Even as Sintex Industries posted another set of weak financial performance in September 2012 quarter with consolidated margins dropping over 200 basis points year-on-year, its stock has gained nearly 4% led by improved business outlook and proposed warrants issuance.
According to the company, the recent spate of reforms from the government will help gradually revive the domestic economy and augurs well for Sintex as a buoyant social spending and an improved capex from private sector will ensure a strong revival in the company’s fortunes. But, even before the benefits of the reforms start trickling, the company is witnessing improvement in the business. Amit Patel, managing director of the company, said in the post results conference call last week-end, “We have started seeing slow but steady improvement in most of our businesses, which is very encouraging. Visibility has improved across businesses. I strongly believe we will bounce back in the near future.”
Though the monolithic business, which has been suffering due to sluggishness from government activity and consequent delays in execution and receivables pulled down overall performance in the September quarter, things are expected to get better as Sintex has reduced number of slow moving sites from 7 to 5 and this will soon come down to 3 by end-FY13. Says Patel, “We are very choosy on new orders. Once external environment improves, this business is poised to grow.” The outlook for pre-fabs business though remains bullish. Large chunk of the growth (15 per cent) in customs moulding business will be led by domestic operations (20-25 per cent) while overseas will be flattish (8-9 per cent).
In order to address concerns regarding funding of FCCB re-payment ($290 million due by March 2013), the company announced its intention of issuing 30 million preferential warrants to promoters (subject to shareholder approval). It might also look at further options like ECB, new FCCB and QIP. Ankur Agarwal, analyst, Nomura Equity Research has welcomed the move though he expects an equity dilution of 7-8 per cent. “The company took the first step in addressing investor concerns around the balance sheet,” he says in his post result note.
In fact, the company has been focussing on improving balance sheet and return ratios for the past six months. Says Patel, “We have allowed our certain businesses (read monolithic) to de-grow and controlled our capex to ensure that balance sheet and profit and loss account remains healthy for future. We want each of the businesses to become cash neutral or positive in FY13 and FY14.”
The company has highlighted generating free cash flows for next couple of years, improving return on capital, shrinking the overall balance sheet size and improving working capital by stringent controls on monolithic business, as key focus areas to strengthen its balance sheet going forward.
Given the expected improvement in external and internal factors, the stock’s valuation at 5 times FY14 estimated earnings (almost half of its 5-year average of 10.7 times) looks attractive. While pegging the target price at Rs 109, Agarwal points out, “Potential rewards significantly outweighs the risks.”
