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Sintex Plastics Technology's Q1FY19 results (Outperformer) - Disappointing run continues; bottomed out?

Q1FY19 results highlights

• SINTEX’s cons. revenue fell 12.5% yoy to ~Rs13.3bn (in-line). Within segments, custom moulding (CM) has fared slightly worse than expected (+7% yoy on re-stated base; 3% miss) while prefab/infra has done better (50% yoy decline; 16% beat). Govt. driven prefab/infra de-focus continues and the segment is expected to report growth only from FY20E onwards.
• Cons. EBITDA at Rs1.63bn fell by 30% yoy was weaker than estimates (14% miss), due to weak performance in the domestic CM business (retooling optimization at certain units). Domestic CM margin came off to 13.8% (vs regular run-rate of 17-18%). International CM margins were stable at 12%. Prefab/Infra margin stood at 13%. Consequently, cons. EBITDA margin came off ~310bps yoy to 12.3%.
• PBT fell by 69% yoy to Rs345m (53% miss) on weak EBITDA performance and higher than est. interest expense which is surprising as it should have been lower due to KKR re-financing.
• SINTEX took a ~Rs113m deferred tax write-back in Q1. As a result, PAT fell only 46.8% yoy to ~Rs375m (32% miss).
• Net Debt was stable at ~Rs31.6bn (flat qoq). As per the management, debt repayment targets for FY19E remain on track.

Key positives: Stable international CM performance.

Key negatives: Margin weakness in domestic CM.

Change in financials: Cut FY19E/20E EPS by 27%/19%.

Valuation & view

SINTEX has had a string of financial underperformances ever since its demerger from the parent entity. The company’s strategy of cleaning out its government-driven business in prefab/infra is largely behind it, and its focused approach of improving retail contribution to its domestic CM business requires margin investments upfront which would take some time to settle down. However, balance sheet strengthening is on track (by reducing high WC govt. business) and through internal cash generation and promoter infusion. KKR’s entry into BAPL (as a debt investor) should also aid SINTEX’s corporate governance perception. SINTEX needs to deliver in terms of profit growth before markets start looking at it favourably; we believe things would start to look up from Q3FY19E onwards. We retain our Outperformer rating on SINTEX with a revised target price of Rs58 (12x FY20E fully diluted EPS lowered form 13.5x earlier).