Debt concerns easing for Sintex Industries

Last Updated: Thu, Dec 06, 2012 05:08 hrs

Debt-ridden Sintex has initiated restructuring of its loans, which should help strengthen its balance sheet and revive its business fortunes. These also should help ease concerns and provide some boost to the stock, which at Rs 64.7 is trading at historical low valuations. Also, the company has recently raised a total of Rs 950 crore through the QIP route and FCCBs, which should provide relief on the liquidity front. Although these moves have meant a significant dilution in equity capital and cut in earnings estimate, analysts believe valuations are still reasonable. At current levels, the company is being valued (enterprise value) at Rs 4,800 crore, which is about one time its sales and 6.5 times its operating profit.

Sintex, which is a well-known brand in the plastic and building material products segments, due to higher capex, rising working capital and several acquisitions over the last few years has suffered as a result of lack of sufficient cash flows and partly due to slowing growth and margin pressures in the business. As a result, the company is currently having total consolidated debt in the vicinity of about Rs 3,100 crore and debt-equity ratio of 1.6 times as at end-FY12.

Importantly, of this debt, Rs 1,600 crore is due for repayment in March 2013, which was the key reason for the stocks' under performance, as the markets were worried about the company's ability to repay.

Also, given the depressed share prices, reliance on equity issuance meant higher equity dilution. Positively, Sintex's cash generation capacity has improved in the recent past and the company currently has cash of about Rs 740 crore (at end-September), though slightly higher than Rs 720 crore at end-March.

With the company have raised over Rs 176 crore from QIP (equity) and another Rs 770 crore through the FCCBs (conversion price Rs 75.6 per share), its liquidity position has improved. With this exercise the company is looking to bring its debt-equity to 0.8 times.

However, this came with significant equity dilution of 58.4 per cent. As a result, analysts have cut their FY14 earnings estimates for Sintex by about 26 per cent as against 15-17 per cent savings in interest costs. Nevertheless, even after factoring the dilution, the estimated earnings growth of 16 per cent for FY14 is healthy while valuations (PE of 6.8 times) are reasonable, both of which should provide downside support to the stock.

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