Formidable structure

PENNY WISE/ Sintex Industries

One simple stockpicking approach is to buy the domestic growth stories such as infrastructure, telecom and housing due to their high earnings visibility over the next few years. But after the euphoric rise in the Sensex and the prevailing volatility, finding cheap stocks with relative safety even in the above mentioned sectors isn't easy. Sintex Industries seems to be one exception. Considering its unique position, first-mover advantage in many products and high entry barriers in its new businesses make it interesting.

Originally a textile company, Sintex pioneered the plastic water tanks business in the seventies and even today, the company's brand 'Sintex' is synonymous with water tanks. But over the years, competition emerged in this business and the company reduced its exposure to this segment. Today, it derives only 10 per cent of its sales from tanks.

If this business was getting competitive, Sintex ventured into other high growth businesses such as pre-fabs, monolithics and custom moulding businesses. Pre-fabs are structures made from plastics, concrete and related materials used for public health care centres, schools, public administration buildings, portable toilet boxes and telecom shelters.

Monolithic construction is an extension of pre-fab structures used for making multi-storeyed buildings required for mass housing projects. Both these businesses have high entry barriers as Sintex has front-end capabilities to execute projects in short time. It has also forayed in the custom moulding business, which finds application in the auto component and electrical business.

Sintex gets only 22 per cent of its revenues from textiles today. Over the years, it has entered into a niche segment of structured fabrics in textiles, which command a margin of 30 per cent. The global capacity of this product is small and there is little competition from China. The company supplies to high-end brands like Armani, Versace and Tommy Hilfiger through its partners.

Sintex is expanding its current capacity of 21 million metres to 24 million metres and 29 million metres by FY08 and FY09 respectively. It is also setting up a 10,000 pieces a shift garments capacity exclusively for these customers, which will be ready in a year.

Plastics: Growth vehicle

Sintex is likely to report a strong 35-40 per cent growth a year for the next few years, thanks to the robust growth potential of its pre-fabs and monolithic business, which is expected to grow at 50 per cent. The share of plastic business to total revenues is expected to move up even higher from 78 per cent to 88 per cent by FY11. The wide usage and increasing requirement of schools, toilets, police stations, toll nakas and telephone booths provides strong revenue visibility for the company's pre-fabs business.

On the other hand, the government's thrust on providing better housing facilities will drive the growth of monolithic construction. The company has received orders from Gujarat government for constructing quarters for economically weaker sections in Ahmedabad, Baroda, Rajkot and Surat. There is such opportunity in many other regions including cities. Further, the company's inorganic growth initiatives in the past are expected to drive growth in the custom moulding business.

Aggressive buyer

Sintex has gobbled up three companies in the custom moulding business since May 2007 when it acquired US-based $23-million Wasaukee Composites, which caters to the auto, electrical and medical imaging industries for $20.5 million. In September 2007, it acquired the automotive product business of Bright Brothers, which has domestic leadership in passenger automotive plastic component segment for Rs 149 crore.

Just a month back, the company announced the buy-out of Europe-based $170-million Neif Plastics having presence in electrical, automotive, aerospace and defence sectors for about Rs 180 crore. All the acquired companies are making profits, though they have lower margins as compared to Sintex.

These acquisitions will enable the company to expand its products and geographical presence. The company has indicated that it is open to more acquisitions in the future, especially in the custom moulding business. The company has passed an enabling resolution to raise funds for future acquisitions.

Strong financial track record

Its standalone sales and net profits have grown at 25 per cent and 47 per cent a year respectively between FY02 and FY07 leading to an expansion of 600 basis points in net profit margin largely attributable to the plastics business. This trend has continued even this year.

In the September 2007 quarter, net sales increased 26 per cent year-on-year to Rs 320 crore and operating profit of Rs 73 crore jumped at a faster rate of 38 per cent due to better control over raw material costs. This was followed by 35 per cent rise in net profit to Rs 42 crore.

While this growth momentum is expected to continue even in the next three years, margin expansion will get constrained to some extent in FY09 as the impact of all its acquisitions will be fully reflected.

Moreover, the impact of high margins in the pre-fabs and textiles business will be softened by relatively lower margins of monolithic and other businesses. However, with benefits of integration and synergies, Sintex should not find it difficult to improve margins. 
 

ACQUIRING SIZE
Rs crore	Standalone		Consolidated
	FY06	FY07	FY08E	FY09E	FY10E
Net sales	853.00	1115.00	1903.74	3099.69	4015.89
Operating profit	174.00	244.00	409.30	635.44	843.34
OPM (%)	20.40	21.88	21.50	20.50	21.00
Net profit	92.00	131.00	209.41	371.96	522.07
NPM (%)	10.79	11.75	11.00	12.00	13.00
EPS	9.95	12.15	17.45	30.36	41.77
P/E (x)	46.53	38.11	26.53	15.25	11.09
Source: Company

Outperformer

Sintex has consistently outperformed the Sensex for the past three years--while Sensex has tripled in the period, Sintex has gained eightfold. This outperformance is likely to continue as the stock trades at an attractive valuation of 15 times and 11 times its estimated earnings for FY08 and FY09 respectively. Further, foreign institutional investors and mutual funds together hold about 30 per cent of the total recent shareholding, which instils confidence.