Sintex Industries’ businesses gained further strength in December 2012 quarter (Q3) as it reported five quarter high revenue growth of 23% led by a rebound in international custom moulding and monolithic businesses, which saw a jump of 27.5% and 40% respectively in revenues compared to a decline of 6% and 14% in September 2012 quarter (Q2). Even domestic custom moulding business witnessed better growth of 15% versus 9% in Q2. Prefabs business also maintained its robust revenue growth momentum with sales growth of 22.5%.
Operating profit margin expanded---for the first time in six quarters---by 129 basis points (bps) to 15.4% due to good volume growth in custom moulding and monolithic businesses. Additionally raw material costs as percentage to sales also softened by 66 bps followed by employee costs (down 14bps). Adjusted net profit jumped 43.5% despite significant increase in taxation, 11% rise in depreciation and decline in other income.
Amit Patel, managing director of the company expects strong topline growth and margins to continue in Q4 and also FY14 but without losing focus on balance sheet. The company recently completed its private placement, QIP issue and refinancing of FCCB. All of these will bring down debt to equity ratio, improve return on capital employed and generate free cash flow. There will be no forex loss in the March quarter, current FCCB will be repaid by FY13-end and new FCCB will be hedged. All this along with reduction in working capital in monolithic business will further save on interest costs, which in turn would lead to improvement in net profit growth. The company is targeting more debt repayment in FY14.
Custom moulding business is expected to see exciting times ahead. Though Indian auto industry may see a slowdown (25% exposure), the same will be negated by company’s presence in wide range of sectors like defence, electrical, mass transit, marine, aerospace and renewable energy. Besides the business is also well diversified in terms of geography--domestic and international. The company’s overseas subsidiaries are doing extremely well though Europe continues to be under pressure.
In monolithic segment, another slow moving site was cleared in Q3 and the company is well on target to reduce number of slow moving sites to 3 by FY13, which will further help reduce working capital. On the other hand, speedy execution rate (order book of Rs 2,300 crore) witnessed in Q3 will continue. However, the company sounded cautious about fresh order inflows as nothing has come on ground yet though Gujarat government has talked a lot on low cost housing in the recently concluded state elections. The company sees a bigger opportunity in Uttar Pradesh, which will be sustainable.
Prefabs’ business growth should be driven by fresh order inflows on account of higher spending by government as well as private (as economy recovers) and ramp up of execution across geographies by adding new states. In short, all is going to be well in future for the company and worst is behind. Accordingly, the stock is set for a re-rating as valuation of 5 times FY14 estimated earnings is half of its five year average of 10.7 times. Ankur Agarwal, analyst, Noumra equity research, in his preview note on the company has set the target price at Rs 109 (an upside of 58%).
