Sintex: Bright future

Sintex Industries' purchase of Bright Brothers will strengthen the former's presence in auto industry.

Plastics and textiles player Sintex Industries' purchase of Bright Brothers' automotive products business division will strengthen its presence as a component supplier to the domestic auto industry.

The company will pay Rs 149 crore to acquire the business, which is under 1.4 times this division's FY07 sales (year ending June) and is estimated at 6.4 times the division's operating profit.

Analysts say the price paid by Sintex is in line with similar deals in the auto component industry. They also add that there aren't too many assets available for purchase in the auto ancillary sector.

For the Bright Brothers shareholder, it is a great deal, as the pre-tax per share value from this sale is around Rs 250, while the share closed at Rs 76 on Thursday.

Bright Brothers has a market capitalisation of Rs 45 crore, and according to the management, its debt is below Rs 70 crore. The sale of Bright Brothers' automotive business, which contributed around 50 per cent to the company's turnover, has been valued much higher than the enterprise value.

Sintex Industries has been interested in developing a product line in automotive plastics, and with this purchase, it gets five plants that manufacture auto body parts, instrument panels, consoles, trims etc.

So far, Sintex was manufacturing products like fuel tanks for off-the-road vehicles. This acquisition brings marquee clients like Maruti, Hyundai, Tata Motors and M&M.

Sintex expects this acquisition to be earnings accretive. Sintex had consolidated plastics revenues of Rs 854 crore in FY07, with auto plastic sales accounting of 12-13 per cent, which will double after the Bright Brothers' division.

With the new money, Bright Brothers will retire some of its debt, focus on consumer and industrial plastics, enter luxury plastic consumer products such as those used in microwave and for hair care, and may also set up more plants closer to its industrial consumers.

Bright Brothers, which made losses at the net level for six years till FY06 made a small profit in FY07. With its debt burden coming down and a new thrust on the business, profitability should improve going forward.

Sintex trades at 27 times trailing 12-month earnings.

Two-wheeler sales: Roadblock

The total sales of two-wheeler manufacturers (Hero Honda, Bajaj Auto and TVS Motors) declined 3.5 per cent y-o-y to 539,316 units in August 2007, but the performance was considerably better than the previous month.

That's because Hero Honda managed to grow its sales by an impressive 12 per cent y-o-y in August 2007 to 240,875 units, helped by better demand for its recent launches for models such as the refurbished Pleasure, Splendor NXG and the new Passion Plus.

In July 2007, the total sales of these three players had declined a whopping 11.5 per cent y-o-y to 492,447 units. Analysts highlight that buyers have shown reduced interest in the fundamentally unchanged 100 cc motorcycles offered by these players, which has led to a widespread slowdown in the industry.

In the June 2007 quarter too, total sales of these three players had declined 8.7 per cent y-o-y to 1.69 million units. In FY07, two-wheeler sales grew by 14 per cent.

Investors have been cautious to stocks in this sector for the past two months "� for instance, Hero Honda has declined 6.5 per cent during this period as compared to a 4.5 per cent rise in the Sensex. However, Bajaj Auto gained 10.5 per cent and TVS Motors also rose 6 per cent.

To improve sales in the upcoming festive season, two-wheeler manufacturers like Bajaj Auto and TVS Motors are planning new product launches. Bajaj Auto trades at nearly 29 times estimated FY08 earnings, while Hero Honda gets a discounting of 18.5 times, which leaves little room for further upside.