Analysts raise red flag as operating, financial metrics show signs of stress.
Sintex Industries, which manufactures plastics and composites, has seen its share price slide 52 per cent over the last three months. The plastic water tank producer’s stock is under pressure, both for operational and financial reasons.
In fact, the Gujarat-based company is seeing a slowdown in its monolithic business (mass housing) and custom-molded composites for various industries. Also there have been delays in payments from the government for the capital-intensive monolithic business, claim analysts. In the given circumstances, the 1931-founded company, headquartered in Kalol of Panchmahal district, is planning to slow down in the monolithic segment in order to conserve cash. This will have an impact on the company’s earnings, analysts claim.
Analysts say that while the working capital cycle is stretched, things could improve once the company slows down the growth in its monolithic business.
According to investment banking institution JP Morgan, while working capital in FY12 is likely to deteriorate at the margin on account of the delay in government payments, free cash generation should improve aided by slower growth of the working-capital-intensive monolithic business and lower capital expenditure.
On its part, Nirmal Bang Securities Ltd says deteriorating working capital scenario at 34.2 per cent of sales in FY13 from 27.9 per cent of sales in FY11 is a negative.
The slowdown in the custom-moulding division is another big concern, as the company has a higher proportion of clients in US and European. Its US subsidiary Wausaukee and French arm Nief Plastic contributing 4.7 per cent and 21.9 per cent to FY11 revenue. With the sharp economic deterioration in the US and Europe, analysts expect these subsidiaries to report a contraction of 5 per cent and 7 per cent in FY13.
Another issue that investors have been concerned about is the foreign currency bond repayment that is maturing in March 2013. The management has conveyed to JP Morgan, at an investor meet, that this repayment of $278 million will be partly met through $170 million of dollar-denominated cash deposits. The remaining $110 million will likely be refinanced through a dollar-denominated ECB. However, given that the rupee has depreciated sharply, the company could suffer some marked to market losses. According to Nirmal Bang, assuming the rupee stays at the current level (Rs 53.71/$) on 31 December 2011, Sintex would suffer MTM loss of Rs 65 crore in 3QFY12 in respect of un-hedged FCCBs. It would “thereby exert pressure on profitability”.