the revenues. The benefit of higher raw materials prices will start showing from the ensuing quarters, by boosting Sintex’s top-Line.
Operational performance impacted by a lower contribution from the textile and monolithic segments: Sintex’s 3QFY2010 consolidated Operating profit stood at Rs 126.9cr (Rs127.3cr), flat yoy. The OPM for the quarter stood at 15.0%, 50bp down yoy and 320bp down qoq, on account of a lower contribution from the high margin monolithic and textile segments. However,the international business continued to show stability in its operating margins, on account of the ongoing integration process. The EBIT margin for the Plastic segment was higher by 85bp yoy, but lower by 308bp qoq, on account of a lower contribution from the high margin monolithic segment. The quarterly margins are not a fair indicator, due to the lumpiness of its monolithic business and we expect a high contribution from the segment in 4QFY2010.
The EBIT Margin in the Textile segment, which continues to remain weak, declined by 1,345bp yoy; it went up by 349bp qoq, on account of improving capacity utilisation.
Management maintains its FY2010 guidance: The management is maintaining its annual revenue guidance of Rs3,300cr and of a 5% yoy PAT growth in FY2010. As on 2QFY2010, Sintex has a cash balance of Rs1,100cr and debt of Rs1,900cr on its books; hence, it is sufficiently funded for capex and for acquisitions.
• Monolithic segment drag revenues in domestic plastic segment; however management maintains its annual revenue guidance of ~Rs700cr for the same.
• Revenues in all segments, except Standalone BT Shelter, Zeppelin, Wausaukee and textiles, have increased yoy.
• Sales from the Textiles division were lower by 5.9% yoy at Rs89.0cr (Rs94.5cr), however it went up by 16.8% qoq indicating pick up in demand for high-end fabrics. The management was positive about demand revival in the segment in ensuing quarters.
• The Standalone Pre-fab segment, which includes BT shelter, declined by 2.8% yoy, and was impacted by a slowdown in capex for telecom towers across the industry. The BT Shelter will continue to remain weak, due to the slowdown in capex from the telecom sector.
• The Monolithic segment grew by mere 1.6% yoy on account of slower execution; moreover, the order book of Rs1,500cr provides strong revenue visibility over the next two years. We expect growth to accelerate in ensuing quarters.
• The domestic Custom moulding revenue was up by 12.7% yoy, at Rs115cr on account of surge in demand in electrical accessories as investment in power sector picks up. Bright Autoplast revenue, which grew by 78.5% yoy, was aided by the operations of its new Chennai plant. Wausaukee continues to remain weak on lower capacity utilisation and weak demand. Consequently consolidated custom moulding segment grew by11.2% yoy to Rs401cr.
Operational performance impacted by lower contribution from high margin segment The EBIT margin for the Plastic segment was higher by 85bp yoy, but lower by 308bp qoq, on account of a lower contribution from the high margin monolithic segment. The EBIT Margin in the Textile segment, which continues to remain weak, declined by 1,345bp yoy; however, it went up by 349bp qoq, on account of improving capacity utilisation and a pick-up in demand. The quarterly margins are not a fair indicator, due to the lumpiness of its monolithic business and we expect a high contribution from the segment in 4QFY2010.
Outlook and Valuation
Sintex’s higher exposure to government orders provides it with higher visibility and a lesser risk of cancellation in the domestic plastic segment. The Monolithic segment has an order book position of around Rs1,500cr. Going ahead, we expect the company’s business to be primarily driven by its domestic plastic segment, on account of the government’s higher thrust on infrastructure and a pick-up in private capex.
We expect growth to accelerate in the ensuing quarters, as the company starts passing on the higher input prices to its customers; additionally, the recovery in the domestic auto and electrical segments will boost its custom moulding segment. We believe that Sintex will resume its historical growth trajectory from FY2011 onwards. The integration of foreign subsidiaries will act as a key catalyst for the stock’s performance. However, early signs of margin recovery have already been witnessed. At Rs260, the stock is currently trading at 7.7x its FY2012E Earnings and at 1.4x its FY2012E Book Value. Historically, Sintex has traded at 13.6x its one-year forward average (two, three and five-year) P/E, which makes the current valuations attractive. Moreover, its fundamentals have been strengthened with a well-capitalised balance sheet, strong revenue visibility (monolithic order book of Rs1,500cr), and a demand revival in its domestic plastic segment. We maintain a Buy on the stock, with a target price of Rs369.