FREE

Company update: Sintex Plastics Tech. (Outperformer) - Focus on Balance Sheet disrupting P&L!

We remain positive on Sintex Plastics Technology (SINTEX), notwithstanding the company’s underperformance versus broader indices (post listing). Weak 9MFY18 performance, especially in the prefab/infra segment coupled with company’s delay in communicating shift in strategy (taking government share to 0% vs ~60% earlier) has weighed down the stock. However, the silver lining is our expectation that 1) SINTEX’s working capital stress (due to delayed payments) should ease 2) Debt repayments would remain on track due to FCF generation and recent promoter equity infusion, 3) potential debt-deal with KKR would reduce interest payouts. Sustained delivery in the custom moulding (CM) segment, coupled with rising focus on retail business and lower contribution of government revenue would improve earnings quality and return ratios, but we would look for early signs of an uptrend (expected from Q3FY19E onwards) before turning upbeat; we roll forward to FY20E EPS, but have cut PE multiple to 13.5x (15x earlier). Current valuations more than discount our muted expectations. We retain our Outperformer rating with a revised target price of Rs90.

Government business withdrawal disrupts P&L but improves balance sheet: We believe SINTEX’s strategic decision to lower government revenue share to nil (~21% in FY17) would result in 3% consolidated revenue and ~13% profit decline per annum (pa) over FY17-19E versus our earlier expectation of growth. As government business was marred by higher working capital investments, provisions made for delayed payments hampered margins. As a result, we expect exit from government business to ease working capital; in addition, recent equity infusion (Rs6bn warrants) by the promoter will also aid the company’s debt repayment target. SINTEX has already repaid ~Rs3bn debt in FY18E and expects to repay another ~Rs10bn by FY20E (Net Debt/EBITDA to fall to ~2.3x versus ~4.1x in FY18E).

Superior earnings quality through sustained delivery in CM and rising focus on retail: We estimate ~34% pa decline in prefab segment revenue but ~10% CAGR in CM over FY17-19E; this coupled with SINTEX’s renewed focus on retail (organized players to benefit post GST) would improve SINTEX’s earnings quality on lower working capital requirements.

KKR deal could improve corporate governance perception: KKR private equity might get 1-2 seats on BAPL Board (CM segment, 100% subsidiary of SINTEX), after KKR refinances BAPL’s debt. We expect BAPL to contribute ~85%/~88% of SINTEX’s revenue/EBITDA by FY20E; the rub-off effect on company-wide corporate governance would be perceived as a positive by the market once KKR comes on board, in our view.