Sintex Industries: Attractive valuations

Correction in the stock is undue and gives an attractive investment opportunity.

Sintex Industries has corrected 17 per cent in December, as compared to the Sensex’s 2.4 per cent rise in the same period. It is despite the company acquiring a 30 per cent stake in Durha Constructions, a civil and mechanical construction company, on December 13, which was welcomed by analysts.

The free fall in the stock price could partly be attributed to a four per cent downside in the BSE Midcap index, of which the company is a part, as midcap firms are the first to bear the brunt of volatile markets. Analysts feel the correction in Sintex’s stock was undue and the benefit of the acquisition of Durha wasn’t discounted by the market. Most analysts are overweight on the stock, as its trades are nine times the average estimated earnings for financial year 2011-12, thus providing an upside potential of 42 per cent, based on an average target price of Rs 252.

Sintex’s current growth drivers — monolithic construction and prefabricated structures (around 40 per cent of consolidated sales for 2009-10), are expected to register a compounded annual growth rate (CAGR) of 26 per cent over the next two years, thanks to higher government spending on mass housing and social sector schemes, especially in rural areas.

Durha has created a new growth driver by providing exposure to India’s fast growing infrastructure sector, especially in engineering, procurement and construction, in segments such as power, cement and petrochemicals.

Analysts suggest Durha’s operations are scalable and, thus, the 2009-10 revenue of Rs 150 crore is expected to grow at 53 per cent annually over the next two years. With better synergies and value addition, the 2009-10 operating profit margin of 17 per cent (higher than Sintex’s 15 per cent) has scope for improvement.

While Durha, which provides robust revenue visibility of five times the order book to 2009-10 sales, is positive, Sintex Industries itself is on a strong traction, with a CAGR of about 20 per cent each on expected sales and profits between 2010 and 2013, on a higher base.