Even as Sintex Industries posted another set of weak financial performance in the September quarter with consolidated margins dropping 200 basis points year-on-year, its stock has gained nearly four per cent 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 the private sector will ensure a strong revival in the company’s fortunes. But, even before the benefits of the reforms start trickling in, the company is witnessing improvement in the business. Amit Patel, managing director of the company, said in the post results conference call last weekend, “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 the number of slow moving sites from seven to five and this will soon come down to three by the end of FY13. Says Patel, “We are very choosy on new orders. Once the 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 the customs moulding business will be led by domestic operations (20-25 per cent) while overseas will be flattish (eight-nine per cent).
In order to address concerns regarding funding of foreign currency convertible bonds 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 external commercial borrowings, new FCCB and qualified institutional placement. Ankur Agarwal, analyst, Nomura Equity Research, has welcomed the move though he expects an equity dilution of seven-eight per cent. “The company took the first step in addressing investor concerns around the balance sheet,” he says in his post-results 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 remain 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 the next couple of years, improving return on capital, shrinking the overall balance sheet size and improving working capital through stringent controls on the 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 five times FY14 estimated earnings (almost half of its five-year average of 10.7 times) looks attractive. While pegging the target price at Rs 109, Agarwal points out, “Potential rewards significantly outweigh the risks.”
