Ambit_Sintex Industries_Getting Its House in Order_5Mar2012

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Sintex Industries: Getting its house in order

Ambit Capital Pvt Ltd 5 March 2012, Page 1

Sintex Industries: Getting its house in order(SINT IN, mcap US$457mn, NOT RATED)

Analyst: Nitin Bhasin, [email protected], Tel: +91 22 3043 3241Analyst: Chhavi Agarwal, [email protected], Tel: +91 22 3043 3203

In our Strategy thematic - The best from the broken Balance Sheet sectors - dated February 21, 2012 we hadhighlighted Sintex Industries (SINT IN, mcap US$457mn, NOT RATED) as one of the better industrial stocks to ownfrom among the broken balance sheet sectors. Using historical analysis of fundamentals and then using ourproprietary models for accounting quality and greatness, Sintex stood out as a company, which could potentially seeits stock rerate with an improvement in the macro environment and a reduction in the cost of funding. Sintex iscurrently trading at a 71% discount to its 5-year average trailing twelve months (TTM) P/B multiple.

Given this backdrop, we met with the management (the President, Mr Sunil Kanojia) recently to gaugewhether and how soon can this large discount could close. The key highlights from our meeting withmanagement:

1. Corporate governance issues unlikely to be repeated. Management highlighted that the investor activismof the last two years has provided them with clarity in terms of what investors expect from them. Whilstmanagement understands that the power and oil & gas initiatives could be in conflict with minority investorsexpectations, it does not believe that the award of the power project from a promoter entity to Sintex (the listedentity) was a mistake.

2. Cash conservation and balance sheet improvement to be the near-term goals. The upcomingUS$285mn FCCB repayment in March 2013 remains the main concern of the management in the near term.Whilst the unutilized FCCB proceeds of US$110mn provide some cushion for the cash needed to repay thisFCCB, the balance US$175mn will have to be raised from the present business (equity dilution whilsttheoretically possible is not being entertained due to the beaten down market cap). A good part of this

US$175mn will be generated from capex restraints (annual average of US$75-US$85mn for the last 4 years)and a reduction in working capital (through receivables recovery or lower intake of working capital intensivejobs). The balance requirement, if any, will be met through external commercial borrowings (ECBs), which aregenerally at a much lower cost.

3. International subsidiaries lack growth but dont need cash. Whilst the international compositemanufacturing subsidiaries (Wausaukee, Nief Plastic, and Nero Plastics) continue to face macro headwinds inmost of their operational regions, they continue to gradually improve upon their EBITDA margins and generateenough cash to fund their reinvestment requirements. Relationships with OEM clients in these entities haveprovided higher penetration opportunities and some sporadic opportunities for cost savings by moving theirproduction bases to India. The higher potential of cost savings by manufacturing in India is only possible whengrowth recovers in the West.

4. Rising industrial/electrical MNC focus towards India an opportunity for capitalizing on globalrelationships. Global electrical equipment manufacturers are becoming aggressive in their approach to Indiaand players such as Legrand and Schneider are setting up/acquiring manufacturing capacities in India. Sintexthrough its international subsidiaries is supplying high impact electrical insulation composites to thesecompanies and it is possible that soon these companies could work with Sintex for these products in India. If thishappens, this could be a fruition of Sintexs strategy of firstly capitalizing on its global relationships in theirclients Indian operations and then offering low cost India-manufactured products to international clients.

5. India could be the only near-term growth driver but macro is the key. Management highlights that afavorable political and investment climate in the country can be highly beneficial for its pre-fabricated andmonolithic construction businesses. Improved Government activity can drive not only orders for both thesebusinesses but can also reduce payment delays, which have been a perennial problem for nearly 6-9 months.

Furthermore, improving automobile demand is proving to be beneficial for its subsidiary, Bright AutoPlast whichis witnessing improving demand from Indian as well as MNC companies in India.


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Where do we go from here? The management appears to be cognizant of the fact that the reputational dents onaccount of its corporate governance practices and some unfavorable capital allocation will take time to be ironedout, and from hereon, the company will try to manage its investor expectations effectively. FY2013 looks likely to bea year of improving the balance sheet, which if done effectively can reduce the discount at which the stock is tradingpresently. The extent of reduction in this discount will be a function of management behaviour, cash flowgeneration/control and improvement in the operating environment. The stock is presently trading at a 71% discount

to its 5-year average trailing twelve months (TTM) P/B multiple. On consensus estimates, the stock is trading at0.74x one-year forward P/B and 5.3x one-year forward earnings (consensus estimates 10% growth in earnings forFY13 with a similar growth in sales generating a stable 14% RoE).


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Institutional Equities Team

Saurabh Mukherjea, CFA Head of Equities (022) 30433174 [email protected]

Research

Analysts Industry Sectors Desk-Phone E-mail

Aadesh Mehta Banking / NBFCs (022) 30433239 [email protected]

Anand Mour FMCG (022) 30433169 [email protected]

Ankur Rudra, CFA Technology / Telecom / Education (022) 30433211 [email protected]

Ashvin Shetty Automobile (022) 30433285 [email protected]

Bhargav Buddhadev Power / Capital Goods (022) 30433252 [email protected]

Chandrani De, CFA Metals & Mining (022) 30433210 [email protected]

Chhavi Agarwal Construction / Infrastructure (022) 30433203 [email protected]

Dayanand Mittal Oil & Gas (022) 30433202 [email protected]

Gaurav Mehta Derivatives Research (022) 30433255 [email protected]

Hardik Shah Technology / Education Services (022) 30433291 [email protected] ASV Banking (022) 30433205 [email protected]

Nitin Bhasin Construction / Infrastructure / Cement (022) 30433241 [email protected]

Pankaj Agarwal, CFA NBFCs (022) 30433206 [email protected]

Parita Ashar Metals & Mining / Media / Telecom (022) 30433223 [email protected]

Puneet Bambha Power / Capital Goods (022) 30433259 [email protected]

Rakshit Ranjan, CFA Mid-Cap (022) 30433201 [email protected]

Ritika Mankar Mukherjee Economy (022) 30433175 [email protected]

Ritu Modi Cement (022) 30433292 [email protected]

Shariq Merchant Consumer (022) 30433246 [email protected]

Sales

Name Regions Desk-Phone E-mail

Deepak Sawhney India / Asia (022) 30433295 [email protected]

Dharmen Shah India / Asia (022) 30433289 [email protected]

Dipti Mehta India / Europe (022) 30433053 [email protected]

Pramod Gubbi, CFA India / Asia (022) 30433228 [email protected]

Sarojini Ramachandran UK +44 (0) 20 7614 8374 [email protected]

Production

Sajid Merchant Production (022) 30433247 [email protected]

Kausalya Vijapurkar Editor (022) 30433284 [email protected]


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Explanation of Investment Rating

Investment Rating Expected return(over 12-month period from date of initial rating)

Buy >5%

Sell

Ambit_Sintex Industries_Getting Its House in Order_5Mar2012

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