Sintex Industries

The stock of Sintex Industries offers a good investment option for investors with a two-three year horizon. From being a plastic storage tank manufacturer, Sintex has become a diversified producer of plastic products that cater to a range of sectors. Its product offerings range from pre-fabricated structures, monolithic construction sheets, industrial storage containers and plastic moulding, to textiles.

The diversified product portfolio gives the company leeway to tap the recovery in sectors such as housing, infrastructure and automobiles better than other pure plastics companies. Currently at Rs 222, the Sintex stock trades at nine times its trailing four quarter earnings.
Plastics: money spinner

About 87 per cent of Sintex’s total revenues are generated by its plastics business. This business is spilt into two segments —building materials (41 per cent of overall revenues) and mouldings (46 per cent).

Pre-fabricated sheets, monolithic construction material and overhead storage tanks constitute the building materials business. As the concept of low-cost housing is grabbing more attention , Sintex has been focussing on this segment. It has bagged a couple of State government orders executable this year. The company appears well-positioned to tap the low-cost housing segment.

The company also produces telecom shelters and its major customers are Bharti Telecom, Reliance Communication and Tata Communication. Given the slower pace of tower rollouts over the past year, this segment has seen muted growth. Expansion of order-book here depends on tower capex plans of these telecom companies.

The moulding business caters mainly to industrial users in segments such as automobiles and consumer goods. Sintex’s acquired arms — Nief Plastics, Wausaukee Composites and automotive products division of Bright Brothers— are also housed in this segment and have expanded the company’s business horizons to the automobiles, electrical, medical instruments, defence and aerospace sectors. Valeo, Renault Schneider, Caterpillar, GE Medical Systems and Alstom are some of its clients.

The acquisition of the automotive division of Bright Brothers has widened Sintex’s customer base in the Indian automobiles component industry. Mahindra and Mahindra, Maruti Suzuki, Tata Motors and Honda Siel Cars are among the company’s noted customers.

In the December quarter of 2008-09, the plastics division posted a 84 per cent year-on-year increase in sales revenue on a consolidated basis. However, total revenues from this division dipped by over 12 per cent last quarter compared to the March quarter of FY-08.

This can be attributed to production cuts put in place by many automobile companies in the last quarter of FY-2009 and the price cuts demanded by many of Sintex’s customers.

PVC resins, plastic granules and powder are the major raw materials for the plastics division and they make up over 74 per cent of the total production cost. Materials are procured from suppliers such as GAIL, Reliance Industries and Haldia Petrochemicals.

The prices of these materials closely follow those of crude oil. The spot price of crude oil declined by 60 per cent in the third quarter of FY 09 after peaking in July 2008.

The softening input costs forced the company to slash prices on its finished products. Much of the discounts were offered in the last quarter of FY 09.

Given that the company operates on three-four month sourcing contracts for materials, margin pressures were highest in the December and March quarters, with the company taking inventory write downs in December.

March numbers, however, showed sequential improvement, with operating margins improving from 12 per cent in the last quarter of FY-08 to 17 per cent, thanks to a 13 per cent decline in total expenditure.
Textiles: Under pressure

Sintex operates in yarn-dyed structured fabrics. This includes men’s shirting fabrics, yarn-dyed corduroy and home-furnishing materials. Some of the priced customers in this segment are ColorPlus, ITC Wills, Ann Taylor, Marks & Spencer, Pantaloons, Louis Philippe and Van Heusen. Much of the operations in this segment cater to the domestic market.

The uncertainties that cloud the outlook for the retail industry, may put Sintex’s textiles operations under pressure this fiscal. For the year ended March 2009, textiles business contributed to 12 per cent of the company’s total revenues.
Financial Performance

Net sales of Sintex grew at a compounded annual rate of 33 per cent between 2004 and 2008. Its net profits grew at 45 per cent in this period.

However, the March quarter of FY-09 saw its net sales decline by 10 per cent, though the net profits registered a growth of 22 per cent, on a consolidated basis.

Due to price cuts offered to customers, the operating profit margins fell marginally to 16 per cent (from 18 per cent) in this quarter.

With crude oil prices recovering substantially from their lows, pricing pressures may ease off even as input costs also witness some increases.

The signs of a possible mild recovery in the automobiles and the housing sectors coupled with further moderation in input costs will be the major revenue drivers.

via BL