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Sintex Plastics Technology's Q3FY19 results (Downgrade to Neutral) - The illusive promise of a recovery…

Q3FY19 results highlights

• SINTEX’s disappointing quarterly streak continued with rev. falling ~17% yoy to ~Rs11.1bn (8% miss). Both custom moulding (7% yoy fall; 7% miss) and prefab/infra (48% yoy fall; 16% miss) drove the decline in top-line. CM revenue fall was partially attributable to slowdown in automotive business and EUR depreciation, while Prefab/Infra revenue fall was in-line with the company’s strategy.
• Although EBITDA margins have been steady at 13.7% (20 bps fall yoy; 13.9% est.) as the company weeded out low margin products in favour of higher margin ones, but weakness in rev. led to EBITDA falling ~18% yoy to ~Rs1.5bn (10% miss). CM margin stood at 13.9% (-180 bps yoy) while Prefab/Infra margin stood at 14.3% (+130 bps yoy). CM margin compression was partially attributable to SINTEX expensing product development costs to widen its retail portfolio (~Rs240-250m).
• Finance cost grew ~4% yoy (10% lower than est.), mainly due to better WC management. Net debt has increased marginally in Q3 to ~Rs33.9bn (versus ~Rs33bn in Q2 end).
• PAT fell ~50% yoy to ~Rs259m (29% miss).
• No debt repayments were done in Q3, but the management plans to repay ~Rs1.5-1.6bn in Q4, 9MFY19 capex stood at Rs860m.

Key negatives: Top-line continues to be under pressure.

Impact on financials: Cut FY19E/20E EPS by 20%/31%.

Valuation & view

SINTEX has had a string of financial underperformances ever since its demerger from the parent entity. While the management had later (post the demerger) indicated their strategy of exiting the Govt. prefab/infra segment, the decline was sharper than expected. However, the real disappointment stems from continuous pressure on CM segment rev. which was expected to be the growth driver. Now SINTEX is focusing on retail segment where it does have a strong brand; however, it is targeting the price sensitive customer where the competition is tough and mostly unorganised. In such a scenario, we believe that it may not be an easy road for SINTEX and there could be further margin pressures in the near term (SINTEX has already missed its roll-out targets as accepted in the Q3 call). Although debt repayments are mostly expected to remain on track (positive OCF; low capex period), we believe that risks on the retail front could keep earnings growth under check in the interim. As a result, we downgrade the stock to Neutral (revised TP of Rs20; 8x FY20E EPS). Retail execution strategy and debt repayments are key monitorables.