SINTEX INDUSTRIES: Long-term growth story, eclipsed by near-term slowdown - Most concerns priced in; Buy for 42% upside - Motilal Oswal

- We believe Sintex's long-term growth story is broadly intact:
1. Building materials: Offers secular play on government's spending on low cost housing and social infrastructure e.g. slum rehabilitation is an INR4.5t opportunity.

2. Composites: Expect synergies with overseas subsidiaries and continuous innovations to drive next phase of profitable growth.

- Domestic and global slowdown will stretch Sintex's working capital and moderate its growth momentum over FY11-14. However, its operating efficiency combined with lower capex will help sustain positive FCF.

- Most concerns are priced in; stock is attractively valued at 5.6x FY13E EPS. Re-initiate coverage with TP of INR112 (8x FY13E EPS). Buy for ~42% upside.

Building Materials a huge opportunity; Sintex offers excellent play: Sintex's Building Materials business caters to two kinds of low-cost construction opportunities - (1) Housing, via monolithic construction, and (2) Non-housing, via prefab structures (rural classrooms and healthcare clinics, worker shelters, etc). Low-cost housing demand will be mainly driven by slum rehabilitation, an INR4.5t opportunity by our estimates. Here, Sintex's monolithic segment enjoys a strong order book of INR30b (BTB of 2x TTM) to be executed over 22 months. In the non-housing segment, expect Sintex's prefab structures business to benefit from rising government welfare expenditure on social infrastructure projects.

"Plastic-ization" to drive composites growth; Sintex well-placed: "Plastic-ization" is an ongoing process of substitution of metals by plastic, driving Sintex's composites business. We believe Sintex is poised to reap significant gains from two kinds of synergies from its overseas subsidiaries: (1) Client synergy: Many global clients of Nief (Sintex's European subsidiary) are expected to buy composites from Sintex India. Subsidiary Bright is already supplying electrical parts to Schneider. Other clients are also expected to follow shortly; and (2) Operating synergy: Overseas subsidiaries will increasingly source intermediate products and services (e.g. design) from India, leading to higher margins.

Headwinds may moderate growth, but balance sheet will improve: Expect Sintex's FY11-14 revenue CAGR of only 7% and EBITDA CAGR of only 3%, given multiple headwinds: (1) Deteriorating working capital due to payment delays, (2) delay/cancellation of projects (ahead of state elections), (3) order slowdown, etc. However, focus on working capital management and disciplined capex would improve FCF and balance sheet, to (1) enable USD290m FCCB redemption due in Mar-13, and (2) bring down net debt-equity to 0.3x in FY14 from 0.6x currently.

Concerns priced in; re-initiating coverage with TP of INR112, Buy: Sintex stock is attractively valued at 5.6x FY13E EPS. This, we believe, prices in both (1) growth slowdown, and (2) other concerns (FCCB repayment, conflict of interest issue on power venture, etc). We value Sintex at 8x FY13E EPS, which is 33% discount to its long-term average P/E. Our target price of INR112 offers ~42% upside from current levels. Re-initiating coverage with a Buy rating. We believe recovery in growth expected in 2HFY13 can provide with further re-rating catalysts.

Source : Equity Bulls

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