Sintex Plastics Research Reports By IIFL And Joindre Capital

Research Report By IIFL

We believe that increasing substitution of metal with composite plastics will drive overall top-line growth for Sintex Plastic Technology (SPTL). It is expected to post strong FCF growth on account of 1) lower focus on w/c intensive monolithic business, 2) asset light route (outsourcing) for retail custom molding business and 3) cost benefits arising out of shifting of production of low value-add work to low cost manufacturing sites. As a result, we expect steady reduction in debt to aid profitability. We value SPTL at 17.0x FY19 EPS of Rs 8.7 to arrive at a price target of Rs 147.

Research Report By Joindre Capital

What are the Key Earnings Drivers for SPTL?

Monolithic construction business could turn out a potential dark horse over the medium term –

Earlier in the last 5 years the entire monolithic business segment was largely driven by government orders including from housing boards, slum rehabilitation, railways and government quarters amongst others. Typical order sizes here ranged between Rs 15 crs to Rs 75 crs. However given the large size of such orders and long delays in the payment cycle by the various government departments, led to receivable days increasing to 270 days from 100-120 days on an average earlier. This made Sintex scale back its monolithic construction business considerably earlier.

While SPTL has adopted a prudent strategy of focusing on profitable growth and remains selective in this space, we believe that this business segment can grow strongly ahead in the next 2-3 years as the impetus on low-cost/affordable housing is getting more prominence.

Another segment which SPTL is likely to look at is large real estate developers once RERA compliance improves and real-estate developers start focussing on affordable housing.

Business Outlook & Stock Valuation –

On a rough cut basis, in FY18, Revenue is expected to touch Rs 6595 crs.

On the bottomline level we expect the company to record a PAT of Rs 480 crs in FY18E. Thus on a conservative basis, SPTL should record a EPS of Rs 8 for FY18E. For FY19E and FY20E our expectation is that earnings traction for SPTL will continue to remain attractive wherein we expect a EPS of Rs 9.77 & Rs 12 respectively.

SPTL offers one of the widest plastic-based solutions in the global plastic processing space – from creating housing units to small components that find application in the medical equipment and electrical businesses.

SPTL is the only Indian plastic processing company with pan India presence and enjoys an early-mover advantage in businesses that are levered to the social sector spending in India (schools/ low-cost housing/ healthcare centres), funded almost entirely by government.

A macroeconomic turnaround, improving trajectory of businesses linked to government spending, improving financial performance and further easing of working capital will drive the expected improvement in the company’s operating metrics. Going ahead SPTL is not expected to incur high capex over the next 2 years as average capacity utilisation stands at around 60% across product segments and capex would be required once this improves to 80-90% (mostly in FY20E).

Valuation wise looking at the small earnings and revenue base of SPTL, we believe the markets would be looking at SPTL as a RE RATING story with overall debt reduction likely to boost earnings at the net level going ahead over the next 2 years.

Hence we believe that the SPTL stock should be purchased at the current price for a price target of around Rs 150 over the next 12 to 18 months.