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Reuters: SNTX.BO Bloomberg: SINT IN

Sintex Industries

Re-laying the Building Blocks

With a buoyant order book, including a robust stream of government orders and an excellent execution track record, Sintex Industries’ building products division should register a 26.6% CAGR and account for 76.4% of incremental sales over FY11-13. Strong operating free cash flow of Rs4.3bn and RoCE improvement by 249bps to 16.1% over FY11-13 due to high net sales growth of 17.6% supported by balance sheet discipline and $225mn FCCB redemption calls for a re-rating of the stock. We assign a Buy rating to it with a SOTP-based TP of Rs224 (6.6x FY13 EV/EBITDA), 24% up from CMP.

Government spending to up building products division’s revenue by 26.6%: Sintex’s building products division, which accounted for 48.6% of FY11 consolidated sales, derives 65-70% of its revenue from state and central government orders under their respective social schemes. Allocation towards these schemes has showed a 17.2% CAGR over FY07-12 to Rs542bn. Its monolithic division has a strong order book of Rs30bn, 2.25x its FY11 sales of Rs13,360mn, to be executed over a period of 22 months. We expect this division to grow 26.6% over FY11-13 to Rs35bn and be a key revenue driver, contributing 76.4% to incremental consolidated revenue of Rs17.2bn. On the back of building products division, the consolidated net revenue should witness a 17.6% CAGR, which would improve the RoCE by 203bps.

Balance sheet discipline and FCCB redemption to improve RoCE: Ex-cash working capital increased to 41.7% in FY10 from 20.2% in FY09, while cash deposit in escrow account stood at Rs3.5bn in FY10. The company has liquidated all such non-core investments in FY11, reducing ex-cash working capital to 27.9%. We expect Sintex to maintain balance sheet discipline and increase sales by 17.6% CAGR, which would generate positive operating free cash flow of Rs4.3bn. Out of $225mn FCCB proceeds, $165mn remains unutilised, thereby putting pressure on the return ratios. We expect the redemption of FCCBs by March 2013, which would improve the RoCE by 136bps over FY11-13.

Valuation: At CMP, the stock is trading attractively at 8.9x/7.6x FY12/13E EPS of Rs20.38/Rs23.84, below the 7-year median of 11.4x, and at EV/EBITDA of 6.7x/5.6x FY12/13E, which is lower than its 7-year median of 7.2x. Strong operating free cash flow of Rs4.3bn and RoCE improvement by 249bps to 16.1% over FY11-13 due to high net sales growth of 17.6% supported by balance sheet discipline and FCCB redemption of $225mn calls for a re-rating of the stock. We assign a Buy rating to it with a SOTP-based TP of Rs224.

BUY

Sector: Diversified

CMP: Rs181

Target Price: Rs224

Upside: 24%

Jignesh Kamani [email protected] +91-22-3926 8239

Saiprasad Prabhu [email protected] +91-22-3926 8172

Key Data

Current Shares O/S (mn) 273.0

Mkt Cap (Rsbn/US$bn) 49.9/1.1

52 Wk H / L (Rs) 237/138

Daily Vol. (3M NSE Avg.) 1,514,492

Share holding (%) 3QFY11 4QFY11 1QFY12

Promoter 34.6 35.0 35.0

FII 34.9 33.7 38.2

DII 11.7 8.8 5.8

Corporate 10.6 11.4 10.3

General Public 8.2 11.2 10.8

One Year Indexed Stock Performance

Price Performance (%)

1 M 6 M 1 Yr

Sintex (1.5) 10.0 6.0

Nifty Index 2.4 (0.4) 4.6

Source: Bloomberg

Y/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13E

Net Sales 30,639 32,816 44,837 52,184 61,998

EBITDA 4,500 5,005 8,155 9,262 10,739

Net Profit 3,095 3,215 4,600 5,523 6,463

EPS (Rs) 11.4 11.9 17.0 20.4 23.8

EPS Growth (%) 40.7 3.9 43.0 20.1 17.0

EBITDA margin (%) 14.7 15.3 18.2 17.7 17.3

PER (x) 15.9 15.3 10.7 8.9 7.6

P/BV (x) 2.9 2.5 2.0 1.7 1.4

EV/EBITDA (x) 13.0 12.7 7.8 6.7 5.6

RoCE (%) 8.9 8.3 13.6 13.9 16.1

RoE (%) 19.1 17.6 21.2 20.7 19.9

Source: Company, Nirmal Bang Institutional Equities Research

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Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11

SINTEX INDUS LTD NSE S&P CNX NIFTY INDEX

15 July 2011


2 Sintex Industries

Valuation

Sintex had witnessed a re-rating of its stock during FY04-08 on the back of healthy improvement in RoCE to 12.7% in FY08 from 9.8% in FY03, supported by healthy profitability CAGR of 57%. The stock witnessed a surge in PE multiple from 5x to 20x and EV/EBIDTA multiple from 6x to 14x during the same period. On account of a structural shift in its business model towards working capital-intensive business, the unutilised FCCB sum and higher loans and advances, the RoCE declined to 8.3% in FY10 (13.6% in FY11) from 12.7% in FY08 which led to a de-rating of its stock and it traded in a PE band of 8-10x and EV/EBITDA band of 6-8x over FY09-FY11. At the current market price, the stock is trading attractively at 8.9x and 7.6x FY12E EPS of Rs20.38 and FY13E EPS of Rs23.84, below the 7-year median of 11.4x, and at EV/EBITDA of 6.7x/5.6x FY12/13, which is lower than its 7-year median of 7.2x. The company divested/liquidated its non-core businesses/investments, improved working capital discipline and as a result the RoCE improved from 8.3% in FY10 to 13.6% in FY11. We expect it to improve by 249bps to 16.1% over FY11-FY13 on the back of strong net sales growth and redemption of FCCBs. Of the $225mn FCCB proceeds, $165mn is unutilised, thereby putting pressure on the return ratios. FCCBs are due for conversion in March 2013 and we expect the company to redeem FCCBs as the conversion price of Rs246 and the break-even price of Rs354, both are higher than our target price. In case FCCBs are converted into equity shares, the company will have a better control over utilising this money. Due to higher capex of Rs24.4bn over FY07-11 and also higher working capital, free cash flow was negative until FY10. Working capital discipline and improved focus on core business led to positive operative free cash flow, although it was a small sum, in FY11. We expect this trend to continue in FY12 and FY13 and the company would have operating free cash flow of Rs4.3bn over FY11-13. Sintex is poised for a strong re-rating, just like it happened during FY04-08.

Sintex operates in different segments which enjoy different valuations and as a result we valued the stock based on SOTP-based multiple, valuing each of its divisions at a premium/discount to competitors. We valued its building products division at 6.4x EV/EBITDA, at a premium over construction industry average of 5.1x due to higher margins, better order execution skills and a strong order book. We valued its custom moulding division at 7.5x EV/EBIDTA, in line with automobile ancillary industry’s leader, and we valued textile business at 7x EV/EBIDTA in line with textile peers. We thus arrived at a final valuation of Rs224 for Sintex. We haven’t considered conversion of FCCBs into our valuation. In case FCCBs are converted into equity shares, our target price increases to Rs226. At our TP of Rs 224, the stock is valued at 11x/9.4x FY12/13E PE and 8x/6.6x FY12/13 EV/EBIDTA. We assign a Buy rating to the stock.

Exhibit 1: NBIE estimates vs consensus projections

(Rsmn) FY12E FY13E

Y/E March NBIE Consensus (%) NBIE Consensus (%)

Sales 52,184 53,788 (3.0) 61,998 63,370 (2.2)

EBIDTA 9,262 9,555 (3.1) 10,739 11,163 (3.8)

EBIDTA (%) 17.7 17.8 (2) 17.3 17.6 (29)

PAT 5,523 5,521 0.1 6,463 6,526 (1.0)

PAT (%) 10.6 10.3 32bps 10.4 10.3 13bps

EPS (Rs) 20.4 19.9 2.5 23.2 23.2 0.1

Source: Bloomberg, Company, Nirmal Bang Institutional Equities Research


3 Sintex Industries

Exhibit 2: SOTP valuation

EBITDA FY13 (Rsmn) Multiple (x) EV (Rsmn)

Tank division 227 5.5 1,247

Pre-fab division 1,575 6.5 10,236

Zeppelin, India 90 5.5 492

Monolithic division 4,113 6.5 26,731

Building Products 6,003 6.4 38,706

Custom moulding - domestic 1,014 7.0 7,100

Wausaukee Composites, US 211 6.5 1,374

Nief Plastics, France 1,500 7.0 10,498

Bright Auto Plast, India 673 7.5 5,049

Total - custom moulding 3,399 7.1 24,021

Textile division 1,230 7.0 8,610

Total EV 10,632 6.7 71,337

Less: Net debt 10,688

Equity value 60,649

Target price 224


Exhibit 3: Scenario analysis – FY13

Base Case

Monolithic margin (%) 18.5 17.5 16.5 15.5 14.5

EPS (Rs) 24.5 23.8 23.2 22.5 21.9

Change (%) 2.7 0.0 (2.7) (5.5) (8.2}

RoCE (%) 16.5 16.1 15.7 15.3 14.9

Pre-fab margin (%) 21.0 20.0 19.0 18.0 17.0

EPS (Rs) 24.1 23.8 23.6 23.4 23.2

Change (%) 0.9 0.0 (0.9) (1.8) (2.7)

RoCE (%) 16.3 16.1 16.0 15.9 15.7



4 Sintex Industries

Exhibit 4: Relative valuation

(Rsmn) Market CMP Net Sales EBITDA (%) EPS (Rs) P/E (x) EV/EBIDTA (x) RoE (%)

Cap (Rs) FY11 FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E

Sintex Industries 49,479 181 44,837 18.2 17.7 17.3 17.0 20.4 23.8 10.7 8.9 7.6 7.8 6.7 5.6 21.2 20.7 19.9

Construction

CCCL 6,153 33 21,685 8.8 8.9 9.1 4.3 4.3 5.0 7.7 7.7 6.7 4.9 4.3 3.7 13.8 13.0 12.9

Ahluwalia Contracts 8,222 131 15,645 10.7 9.5 10.2 13.6 13.2 15.9 9.7 9.9 8.2 4.6 4.3 3.4 29.0 22.4 21.6

BL Kashyap 3,903 19 15,074 8.0 7.5 7.6 2.5 2.7 3.3 7.5 7.2 5.7 7.4 6.5 5.4 9.6 9.3 10.6

Simpex Infra 13,988 283 48,729 9.7 9.7 9.6 26.5 29.0 36.1 10.7 9.7 7.8 5.6 4.8 4.1 12.6 12.1 13.2

Gammon India 11,958 94 56,937 8.3 8.0 8.3 8.8 7.2 9.5 10.7 13.0 9.9 7.6 7.2 6.1 6.6 4.7 6.3

NCC 20,719 81 53,490 9.9 9.8 9.8 7.6 7.3 8.8 10.7 11.1 9.2 7.6 6.8 5.8 8.5 7.5 8.4

HCC 20,410 34 41,720 12.8 13.0 12.9 1.4 1.0 1.3 23.5 33.4 25.2 10.0 8.5 7.5 5.5 4.4 5.4

IVRCL 18,477 69 59,614 9.3 9.4 9.5 7.0 7.1 8.5 9.9 9.8 8.2 6.9 6.1 5.2 9.7 9.1 10.1

Average

39,112 9.7 9.6 9.7

11.3 12.7 10.1 6.8 6.1 5.1 11.9 10.3 11.1

Textile

Arvind 21,714 85 36,811 13.5 12.8 13.6 5.0 6.9 6.4 17.1 12.5 13.3 8.7 8.0 7.7 4.7 6.0 6.2

Raymond 24,163 394 29,376 13.1 13.2 13.0 19.5 25.3 29.1 20.2 15.6 13.5 9.4 8.0 7.5 6.3 11.5 12.1

SKNL 15,004 53 53,253 18.2 19.3 20.2 9.8 15.0 21.3 5.4 3.5 2.5 5.4 4.2 3.3 12.5 15.2 16.1

Average

39,813 15.5 15.9 16.7

14.2 10.5 9.8 7.8 6.7 6.2 7.8 10.9 11.5

Auto Ancillaries

Motherson Sumi 92,702 239 82,201 10.1 10.9 11.3 8.9 12.3 15.4 27.0 19.5 15.5 12.1 9.4 7.7 25.7 28.7 29.6

Sona Koyo Steering 3,307 17 9,765 9.3 9.5 9.7 1.3 1.7 2.5 12.8 10.1 6.7 6.0 4.7 4.1 15.2 17.5 18.8

Average

45,983 10.0 10.7 11.1

19.9 14.8 11.1 9.0 7.1 5.9 20.4 23.1 24.2

Composite / custom moulding

Time Technoplast 14,785 71 12,891 19.1 18.4 18.4 5.2 7.3 9.3 13.6 9.6 7.6 8.3 6.9 5.7 18.7 18.4 19.8

Note: Consolidated numbers for Sintex Industries, Arvind, Raymond, SKNL, Motherson Sumi, Time Technoplast rest Standalone numbers

Source: Bloomberg, Nirmal Bang Institutional Equities Research


5 Sintex Industries

Exhibit 5: EV/EBITDA

Exhibit 6: P/E

Exhibit 7: P/B

Source: Nirmal Bang Institutional Equities Research

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6 Sintex Industries

Free cash flow turns positive on strong revenue growth, tighter control over balance sheet

We expect a strong improvement in the RoCE from 8.3%/13.6% in FY10/11 to 16.1% in FY13 on the back of strong revenue growth, balance sheet discipline and FCCB redemption. Strong revenue growth of 17.6% CAGR would increase the RoCE by 203bps while FCCB redemption would improve RoCE by 136bops over FY11-13, which would more than compensate drop of 89bps on RoCE due to margin pressure of 87bps. We strongly believe that subdued RoCE of 8.3-8.9% in FY09/10 was on account of one-off events. The company ventured into high working capital-intensive monolithic business in FY08, which increased overall working capital requirement. In addition, a higher sum of money deposited into the escrow account resulted in a negative cash flow from operations of Rs3,259mn in FY10. As a result, cash flow from operations was under pressure in the past and effective attention toward these issues would lead to a improvement in the return ratios. The company was in heavy investment mode during FY08-11, spending Rs24.4bn organically and inorganically, which increased gross block by3.7x to Rs33.3bn in FY11 from Rs8.9bn in FY07. Due to high capex and lower operating cash flow, free cash flow was negative until FY10 but the benefit of this capex would take place in the coming years. Operating free cash flow has just turned positive in FY11. Net revenue growth of 17.6% CAGR over FY11-13 along with working capital discipline and improved focus on core business should lead to positive operating free cash flow of Rs4.3bn over FY11-13. We expect a higher return ratios and a positive operating free cash flow leading to a re-rating of the stock.

Exhibit 8: Invested capital % RoIC Exhibit 9: Operating free cash flow trend and Cash flow trend


Redemption of FCCBs – major driver of RoCE improvement

Sintex has $225mn of FCCBs outstanding having a conversion price of Rs246, which are due for conversion in March 2013. FCCB money was raised to finance acquisitions and as there was no major acquisition by the company in FY10-11, only $60mn of the FCCB proceeds were utilised and the remaining $165mn lies in an escrow account at an overseas branch of State Bank of India, yielding a very low return and thus depressing the return ratios. If FCCBs are redeemed, it would reduce the capital base, leading to an improvement in RoCE in FY13 by 136bps over FY11.

Exhibit 10: Better utilisation of cash to improve return ratios


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7 Sintex Industries

In case FCCBs are converted into equity shares, the company would have a better control on utilising this money, including repayment of debt, and thereby reducing the capital base and improving the return ratios. We expect RoCE to improve by 249bps over FY11-13 out of which 136bps improvement is on account of likely FCCB redemption. After adjusting for FCCB premium and rupee dollar equation, FCCB holders would benefit only if the stock price is higher than Rs354, at INR/USD 45. We have considered redemption of FCCBs by March 2013 as the conversion price of Rs246 and break-even price of Rs354 are higher than CMP and our target price of Rs224, which would reduce D/E from 1.2x to 0.5x in FY13. The company had cash on its books of Rs9.9bn in FY11 and we expect it to generate free cash flow of Rs3.4bn over FY11-13 and thereafter redemption of FCCBs won’t be an issue. If FCCBs are converted into equity, it would result in equity dilution of 13.6% and in that case our TP would increase to Rs226 (as against Rs224).

Balance sheet clean-up to improve working capital discipline

The company was operating with a lean working capital between FY07-09, at 11-20% of sales. It entered the monolithic construction business in FY08 and revenue from this segment increased 6.4x from Rs2,100mn to Rs13,360mn in FY11. Working capital cycle in the monolithic segment is high, at 5-6 months, which increased consolidated working capital cycle of the company. However, with the monolithic segment attaining sizeable proportions, the working capital requirement would be limited to incremental monolithic sales only. On account of a strong learning curve over the past four years and better order execution, we expect working capital requirement for the monolithic segment to remain under control. The company was looking for inorganic growth and after considering a few proposals, it deposited Rs3.5-4bn as security in the escrow account created for that purpose in FY10, in addition the company has provided for bank guarantee for monolithic orders from Uttar Pradesh. These increased its loan and advances to Rs8.2bn in FY10 from Rs3.8bn in FY09. On account of this, net working capital, ex-cash, increased by Rs7,480mn in FY10 against incremental sales of Rs2,178mn. Net working capital as a percentage of sales touched its highest level at 41.7% in FY10, which decreased RoCE to 8.3% in FY10 from 12.7% in FY08, and as the company has recovered this money in FY11 it would be put to a better use in future. Also, as a result, the working capital reached a normal level of 27.9% in FY11. The company had ventured into non-core businesses of oil and gas exploration and power generation, which would have required heavy investment and suppressed the return ratios and subsequently led to a de-rating of the PE multiple. The management has taken care of that by divesting stake in non-core businesses, focusing its interests in power to meet only captive consumption needs.

Exhibit 11: Loan and advances Exhibit 12: Working capital Exhibit 13: Incremental working capital


Building products division – key driver of revenue growth

Building products division (BPD) comprising tanks, prefab construction and monolithic construction businesses contributed 48.6% to consolidated sales in FY11 and out of that monolithic construction contributed 29.8% and prefab construction 11.8% to consolidated sales. We expect this division to grow 26.6% over FY11-13 to Rs35bn and be a key revenue driver, contributing 76.4% to incremental consolidated revenue of Rs17.2bn. Revenue from prefab construction business has shown 20.1% CAGR over FY06-11 at Rs5,290mn.

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8 Sintex Industries

With the expansion of its markets, covering further north and north-eastern regions, the government’s continued focus on social schemes and buoyant demand for its products from the private sector for cold chain storage, agri-sheds and bunk houses, net revenue should grow by 22% to Rs7,874mn over FY11-13E. The company’s monolithic division has a strong order book of Rs30bn, 2.25x FY11 revenue of Rs13,360mn, to be executed over a period of 22 months. We expect this segment to show 32.6% CAGR over the same period, at Rs23,500mn. Sintex Industries had acquired a 74% stake in Zeppelin Mobile Systems India (ZMSIL) in May 2006 at a cost of Rs180mn. In June 2008, the company, through Zeppelin Mobile, acquired Digvijay Communications and Networks Private Limited (DCNPL) for Rs540mn and subsequently merged it with Zeppelin. On account of a downturn in the telecommunications industry, revenue from these acquisitions declined by13% in FY11 and we expect it to bottom out and grow marginally by 5% in FY12 and FY13. Building products’ revenue has grown 38% over FY06-11 and we expect it to grow 26.6% over FY11-13E. Unlike in the past where growth in the building construction, particularly monolithic construction division came at a cost to return ratios, strong growth in the building product division with balance sheet discipline would contribute positively towards the return ratios.

Exhibit 14: Revenue – Prefab Exhibit 15: Revenue – Monolithic Exhibit 16: Revenue - BPD


Pre-fabricated structures – sturdiest business of Sintex

Pre-fabricated structures are quite popular in the housing and construction segment globally as they can be used for building temporary as well as permanent residential homes, schools, site offices, security cabins, kiosks, telephone booths, dispensaries, orphanages, police stations, defence shelters, telecom BT shelters etc. Sintex entered this business in 2000 and has emerged as one of the leaders in the segment.

In the pre-fabricated structures business, the biggest entry barrier is pre-qualification, as a new player has to take approvals from state governments, which takes around one or two years. Sintex has been pre-qualified in 17 states, of which it is active in 14 states. A pre-fabricated structure maker can serve clients only within an area of 1,500 km as most of the structures are manufactured at the company’s plant and transported to client sites through a truck, making it unviable to service long-distance customers. Sintex has five plants and is setting up two more so as to cover every nook and corner of India. In the pre-fabricated construction business, raw material and bought-out items cost 25-30% of sales, making of the kit at the plant costs 20% while logistics and labour costs account for 20-25% of sales. A team of 4-5 people loads the prefabricated structure and supporting items on to a truck, travels to the project site in four-six days and executes the project in the next three days. The company maintains stringent design specifications so that its execution team doesn’t have to return to the plant or ask for further help, which would increase transportation and labour costs. The execution team is able to do three installations in a month. Any new entrant has to go through a learning curve and because of these hurdles the number of installations would be limited to 2-2.5, which would exert pressure on margins.

The company is expanding its markets, covering further north and north-eastern regions in FY12. It has added Uttar Pradesh to its list in FY11 and plans to add Bihar in FY12. The company derives 30% of its pre-fabricated construction revenue from the private sector, mainly from products like cold chain storage facility, agri-sheds, bunk houses and these products have recorded strong growth last year. The company reported growth of 23% in its pre-fab construction revenue in FY11 and we expect it to grow by 22% each in FY12 and FY13.

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9 Sintex Industries

Exhibit 17: Pan India plant location helps in efficient service

Exisiting Plant Location Approved States Likely Plant

Kalol Rajasthan

Gujarat

Baddi Delhi

Punjab

Haryana

Himachal Pradesh Dadri (Greenfield)

Uttar Pradesh Expansion (Brownfield)

Salem Tamil Nadu

Kerala Expansion (Brownfield)

Kolkata West Bengal

Assam Buhar (Greenfield)

Bihar Assam (Greenfield)

Maharashtra

Nagpur Madhya Pradesh

Chhattisgarh


Government’s focus on social spending to benefit pre-fab, monolithic divisions

The company’s pre-fab division derives a substantial portion of its revenue i.e. around 70%, from government orders under social schemes like Sarva Shiksha Abhiyan (SSA) and National Rural Health Mission (NRHM). SSA has been launched for universalisation of elementary education, which is being implemented through a partnership between Central and State Governments/Union Territories. The programme seeks to provide access, equity, retention and quality in the area of elementary education. Government allocation to SSA has shown 45% CAGR over FY01-11 and 13.8% CAGR over FY06-11 to Rs210bn in FY12. National Rural Health Mission (NRHM) was launched in April 2005 to achieve progress in providing universal access to equitable, affordable and quality health care which is responsive to the needs of the people. Government allocation to NRHM showed 18% CAGR over FY06-12 to Rs178.4bn. Revenue from the pre-fab division showed CAGR of 10.2% over FY06-11 to Rs5,290mn in FY11. Almost 30% of allocation towards SSA and NRHM is directed toward setting up of classrooms, mid-day meal kitchens, toilet blocks and healthcare centres, thus providing a healthy opportunity to Sintex which executes pre-fab structure for such projects. The company reported a growth of 23% in its pre-fab construction revenue in FY11 and we expect it to grow by 22% in FY12 and FY13 respectively.

Exhibit 18: Government of Indian allocation to various social schemes from 2000-01 to 2011-12

Rsbn SSA Growth (%) NRHM Growth (%) Rural Housing (IAY) Growth (%) BSUP IHSDP RAY Total

2000-01 3.5 17.1 20.6

2001-02 5.0 42.9 15.3 (10.7) 20.3

2002-03 16.5 230.0 47.0 207.7 63.5

2003-04 19.5 18.2 19.0 (59.6) 38.5

2004-05 30.6 56.8 25.0 31.6 55.6

2005-06 71.6 134.1 66.0 25.7 2.8 3.3 166.7

2006-07 110.0 53.7 90.6 37.2 29.2 13.6 10.0 5.0 244.9

2007-08 106.7 (3.0) 108.9 20.1 40.4 38.4 15.0 4.9 275.9

2008-09 131.0 22.8 150.9 38.6 54.0 33.7 18.8 6.1 360.8

2009-10 131.0 0.0 139.3 (7.7) 88.0 63.0 22.7 11.1 2.0 394.1

2010-11 150.0 14.5 154.4 10.8 100.0 13.6 29.1 11.6 13.0 458.1

2011-12 210.0 40.0 178.4 15.5 100.0 0.0 13 542.1

CAGR (%) 07-12 13.8 14.5 27.9 30.5 23.5 17.2

Source: India Budget Documents Note: SSA: Sarva Shiksha Abhiyan, IAY: Indira Awaas Yojana, NRHM: National Rural Health Mission BSUP: Basic Services to the Urban Poor, IHSDP: Integrated Housing & Slum Development Programme RAY: Rajiv Gandhi Awas Yojana


10 Sintex Industries

Sintex designed and introduced an entirely new solution for low-cost mass housing in India in January 2008 and became the leader in the segment. In monolithic construction, liquid cement concrete is poured into a formwork system to make walls and slabs, unlike brick and mortar construction which uses bricks and other inputs. As a result, concrete slabs are prepared in one-third of the time and also labour costs get reduced by one-third. Formwork can be prepared from plastic, aluminum or other related materials. Currently, L&T Ltd and Sintex (with monolithic sales of Rs13,360mn) and Shapoorji Pallonji Construction Ltd (focused on high-end projects) are major players in monolithic construction business having a market size of around Rs40bn.

Monolithic division derives 90% of its revenue from public sector entities like state housing boards, JNNURM-funded schemes like Basic Service to the Urban Poor (BSUP), Integrated Housing & Slum Development Programme (IHDP) and rural housing under Indira Awas Yojana (IAY) and Rajiv Gandhi Awas Yojana (RAY). Monolithic construction cost is around Rs900-1,150 per sq ft. In general, any mass housing project under these schemes has an area of 300-350 sq ft and costs Rs0.27-0.35mn. Allocation towards BSUP increased by 30.5% CAGR over 2007-11 to Rs29.1bn and towards IHSDP by 23.5% CAGR to Rs11.6bn over the same period. Government has allocated Rs100bn toward IAY, which reported 17.4% CAGR over 2001-12 and 27.9% over 2007-12. Of late, demand is picking up from Indian Railways, Indian Army, post offices, banks, nano housing scheme of the Tata Group and other players. As per the management, Indian Railways is planning to construct 1.0mn homes for its 1.4mn employees over a period of seven years. Indian Army requires 20-25,000 houses, out of which 3,000-4,000 are monolithic, and Sintex is the only company that has accreditation with three army offices out of nine. Under the vibrant Gujarat scheme, the company had signed a MoU with Gujarat government to construct monolithic homes costing Rs25bn, thus providing future visibility for such orders. The company has started focusing more on winning orders from housing boards as compared to central schemes under JNNURM, which might improve working capital as receivable days from housing boards are lower by around 30 days compared to central government schemes.

Exhibit 19: Order book history of monolithic division

Source: Company

Technology sharing and shifting manufacturing base – a key for custom moulding

Custom moulding division (CMD) contributed 41.6% to consolidated sales and 35.2% to consolidated EBITDA in FY11. Custom moulding division comprises domestic custom moulding, Wausaukee Inc, Nief Plastic S.A. and Bright Auto Plast contributing 8.9%, 4.7%, 21.9% and 6.1% to consolidated sales in FY11. The global composites industry touched a market size of $17.7bn in 2010 and despite a sluggish economy, its growth rate was 10.3%. As per Composite World, the composite industry would touch $27.4bn, showing 7.8% CAGR, by 2016. Developed countries like Germany, US, Europe and Japan are biggest end users of composites globally. Increasing penetration of composites into various market segments would drive this growth. In the transportation sector, composites have a 3.6% share, based on monetary terms, compared to a 68% share in the marine sector. In the construction sector, composites occupy 7% of the market; in aerospace 10% and in wind energy 38%. These figures plainly indicate that there is vast growth potential for composites. The sluggish automotive, construction, electronics and consumer goods markets are expected to bounce back. Wind energy and aerospace are expected to remain the most attractive growth markets in North America and Europe.

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Rising population, infrastructure needs and the green movement are a few of the factors that will drive composite growth to new horizons. Developing countries, including India, would foster strong growth in composite manufacturing on the back of increased OEMs’ production and also as they begin to play larger roles in the global economy. With four acquisitions and strong domestic presence, Sintex has emerged as a prominent global manufacturer of composite and the drive for innovation in this space would benefit the company’s division. The shifting of composite production base to emerging countries also benefits the company. Domestic custom moulding has shown 18.7% CAGR over FY06-11 to Rs4,000mn and we expect it grow by 5% on a higher base over FY11-13. On the back of strong outsourcing, its acquired subsidiary should grow by 10.4% as a result its consolidated custom moulding division (CMD) should grow by 9.3% to Rs22,255mn over FY11-13 and contribute 21% to incremental revenue over same period.

Exhibit 20: Revenue - standalone Exhibit 21: Revenue - inorganic Exhibit 22: Revenue - total CMD


Domestic custom moulding – stable growth on the back of government-focused programmes

Custom moulding division, which contributed 8.9% to FY11 consolidated sales, caters mainly to the requirement of electric accessories and automobile component manufacturers. The company manufactures high/low voltage electrical accessories for large power projects such as meter boxes, arms, trippers, polymeric insulators, cable trays, loop-in loop-out boxes catering to state electricity boards and private power manufacturers. Meter boxes and high voltages accessories account for almost 50% of domestic custom moulding revenue. With a surge in power generation capacity, India needs huge investment in transmission and distribution (T&D) to evacuate power and reduce AT&C losses. Currently, the company is deriving its revenue from Tamil Nadu, Andhra Pradesh and Chattisgarh electricity boards among others. With the government programmes like Accelerated Power Development and Reform Project (APDRP) and Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), the electrical components business in India has huge potential. Automobile segment should witness an increase in demand from preference for replacement of metallic parts with lightweight custom-moulded material. Domestic custom moulding has shown 18.7% CAGR over FY06-11 to Rs4,000mn and we expect it grow by 5% over FY11-13 on higher base. Wausaukee acquisition leads to front-end entry into US market

Sintex acquired 81% stake (100% now) in Wausaukee in June 2007 for $20.5mn at a valuation of 7.9x EV/EBIDTA and 0.55x one-year forward sales to get a front-end entry into the US market for its products and access to superior technology. The company used the Wausaukee platform to acquire 100% stake in Nero Plastics for $4.7mn in December 2007. Wausaukee acquired the company at 0.23x sales and 3.3x one-year forward EV/EBIDTA. Nero was a competitor of Wausaukee in the US market and in order to gain market share, Sintex acquired Nero via Wausaukee. Wausaukee is a US-based company operating out of Wisconsin and has four manufacturing locations in the US. It is a leading manufacturer of highly-engineered composite components for OEMs in construction equipment, agricultural equipment, mass transportation, wind energy, medical and security imaging, commercial site furnishings, therapeutic systems, corrosion-resistant materials and recreation sectors.

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Growth bounces back

Wausaukee plans to become a leading player in North America’s wind energy supply chain. The company set up a dedicated facility to manufacture 600-800 nacelles per year. In wind turbine business, the company was earlier largely dependent only on Acciona and Clipper, which were relatively smaller companies. However, following the global meltdown, the company was not able to register much progress in this venture and as a result, net sales declined by 25.6% in FY10. After that the company did a lot of prototyping for other customers like Nordex, GE, and Siemens. The company also added the bus rapid transport system to its list and continues getting new orders from existing customers like Alstom, Siemens, Kinkisharyo etc and as a result, revenue bounced back to pre-crisis level of Rs2,090mn in FY11. Although the US wind energy market weakened in 2010, there is still considerable growth potential despite competition from natural gas besides grid-connectivity problems. The lack of robust, long-term federal targets for renewable energy is unfortunate, but political support for it is expected going forward. And even in highly developed wind markets, such as Germany, the penetration of composite compared to the potential remains low, at only 30%. We expect revenue to show 6% CAGR over FY11-13E to Rs2,348mn. Nief Plastic - a feather in its cap

Sintex acquired 100% stake in Nief Plastic S.A. in December 2007 for Є43mn. The company has 11 manufacturing facilities, seven in France and one each in Hungary, Slovakia, Tunisia and Morocco. It has a strong presence in the high quality insert moulding and bipolymer injection technology. Nief Plastic manufactures a wide variety of plastic products for use in the automotive, electrical and electronics, aeronautics and defence, household appliances and building industries and is serving international clients like Schneider, ABB, Alstom, Peugeot, Valeo, Faurecia etc. Last year, the automotive segment contributed 40%, electric segment 30%, aerospace and defence 20% while others contributed 10% to sales. Key idea behind the acquisition was to have access to Nief’s manufacturing base, deploy these manufacturing technologies in India, and enter European plastic component market by accessing Nief’s existing customer base. Nief has shown 23.9% growth over FY10-11 and we expect 8.5% CAGR over FY11-13E. A part of Nief’s revenue would be captured in Bright Auto Plast on account of higher outsourcing. . Increased use of composite in transportation segment to benefit Nief, Bright Auto Plast

Rising fuel prices, changing Corporate Average Fuel Economy (CAFE) standards, high crude oil prices, rapid growth in developing countries, focus on sustainability and increasing consumer demand for alternate energy-driven vehicles seem to signal a new and different automotive industry favouring increased use of composite in cars and trucks over the next couple of decade. Composites provide the best method of decreasing vehicle weight and increasing fuel efficiency. This results in not only part-by-part weight loss, but also the ripple effect. A lighter chassis, for example, requires a smaller engine and a less robust braking system. Indeed, a 2007 report issued by engineering and consulting firm Ricardo (West Sussex, U.K.) noted that in a small car, a 20% weight loss increases fuel efficiency by 8.4% and if the engine of that small car is downsized, fuel efficiency increases 13%. Nief and Bright Auto Plast, highly dependent on the automobile industry, would benefit from increased usage of composite in the industry. Outsourcing to Indian plant providing healthy visibility

Currently, Sintex, through its various subsidiaries, derives around 80% of its international custom moulding revenue from 38 clients out of which 30 are Fortune 500 clients. Sintex is strongly focusing on outsourcing its international business as employee expenses are higher by 28-32% at Nief and by 35-38% at Wausaukee as against 9-10% at Bright Auto Plast and 3.8% at Sintex (standalone) thereby leaving a greater scope for improvement in margins. Schneider, a key client of Nief, has started meeting the requirement of its global subsidiaries from Bright Auto Plast, India. Bright Auto Plast has set up facility at Chennai dedicated for Schneider. Currently, Sintex has started outsourcing with only 2-3 customers, thereby leaving greater scope with other clients. We expect a strong synergy between Nief and Bright Auto Plast as both are present in the automotive segment.



Bright Auto Plast to lead outsourcing strategy

In December 2007, Bright Auto Plast, a subsidiary of Sintex, acquired five manufacturing plants of the automotive plastics business division of Bright Brothers, located at Pune, Sohna, Chennai, Pithampur and Nashik for Rs1,490mn. All plants are strategically located closed to automobile manufacturing hubs. The strategic rationale behind the acquisition was to get access to automotive composite business, production facilities and also access to India’s top automobile manufacturers including Maruti Suzuki, M&M, Honda, Hyundai Motors, Tata Motors, General Motors, Force Motors, TVS Motors, Honda Scooters etc, and increasing outsourcing for clients of Nief and Wausaukee. Product profile of the company includes exterior systems like front and rear bumper, systems, green house systems, body side systems, interior systems like cockpit, overhead systems, seating systems, and under-the-hood products like air dam, radiator of fan, and air intake manifold. On the back of strong synergy between Nief and Bright Auto Plast, and higher outsourcing, the company should show a healthy 20% CAGR over FY11-13. Textiles is an established business with a steady cash flow

Textiles is the oldest business of Sintex and it has the facility to manufacture 29mn metres of structured fabrics. The company has a tie-up with Italian fashion house Calcliin. On the back of major capex done in FY09-11 and higher cotton prices, net sales increased by 27.2% in FY11. We don’t foresee any further capex in FY12 and in addition with the revival of overseas demand, we expect the textile division to report a steady cash flow over FY12-13. Although cotton prices have declined by 25% from their peak in March 2011, on account of strong volume growth, the textile division should report a growth of 5% over FY11-13, at Rs4,823mn, and the profitability should bounce back in FY12-13. Lower cotton prices would reduce its inventory cost and thereby improve the return ratios. Strong revenue growth and healthy balance sheet to cushion impact of margin decline

We expect building products division’s margin to decline by 114bps over FY11-13 on 170bps drop in the margin in monolithic construction division due to emerging competition. Operating margin of custom moulding division should improve by 40bps over FY11-13 to 15.3%. On account of the highest contribution of building products division to consolidated sales at 56.3%, overall EBITDA margin would decline by 87bps over FY11-13 and should erode the RoCE by 0.89%, but it would be more than compensated by sales growth and FCCB redemption, which would increase the RoCE by 2.03% and 1.36%, respectively, over the same period. After accounting for lower margin, the RoCE should improve by 2.49% to 16.1% over FY11-13. Operating margin of custom moulding division should improve by 40bps over FY11-13 to 15.3% on the back of better synergies among acquired companies, increased outsourcing and revival of overseas subsidiaries (which would see their margin rising by 100bps over FY11-13). Higher margin of 40bps would increase RoCE by 10bps. This would provide some cushion to the company’s consolidated margin which would be under pressure due to emerging competition in the monolithic construction segment. On account of revival in the business scenario and outsourcing, operating margin of Wausaukee should improve by 1% to 9% over FY11-13. Nief has decreased dependence on the automobile sector from 60% to 40%, reduced production at its high-cost France plant and is increasing output from low-cost plants in Hungary, Slovakia, Tunisia and Morocco. Also, it has taken various cost-cutting measures. We expect its operating margin to improve by 0.5% per year in FY12 and FY13. Due to higher outsourcing and more value added products, operating margin of Bright Auto Plast should improve by 0.5% each in FY12 and FY13.

Monolithic division’s margin to remain higher than peers on the back of strong order book

Sintex uses in-house plastic formwork while L&T uses aluminum-based formwork and imports it from Maivan, Taiwan and the US. Aluminum-based formwork is expensive, which lowers operating margin in the case of small and medium projects, but for a large project it is economical as it can be re-used 200-300 times. Plastic formwork is cheaper and can be used 80-100 times and is the most effective for a medium-sized project comprising 60-100 buildings. Sintex has an in-house team of architects, civil engineers and support staff which designs monolithic structures, plastic formwork and also manufactures plastic formwork. Plastic or aluminum formworks are not available in India and competitors, including L&T, have to outsource their requirement of formworks as well as related architectural designs, which increases costs by 4-8%.



For Sintex, the cost of plastic formwork is very low due to 70,000 to 80,000 tonne of plastic processed in-house for various products and the requirement for formwork is also less than 200 tonne. Also, formwork recycling is done in its own plants leading to a significant cost advantage.

For any monolithic project, the raw materials i.e. cement and steel, account for 35-40% of the costs, labour 7-9%, formwork 5-8%, site management expenses 12-15% while the rest is gross margin. From its vast experience supported by a strong architectural and execution team, the company has reduced its raw material requirement. For example, it constructs walls having a thickness of just four inch as against six inch in the brick and mortar construction sector without compromising on the strength. Raw material requirement is lower by 12.3% in a RCC wall via the monolithic route compared to a masonry wall under the brick and mortar construction method.

Exhibit 23: Comparison of raw material cost for masonry wall and RCC wall

Sr. No. Item RCC cost

L B D/T Qty Unit Rate Amount (Rs)

1 M20 Concrete 3 3 0.1 0.9 CMT 3,200 2,880

2 Reinforcement @ 50 K.g. per CMT 42 K. g. 45 1,890

3 Shuttering (2 Sides) 3 3 3 18.1 Smt. 140 2,530

Total 7,300

Brick masonry wall cost mm thick - traditional

Sr. No. Item Masonry cost

1 Masonry 3 3 0.23 2.07 CMT 2,700 5,590

2 Internal Plaster 12 mm 1 3 3 9 Smt. 125 1,125

3 External Plaster 12 mm 1 3 3 9 Smt. 165 1,485

Total 8,200

% High 12.3

Source: Company

In addition, the company is in the process of reducing cement requirement by blending specialty chemicals which would maintain strength of the construction but reduce raw material costs. Currently, the monolithic concept is very well understood in the market as well as by various government authorities. Normal (brick and mortar) construction players like Ahluwalia Constructions, BL Kashyap and Nagarjuna Construction etc are operating with an EBITDA margin of 8-13% as against 18.5-19% enjoyed by the monolithic division of Sintex Industries. On account of strong demand and higher margins, many new players like Embassy Construction, Ahluwalia Construction, BL Kashyap, Billimoria Construction etc are entering the monolithic construction business. On account of tighter control over raw materials, in-house formwork and blending technique, Sintex has been able to increase its operating margin gradually to 19.2% in FY11. In order to increase order execution capability, Sintex acquired a 30% stake in Durha Constructions, a privately held civil and mechanical sub-contractor, for Rs420mn in June 2010. As monolithic business has reached a sufficient scale, the company may get savings from bulk purchases of steel and cement. We believe the rivals have to pass through a learning curve to assimilate technology and give strong competition to Sintex. Competition is tough in small projects. Sintex was able to increase its average project size from Rs150-200mn in FY08 to Rs700mn in FY11, thereby achieving economies of scale, better utilisation of formwork and reduced costs. In addition, we believe the opportunity in the monolithic business is large and that every player would have a share in it. The company had a strong order book of Rs30bn as of end June 2011, to be executed over next 22 months. As per the management, operating margin in these orders is in line with its historical margin of 18.5-19%. On account of this, we expect Sintex to maintain its operating margin at a higher level of 19% in FY12. We expect operating margin to decline by 170bps to 17.5% in FY13E because of emerging competition. In the long run, its margin would decline to 13-15% and should stabilise at that level, but it would remain higher compared to peers.

In the pre-fabricated structures business, the biggest entry barrier is pre-qualification as a new player has to take approvals from state governments, which takes around one or two years. Sintex has been pre-qualified in 17 states, of which it is active in 14 states. A pre-fabricated structure maker can serve clients only within an area of 1,500 km as most of the structures are manufactured at the company’s plant and transported to the client’s site through a truck, making it unviable to service long-distance customers. Sintex has five plants and is setting up two more so as to cover every nook and corner of India.



In the pre-fabricated construction business, raw material and bought-out items cost 25-30% of sales, making of the kit at the plant costs 20% while logistics and labour costs account for 20-25% of sales. A team of 4-5 people loads the prefabricated structure and supporting items on to a truck, travels to the project site in four-six days and executes the project in the next three days. The company maintains stringent design specifications so that its execution team doesn’t have to return to the plant or ask for further help, thereby increasing transportation and labour costs. The execution team is able to do three installations in a month. Any new entrant has to go through a learning curve and because of these hurdles the number of installations would be limited to 2-2.5, which would exert pressure on margins. We expect Sintex to derive logistics benefit from its new plants, thereby mitigating pressure on margins, if any. Building products division’s operating margin improved to 18.3% in FY11 from 15.4% in FY06 and we expect it to report 18.2% margin in FY12 and 17.2% in FY13.

Financials

On the back of organic and inorganic growth, Sintex’s net sales have shown 39.3% CAGR over FY06-11 to Rs44,837mn and we expect 17.6% CAGR to Rs61,998mn over FY11-13. Building products division has shown 38% CAGR over FY06-11 and we expect 26.6% CAGR over FY11-13 on the back of healthy order book of monolithic construction business, at Rs30bn, to be executed over a period of 22 months and 22% growth in pre-fab construction on the back of government’s continued focus on social spending. Following higher outsourcing and revival in overseas subsidiaries, the custom moulding division should show 9.3% CAGR over FY11-13 to Rs22,255mn. Of the total incremental revenue of Rs17.2bn over the same period, 76.4% would be contributed by building products division, particularly monolithic construction (Rs10.1bn) on buoyant order book and strong execution, custom moulding division would contribute 21% to incremental revenue and the balance would be contributed by textile division. We expect building products division to contribute 56.3% to consolidated sales in FY13, custom moulding division 35.9% and textile division to contribute a mere 7.8%. Diversified revenue stream would provide hedge against cyclicality in any particular industry segment or geography.

Exhibit 24: Revenue growth Exhibit 25: Break-up of revenue growth

Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

Strong revenue growth and healthy balance sheet to outpace impact of margin decline

Sintex enjoys operating margin of 18.5-19% in the monolithic construction business as against brick and mortar construction margin of 8-13%. We believe the new players have to pass through a learning curve and in addition the margin on current order book of Rs30bn is in line with historical margin of 18.5-19%. With an established relationship with state and central government bodies, strong order book, in-house facilities and strong execution skill, the margins in monolithic segment may remain at a higher level of 19% in FY12 (as against 19.2% in FY11). With emerging competition, the operating margin should decline by 150bps to 17.5% in FY13, although it would be higher than peers. Pre-fabricated business is strongest business of the company and its margin would remain firm due to strong pre-qualification, pan India presence and buoyant order execution. We have considered pre-fab margin of 21%/ 20% in FY12/13 against 18%/21% in FY10/11. Following the margin pressure in monolithic construction, the margin of building products division should decline by 114bps over FY11-13. As the building products division’s contribution is highest at 56.3% to consolidate sales, overall EBITDA margin would decline by 87bps over FY11-13. Currently, Sintex has started outsourcing with only 2-3 customers, thereby leaving a greater scope with other clients.

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We expect strong synergy between Nief and Bright Auto Plast as both are present in the automotive segment. On account of outsourcing and revival of international subsidiaries, we expect consolidated margin in the custom moulding segment to increase by 40bps to 15.3% over FY11-FY13. This would provide some cushion to the company’s consolidated margin which would be under pressure due to emerging competition in the monolithic segment. On account of strong cash position of Rs9,861mn in FY11 and buoyant operating free cash flow of Rs4.3bn, we don’t expect any increase in debt level of the company and expect redemption of FCCBs due in March 2013. On account of lower interest outflow, net profit should grow at 19% outpacing net sales growth of 17.6%. We expect the company to report EPS of Rs20.40 and Rs23.80 in FY12 and FY13, up 21.1% and 17%, respectively.

During FY10, the company deposited Rs3.5-4.0bn as security in an escrow account to scout for inorganic growth opportunities which increased its loan and advances to Rs8.2bn from Rs3.8bn and hence, net working capital as a percentage of sales reached the highest level of 41.7% in FY10, decreasing RoCE to 8.3% from 12.7% in FY08. In addition, the company ventured into non-core businesses of oil and gas exploration and power generation. The management has taken care of that by divesting stake in non-core businesses and improving working capital discipline. Out of $225 mn FCCB proceeds, $165mn has been unutilised, depressing the return ratios, and we expect redemption of FCCBs by March 2013. On account of this, the RoCE should improve from 13.6% in FY11 to 16.1% in FY13. On account of higher cash level in FY11, strong cash flow and redemption of FCCBs, the debt-equity ratio should decline to 0.5x in FY13 from 1.2x in FY11 and as a result, the RoE should be low at 19.9% in FY13 compared to 21% in FY11.

Exhibit 26: Margins and return ratios


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Key concerns

• Sintex, with approval from High Court of Gujarat for its Scheme of Arrangement in 2008-09, had created International Business Development Reserve Account (IBDR). The company transferred Rs2bn from share premium account to IBDR in FY08 and adjusted its IBDR account with Rs1,307mn in FY09 and Rs105mn in FY10 against various expenses (acquisition and restructuring) on its subsidiaries, thereby overstating profit and understating securities premium account during the said period. While this was done with the court’s approval, it is not in accordance with accounting conventions. As FY10 closing balance in IBDR account is Rs587.4mn, any repeat of such activity in future (although unlikely) would lead to corporate governance issue.

Exhibit 27: Details of International Business Development Reserve Account

Rsmn FY09 FY10 FY11

Securities Premium Reserve

Balance as per last Balance Sheet 8,851.2 6,374.8 6,734.8

Less: Expenses relating to FCCB/Debenture issue 116.4

Less: Transferred to IBDR 2,000.0

Ending Balance 6,734.8

International Business Development Reserve ("IBDR") Account

Balance as per last Balance Sheet 0 692.7 587.4

Add: Transferred from Securities Premium Reserve 2,000.0 0

Less : Adjusted against investment in a subsidiary 1,307.3 105.3

Ending Balance 692.7 587.4

Source: Nirmal Bang Institutional Equities Research, Company

• On account of a series of acquisitions over FY07-09, the company has Rs2,190mn as goodwill on its consolidated balance sheet. Amortisation of goodwill as per Indian GAAP over five years would reduce its profit by Rs438mn i.e. by 6.8% to Rs6,025mn and by RoCE by 48bps to 15.6% in FY13E. After adjusting for goodwill, the RoCE should improve by 295bps over FY11-13. The stock is attractively trading at its goodwill-adjusted median PE is 9.5. We expect the stock to trade at higher end (PE band 8x-14x) of the multiple on the back of strong operating free cash flow of Rs4.3bn and RoCE improvement.

• Building products division contributed 48.6% to consolidated FY11 sales and out of that monolithic construction contributed 29.8% and pre-fab construction 11.8%. We expect building products division to be the main driver of consolidated growth over FY11-13. This division operated at a higher margin of 18.3% in FY11 and any sharp pressure on margin would depress the return ratios significantly, as it would contribute- 56.3%, the highest, to consolidated sales by FY13 and 76.4% towards incremental sales over FY11-13. If operating margin of monolithic construction decreases by one percentage point, consolidated EPS would reduce by 2.7% and the RoCE would fall by 40bps to 15.7% in FY13. Similarly, for every percentage drop in pre-fab construction margin, EPS would decline by 0.9% and the RoCE by 13bps in FY13. However, on account of high margin buoyant order book, excellent execution capability, in-house formwork facilities and a good relationship with government authorities, we don’t expect operating margin of monolithic construction division to decline in FY12 and the drop would be limited to 150bps to 17.5% in FY13.

Exhibit 28: Scenario analysis – FY13

Base Case

Monolithic margin (%) 18.5 17.5 16.5 15.5 14.5

EPS 24.5 23.8 23.2 22.5 21.9

Change (%) 2.7 0.0 (2.7) (5.5) (8.2)

RoCE (%) 16.5 16.1 15.7 15.3 14.9

Pre-fab margin (%) 21.0 20.0 19.0 18.0 17.0

EPS 24.1 23.8 23.6 23.4 23.2

Change (%) 0.9 0.0 (0.9) (1.8) (2.7)

RoCE (%) 16.3 16.1 16.0 15.9 15.7

Source: Nirmal Bang Institutional Equities Research

• Successful integration of overseas businesses and improvement in operational efficiency of acquired entities would be a key challenge



Company profile

Sintex Industries is one of the leading manufacturers of plastic products and structured yarn-dyed textiles in India. It manufactures a wide range of plastic products at its eight facilities across the country, which includes pre-fabricated structures, industrial custom moulding products, FRP products and water storage tanks. The plastic division’s manufacturing facilities are located at Kalol, Kolkata, Daman, Bangalore, Nagpur, Baddi, Salem and Bhachaua. At its manufacturing facility in Kalol, Sintex has developed the capability to manufacture plastics using 12 different manufacturing processes which enables it to produce the entire range of products at a single location. Sintex also has a textile division which focuses on niche products and specialises in men’s structured shirting for the premium fashion industry. The textiles division is located primarily in Kalol. It has constantly innovated in the plastics space and identified newer uses for it. Post commoditisation of plastic tanks, it has found out newer uses for plastic. It extended the use of plastic sheets by venturing into pre-fab construction in 2000 and into monolithic construction for mass housing projects in FY08, garnering a strong order book of Rs.29bn. Visualising the shift from metal to composite globally, it also ventured into the composite business and in a very short span of time achieved the leadership position in India. It is planning to be among top 10 composite manufacturers in the world in the next five years.

Exhibit 29: Overview of Sintex’s principal business lines – FY11


Sintex Industries Sales Rs44.8bn

Plastic Division Rs40.43bn (90.2%)

Tanks Rs1.98bn

(4.4%)

Textiles Rs4.37bn (9.8%)

Prefabs Rs6.4bn (14.4%)

Custom Moulding

Rs4bn (8.9%)

Zeppelin

Mobile Electrical Auto Prefab

Construction

Nief Plastic, France

Rs9.8bn (21.9%) Bright Brothers, India

Rs2.75bn (6.1%)

Wausaukee Composite, USA

Rs2.09bn (4.7%)

Nero Plastic, USA

Monolithic Construction

Rs13.4bn (29.8%)

Custom Moulding Inorganic

Rs14.6bn (32.7%)

Geiger Technik GmbH

Germany

(Written off)

Digvijay Communications and

Networks

Building products division Sales: Rs21.8bn (48.6%),

EBITDA Rs4bn, margin 18.3% Sales CAGR 26.6% FY11-13

Custom moulding division Sales: Rs18.6bn (41.6%),

EBITDA Rs2.8bn, margin 14.9% Sales CAGR 9.3% FY11-13

Durha

Construction



The company operates in three segments - building products division, custom moulding division and textile division. Building products division comprises tank, pre-fab construction and monolithic division, accounting for 48.6% of consolidated sales and 50.5% of consolidated EBITDA in FY11. Custom moulding comprises domestic custom moulding division which focuses on electrical and automotive segments. Acquisition of companies overseas like Nief, Wausaukee and Bright AutoPlast contributed 41.6% to consolidated sales and 35.2% to EBITDA in FY11. Its textile division contributed 9.8% to consolidated sales and 13.3% to EBITDA in FY11, focusing on high value and niche cotton fabric segment with capacity of 29mn metres. The textile division enjoys very high margin of 24-28%. The division’s contribution would be miniscule in the near future but with a depreciated plant, it should keep the cash register rolling.

A diversified revenue steam would provide a hedge against cyclicality in any particular industry segment or geography. This would also result in relatively low volatility in income, allowing Sintex to more effectively plan and invest in the growing sectors. Most of Sintex’s plants are located in the tax-free zones at Kalol, Baddi, Bachau, and Daman where the effective tax rate was around 24.8% in FY11.

Inorganic growth a key strategic focus

Sintex and its subsidiaries have acquired seven companies in last five years. In May 2006, it acquired a 74% equity stake in Zeppelin Mobile Systems India (ZMSIL). In June 2007, it acquired a 81% stake in Wausaukee Composites Inc. (WCI). In December 2007, Bright Auto Plast, a subsidiary of Sintex, acquired five manufacturing plants of the automotive plastics business division of Bright Brothers located at Pune, Sona, Chennai, Pithampur and Nashik. In October 2007, Sintex acquired a 100% stake in Nief Plastic S.A. and in December 2007, Wausaukee acquired a 100% stake in Nero Plastics Inc. In June 2008, Sintex, through Zeppelin Mobile, acquired Digvijay Communications and Networks Private Limited (DCNPL) and in July 2008 it tried to acquire 90% stake in Geiger Technik GmbH Germany, through wholly-owned subsidiary Sintex Holdings B.V., Netherlands. However, following the bankruptcy of Geiger, the company has written off initial payment of $10mn made towards the acquisition.

These acquisitions have enabled Sintex to access a number of new technological processes. The manufacturing facilities acquired by Bright Auto Plast specialise in the manufacture of injection-moulded plastic components for the automotive industry such as exterior systems, interior systems and under-the-hood systems. Similarly, Nief Plastic has access to technology for high quality insertion moulding. The acquisitions also provide Sintex with access to new markets, including the US and the European composite market, apart from high-end customers such as Phillips Medical Systems, Siemens Medical Solutions, Alstom Transportation, G.E. Medical Systems, Idea Mobile, Reliance Telecom, Hutchison, Quipo Telecom and Bharti Airtel, BMW, VW, Daimler, Audi, Opel and Porsche.

Sintex would be able to enjoy labour arbitrage by outsourcing orders to Indian operations. In addition, because of the small size these companies were paying a higher interest rate on loans. Sintex would now use its strong balance sheet to reduce the cost of debt of these companies.

Exhibit 30: List of acquisitions

Company Acquisition date

Product profile Acquisition value

(Rsmn)

P/S (x)

EV/EBIDTA (x)

Zeppelin, India May 2006 BT shelters, mobile hospitals, refrigerated vans 180 0.14 1.2

Wausaukee Composites, US June 2007 Medical imaging, wind energy, off-road vehicles 872 0.55 7.9

Nief Plastics, France October 2007 Automotive electrical accessories, aerospace, defence & mass transit systems 2,851 0.31 3.5

Nero Plastics, US December 2007 Heavy equipment mining, heavy truck, medical, mass transit etc 203 0.23 3.3

Bright Auto Plast, India December 2007 Automotive electrical accessories 1490 1.17 7.3

Digvijay Communications June 2008 Infrastructure development, installation and commissioning of towers and BT structures and tower manufacturing 540 1.35 4.9

Geiger Technik GmbH Germany

July 2008 Coolant and brake fluid reservoir, injection moulding with multilayer extrusion blow moulding process and latest joining and welding, assembly $10 NA NA

Durha Construction December 2010 Construction 420

Note: One-year forward multiples




Exhibit 31: Revenue, EBITDA margin estimates

Y/E March FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY10 FY11 FY12E FY13E FY09 FY10 FY11 FY12E FY13E

(Rsmn) Sales (Rsmn) Growth (%) Common sized (%)

Tanks 1,100 1,320 1,558 1,410 1,620 1,980 2,119 2,267 14.9 22.2 7.0 7.0 4.7 5.0 4.4 4.1 3.7

Prefabs 3,260 4,230 5,339 5,580 4,300 5,290 6,454 7,874 (22.9) 23.0 22.0 22.0 18.5 13.1 11.8 12.4 12.7

Zeppelin 530 1,273 1,110 1,340 1,160 1,218 1,279 20.7 (13.4) 5.0 5.0 3.7 4.1 2.6 2.3 2.1

Monolithic 2,102 4,520 7,190 13,360 17,500 23,500 59.1 85.8 31.0 34.3 15.0 22.0 29.8 33.5 37.9

Building Products 4,360 6,080 10,272 12,620 14,450 21,790 27,290 34,919 14.5 50.8 25.2 28.0 41.8 44.2 48.6 52.3 56.3

Custom Molding – Domestic 1,700 2,460 4,119 3,470 3,540 4,000 4,200 4,410 2.0 13.0 5.0 5.0 11.5 10.8 8.9 8.0 7.1

Wausaukee Composites, US 1,017 1,978 1,471 2,090 2,215 2,348 (25.6) 42.1 6.0 6.0 6.6 4.5 4.7 4.2 3.8

Bright Auto Plast 404 1,270 1,910 2,750 3,300 3,960 50.4 44.0 20.0 20.0 4.2 5.8 6.1 6.3 6.4

Nief 3,489 7,157 7,912 9,800 10,584 11,537 10.5 23.9 8.0 9.0 23.7 24.2 21.9 20.3 18.6

Total Custom Moulding 1,700 2,460 9,029 13,875 14,833 18,640 20,299 22,255 6.9 25.7 8.9 9.6 46.0 45.3 41.6 38.9 35.9

Textiles 2,480 3,160 3,440 3,680 3,440 4,375 4,594 4,823 (6.5) 27.2 5.0 5.0 12.2 10.5 9.8 8.8 7.8

Total Revenue 8,540 11,700 22,741 30,175 32,723 44,805 52,184 61,998 8.4 36.9 16.5 18.8 100 100 100 100 100

Adjustment 10 (70) 14 464 93 32 - -

Reported Net Sales 8,550 11,631 22,755 30,639 32,816 44,837 52,184 61,998

FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY10 FY11 FY12E FY13E FY09 FY10 FY11 FY12E FY13E

EBIDTA (Rsmn) EBIDTA (%)

Common sized (%)

Tanks 88 132 140 127 162 238 212 227 10.0 12.0 10.0 10.0 2.3 2.8 3.0 2.3 2.1

Prefabs 583 890 1,081 1,116 774 1,111 1,355 1,575 18.0 21.0 21.0 20.0 20.5 13.4 14.0 14.7 14.7

Zeppelin 56 153 200 161 81 85 90 12.0 7.0 7.0 7.0 3.7 2.8 1.0 0.9 0.8

Monolithic 399 836 1,366 2,565 3,325 4,113 19.0 19.2 19.0 17.5 15.4 23.7 32.4 36.0 38.4

Building Products 671 1,078 1,773 2,279 2,463 3,995 4,977 6,003 17.0 18.3 18.2 17.2 41.9 42.7 50.5 53.9 56.0

Custom Molding Domestic 311 515 1,083 763 814 960 966 1,014 23.0 24.0 23.0 23.0 14.0 14.1 12.1 10.5 9.5

Wausaukee 2 30 138 147 167 184 211 10.0 8.0 8.3 9.0 2.5 2.6 2.1 2.0 2.0

Bright Auto Plast 80 203 267 440 545 673 14.0 16.0 16.5 17.0 3.7 4.6 5.6 5.9 6.3

Nief 298 823 949 1,215 1,323 1,500 12.0 12.4 12.5 13.0 15.1 16.5 15.4 14.3 14.0

Total Custom Moulding 311 517 1,491 1,927 2,177 2,782 3,017 3,399 14.7 14.9 14.9 15.3 35.4 37.8 35.2 32.7 31.7

Textiles 719 910 965 1,030 963 1,050 1,148 1,230 28.0 24.0 25.0 25.5 18.9 16.7 13.3 12.4 11.5

Total EBIDTA 719 2,561 4,382 5,436 5,764 7,908 9,228 10,722 17.6 17.6 17.7 17.3 100 100 100 100 100

Adjustment 728 (334) (555) (936) (759) 247 (33) (18)

Reported EBIDTA 1,447 2,227 3,827 4,500 5,005 8,155 9,262 10,739 15.3 18.2 17.7 17.3




Financials (Consolidated)

Exhibit 32: Income statement

Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E

Net Sales 30,639 32,816 44,837 52,184 61,998

% growth 34.6 7.1 36.6 16.4 18.8

Raw Material 16,152 17,985 26,306 30,346 36,317

Staff 4,142 4,389 4,613 4,436 5,270

Any other 3,925 3,306 3,516 5,114 6,076

Other manufacturing 1,920 2,132 2,248 3,027 3,596

Total Expenditure 26,139 27,811 36,682 42,922 51,259

EBITDA 4,500 5,005 8,155 9,262 10,739

% growth 17.6 11.2 62.9 13.6 16.0

EBITDA margin (%) 14.7 15.3 18.2 17.7 17.3

Other income 1,563 1,254 518 887 744

Interest 820 731 1,089 1,110 1,020

Gross Profit 5,244 5,528 7,583 9,039 10,463

% growth 38.6 5.4 37.2 19.2 15.7

Depreciation 1,144 1,445 1,491 1,675 1,846

Profit Before Tax 4,100 4,083 6,092 7,365 8,617

% growth 35.8 (0.4) 49.2 20.9 17.0

Tax 826 772 1,508 1,841 2,154

Effective tax rate (%) 20.1 18.9 24.8 25.0 25.0

Net Profit 3,274 3,311 4,584 5,523 6,463

% growth 41.0 1.1 38.4 20.5 17.0

Minority Interest 23 21 3 - -

PAT after Minority Interest 3,251 3,290 4,600 5,523 6,463

Extraordinaire 157 75 - - -

Reported Net Profit 3,095 3,215 4,600 5,523 6,463

% growth 40.7 3.9 43.1 20.1 17.0


Exhibit 34: Balance Sheet


Equity 271 271 271 271 271

Reserves 16,778 19,198 23,744 29,062 35,319

Net worth 17,049 19,469 24,015 29,333 35,590

Minority Int 263 190 - - -

Short-term Loans 514 5,582 7,016 7,016 7,016

Long-term Loans 22,450 20,722 20,722 20,722 10,597

Total Loans 22,964 26,303 27,738 27,738 17,613

Deferred Tax Liability 1,420 1,693 2,057 2,573 3,176

Liabilities 41,696 47,655 53,810 59,644 56,379

Gross Block 23,788 25,581 33,297 37,220 41,020

Depreciation 6,366 7,746 9,237 10,912 12,758

Net Block 17,422 17,834 24,060 26,308 28,262

Capital work-in-progress 2,377 1,716 1,423 800 500

Long-term Investments 117 247 247 247 247

Goodwill - ex amortizatoin 2,198 2,665 2,190 2,190 2,190

Inventories 3,771 3,411 3,770 4,173 4,983

Debtors 8,094 10,121 14,229 17,787 21,132

Cash 11,685 9,295 9,861 10,982 3,150

Liquid Investments 1,702 2,223 3,528 3,528 3,528

Other Current assets 3,676 8,156 5,147 6,001 7,130

Total Current assets 28,928 33,207 36,535 42,471 39,923

Creditors 5,048 3,947 6,114 7,154 8,543

Other current liabilities 4,300 4,067 4,530 5,218 6,200

Total current liabilities 9,348 8,015 10,644 12,372 14,743

Net current assets 19,580 25,192 25,890 30,099 25,180

Total Assets 41,696 47,655 53,810 59,644 56,379


Exhibit 33:Cash flow


EBIT 3,356 3,560 6,664 7,587 8,893

(Inc.)/Dec in working capital (2,144) (8,001) (133) (3,088) (2,913)

Cash flow from operations 1,212 (4,441) 6,531 4,499 5,980

Other income 1,563 1,254 518 887 744

Depreciation 1,144 1,445 1,491 1,675 1,846

Deferred Liabilities 350 274 364 516 603

Interest paid (-) (820) (731) (1,089) (1,110) (1,020)

Tax paid (-) (826) (772) (1,508) (1,841) (2,154)

Dividends paid (-) (177) (191) (240) (205) (205)

Minority Int ( P&L) (23) (21) 16 - -

Extraordinary Items (157) (75) - - -

Net cash from operations 2,268 (3,259) 6,082 4,421 5,793

Capital expenditure (-) (6,719) (1,663) (6,948) (3,300) (3,500)

Net cash after capex (4,451) (4,922) (866) 1,121 2,293

Inc./(Dec.) in short-term borrowing (1,329) 5,068 1,434 - -

Inc./(dec.) in long-term borrowing 5,031 (1,728) - - (10,125)

Inc./(dec.) in borrowings 3,702 3,339 1,434 - (10,125)

(Inc.)/Dec. in investments (87) (130) - - -

Minority Int 60 (74) (190) - -

Equity issue/(Buyback) (1,261) (605) 187 (0) -

Cash from Financial Activities 2,414 2,531 1,432 (0) (10,125)

Opening cash 13,713 11,685 9,295 9,861 10,982

Closing cash 11,685 9,295 9,861 10,982 3,150

Change in cash (2,028) (2,390) 566 1,121 (7,832)


Exhibit 35:Key Ratios

Y/E March FY09 FY10 FY11 FY12E FY13E

Per share (Rs)

EPS 11.4 11.9 17.0 20.4 23.8

Book value 62.9 71.8 88.6 108.2 131.3

Valuation (x)

P/E 15.9 15.3 10.7 8.9 7.6

P/BV 2.9 2.5 2.0 1.7 1.4

EV/EBITDA 13.0 12.7 7.8 6.7 5.6

EV/Sales 1.9 1.9 1.4 1.2 1.0

Return Ratio (%)

RoCE 8.9 8.3 13.6 13.9 16.1

RoE 19.1 17.6 21.2 20.7 19.9

Margin Ratio (%)

EBITDA Margin 14.7 15.3 18.2 17.7 17.3

PBIT Margin 11.0 10.8 14.9 14.5 14.3

PBT Margin 13.4 12.4 13.6 14.1 13.9

PAT Margin 10.1 9.8 10.3 10.6 10.4

Turnover Ratio

Asset turnover ratio (x) 0.7 0.7 0.8 0.9 1.1

Avg collection period (days) 91 107 114 115 115

Avg payment period (days) 70 51 60 60 60

Solvency Ratio (x)

Debt-equity 1.3 1.4 1.2 0.9 0.5

Interest coverage ratio 4.1 4.9 6.1 6.8 8.7




Disclaimer Stock Ratings Absolute Returns

BUY > 15%

HOLD 0-15%

SELL < 0%

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