Sintex Industries (SIL) - Buy Recommendation

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Sintex Industries (SIL), a dominant player in the plastic industry is migrating from its age old business to new high growth businesses with global footprints. Over the years it has built a strong brand recognition in commodity business like water tanks and textiles and is now leveraging its knowledge of plastics business to venture into composite business, which would be its future growth driver. With its strong domestic manufacturing base and ready global delivery model, we expect sales to grow at a CAGR of 64.5% with profit growth of 55.7% CAGR over FY08-FY10E. We initiate coverage with BUY rating on the company.

Key investment rational
Robust order pipeline – Sintex has quickly delivered affordable housing projects and hence, has secured a strong order book of Rs.14 bn for monolithic construction, executable over next 1-2 years. In the prefab business the company has secured necessary approvals from 16 states, which is biggest entry barrier in this space.

Management focusing on composite to drive company into new league – The company is aiming to become one of the top 10 composite manufacturers in the world . It has already acquired six companies across the value chain and with a war chest of Rs.9 bn is on the look-out for more opportunities. We expect the composite division to grow by more than 50% for next five years.
Acquisition to enable access to technology and new markets – Composites has been replacing metals in numerous forms of uses, to capitalize Sintex has acquired companies in domestic and international markets. The acquisitions have enabled access of technology, new markets and many prominent customers. It would also get labour arbitrage by outsourcing some products from India.

Changing product mix to make business sturdier – The company is shifting its focus from textile to high growth composites business. By FY10E we expect textile division to contribute 7% only down from 15% currently. While around 49.5% and 16.3% revenues would come from composite and monolith segment, respectively. We believe that its diversified income from 4-5 segments will provide a hedge against cyclicality.

We expect its net sales and net profit to grow at 64.5% and 55.7% CAGR to Rs.61.5 bn and Rs.5.6 bn respectively on consolidated basis over FY08-10E. The stock is trading at 13.3x its FY09E EPS of Rs.24.0 and 8.7x its FY10E EPS of Rs.36.7. It is available at just 5.7x its FY10E EV/EBIDTA. The stock has been trading at one-year forward P/E band of 14-18x and EV/EBIDTA band of 6-8x. On account of the recent acquisitions the consolidation may seem an intermediate dampner, but in view of the managment capability, consistent track record in execution and acquisition synergy, we expect the company to trade at approximatly 15x one year forward earning. Based on 15x average EPS of FY09-10E of Rs.30.3, we have arrived at price target of Rs.455. Accounting for the cash per share of Rs.43 our 18-months price target comes to Rs.498. We initiate coverage on the stock with BUY recommendation.
Source: Inhouse Research