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Sintex Plastics Technology's Q3FY18 results (Outperformer) - Balance sheet strengthening preferred over growth!

Q3FY18 results highlights

• SINTEX cons. rev. declined 7% qoq to ~Rs13.3bn (~10% miss).
• The miss was more pronounced on the Prefab/Infra side (34% qoq decline; ~27% lower than est.) as the company continued to aggressively reduce its focus on high WC govt. driven businesses in this segment. Custom Moulding (incl. Retail) came in marginally below our expectations (2% miss; 6% qoq growth).
• Weak performance on top-line weighed down on EBITDA, which declined 4% qoq to ~Rs1.8bn (~20% miss). EBITDA margin improved ~40 bps qoq to 13.9% due to better business mix. Prefab/Infra margins came in at 13.2% while Custom Moulding (incl. Retail) margin stood at 15.2% for Q3FY18.
• As per our calculations, prefab segment revenue declined by ~42% yoy whereas Custom Moulding reported an 8% yoy growth. As per our calculations, EBITDA margin fell by 290bp yoy to 13.9% because of significant drop in higher margin prefab segment.
• PAT came in at ~Rs518mn (34% miss; ~27% qoq decline) due to weak performance in the prefab/infra segment.
• On the positive side, lower focus on high WC business in the prefab/infra segment is leading to lower WC / better FCF generation. SINTEX has reduced its net debt by ~Rs2.9bn over 9MFY18 so far (Rs3-3.5bn target for FY18E). Current net debt stands at ~Rs33bn (vs ~Rs33.6 bn as of September 2017).

Key positives: Debt reduction on track.

Key negatives: Continued weakness in prefab & infra segment.

Change in financials: Cut FY18E/19E EPS by 23%/10%. Introduce FY20E financials.

Valuation & view

Q3FY18 and 9MFY18 results were below muted expectations largely because of change in management strategy of completely defocussing on the high margin prefab/infra segment. This has led to significant cut in FY18E/19E estimates as well. However, improvement in balance sheet is on track and we expect the street to re-rate SINTEX once revenue growth revives from FY19E onwards. Management alluded increasing its stake to 40% by FY19E end and refinancing high cost debt through longer duration financing from a marquee PE entity; these are additional triggers. We retain our Outperformer call with a revised price target of Rs102 (15x FY19E diluted EPS).