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Spinning Value
Can Sintex Industries’ decision to demerge its plastics business create more moolah for its shareholders?

Jitendra Kumar Gupta

Sintex Industries seems to have finally found a way out to counter investor pessimism. The company is demerging its textile business that accounts for the majority of its 6,000 crore debt (net gearing: 1.03x). Under the scheme, shareholders of Sintex Industries will get one equity share of Sintex Plastics, as against one equity share held in Sintex Industries. Textile has been a major drag on its financials, depressing its return on equity to 11.5% and limiting valuation to 6x earnings, despite consumer-facing businesses like monolithic and prefab, which has a higher margin. (See: Poles apart)

That precisely is the rationale for separately listing its plastic business. Sintex is the market leader in plastic prefab (building material for schools, low-budget housing, defence, civil construction and temporary shelters; etc) and storage tanks. Its strong distribution, brand and the product portfolio of about 3,500 products, largely in value-added segments like custom moulding and plastic products used in high-end engineering and automobiles applications, make it a strong player. 

Extruding cash 
The listed players in the plastic industry, such as Supreme Industries and Nilkamal, are currently trading at a price to earnings ratio of about 26x. Both the companies boast a close to 24% return on capital, which is higher than Sintex’s plastic business that had a 16% return on capital in FY16. In this backdrop, even at half the valuation, Sintex’s plastic business could be worth 6,400 crore, as against the current market capitalisation of 4,300 crore for the combined entity. The revised valuation does not include the textile business, which could be worth 520 crore at 6x earnings given its 3% return on capital.

Rohit Dokania  VP-research, IDFC Securities

“Currently Sintex trades at 5.5x FY17 and 4.1x FY18 estimated earnings as its large spinning capex masks the good performance of its plastic segment. Post the demerger, the textile segment (15% of FY16 net profit) could trade at 5-6x one-year forward earnings and plastics segment (85% of FY16 net profit) could list at 10-12x one-year forward earnings, given its strong growth and return profile,” says Rohit Dokania, vice-president-research, who tracks the company at IDFC Securities. Dokania’s expectation of the textile business trading at 5-6x earnings may happen if the textiles business picks up but even if the textile business gets decimated in the interim, the vibrant plastics business does seem to have an upside. (See: Value unlocking

Vikram Suryavanshi  Analyst, PhillipCapital

Vikram Suryavanshi, analyst, PhillipCapital, echoes a similar viewpoint. “We expect a re-rating considering Sintex’s leadership and a sharper focus on the plastic and custom moulding businesses after the demerger. We have increased our target valuation to 7x FY18 earnings as against 6x earlier to arrive at a price target of 120 per share.” Suryavanshi however is uncertain about the valuation of the textile business despite its EBITDA of 217 crore. “The contribution from the on-going textile expansion (3,000 crore) is almost nil. Whereas, the cost related to these new upcoming projects is being undertaken by the textile business which makes close to 24% EBITDA margin,” cautions Suryavanshi. The textile business consumes 45% of the capital employed in the combined entity, but its contribution is a mere 12% to the overall Ebit.

Expansion pain 
Between 2007 and 2010, the company’s overall debt jumped almost five-fold to about 2,500 crore because of several acquisitions made in the plastic business in the US and European markets. Adding to its woes, a global slowdown also put pressure on its working capital. Its cash from operating activities also plunged from 148 crore to a negative 281 crore. 

Rising debt has also added other associated issues like equity dilution and pledging of shares. In January 2015, about 52% of the promoters equity was pledged, which has gradually reduced to 47% in December 2015 and 40.24% currently. In FY12 and FY13, it raised funds through QIP, issue warrants and FCCBs. Its equity was diluted by almost 40% to 52.4 crore outstanding shares by FY17 compared to 31.1 crore shares in FY14. While exact breakup of debt is not known, majority of the consolidated debt is in the textile business. In the past, the company also borrowed under the Technology Upgradation Fund Scheme for expanding its textile business. 

Scale play
Sintex’s on-going projects in the textile space enjoy the advantage of low power cost, location (6 kms away from Pipavav Port), low raw material and funding cost (effective interest rates of about 3%). The first phase (3 lakh spindles) of the project is operational while the textile division is making an Ebit margin of close to 16%. The second phase, which is expected to be operational by September 2017, will have an additional 3 lakh spindle capacity, with an expected IRR of 16-18%. 

“The first phase of the project is operational but the full impact, which is another 1,200-1,500 crore in sales, will be seen in FY18 and similarly the impact of second phase will be visible in FY19. While the management is expecting 18-20% operating margin, even at 15% you can calculate the possible operating profit, once the entire facilities are operational. In that case, the numbers for the textile business will start to look differently as related interest cost will be absorbed on a higher scale,” adds Suryavanshi.  Investors still interested in the textile business will be counting on that as post the demerger; the fabrication business could hog most of the love.

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