Sintex (SINT

)
Others
RESULT

SELL
JULY 12, 2011

Coverage view:

Marginally lower than estimates. Sintex’s 1QFY12 EBITDA at Rs1.89 bn was a little lower
than our estimates at Rs1.96 bn. PAT grew 20% yoy on account of higher tax rate (27% versus 18% in 1QFY11). We make the following observations on the quality of the earnings growth of the company in the last few years: (1) The growth is led by rapid expansion of balance sheet, (2) in our opinion it would be difficult for the company to generate cash flows going forward even if the growth rate slows down, and (3) The business (SA) is generating very low asset turns on incremental capex. We retain SELL with a 12-month target price of Rs170.
Company data and valuation summary Sintex Stock data 237-138 52-week range (Rs) (high,low) Market Cap. (Rs bn) 50.0 Shareholding pattern (%) Promoters 35.0 FIIs 33.3 MFs 6.2 Price performance (%) 1M 3M 12M Absolute 4.0 13.1 13.2 Rel. to BSE-30 0.7 15.5 7.0

Price (Rs): 179 Target price (Rs): 170 BSE-30: 18,721

Forecasts/Valuations EPS (Rs) EPS growth (%) P/E (X) Sales (Rs bn) Net profits (Rs bn) EBITDA (Rs bn) EV/EBITDA (X) ROE (%) Div. Yield (%)

2011 17.0 40.2 10.8 44.8 4.6 8.2 8.4 17.9 0.7

2012E 19.2 13.4 9.6 55.7 5.2 9.6 7.4 16.9 0.8

2013E 20.3 5.7 9.1 65.7 5.5 10.7 6.6 15.1 0.8

1QFY12 EBITDA marginally lower than estimates; PAT miss due to higher tax rate yoy Sintex’s 1QFY12 consolidated revenues at Rs11 bn (+22% yoy; -24% qoq) were in line with our estimates. Marginal underperformance in the building products segment was mitigated by outperformance in the custom moldings division. PAT at Rs946 mn (+20% yoy; -43% qoq) was lower versus our estimate at Rs1.06 bn due to higher tax rate (27% versus 18% in 1QFY11). EBITDA margins in the monolithic segment came in line with our estimates at 18%; historically, the margins have been above our estimates. Order book in the segment at Rs30 bn is almost flat versus Rs29 bn reported in 4QFY11. Earnings growth led by rapidly expanding balance sheet We make the following observations on quality of earnings growth in the last few years. Earnings growth is led by expansion of the balance sheet. As per our estimates, in FY2008-11 (three years), for every Rs100 of incremental sales (SA entity), the company has deployed Rs170 of incremental capital (capex+working capital) (Exhibit 4). It would be hard for the company to generate cash flows even if growth slows down. We compute that it may be difficult for the company to generate operating cash in the SA entity even if the revenue growth rate were to slow down to 8-10%. Low asset turns: In FY2008-11, the company (SA) generated asset turn of one on its incremental capex (Exhibit 4). It is possible that the company might generate incremental revenues without much increase in capex, but we would like to see some improvement before taking a positive view. We retain our SELL rating with a target price of Rs170 We are leaving our earning estimates unchanged and retain SELL rating with a target price of Rs170 (at 10X FY2013E adj. EPS). We adjust the earnings for the impact of O/S FCCBs assuming an interest rate of 6% (P&L doesn’t reflect the actual interest expense) of the face value of FCCBs.
Jasdeep Walia
jasdeep.w@kotak.com Mumbai: +91-22-66341328

Kotak Institutional Equities Research kotak.research@kotak.com Mumbai: +91-22-6634-1100 For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

165 180 1.1 13.374 3.8) 20. Adjusted PAT Extraordinaries Reported PAT Segmental Revenues (including other income) Textiles Plastics Un allocated Total EBIT (including other income) Textiles Plastics Un allocated Total EBIT margin (%) Textiles Plastics Un allocated Total 1. consolidated.6 31.1 12.6 897.685 (11.7 Source: Company.1) 25.0 (9.2 168 150 202 (93) 12.5) 2.350 (40) 14.8 15.290 13.9 (6.0) 95. Kotak Institutional Equities 2 KOTAK INSTITUTIONAL EQUITIES RESEARCH .6) (39.1 21.815 150 11.9) 18.3 (439) (400) (363) (396) 9.0 15.200 9.0 (47.1 (5.175) (1.542) 1.120 202 9.8 (45.6) 17.098 (3.8 (350) (310) (249) (296) 13.540) — (1.5) — (2) 22 NM 13 946 1.213 11.4) (2.0) 21.4 13.066 791 1.3 (22.962 1.765) — 170 — 200 (140) — (1.0) 6.218) (8.9) (6.9 (43.098 10.287) — (1.6 8.309 114 1.313 (9.4) (338) (337) (174) (650) 0.712 15.022 168 11.4) (2.3 (20.3 114.3 1.3 (0.1 (24.382 129 1.0 17.733) (11.402 964 2.6 933 1.120 11.685 (11.1 11.280 133 2.9 (43.8) (38.8 — 14.0) NM NM 9.663 (12.288 111 1.9) 23.3) 17.472 60 1.1 1.015 9.571) — (5.066 788 1.9) Net sales Total expenditure Raw material cost Stock adjustment Employee expenses Other expenses EBITDA OPM (%) Other income Depreciation Interest Pretax profits Tax Net income Minority interest/share of assoc.1) 27.106 14.0 15.3) — — — — — 946 1.3) (% chg.609 15.7) (526.Others Sintex Exhibit 1: Results marginally below estimates – led by slightly lower margins and higher-thanestimated tax rate Interim results of Sintex.1 (335.0) 19.3 (14. March fiscal year-ends (Rs mn) 1QFY12 1QFY12E 1QFY11 4QFY11 KIE est.7) (43.271 1.0 1.621 10.9) — — 19.7 (38.9 10.540) (1.0 18.228) (9.189) — (1.9 41.053) (7.600 196 2.4 6.3 987 8.0 (43.892 1.4 (24.9 (8.086 13 1.0 40. 11.9 (25.) yoy qoq 22.4 1.7) (280.448) — 1.3) 33.066 788 1.2 17.6 13.640 1.9) (16.8) (37.9) (16.9) NM NM 19.4 37.

4 23 21.43 bn while the incremental capital deployed (capex+incremental working capital adjusted for ICDs and escrow account) in the same period has been Rs15.0 22 Source: Company.9) (24.349 1.860 4QFY11 1.96 bn (Exhibit 4).640 1QFY12 1QFY12E 1.Sintex Others Exhibit 2: Revenues were in line.430 250 440 4. Please note that we have done entire analysis on the standalone entity.130 23 8.5 2.120 4.3) (7.373 5.039 674 (44. Kotak Institutional Equities Earnings growth is led by rapid balance sheet expansion We make the following observations on the quality of earnings reported by the company in the last few years.893 822 15.4 13.0 (% chg. consolidated.5 7 14.5) 1.770 185 480 4.150 11.015 KIE est.7 28.3) (48.4 1.120 987 9.223 126 13.098 11.7 26 25.735 5. March fiscal year-ends (Rs mn) 1QFY11 Building products Pre-fabs Monolithic Zeppelin Tanks Total building products [A] Custom molding Total custom molding [B] Others [C] Total plastics [A+B+C] Textiles Total revenues 1.7) (7.3 57. (7.760 243 440 3.130 4.100 4.366 81 1. marginal underperformance in the building products segment was balanced by custom moldings Quarterly segmental revenues for Sintex.200 11. KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 .3 16.668 299 1967 4QFY11 446 1.3) (51.4 11.147 227 1374 2QFY11 275 583 33 891 575 18.2) (17.490 320 520 6. March fiscal year-ends (Rs mn) 1QFY11 Building products Pre-fabs + Zepplin Monolithic Tanks Total building products [A] Custom molding [B] Others [C] Total plastics [A+B+C] Textiles Total EBITDA EBITDA margin trend (%) Building products Pre-fabs + Zepplin Monolithic Tanks Custom molding Textiles 205 326 31 562 589 (3.000 300 520 5. Kotak Institutional Equities Exhibit 3: Margins in the monolithic segment came in line with our estimates versus strong outperformance in the earlier quarters.9) 9.8) 1.593 17 10.7) (38.000 5.9) (14.1 18.5 14. for every Rs100 of incremental sales.815 1.2) 1.283 948 9.580 4.0) Source: Company.5) 11.7) 1.9 24.290 14.250 37 10.2) (41) 1 (24.1 32 28 23.300 3. the company has deployed Rs170 of incremental capital.485 231 1716 3QFY11 358 642 39 1.4 17.1 qoq (5. The increase in sales between FY2008 and FY2011 has been Rs9.4 (23.096 444 8. Earnings have been led by rapid balance sheet expansion.3 22.4 7. consolidated.8 24 14 15.5 18 8. So.) yoy 14. Quarterly trends in EBITDA for Sintex.010 2.1 (8.120 1.651 242 1892 14.137 1.231 3QFY11 1.300 2.695 9.8 2.9 18.106 2QFY11 1.770 3.5 20.8 24 7.022 1.730 368 3098 1QFY12 304 499 40 843 840 (32.710 1.690 357 580 8.

in our view.6 mn. the company has generated low asset turns (incremental sales/incremental capex) of ~1.Others Sintex Difficult to generate cash flows at this rate even if the growth slows down. Low asset turns: In FY2008-11. As per our understanding of the industry. as per our assumptions. As per our estimates. The company would not generate cash even if it reduces revenue growth rate to 10%. Assuming the company continues to make 22% EBITDA margins (highest in the last five years). there would be a net cash outflow of Rs32 mn. in case past trends in cash flow were to continue. it would have to deploy incremental capital of Rs50. As shown in Exhibit 5. asset turns in pre-fabs and monolithic segments are about 3X (or more). ROCE may not improve from the current low levels going forward given the competitive nature of the growth businesses of the company (monolithic + pre-fabs) and the fact that competitive intensity might increase given the high margins in the business. 4 KOTAK INSTITUTIONAL EQUITIES RESEARCH .5% on the incremental capital deployed in the business (capex and working capital). in FY2008-11. Therefore. it would be difficult for Sintex to generate cash even if the growth rate were to slow down from the current levels. the company has generated an ROCE of 9. Low ROCE on incremental capital. the company has deployed Rs170 of incremental capital in FY2008-11. if the company grows at 30%. for every Rs100 of incremental sales. we would wait to see improvements in the capital efficiency (increasing (incremental sales)/ (incremental capital deployed) ratio) before taking a positive view of the stock. assuming base level sales of Rs100. Low assets turns could be due to low capacity utilization in the business and it may be possible to increase revenues without deploying incremental capital but we would wait to see some improvement before taking a positive view. if one were to project the past trends in cash flows in the future. In light of the above-mentioned points. it would have an operating profit of Rs28. As illustrated above. So.

Remaining sales (out of total sales of Rs13.(d) .771 7.333 2. March fiscal year-ends.( c) .866 4.27 0.213 1.Sintex Others Exhibit 4.636 6.811 3. 4.966 7. For FY2011 we have deducted Rs750 mn from total loans and advances on account of money locked in escrow accounts.893 3.736 5.188 10.239 4.127 5. Rs10.800 2008 16. Growth is led by rapid expansion of the balance sheet Balance sheet and P&L items of Sintex.130 668 668 2.628 4. We have deducted the provisions on account of the FCCBs from total provisions.200 3.439 2009 16.751 3.744 17.7 100 30 51 130 22 28.867 942 2010 19.840 2.033 4.946 5.59 351 2.244 17.117 15.427 1.100 3.455 2.530 5.524 11921 15.022 3.473 1.966 1.724 24.960 22.50 bn in FY2011) have booked in 100% subsidiary (Sintex Infra).61 4 (32) 1.0 0.790 2011 21.271 1.381 5.812 4. 50% of the loans and advances are part of the working capital for FY2008-10 FY2008-10 FY2008-11 6.520 3.7 100 10 17 110 22 24.277 19.804 7.538 13.963 3.209 5.6 5.821 21.750 2. Standalone.783 8.(a) 1. Cash-flow generation would be difficult even if the growth slows down and assuming the high margins would sustain Scenario analysis for cash-flow generation (Rs mn) Sales/Capital deployed Base year sales Growth (%) Capital required (a) Sales EBITDA (%) EBITDA (Rs) (b) Interest at 11% ( c) Tax at 20% ( d) Cash flow (b) .739 9.263 19.544 12.215 9.336 4. Source: Company.921 1. 2008-11 (Rs mn) Equity Total Debt Gross block Less: depreciation Average gross block Net block CWIP Inventories Sundry debtors Loans and advances Loans and advances (adj.447 2.976 Total Sales Sales in monolithic business EBITDA Increase in average gross block (a) Increase in working capital Increase in total capital deployed (b) Increase in sales ( c) Asset turns on incremental capex (X) ( c)/(a) Incremental sales / Incremental capital ( c)/(b) Increase in EBITDA Increase in depreciation ROCE on incremental capital (%) Assumptions: 1.921 2.369 10.384 15.951 9.3 9.687 6.509 6.227 2.) (1) Current liabilities and provisions Current liabilities and provisions (adj.575 0 2.5 2.354 388 1.819 2.215 2007 11.974 1.2 1.733 2010 18.400 2011 26.769 3.537 9.408 11.174 2008 15.) (3) Working capital Purchase of fixed assets 2007 6.686 3.790 2.271 12.346 4.368 1.371 16.224 5.438 0.87 4 1 Source: Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 5 . Kotak Institutional Equities Exhibit 5.5 1.489 6.439 5181 6.537 320 519 0.747 8.958 4.346 2009 19.464 6. 3.092 3.53 bn of sales in the monolithic business have been booked in the SA business.

901 3.908 230 29.428 349 5.0 16.0 3.938 1.0 18.744 604 40.679 8.042 3.7 20.123 1.456 1.0 16.0 20.059 5.571 2.558 2.038 4.0 15.0 20.6 27.0 8.1 21.5 16.450 1.6 12.7 23.2 17.2 15.370 5.463 33.174 3.257 4.381 44.337 10.0 14.5 13.423 4.515 3.9 16.651 3.050 21.411 14. March fiscal year-ends.680 37.266 2.183 22.9 24.740 1.124 9.318 14.447 273 3.0 18.0 24.5 25.0 15.8 16.278 262 3.814 9.420 1.6 17.0 25. 2009-14E (Rs mn) 2009 Revenues Plastics Building products [A] Monolithic Standalone prefab business Zeppelin (consolidated) Water Tanks Custom molding [B] Standalone Wasaukee Nief Plastics Bright AutoPlast Others [C] Total plastics [A+B+C] Textiles Collection RMG Others Total textiles Total revenues EBITDA margin (%) Plastics Building products [A] Monolithic Standalone prefab business Water Tanks Custom molding [B] Standalone Wasaukee Nief Plastics Bright AutoPlast Others [C] Total plastics [A+B+C] Textiles Collection RMG Others Total textiles Total consolidated 2010E 2011 2012E 2013E 2014E 12.0 16.456 7.810 13.170 1.8 16.187 2.520 5.927 1.0 12.980 18.3 15.804 1.508 2.5 30.260 709 60.0 17.0 20.693 41.0 15.0 15.0 16.0 16.837 30.0 24.401 3.5 18.0 3.4 6.748 26.5 33.0 24.7 30.896 1.382 28.6 18.571 11.0 16.371 2.292 24.607 991 2.707 384 5.0 12.620 14.0 15.072 8.0 17.266 653 27.3 Source: Kotak Institutional Equities estimates 6 KOTAK INSTITUTIONAL EQUITIES RESEARCH .0 15.049 7.5 13.0 21.055 6.Others Sintex Key operating assumptions Sintex.0 3.3 18.4 10.0 24.515 1.0 3.439 2.079 20.0 15.0 18.0 14.290 1.0 16.976 1.2 24.5 13.0 3.298 5.0 22.8 8.711 31.0 20.7 19.4 24.0 18.506 1.0 12.704 654 50.0 26.204 20.5 8.297 1.2 8.9 24. operating assumptions.549 7.8 30.339 1.0 16.0 24.484 2.0 20.899 770 66.0 8.8 30.0 17.039 2.171 317 4.0 20.4 10.784 55.0 22.905 288 4.178 65.7 5.0 17.0 15.200 4.587 923 2.0 22.2 3.4 10.0 15.055 19.0 28.0 8.780 4.296 3.108 1.605 72.

917 (1.930 3.896 2.985 1.7 15.611 17.100 (476) (350) 3.905 (30) (30) 5.2 16.467 23.190 25.3 9.590 22 4.031) 301 958 4.0 26.571 30.492 22.351) 570 132 6.5 45.2 31.3 12.645 64.904 36.5 9. balance sheet and cash flow model for Sintex.668 73.7 2012E 55.693 72.469 2.162 26.764) 332 192 70 70 7.3 21.8 53.9 10.2 15.3 17.665 31.597) (4.590 40.055 10.1 13.701 11.315) (1.2 65.042 11.665 27.5 11.927 72.050 5.669 3.445) (1.2 92.274 (23) 3.1 12.528) 15.8 125.1 11.861 23.483 3.307 7.081) (427) 4.9 11.021 (436) (274) 3.769 (1.227 19.257) (2. working capital Working capital changes Capital expenditure Investment changes Other income Free cash flow Ratios (%) EBITDA margin Debt/equity Net debt/equity RoAE RoACE RoACE (excl.194 2.388 1.198 19.678) (4.800) — 523 332 18.819 51.348 51.685 15.479) (1.000) — 262 (336) 16.5 125.361) (1.680 9.3 13.9 KOTAK INSTITUTIONAL EQUITIES RESEARCH 7 .597 (2.749 (2.509 2.2 42.145 2.251 12.998 (3.186) (4.249 80.257 (30) 5.665 29.9 11.539) (1.673 2.6 2013E 2014E 31.007 28.2 106.970 72.318 5.168 8.553 5. consolidated.470 55.292 24.751) 16.388 7.645 6. March fiscal year-ends.554 (7.551 2.100) — 701 (2.2 2011E 44.665 19.071 27.0 18.000) — 402 (429) 16.0 17.3 60.875 20.587 (5.493 8.089) 473 50 6.290 12.939 (5.6 10.238 (1.987) — 267 (5.541 2.8 12.645 7.897) — 663 (6.119 80.2 58.514) (7.688 2.454 5.155 (1.9 50.738 10.758 13.042 3.168 3.710 12.669 9.491) (1.398) (438) (466) 5.030) (1.227 9.295 21. 2009-14E (Rs mn) 2009 Profit model Revenues EBITDA Depreciation Interest expense Finance income Other income Reported PBT Tax Deferred taxation Profit after tax Minority interest Adjusted PAT Earnings per share (Rs) Balance sheet Total equity Total borrowings Current liabilities Total liabilities and equity Cash Other current assets Goodwill Tangible fixed assets Investments Total assets Free cash flow Operating cash flow.837 8.454 9.311 (21) 3.144) (820) 645 238 4.098 (1.3 58.245) (415) 5.057) 17.Sintex Others Summary financials Profit model.847 (4.249 73.6 56.0 70.523 5. excl.6 36.180 (1.228 14.1 21.775 64.799 1. cash) Source: Kotak Institutional Equities estimates 2010E 33.015 55.625 (7.

0% 0. Jasdeep Walia. if any. The information is not meaningful and is therefore excluded. Sell = We expect this stock to underperform the BSE Sensex by more then 10% over the next 12 months. Cautious.0% 26. The previous investment rating and price target. These ratings are used illustratively to comply with applicable regulations. Other ratings/identifiers NR = Not Rated. NA = Not Available or Not Applicable. Our target price are also on 12-month horizon basis. I also certify that no part of my compensation was. 2011 4. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. NC = Not Covered.3% 30% 20% 12. if any. CS = Coverage Suspended.3% 3. The coverage view will consist of one of the following designations: Attractive. is or will be. We expect this stock to outperform the BSE Sensex by 0-10% over the next 12 months.8% 28. Reduce = We expect this stock to underperform the BSE Sensex by 0-10% over the next 12 months. Kotak Securities Research has suspended the investment rating and price target. Kotak Securities does not cover this company. have been suspended temporarily. * The above categories are defined as follows: Buy = We expect this stock to outperform the BSE Sensex by 10% over the next 12 months. The information is not available for display or is not applicable. We expect this stock to outperform the BSE Sensex by 10% over the next 12 months. The investment rating and target price. SELL. 8 KOTAK INSTITUTIONAL EQUITIES RESEARCH . Other definitions Coverage view. related to the specific recommendations or views expressed in this report. Kotak Securities has suspended coverage of this company. As of 31/03/2011 Kotak Institutional Equities Investment Research had investment ratings on 164 equity securities. Neutral. NM = Not Meaningful. RS = Rating Suspended. within the specified category.8% 10% 0% BUY ADD REDUCE SELL As of March 31. if any. directly or indirectly. ADD.0% Percentage of companies within each category for which Kotak Institutional Equities and or its affiliates has provided investment banking services within the previous 12 months.3% 4. We expect this stock to underperform the BSE Sensex by more than 10% over the next 12 months." Kotak Institutional Equities Research coverage universe Distribution of ratings/investment banking relationships 70% 60% 50% 40% 32. Add = We expect this stock to outperform the BSE Sensex by 0-10% over the next 12 months. REDUCE. for this stock. Percentage of companies covered by Kotak Institutional Equities.Disclosures "I. We expect this stock to underperform the BSE Sensex by 0-10% over the next 12 months. are no longer in effect for this stock and should not be relied upon. Source: Kotak Institutional Equities Ratings and other definitions/identifiers Definitions of ratings BUY. hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. The coverage view represents each analyst’s overall fundamental outlook on the Sector. because there is not a sufficient fundamental basis for determining an investment rating or target.

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