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Institutional Equities

Sintex Industries
26 March 2014 Reuters: SNTX.BO; Bloomberg: SINT IN

Corporate Governance Takes A Back Seat Again

Sintex Industries (SIL) has informed the Bombay Stock Exchange (BSE) that a committee of its board of directors, at a meeting held on 26 March, 2014, has decided to sell the companys entire equity stake in Zep Infratech, a wholly-owned arm, to Khadayata Decor. Ahmedabad-based Khadayata Dcor, incorporated on 30 November, 1995, has three directors - Mr.Ashok Thakorlal Patel, Mr. Sankal Chand Gandalal Patel and Mr. Gautam Rasiklal Khamar. Of these three directors, Mr. Sankal Chand Gandalal Patel was appointed as a director of Sintex Power on 25 March 2009. Mr.Sankal Chand Gandalal Patel is a director in two companies - Sintex Power and Khadayata Decor (from 1 April, 1999). This is not a one-off event in respect of SIL and Khadayata Decor. On 20 and 21 July, 2010, Khadayata Decor sold 1.85mn shares of SIL, amounting to Rs632mn, which were purchased by BVM Finance - owned by the promoter of SIL. Prior to this also, many transactions took place between Khadayata Decor and SIL. In the wake of elevated capex, concerns over corporate governance and subdued return ratios/free cash flow, we have retained our Sell rating on SIL with a target price of Rs16 based on 2.4x FY16E EV/EBITDA. Corporate governance remains weak: On 17 November, 2011, SIL stated that Sintex Infra Projects (its 100% arm) received a Rs7bn order from Shirpur Power. As per the Department of Heavy Industries website, Sintex Infra Projects (SIPL) sub-contracted this BTG (Boiler Turbine Generator) order worth Rs7bn for 2x150MW units to Bharat Heavy Electricals (BHEL) in July 2011. The promoters of SIL and their relatives are shareholders of Sintex Power, which is one of the sponsors of Shirpur Power. Getting such a large order from Shirpur Power and not informing this to minority shareholders of SIL for a long time has raised concerns over related-party transaction, particularly when SIL has not executed any power EPC contract so far. In addition, on account of a group company transaction, the possibility of favourable working capital terms cannot be ruled out, which may elongate SILs working capital cycle. Even after the receipt of such a large order, SILs management did not disclose the information on Shirpur Power, as to whether it achieved financial closure, secured coal linkage etc. After receiving this order, almost two-and-a-half years have passed, but SIL has not disclosed the revenue recognised so far from that order. Aircraft procurement is another example of weak corporate governance: The Economic Times, on 7 January, 2013, reported that the DRI (Directorate of Revenue Intelligence) has seized a nine-seater Bombardier aircraft imported in CY12 belonging to Zest Aviation, jointly owned by Zydus Cadilas Managing Director Mr. Pankaj Patel and SILs Chairman Mr. Dinesh Patel, for allegedly evading customs duty. We have come across instances where buying of aircraft, helicopter and high-value residential apartment is considered by the investors as major corporate governance issues. We have examples of IRB Infrastructure Developers buying a helicopter in FY12 and the market reacting to this development with a 24% decline in its stock price. Similar reactions have been observed in case of Crompton Greaves (aircraft purchase-46% fall) and JSW Steel (high-value house purchase - 8% fall). Unrelated diversification: To fulfill the ambitions of its promoters, SIL tried to diversify into totally unrelated businesses like power generation and oil/gas ventures in FY10. However, following the protests from the investors, the promoters decided to set up a power generation plant in their personal capacity.
FY12 44,368 (0.9) 7,009 15.8 3,068 3,535 13.0 (21.3) 14.0 9.8 10.8 3.3 FY13 50,794 14.5 7,410 14.6 3,237 4,141 13.3 2.1 14.3 8.9 9.2 3.2 FY14E 53,657 5.6 8,328 15.5 2,986 2,986 7.0 (47.7) 8.1 9.6 9.7 6.2 FY15E 60,253 12.3 9,224 15.3 4,126 4,126 9.6 38.2 9.3 10.6 10.6 4.5 FY16E 67,938 12.8 10,038 14.8 4,814 4,814 11.2 16.7 9.9 11.1 10.8 3.8

Sector: Diversified CMP: Rs43 Target Price: Rs16 Downside: 63%
Jignesh Kamani, CFA +91-22-3926 8239
Key Data Current Shares O/S (mn) Mkt Cap (Rsbn/US$mn) 52 Wk H / L (Rs) Daily Vol. (3M NSE Avg.) 313.1 13.4/223.7 58/17 6,612,439

Event Update

One-Year Indexed Stock Performance




0 Mar-13

May-13 Jul-13 Sintex Industries


Nov-13 Jan-14 Mar-14 NSE CNX NIFTY INDEX

Price Performance (%) 1M Sintex Ind. Nifty Index Source: Bloomberg 24.5 5.8 6M 102.1 12.2 1 Yr (3.0) 17.0

Y/E March (Rsmn) Revenue YoY (%) EBITDA EBITDA (%) Reported PAT Adjusted PAT FDEPS (Rs) YoY (%) RoE (%) RoCE (%) P/E (x) EV/EBITDA (x)

Source: Company, Nirmal Bang Institutional Equities Research

Please refer to the disclaimer towards the end of the document.

Institutional Equities
Exhibit 1: List of directors of Khadayata Decor
Name Ashok Thakorlal Patel Sankal Chand Gandalal Patel Gautam Rasiklal Khamar Present residential address 338, Rani Manzil, Khadia, Golwad, Ahmedabad - 380001, Gujarat. 56 - Shreyas Society, Behind Railway Station, Kalol - 382729, Gujarat. 10 - Mahavirnagar Society, Highway Road, Near Ambica Nagar Bus Stop, Kalol -382729, Gujarat. Designation Director Director Director Date of Appointment 02/05/2002 01/04/1999 10/06/1997

Source: Registrars of Companies

Exhibit 2: List of directors of Sintex Power

Name Vidyut Anubhai Sheth Ketan Piitushbhai Patel Sankal Chand Gandalal Patel Manven Shiv Prasad Dubey Nilay Pravinchandra Modi Present residential address 103- Shraddha flat, Parijat Society, Fatehpura, Paldi, Ahmedabad- 380007, Gujarat. 9-Sarathi, Behind Sterling Park, Near Drive-in Cinema, Memnagar, Ahmedabad - 380052, Gujarat. 56 - Shreyas Society, Behind Railway Station, Kalol - 382729, Gujarat. 7-A, Mrudul Park -II, Sattadhar Crossing, Sola Road, Ahmedabad - 380061, Gujarat 536, Parabdi Ni Pole, Navowas, Opposite Ahmedabad Municipal Corporation, Danapith, Ahmedabad - 380001, Gujarat Designation Director Additional director Director Manager Secretary Date of Appointment 25/03/2009 01/01/2009 25/03/2009 15/07/2010 10/02/2014

Source: Registrar of Companies

Rating track
Date 15 July 2011 4 October 2011 11 October 2011 18 November 2011 15 December 2011 16 January 2012 11 May 2012 16 July 2012 4 October 2012 12 October 2012 19 November 2012 7 January 2013 8 January 2013 11 January 2013 8 May 2013 15 July 2013 7 October 2013 17 October 2013 7 January 2014 31 January 2014 26 March 2014 Rating Buy Buy Buy Hold Sell Sell Sell Hold Hold Sell Sell Sell Sell Sell Buy Sell Sell Sell Sell Sell Sell Market price (Rs) 181 112 116 88 75 72 61 67 71 74 64 70 71 69 54 40 22 27 38 33 43 Target price (Rs) 224 179 167 96 54 54 52 71 71 68 63 63 63 63 63 30 17 17 17 16 16

Sintex Industries

Institutional Equities
Stock Ratings Absolute Returns
BUY > 15% HOLD 0-15% SELL < 0%
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Sintex Industries