Sintex Industries, with strong balance sheet and huge cash balance is well Equipped to manage current challenging business Equipment. We estimates Sintex Industries to post net sales of 3300 crores and 4200 crores for FY09 and FY10 respectively, posting compounded growth rate of 40% for 4 years.

At current market price market price of 137 stock is trading at 6.2x and 5x its FY09 and FY10 estimated earnings. We initiate an accumulate rating on Sintex with a target price of 200 and 240 with an upward bias. We recommend investors to buy on dips. Our valuation is based on expected EV/EBITDA of 5 for FY09. Profit margins for FY09 are expected to be lower at around 9.5% its FY09 sales on account of Higher Raw material prices.

Q4 Earnings Estimates:

We expect company's topline to remain flat with no growth. While profits are expected to rise by 18%, to reach 105 crores from Q4 FY08 earnings of 89 crores. Rise in profits can be attributes to lower raw material costs.

Flat growth in sales point to tough economic conditions lowering the overall growth.

Going forward sales are expected to face tough head winds from new areas however strong orderbook in legacy businesses like prefab and monolithic structures will ensure strong revenues growing forward.

Result Analysis:

Margins for Q3 fell sharply by 400 bps. Margins depreciated on account of inventory write downs. We have treated this as a recurring expenses and company will take benefit of the same in Q4 Earnings which we expect to post higher margins.

Sales on Stand alone basis increased by 31% while margins expanded by 7.6% on standalone basis. Interests costs increased by 25% on Y-o-Y basis to 25 crores. Topline growth was primarily driven by strong growth in Plastics segment.

Other Income of Rs. 25 crores in creased from Rs. 6 crores on account of Interests on deposits.

Subsidiaries performance was satisfactory during the quarter with the sale of Zepplin Mobile increased by 117% on a sequential basis.

Interest's costs increased by 25% to 21 crores on account of higher borrowing costs and increased loans for working capital.

Company Description

Sintex is the largest manufacturer of range of plastic applications. With a well diversified portfolio and a very little competition in place it stands a market leader in Indian plastic processing industry, manufactures a wide range of products and manufactures a range of products including custom moldings for various industries, pre-fabricated and monolithic structures for temporary and permanent housing solutions, automotive components for vehicles, trains, aircrafts and marine applications. Plastic division contributes to around 85% of company's revenues Sintex has 9 manufacturing plants across India with 70% market share in storage tanks and 60% in prefabricated structures.

Outlook and Valuation

We expect Plastic segment of the company to continue to show robust growth with increased contribution from Prefab and monolithic structures for housing and storage tank division to contribute maximum in future growth which have an order book of more than 1500 crore to be executed till FY10E..

We expect a healthy topline growth of 35% CAGR over FY08-FY10E. business segment is likely to slowdown. Also high textile segment growth is expected to slowdown we expect a growth of low single digits.

We expect company to trade between 8-10 P/E ratio and EV/EBITDA levels of around 8 during FY10E.

Investment Rational Strong Balance sheet

Sintex has strong balance sheet with cash in hand of about Rs1600 crore and net debt to equity of 0.2. Sintex is expected to generate free cash of Rs 160 crore in FY10E. With strong cashflow and surplus cash in balance sheet. 900 crores of FCCB raised last year are convertible in 2013 Company planned to raise cash for expanding operations in US, these plans have been put on hold citing tough global conditions giving company ample opportunities to use cash elsewhere.

At CMP of Rs137, the stock is trading at an attractive valuation of 5.3x FY10E earnings and 0.8x FY10E book value.

Revenue Visibility

Strong revenue visibility in terms of housing requirement in rural and slum dwellings along with massive demand in Construction in slum dwellings would be a key growth are for the company. Company order book size of over 1500 crores is 7x times its FY08 revenues of 210 crores. With 9 manufacturing plants company will be able to cater to local demand at reduced logistics cost in its pre fabricated structure business. Foray into evolving busines: With market leadership in value added products company has huge plans to enter new business where it can offer value added products in moulded plastics. With growing presence in US and EU company will also be able to tap growth opportunities globally.

Key Risks: Greiger Technik

Sintex announced the acquisition of Geiger Technik (Germany based auto custom molding company) in Aug. 08 at an EV of 35.6mn Euros. At the time of acquisition EUR
120 million turnover company had EBITDA margins of 7.5%. Auto Industry slump in European markets has pushed the company into red, following which Geiger has filed for preliminary bankruptcy recently. Sintex has already paid USD 10 million In case company winds off Sintex will have to write down the same..

Raw Material:

Raw Material Costs around 55% of total sales and 65% of total Expenditures. High volatility in Commodity prices will make it difficult for Sintex to manage costs. Global Scenario Continuous expansion has led to substantial revenue from Global operations. Current economic scenario is putting a lot of pressure on bottomlines of these once profitable companies. Also currency volatility will put pressure in terms of managing/ hedging these risks. FCCB Company has a total debt of 1900 crores as on
31st march FY08. Out of this 900 crores was raised through convertible bonds at USD - INR of 40.5 convertible at Rs. 580 per Equity share. With share price at 137 conversion seems unlikely and redemption at 30% above issue price (Interests plus principle at current exchange rate of 50).

Sintex Industries stock price fell by over 85% upto 9th March'09, while during the same time Nifty fell by less than 50%. Fundamentally there is no reason for such deep correction in the stock price. As a result of such sharp correction stock has risen by 90% till 16th April. Stock still trades at 75% discount from its January high of Rs. 575. Stock closed at CMP of Rs. 137 on 16th April.

Technical Analysis by Sovid Gupta & Hunny Tarika (hunny.tarika@fairwealth.in), FAIRWEALTH SECURITIES PVT. LTD. Please check  FairWealth Securities for more information.

All the information and opinions mentioned above are purely based on Technical Analysis.