Sintex Industries' Q3FY18 results (Dropping coverage) - Cotton prices/USD fluctuations play spoilsport…

Q3FY18 results highlights

• Cons. rev. grew 43.7% yoy / 15.5% qoq to Rs8.4bn (4.4% beat). The growth was supported by higher trading revenue (+24% qoq) even as there was slow ramp up of Phase #2. Exports have picked up during the quarter while the domestic market has gradually stabilised post GST hiccups. Trading revenue grew ~3x yoy during the quarter.
• Cons. EBITDA declined sharply by 30.4% yoy / 4.2% qoq to Rs581mn (IDFCe: Rs903mn), while EBITDA margin declined ~730 bps yoy / ~140 bps qoq to 6.9% (IDFCe: 11.2%).
• Margin was negatively impacted, despite higher ramp-up in Phase #2 as USD depreciation, higher export contribution to mix (300-400 bps lower realization vs domestic prices), higher trading revenue (with margins of 1-2%) and subdued cotton prices piled up.
• Standalone rev. (spinning and fabric segment) grew by 10.5% qoq indicating slow ramp-up of Phase II capacity (commissioned in early Q3FY18). Standalone EBITDA fell by 8% qoq on account of the reasons mentioned above.
• Cons. PBT at Rs338mn fell by 23.6% yoy (1.1% qoq decline) due to weak operating performance. However, PBT decline was better than EBITDA decline due to steady depreciation (3.6% yoy growth; 0.2% qoq growth). Flattish to marginal growth in depreciation is a surprise, given that Phase #2 capitalization impact was not in the base.
• Cons. net income came in at Rs211mn, registering a decline of 50.2% yoy / 25.2 % qoq (31% miss on estimates).

Key positives: Outperformance on top-line but was led by poor mix.

Key negatives: Weak EBITDA margin performance.

Impact on financials: Last published FY18E/19E EPS estimates at Rs2.4/4.6 respectively.

Valuation & view

With Phase #1 running near peak utilizations and Phase #2 yet to ramp up, the next leg of growth would come from increasing utilisation, adding more value-added yarn products and increasing revenue mix towards domestic sources. However, given the lack of clarity on the time line of this transition, operating performance and earnings visibility remain a question mark. We are dropping coverage on SINT as a result. Our last published rating on the stock was ‘NEUTRAL’ with a 12-month target price of Rs28 (6x FY19E EPS). Our estimates are on page 2 of this report – these estimates should not be used for making investment decision as they have not been updated and circumstances could change materially with time.