Critique of Sintex Industries

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Macroeconomic view:

Greenfield spinning project: Trial runs of phase-1 spinning project are expected to start in Jun- 15 and commercial production in on track for Sep-15 (for first 100,000 spindles) and entire commissioning by Mar-16. The company maintained its FY16/17 utilization to be 30%/80%, implying revenues of Rs5.5/14bn respectively. Sintex has spent a total capex of Rs10bn (of a total capex of Rs18bn) and Rs7bn has been capitalized on the same. The balance capex of Rs8bn is likely to be spent in FY16.

Building materials: While execution in monolithic business will continue to be at a slower pace, revenue growth in prefab business continues to be +25% yoy.  Sintex expects revenue CAGR of 20-25% growth in prefab over the next 2 years, led by increased social spending on education and healthcare, coupled with new government’s focus on low cost housing.

Sintex expects R-O water shelters, family size bio-gas plants and healthcare centres to drive significant social spending in rural areas over the next 5 years and the company could be a huge beneficiary of the same.

Clean India programme – a big opportunity, no near term benefits though: Sintex is extremely bullish on recent initiatives on “Swacch Bharat Mission”, clean India campaign, which would cover 1.04crore households, provide 0.25m seats of community toilets, and solid waste management for 4041 towns. The total cost of the program me is estimated at Rs620bn over 5 years, where Sintex will be the biggest beneficiary, given its 90- 95% market share of prefabricated toilets. However in the near term, Sintex envisages no benefits and expects atleast 9-12 months for meaningful orders to come by.

Overall revenue growth in FY16/17 is likely to be in the range of 15-20%, with a substantial incremental growth coming from Prefab and custom molding overseas business. Our estimates factor in FY16/17 revenue growth of 11/23% respectively.

Of the total FCCB of US$140m, 85% has been converted and the company expects the balance to be converted in near future. In addition, it expects overall interest costs of the o/s FCCB to come down as coupon interest rate for the balance period is at 3.75%. Post Oct-15, there is a compulsory conversion clause (at Rs96) at the discretion of the company.

Total FY15 capex came at Rs15bn, of which Rs6bn was spent on plastics, Rs1.4bn on increasing textile capacity and Rs7bn on Greenfield spinning project.

Comments on Ratio Analysis:

• Debt to Equity Ratio: The D/E ratio as per the report by Group- 1 has increased in 2013-14 to 1.13 as compared to 0.97 in 2012-13. This is due to the investment by Sintex industries in a new spinning business in Gujurat with a Capex of Rs 1800 crores of which 75% is debt financed due to its low cost. A higher D/E ratio along with the resulting lower interest coverage ratio is not a good sign for shareholders. But in FY 2014-15, the D/E ratio has again lowered to 0.93 due to increase in share capital for Sintex with no significant change in debt that lowers the risk for the investors.
• It has been mentioned that the basic and diluted EPS are the same and thus convertible securities are anti-dilutive but for FY 2014-15, it has been observed from the unaudited results that basic EPS is 12.48 and the diluted EPS is 11.64. So, the assumption of anti-dilutive nature of convertible securities does not hold true.

DU PONT ANALYSIS