FREE

Sintex Plastics Technology's Q2FY19 results (Outperformer) - Awaiting the bottom of the earnings downgrade cycle!

Q2FY19 results highlights

• SINTEX’s disappointing streak continued with revenue falling ~18% yoy to ~Rs11.7bn (15% miss). Key driver for the miss was lower than anticipated custom moulding (CM) revenue which declined ~2.5% yoy (19% miss). Prefab/Infra revenue declined ~49% yoy (6% beat), in-line with the company’s defocusing strategy.
• EBITDA, however, fell ~14% yoy to ~Rs1.7bn due to cost optimization benefits and reduced focus on CM product streams where the company was not in a position to pass-on RM cost hikes (most of the raw material are crude/dollar linked); this also explains to some extent the decline in CM revenue). EBITDA margin, as a result, improved ~70 bps yoy and ~190 bps qoq to 14.2% (IDFCe: 13.9%).
• Finance costs persisted at elevated levels (~Rs900m; +20% yoy), despite debt repayments of ~Rs2.3bn in H1 and KKR’s low-cost debt into the picture, due to forex fluctuations. ~Rs110-120m forex impact was booked during the quarter. Forex fluctuations have also led to SINTEX’s Net Debt rising to ~Rs33bn vs (~Rs31.6 bn in Q1).
• SINTEX took a ~Rs148m deferred tax write-back in Q2. Despite this, PAT fell ~43% yoy to ~Rs404m (20% miss); FY19E tax rate exp at 18%.
• Management reiterated guidance of less than ~Rs2bn capex for this fiscal and debt-reduction of Rs3.5-4bn in FY19E. They also noted that  H2FY19E revenue and margin should be better than H1FY19.

Key positives: Operating margin improvement.

Key negatives: Decline in CM revenue/Higher finance costs.

Change in financials: Cut FY19E/20E EPS by 16%/23%.

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, although recent CM product rejigs in light of lower profitability was a surprise and would remain a monitorable issue. Retail contribution to domestic CM, however, has picked up and a higher contribution from the same would meaningfully change SINTEX’s margin profile and return ratios, over the medium-term. In addition, debt repayments through cash generation would also support the company’s financial health. However, SINTEX needs to deliver in terms of profit growth, before markets start looking at it favourably. Retain Outperformer on SINTEX with a revised target price of Rs37 (10x FY20E fully diluted EPS, lowered from 12x).