Sintex Industries Ltd Research Report By Systematix Shares

Sintex Industries Limited (Sintex) is one of the leading players in plastics and composites manufacturing space in India, with a presence also in high-end textile business. Sintex has 38 manufacturing facilities and a global footprint span across 9 countries and 4 continents. The demerger of the plastics and textiles businesses into two separate entities removes a long overhang of capital allocation worries and will unlock the value of each business division. Sintex has commenced commercial production of its spinning plant (Phase 1) of 3.3 lakhs spindles capacity and also in process of setting up additional capacity (Phase 2) of 3.0 lakhs spindles unit for blended yarn with a capex of Rs. 2100. With this expansion, we expect the textile segment to report a revenue growth of 47%. The plastics division has continued to witness steady growth on back of improved performance of custom moulding and building segment division. Sintex continues to retain its focus on reaping benefits from its prefab business, storage tanks and custom moulding business at a CAGR of 16% during the period of FY16-FY19E.

Demerger to unlock value of diversified businesses of the company

Sintex Industries is planning to demerger of business into two separate entities namely, Sintex Industries Ltd (Sintex) and Sintex Plastics Technology Ltd (SPTL). The shareholders of Sintex will be getting one equity share of SPTL to every equity share held in Sintex industries. The proposed demerger of business is before SEBI for its approval and process is expected to be completed by March 2017E. The demerger is expected to unlock shareholder value by separating the various business segments in different entities which is playing at high margin with significant growth rate. Sintex will carry textile & spinning business whereas, SPTL will have custom moulding and building products segments. Both the segments are very different as plastics segment generates ROCE of 15-16% whereas textile segment generates very low ROE and ROCE due to high debt. We expect textile division to post a CAGR of 47% in revenue over the period of FY16-FY19E as the spinning project will be commissioned by period. The plastic segment is expected to grow at a CAGR of 16% in revenue over the period of FY16-FY19E which will be aid mix performance in the segment.

Textile segment on the cusp of a turnaround, to drive growth in future

Sintex’s fiber-to-fabric business is the one of the oldest segment which contributes ~12% to the total revenue of the company. This segment is more focused on high end, value driven, and margin accretive products in the niche markets of the textile industry. In Q1FY17, Sintex has commenced commercial production of Phase 1 spinning plant (compact cotton yarn) at Pipavav with a capacity of 3.3 lakhs spindles running at ~80-85% capacity utilization in 9MFY17. The company is also in process of setting up another 3 lakhs spindles unit for blended yarn with a CAPEX of Rs. 2100 crs with an expected IRR of ~16-18%. The textile segment has the advantages of raw material cost, government textile policy, attractive power rates available at plant and many other benefits from the government which may resulting in healthy return ratios.

Plastic segment offers a good mix with high growth and high return

The plastic and infrastructure verticals which together accounts for 88% of the revenues of the company. The segment is divided into two verticals that are custom moulding and building products. Custom moulding business contributes 51% to the total sales of the company of which ~45% is from domestic business whereas 55% if from overseas subsidiaries. We expect custom moulding business to report a CAGR of 16% for FY16-FY19E aid by low capex, high focus on domestic business with high margin and high return ratios kind of business with Fortune 500 customers. The revenue from building products segment contributes 49% to the total sales of the company and consists of three business vertical viz. storage tanks, prefabs and monolithic construction. We expect building product segment to report a CAGR of 14% during FY16-FY19E led by prefab and tanks segments steady demand and growth.

Valuation

With higher growth expectation from Custom Moulding, Prefabs and Textile segment, we expect revenue to grow a CAGR of 19% over the period of FY16-FY19E. The EBITDA margin is expected to improve by 98bps to reach 17.8% by FY19E. At the current price the stock is trading at a P/E of 8x and 5.7x and an EV/EBIDTA of 7.1x and 5.9x for FY17E and FY18E respectively. We value Sintex at a P/E of 6x for FY19E recommend a BUY with a target price of Rs. 128, with an upside of 37% in a year.