Robust Q2FY15 & H1FY15 Results

SINTEX INDUSTRIES HA S GO O D PO T E N T I A L

CORP. LTD (GMDV)

Retail Desk

Maintain BUY

17 October 2014

Rating Buy

CMP (`) 81

Target Price (`) 135

Upside (%) 67

Key Data

BSE Code 502742

NSE Code SINTEX

Reuters code SNTX.BO

Bloomberg Code SINT IN

Sensex 26108

Face Value (`) 1

Mcap (` Cr.) 2876

52 week H/L (`)10 107/27

2 Wk Avg Qty 2656000 Share holding, September14 Holding %

Promoters 40.6

FIIs 17.6

DIs 4.3

Corporates 6.8

Public 30.7 Performance (%) 3M 6M 12M

Stock-SIL -16.0 71.7 172.4

BSE 200 0.9 16.1 31.9

BSE 500 0.7 17.1 34.2

Price Chart: (One-Year)

http://www.sintex.in

Vijay Dave

vijaydave@sunidhi.com

Ph: 91-22-6760 7700

Technicals by

Niranjan Sane

nbsane@sunidhi.com

Company Description: Sintex Industries was incorporated as Bharat Vijay Mills in Kalol, Gujarat in 1931 and was engaged in the textile business over 1931-74. In 1975, SIL commenced manufacturing of plastic molded polyethylene liquid storage tanks including water tanks and introduced new plastic products like doors, window frames and pallets. Sintex group has 36 manufacturing plants in India and abroad.

In 1995, company was renamed as Sintex Industries and commenced manufacturing of SMC molded products, undertook modernization and expansion of the textile unit and commenced structured yarn dyed business. SIL entered prefab structures business in 2001 and started monolithic business in 2005. Today, SIL, a business Superbrand is a plastic processing MNC with operations in 13 manufacturing locations and 12 nations across four continents. SIL divides its business into two segments namely plastics and textiles the plastics business contributes more than 90% of topline. Exports constitute about 25% of sales.

Subsidiaries: SIL has subsidiaries like Zep Infratech India, Sintex Holdings BV, Netherlands and other six subsidiaries in UK, USA, India and France. Sintexs customised moldings business caters to Fortune 500 customers across continents and various sectors.

Acquisitions: Sintex made four acquisitions in India and overseas to enhance its presence in the composites segment. SILs acquisitions in the composites segment include Wausaukee Components and Nero Plastics in the US, Bright Autoplast in India, and NIEF Plastics in France. These acquisitions have strengthened Sintexs position by giving it access to technology and customers.

Expansion and Capex: Total planned Capex for FY15E/16E stands at `1400 crore/`350 crore, including total maintenance Capex of `200 crore in the period. Of the total earmarked Capex of `1400 crore in FY15, `1000 crore would be spent on the spinning project, `200 crore for acquisitions and the remaining as ongoing Capex. However, with phase-I Capex of spinning likely to be over in FY15, total Capex in

FY16 will be curtailed to `200 crore.

Key Financial: (Consolidated) (` crore)

Year-March H1FY15A H1FY14A FY13A FY14A FY15E FY16E

Sales/OP Inc 3025.2 2493.0 5079.4 5864.5 7060.0 8600.0

PBIDT 496.2 370.1 742.3 1026.9 1235.5 1470.5

Interest 132.6 91.1 146.2 289.4 270.0 290.0

PBDT 363.6 279.0 596.1 737.5 965.5 1180.5

Depreciation 114.8 113.6 205.4 254.8 295.0 300.0

PBT 248.8 165.4 390.7 482.7 670.5 880.5

Tax 79.8 47.0 66.9 118.0 222.5 281.8

PAT 169.0 118.4 323.8 364.7 448.0 598.7

Equity 35.5 31.1 31.1 31.1 44.5 44.5

Reserves 3872.1 3252.3 3065.6 3484.4 4730.5 5329.2

Book Value (`) 110.1 105.6 99.5 113.0 107.3 120.8

EPS (`) 4.8 3.8 10.4 11.7 10.1 13.5

OP Margin (%) 16.4 14.8 15.0 17.5 17.5 17.1

NP Margin (%) 5.6 7.7 5.3 6.2 6.3 7.0

P/E 8.0 6.0

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Q2FY15, H1FY15 & FY14 Results

During Q2FY15, net profit rose 47% to `107.4 crore on 23% higher revenue of `1680 crore. Q2FY15 EPS stands at `3.0. OPM and NPM stood at 17.1% and 6.4% against 15.5% and 5.3% respectively in Q2FY14.

During H1FY15, net profit rose 42.7% to `167.4 crore on 21% higher revenue of `3025 crore. H1FY14 EPS stands at `4.8.

During FY14, consolidated net profit rose 13% to `364.7 crore on 15% higher sales of `5864 crore. EPS stood at `11.7. A dividend of 70% was paid.

Monolithic Concrete Constructions This business, a key revenue contributor and growth engine for the building products vertical and the entire Company, witnessed a very challenging FY14. This was largely due to the following reasons:

Governments persistent fire-fighting on multiple fronts impeded decision-making and staggered payments

High interest costs due to an expanded working capital cycle, which impacted business margins

To maintain business profitability, SIL took a strategic decision to focus on executing projects, which provided cash-flow visibility. Additionally, SIL has strategised to restrict its geographic spread to ensure fast project execution of its order book.

SIL continued to maintain an order book comprising 24 months of business. A sizeable proportion of these orders comprised tall structures (above G+5 structures) and MIG projects.

Water Storage Tanks Water storage tanks revolutionised Sintex from a corporate brand in Kalol to a house-hold name known across India. Despite significant competition from national, regional and local players, SIL maintains its dominance in this space with a more than a 60% share and continues to enjoy a significant premium in this business.

The product range comprises every conceivable application loft tanks in individual apartments to water storage solutions for an entire pin code positioning it as the preferred name in this business.

Prefabricated Structures This business was the star performer in FY14 with the business registering a good growth; it largely covered up for the reduced MCC business. SIL enjoys important competitive advantages, which positions it as one of the preferred partners for prefabricated solutions.

A five-plant manufacturing presence (allows faster execution and optimised logistics cost)

A product mix comprising medium and small structures enables it to cater to diverse demands

In-house availability of majority of the inputs namely the sandwich panels, doors and windows improving the speed from order acceptance to final delivery

A wide opportunity canvass comprising product approvals in 17 states

The strong performance was due to increased government spending towards healthcare and education. The prefab order book provides business visibility for about 18-24 months.

Interiors SIL marketed these environment-friendly solutions to replace traditional timber, aluminium and steel with numerous advantages low-cost maintenance, rust, water and termite-proof, light-weight and easy-to-install. In 2012-13, the Company launched Indiana Doors, a completely new range of doors with sophisticated designs and looks which comprised kitchen and internal doors for houses. The team successfully marketed about 2,000 doors in the first year of launch and is creating avenues to multiply this number.

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Sub-Ground Structures Sub-ground structures represented a new focus area for the Company. This business comprised pollution management solutions namely manhole structures with covers, septic tanks, packaged waste water treatment systems and biogas plants. These products are primarily targeted at municipal corporations of various states and the private sector.

Textile Sintex carved a niche in the value-added textile segment through the manufacture of high-end yarn-dyed structured fabrics for mens shirting, yarn-dyed corduroy, ultima cotton yarn-based corduroy and fabrics for women.

This business is a value-driven, margin accretive business which contributes only about 10% to SILs topline its contribution to SILs profitability is actually more pronounced. The textile business is largely export-oriented with majority of the output being exported (directly or indirectly) to global fashion labels. Its other customers are reputed male and female apparel brands in India.

Expansion in Textile SIL has chalked out plans to expand the textile business. It is actively implementing a spinning project with 3, 19,872 spindles in Gujarat under the New Textile Policy 2012 of the State Government. It is likely to be ramped up to 10 lakh spindles in the next five years.

Since debt (i.e. 75% of total Capex of about `1, 800 crore), to be taken for this project, would remain at low interest cost, this would not have any material impact on its profit & loss account during the Capex phase. SIL expects to commence commercial production by H1FY16 (with conservative estimates of 3-6 month delay).

Several tax sops and interest rebates, which the project expects to receive from the state government should aid margin expansion. The said benefits include: (a) interest subsidy of 5% without a ceiling for the period of five years on new plant & machinery for ginning and processing, (b) interest subsidy of 7% on new plant & machinery for cotton and spinning, and (c) power tariff concession on new investment for cotton spinning at the rate of

`1.8 per unit for five years.

Around 75% of products from this project will be exported. SIL is expecting an RoIC of ~18-20% from the project while expected EBITDA margin is ~28-29% with calculating the government incentives.

Fund Mobilisation SIL recently raised a total of `946 crore in November 2012, through the QIP route (`175 crore) and FCCBs of $140 million (`770 crore) due in 2017, which provided relief on the liquidity front.

These moves had increased the equity capital to `31.1 crore in FY13 from `27.1 crore in FY12 sans FCCB conversion.

FCCB Conversion Out of the above $140 million, during Q1FY15, FCCBs aggregating to US$1.3

million were converted into 10.87 equity shares @`65.74/share. This added `7.04 crore to the security premium account.

Further in Q2FY15, US$31.65 million were converted into 2.65 crore equity

shares, which added `171.30 crore in the security premium account.

It is assumed that the balance $107.05 million FCCBs will be converted into equity shares at the same price, which will increase security premium by

further `579.40 crore.

Equity Capital & Reserves SIL had allotted 3, 00, 00,000 warrants optionally convertible into equity shares to Promoter Group companies on preferential basis at a price of `69.01 per warrant (25% consideration paid upfront).

During FY13-14, the 1, 36, 00, 000 warrants were converted into equity shares at a price of `69.01 (inclusive premium of `68.01 per share).

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During Q1FY15, Promoter Group companies further exercised the options for conversion of the balance 1, 64, 00, 000 warrants into equity at a price of

`69.01 (inclusive premium of `68.01 per share).

The conversion of warrants and FCCBs has increased the equity capital to

`35.5 crore and reserves by `218.67 crore (As per H1FY15 Balance Sheet).

As aforesaid, we assume that the balance $107.05 million FCCBs will be converted into equity shares at the same price, which will increase security

premium by further `579.40 crore.

Equity capital is expected to move up to `44.5 crore with reserves improving to `4451.5 crore. This coupled with our projections of FY15, the book value of the share will work out to `107.3.

Growth Initiatives In custom moulding business, SIL is moving from automobile to other business also, which will help it grow going forward. Also the recent strategic acquisition in Germany and Poland will help the custom moulding business.

These two assets were under liquidation and were brought from settlement commission. At full capacity, they can generate revenue of Euro 40 million. For FY14, it expected to generate Euro 15 million.

SIL expects prefab to continue its strong growth in FY15 also and may see robust growth. It expects strong top-line growth for custom moulding and textile.

Prefab business added two new territories - Maharashtra and Madhya Pradesh. Margin has also improved in prefab business. While monolithic business is on a consolidated mode, SIL has successfully unlocked a significant amount from working capital.

Opportunity Unlike prefabs, which can be used to construct only single storey houses, monolithic construction can be used to construct multistory houses as well and hence is suitable for building structures which can be used for permanent dwellings (e.g. houses), unlike prefabs which are preferred for constructing structures which are not used as permanent dwellings (e.g. classrooms).

Financial Equity capital is `35.5 crore is supported by huge reserves of `3872 crore, which gives the book value of the share of `110 as on H1FY15.

The gross block has gone up by 421% from `937 crore in FY07 to `5215 crore as at FY14. The net worth of `3908 crore gives the DER of almost 1:1 as at H1FY15.

Besides, the cash on hand, current investments and loans etc as at H1FY15

stands at `1082 crore (`30.5/share) whereas the value of noncurrent investments is `250 crore (`7.0/share).

Sale of Plants As part of cost cutting measures, SIL has closed down two plants, one in Kutch and other in Bangalore, which were used for making storage tank.

The company may close down one more plant in Daman, which is also used for making storage tank. SIL expects sale of these plants along with land can

fetch around `80- 100 crore.

Prospects According to census 2011, Indias urban population has grown 31.8% in 2011 over 2001. This compares with 17.6% growth in overall population. The urban population constitutes 31.2% of the total population in 2011 Vs 27.8% in 2001. Demand for low-cost housing remains high.

While the latest estimates are not available (as the 12th plan has yet to be finalized), at the start of 11th plan, estimated investment required for low-cost housing stood at US$32bn (`1, 664bn).Thus prospects for SILs main business looks quite rosy.

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The spending on social infrastructure remains buoyant as it is primarily funded directly by central and state governments. It is expected that an under-developed democracy like India will have to continue spending on social infrastructure for a long time.

Given the governments focus on the social sector in India, the spending on social infra is likely to remain insulated from the current slowdown. This augurs well for the monolithic segment.

Plastic Industry Holds Promise According to the All India Plastics Manufacturers Association (AIPMA), domestic consumption has been growing at 10-12% CAGR over the last decade. Going ahead, the size of the plastic processing industry which currently stands at Rs 850 billion (9 million tonnes), is expected to touch

`1.3 trillion (18.9 million tonnes) by 2015.

The exponential growth will see this number go up to 40,000 units; employment will increase to 7 million by 2015 from the current 3.5 million-plus people (direct and indirect). To achieve this target, India will require 42,000 new machines and an investment estimated at US$10billion by 2015.

Plastics industry Vision 2015 Figures

Turnover (` billion) 1332

Per Capita Consumption (Kgs) 2015 16

Consumption (million tonnes) 2015 18.9

Employment generation (million) 7.0

Processing machines (units) 125,636

Outlook Sintex enjoys early-mover advantage in businesses that are levered to social sector spending in India (schools/low cost housing/ healthcare centers), funded almost entirely by government. It is believed this spending will continue, given the socio economic context.

Sintexs India construction (monolithic and prefab) business (40% of revenue) is geared to social sector spending in India by the central and state governments on low-cost housing, slum rehabilitation, schools and rural healthcare center construction in remote areas.

Though the monolithic business, which has been suffering due to sluggishness from government activity and consequent delays in execution and receivables pulled down overall performance, things are expected to get better as Sintex has reduced the number of slow moving sites from seven to five and this will soon come down to three in the near future.

Valuation & Recommendation According SIL, the recent spate of reforms from the government will help gradually revive the domestic economy and augurs well for SIL as a buoyant social spending and an improved Capex from the private sector will ensure a strong revival in the companys fortunes. But, even before the benefits of the reforms start trickling in, the company is witnessing improvement in the business.

SIL has highlighted generating free cash flows for the next couple of years, improving return on capital, shrinking the overall balance sheet size and improving working capital through stringent controls on the monolithic business, as key focus areas to strengthen its balance sheet, going forward.

SIL offers a one of the widest wide plastic-based solution in global plastic processing space from creating housing units to small components that find application in the medical equipment and electrical businesses.

SIL is the only Indian plastic processing company with a pan-India manufacturing presence and manufacturing operations in 12 nations to cater to the global demand.

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Sintexs customised moldings business caters to Fortune 500 customers across continents and various sectors. It intends to leverage these customers and potentially enhance domestic manufacturing and outsourcing. This will significantly improve margin in the business over the next couple of years.

Q2FY15 is a reflection of strong growth and a drastic improvement in business sentiment. Utilisations are picking up across businesses, upturn in margins and topline growth is clearly visible. The initiatives on clean India campaign have thrown open new set of opportunities to SIL.

Despite economic adversities across the globe, SIL grew its topline by about 21 percent in H1FY15 and strengthened its balance sheet. This was achieved through a disciplined approach in streamlining business systems and processes to maximise efficiencies and a continued focus on improving the business mix. Now, SIL is perfectly poised to accelerate profitable business growth going forward with a hawk eye on maintaining a lean balance sheet.

At the current market price of `81, the share is trading at a P/E of 8.0x on FY15E and 6.0x on FY16E. We recommend BUY with a target price of `135 in the medium-to-long term at which the share will trade at a P/E of 10.0x on FY16.

Sintex Industries Technical

In the weekly chart, the stock of Sintex Industries has given the first sign of a trend reversal to the upside. Prices have taken support of the 38.2% retracement level. RSI indicator has turned up. Prices are expected to rally upto the last top of `105. The long-term target for Sintex stock seems to be `138.

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