Sales & Profitability

Stock Opportunities Not-so-Hidden Gems
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Sintex Industries Ltdâs financial results for the quarter ended December were a pleasant surprise for the Street. Consolidated revenue has gone up by 40%, over the same period last year, toRs.1,186 crore. Growth has been good across its three segmentsâbuilding material, custom moulding and textiles. The building material business includes prefabricated structures (housing and construction concepts) and monolithic constructions (low-cost, mass housing solutions), and it grew by a strong 76% toRs.610 crore. Sintexâs monolithic segment currently has an order book ofRs.2,600 crore to be executed in 20-21 months, which offers good revenue visibility.

The companyâs monolithic segment is one of the main reasons for its working capital position to deteriorate in the recent past. Thatâs been a key worry among investors. Sintex hopes to improve the working capital position to 75-80 days as the current fiscal ends. In FY12, further improvement is expected, to about 65 days, the levels seen in 2007-08.

The second largest contributor to revenue, the custom moulding business, grew at a much slower pace of 15% toRs.460 crore. Sintexâs textile business saw revenue rise by 29%, but on a low base as sales had declined in the December 2009 quarter. The firm does not expect such high growth rates to sustain in the textile business segment, once the base effect wears off.

The firmâs operating profit margins rose by about 230 basis points (bps) to 19.9% during the quarter. One basis point is one-hundredth of a percentage point. Though raw material costs jumped sharply, up by 54%, lower single-digit growth in employeesâ cost and other expenditure helped margins improve. The performance of Sintexâs stand-alone business was much strong at the operating level, where margins improved by about 550 bps to 25.4%. Operating margins of subsidiaries slipped by 50 bps mainly due to a sharp spike in raw material costs.

Consolidated net profit increased by 55% toRs.113 crore, with profit earned by subsidiaries up 109% toRs.35 crore. Stand-alone net profit, too, increased at a robust rate of around 40%.

Sintexâs stock has fallen sharply by 22% since 1 December, when the BSE-200 index fell by 5%, on concerns of a slowdown in government orders. This fall factors in most of the negatives for the stock, making current valuations attractive. In fact, prospects look bright in the near term, with the firm hoping to see strong growth in the March quarterâas the fourth quarter is usually the strongest for Sintex.

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Hi Donald, had a look at Sintex, it looked pretty attractive until I read this report from Kotak. The primary concerns they had are;

  1. unlreated and risky diversifications to power, oil and gas exploration etc.

  2. the entry barrier to this segment is quite low and Sintex won’t be able to maintain 18% margins. The construction companies themselves are beginning to manufacture prefabs and monoliths apparently.

  3. the highly capital intensive nature of business.

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Hi Binu

Can you provide a link to the report you mention. I found one from Kotak of Mar 2010, which actually talks of expanding margins. So will be interesting to read this one.

Thanks.

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Please give me your email id, i will try and share it.

Cheers

-Binu

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Thanks. If you post the link, it will be useful for the larger audience in the forum.

Cheers

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Hi Binu, You can upload the document here as well as an attachment. I would also be interested to read it. Let me check my Kotak account to see if I can get the report.

I have been following Sintex for a while now and like their business and management. There are very few Indian companies which have an uninterrupted 79 year history of paying dividends. That is not something that should be taken lightly by a long term investor.

The 3rd quarter results are also excellent. Growth is good and the specialty textile divisions are also making money. Prefabs and monoliths have grown very well. The market for prefab and monoliths is huge in India, specially with low cost housing, rural schools etc. So, there is no denying the growth traction in the business.

What is concerning me (and why I am very very cautious now) is that after many years Sintex reported negative operating cash flows in 2010. Free cash flow has been negative for nearly 5 years now (on a consolidated basis). So, I want to understand what is happening on the cash flow front before I hike my interest in the company.

There has been some comment in the financial media regarding unrelated diversification by buying a construction company and setting up a power plant. I personally think that these are good areas for diversification. Power generation will increase the net margins in the future. Construction business gives the company immediate access to ready made clients and execution capabilities. The price paid also does not look to be excessive, although with already high debt, I am not very happy on additional debt burden for this.

What concerns me is the price action in the stock. It has been consistently losing in value. So, the price action is something that is concerning me. Market rumour is that one large mutual fund has exited from the stock and hence the fall. But that cannot be verified from published sources.

Overall, I remain cautious on Sintex. It has proved to be a good company for many years. I would like to give the benefit of doubt to the management solely for its previous track record. Valuations are fair at this time. Maybe another Rs 20-30 correction to 130 levels may be good to start picking it up once again.

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Hi Abhishek, I had emailed this report to Donald asking to forward it to you because I don’t know the link to Kotak site as well as I can’t share it in the public domain. Hope you had a chance to read the report.

Rgds

Binu

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Thanks. I got it. Some points mentioned is very relevant and important. The capital intensive nature of the business is hurting cash flows and Sintex has reported -ve cash flows at an operating level in 2010. It would be very interesting to see their 2011 numbers. The high debt levels are also getting punished in the market as rates are going up.

The judgement that is needed now is whether all the negativity is in the price (140-150 odd now). The PE based on TTM EPS is around 12 now. My opinion is that the opportunity in prefabs is very large and there will be very good growth over the next 4-5 years. And industrial plastics will continue to do well.

I am buying in small tranches. I think technically 135-140 is a support zone (Hitesh or others who are technically gifted can help out here), so that is a level I will be watching carefully.

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support wise, 137 for sintex seems to be a crucial support. If it falls below and sustains below that levels, then it might be heading for trouble. Otherwise looks okay.

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Yes. below that it is probably heading for double digits :frowning:

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one positive thing with Sintexinvestorsis they will get to know in what all ways equity dilution can happen :slight_smile: .I suggest newbies(knowlege wise) like me to buy one share and analyse this company, it will be a good exercise.

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well said narendra

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Other day I read an interview of IVRCL chairman mentioning the problems faced byinfrastructurecompanies.He said that BOT projects became like Begging On The road projects.He also mentioned that everybody body want to sell assets to reduce debt by selling assets ,but no buyers for the assets.He sounded like poor farmer who wants to clear debts and sleep peacefully.

Now we are seeing Arshiya international saga which is also in infrastructure space.

After seeing all these I felt that Sintex management is early in correcting mistakes( stretching balance sheet to buy international assets and pursuing growth aggressively in Monolithic) before things go out of hand by restructuring the balance sheet.

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why it is falling like this???

does it not have strong consumer brand???

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Highlights of the call by Capital Market:

The consolidated net sales for Q2 FY14 inclined by 15% to Rs 1359.64 crore. The net profit was stagnant at Rs 72.4 crore.

The sales of Prefab building systems grew by 31% to Rs 303 crore, monolithic grew by 9% to Rs 263 crore, overseas custom molding grew by 22% to Rs 352.9 crore, domestic custom molding de-grew by 4% to Rs 235 crore, storage tank grew by 21% to Rs 75 crore and textile grew by 12% to Rs 130 crore. The margin in prefab was 23%, monolithic was 13.7%, storage tank was 10.7% and custom molding India was 15.3% & overseas was 9.6%. Textile had margin of 22.9%.

OPM was stagnant at 14.9%. The overall company’s margin was under pressure due to monolithic business, Europe business and domestic custom molding. For whole year, the mgmt expects pressure on margin.

Healthy execution in prefabs as a result of ongoing spending on social schemes maintained the robust growth in prefabs. The custom molding business rose 10% largely because of traction in overseas business.

The mgmt said that it expects challenges for next 2 quarters also in monolithic business. However, the company has improved its gross and EBIDTA margin. Presently, it is stuck with 2 sites, which it will close down.

The overseas custom molding business, which is largely centered in Europe, has seen a healthy growth of 22%. Strategically, the acquisition of Poschmann holdings is shaping up well in terms of its restructuring plan, though it is yet to realize its full value in terms of top-line growth and margins in the coming quarters. The company is expecting break even in Poschmann at PAT level by next year and will have margin of around 8% - 9%. Efforts are on to push for better utilization of capacities and rolling out value added products as the economy gradually improves. In custom molding, the company is looking at inorganic opportunities to acquire specific customer of niche technology to bolster its offering.

The sluggishness in domestic economy has resulted in falling automotive sales, thus resulting in lower capacity utilization, affecting domestic custom molding business. The company wants to diversify from automotive to electrical and off the road vehicles segment. This will help in de-risking from the fluctuating fortunes of the passenger car segments,

Better utilization and US $ appreciation, resulting in better pricing for products, thus helping textile business. 70% - 75% of textile sales is associated with dollar pricing, whether it is exported or not.

The company is setting up new spinning unit of textile division in Gujarat under the new textile policy of the state government. The company is implementing approximately 3 lakh spindles in Phase I which will come up in next 15 months at projected cost of approximately Rs 1800 crore. This is likely to be ramped up to 10 lakh spindles (Phase II will have 3 lakh spindles and Phase III will have 4 lakh spindles) in 5 years time horizon. 75% of the products from it will be exported. It will have EBIDTA margin of 28% - 29% and IRR of 19%, as per management’s calculation when Rupee was at 55 for US $. The mgmt said that it will raise as much debt as possible for this plant.

The company’s consolidated capex for FY14 will be around Rs 450 crore.

The company last quarter hedged around $ 80 mn, which now stand at $ 50 mn, out of which $ 30 mn is long term hedge and $ 20 mn is short term hedge.

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I have a very small holding in this stock and have lost some huge percentage of capital in a year time. To put it straightforwardly, it is below average company with good brand name with below par management available at dirt cheap valuations.

At this moment, management should have been working hard on restructuring their assets, sell unprofitable venture’s,reduce debt and atleast try mimic the business profile of Supreme industries.Instead they seem to be planning to spend more money 1800 cr, to get into some new business.

Valuation wise it can double or triple if management is able to do average job in improving business and reducing debt for next 2 years.

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SINTEX DAILY CHART ATTACHED…

SEEMS INTERESTING PUNT FOR THOSE INTERESTED IN HIGH RISK BETS.

If things go right, this could easily double/triple within one year.

Pl do your own diligence and invest if at all.

disc: on watchlist. no holding.

technically stock looks good based on cup and handle pattern shown in daily charts…

Plus it is close to 11% of its all time high which level according to vivek patil is a good level to get in if stock shows stability near to those level after sustained fall.


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On one hand, people say it’ll grow, on the other the debt is huge they say and management will continue to dilute equity.

To hold or to sell? That is my quest to you.

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Highlights of the conf call by Capital Mkt;

  • The consolidated net sales for Q2 FY15 have inclined by 23% to Rs 1680.91 crore. The net profit has increased by 47% to Rs 107.4 crore.
  • The company has seen top-line and profit margin improvements in all the segments and geographies. The company saw substantial high utilization. After 2007, it has seen such strong Q2 and H1 FY15. Prefab was real performer.
  • The sales of Prefab building systems was Rs 396 crore, monolithic was Rs 209 crore, overseas custom molding was Rs 402 crore, domestic custom molding was Rs 291 crore, storage tank was Rs 83 crore, textile was Rs 171 crore and EPC was Rs 122 crore.The margin in prefab was 25.5%, monolithic was 17.2%, storage tank was 12%, custom molding India was 18.5% & overseas was 10.7%, textile was 25% and EPC was at 9%.
  • The mgmt said the prefab business will see good growth in coming years also with the new government at centre and there various schemes like Swacch Bharat Mission and National Mission for Clean Ganga and though various CSR initiatives by private sectors related to drinking water and sanitation. The mgmt said that for the government schemes it don’t have to develop any new products and even if it can get 5% of the total allotted amount for these schemes, it can get around Rs 1500 â 2000 crore revenue.
  • Custom molding is doing well. Auto market in India has stated seeing growth. The company has seen good margin in Bright and Custom Molding overseas.
  • 90% of Bright business is from automobile industries and 10% from electrical. In automobile, it is largely concentrated on passenger vehicles, but now also exploring commercial vehicle space. The mgmt expects 25% growth from Bright for FY15.
  • The company is bullish on spinning industry. Expect it to give revenue from Q1 of FY16. Going forward, the mgmt expects to have revenue of Rs 1700 crore from spinning business in bearish scenario and can expects a revenue of Rs 2400 crore in bullish scenario. The mgmt expects 24%-26% OPM from spinning business.
  • The order book for EPC business is Rs 1700 crore.Working capital days decreased by 5 days to 105.The capex for H1 FY15 was Rs 1000 crore.The company has normal capex of Rs 380 â 400 crore for FY15.The capex for spindle business is around Rs 1900 crore.Rs 4200 crore is the consolidated net debt.
  • The mgmt expects strong H2 FY15 on back of strong order book and improved market sentiments and good auto business.
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Hemant, thanks for sharing these details.

Did the management indicate by when they will be able to pay off the huge debt? That is the only negative that I see in this otherwise good company.