Sintex Industries: No sharks in the tank

Textile business expected to see better margins in the coming quarters

Sintex Industries’ share price has rallied 12 per cent after it posted better-than-expected results for the September quarter on Tuesday. The performance has also led to a renewed optimism as key business segments, namely monolithic, prefab and custom moulding reported better-than-expected growth and posted improvement in margins (particularly textile and foreign moulding business).

However, near-term headwinds for Sintex remain as some segments like monolithic and domestic custom moulding are expected to witness pressure because of the slowdown, particularly in the automobile industry. Some of this pressure will be offset by better performance of the pre-fab and foreign custom moulding businesses due to the rupee depreciation and recent acquisition. The textile business, 22 per cent of the revenues, is also expected to see better margins. This will add to the overall operating margins, expected to move up from 15.1 per cent in FY13 to 16.1 per cent in FY14.

Traction in domestic business, turnround in international operations (including the recent acquisition) and easing working capital cycle will be key positive triggers.

"We believe a longer term re-rating would only happen on the easing of working capital cycle and improvement in earnings momentum at monolithic and custom moulding business abroad. We maintain outperformer, with a revised target price of Rs 62 a share, valuing the company at five times FY15 estimated earnings," said Saumil Mehta, analyst, IDFC Securities.

For the September quarter, Sintex reported 14 per cent growth in revenues to Rs 1,365 crore followed by 16 per cent growth in operating profits to Rs 212 crore, compared to a year ago. However, net profit remained flat on higher interest cost of Rs 47.6 crore (up by 32 per cent). The growth momentum may continue for the rest of the year, with the company expecting 10-12 per cent revenue growth in FY14. That apart, analysts are not yet factoring the turnround of its recent acquisition of Poschmann. Higher utilisation at its German facility and stable operating margins of eight-ninr per cent should help improve operations and revenues. Analysts are expecting seven-10 per cent annual growth in revenues over the next two years.

While there are signs of recovery, some are also sceptical. “Capacity utilisation at its domestic custom moulding plant is at an all-time low, while the monolithic business is in the red at a net level. Sintex plans to close its two plants in India as they are not lucrative, with various tax benefits coming to an end. Against this backdrop, we are worried about Sintex’s large capex and capacity utilisation. We do not expect Sintex to report any meaningful free cash flow over FY13-FY15, which would exert pressure on its valuation,” said Jignesh Kamani who tracks the company at Nirmal Bang Equities.

The funding requirements for its capex plans and working capital needs remain a key concern as cash flows from the operations are still inadequate. Currently, the net debt-to-equity ratio is 0.8 and interest coverage ratio 4.5, which indicates enough room for fund raising. However, if the environment does not improve, the funds could pressure profitability.