Structurally a strong growth story: We initiate coverage on Sintex with a BUY rating (upside of 38%). We like Sintex primarily for: (1) A diversified business model marked by low volatility in sales, profit and cash flows; (2) Market leadership in the prime Monolithic and Prefab segments which are expected to show CAGR of 25% and 27% during FY11-FY13E respectively; (3) Acquired overseas and domestic subsidiaries likely to show operational improvement with 300bps increase in margin in FY13e v FY10; (4) Emerging cash flow positive in FY12-FY13e through better management. At our TP of Rs220, the stock looks attractive and discounts 12x & 10.6x FY12e & FY13e EPS of Rs18.5 & Rs20.7 respectively.

Govt thrust on social spending to drive the Prefab and Monolithic business: Government of India’s (GoI) increased focus on urban/ rural housing, rural education and health care over the past few years has led to increased spending on various schemes. Sintex, with a leading presence in Monolithic and Prefab , is a direct beneficiary.

Prefab and Monolithic – foundation for growth: Strong execution capabilities in Monolithic and Prefab separate Sintex from SME peers. Monolithic and Prefab grew at 56% and 5% CAGR over FY09-FY11e respectively. We expect Prefab and Monolithic to grow at a CAGR of 25% and 27% respectively during FY11e-FY13e.

Overseas subsidiaries start performing: The acquired companies (all 100% subsidiaries now) in Sintex’s portfolio have started delivering. We believe that with moderate recovery in the western markets, operational improvement in the acquired companies would come in soon. We expect margin of the subsidiaries to improve from
9.2% in FY10 to 12.2% in FY13e.

Positive operational cash flow in FY12-FY13: We believe Sintex would be operational cashflow +ve in FY12-FY13e on better mgmt of WC days and operational improvement in the subsidiaries. Operational CF in FY12e and FY13e is likely to be Rs5.9bn and Rs6.4bn as against Rs1.5bn and Rs(2.6bn) in FY09 and FY10 respectively.

Valuation attractive: Sintex has historically traded at 6x–14x multiples. We assign 12x PE multiple to arrive at 12-month TP of Rs220. At CMP, the stock discounts 8.6x & 7.7x FY12 EPS & FY13 EPS of Rs18.5 & Rs20.7 respectively and is available at 6.6x FY13e EV/EBIDTA. Key risks to our assumption are (1) Execution risks in the Monolithic and Prefab segments; (2) Fluctuation in raw material prices denting margin; and (3) Delay in improvement of subsidiaries.