| Summary of Contents
| STOCK UPDATE Sintex Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Rs120
Current market price: Rs71 Price target revised to Rs120 Our interaction with the management of Sintex Industries leads us to believe that the demand in the domestic as well as the international markets is moderating.
Factoring the moderating demand, high crude prices and open forex exposure in the form of foreign currency convertible bonds (FCCBs: $110 million), we have reduced our FY2012 and FY2013 earning per share (EPS) estimate by 26% and 21% respectively. Our revised EPS for the stock is Rs13.5 (Rs18 earlier) and Rs16 (Rs20.3 earlier) respectively.
On the stock performance side, Sintex Industries has underperformed the benchmark indices in the last six months (it has lost 52% while the Sensex has declined 11% in the same period). We believe that this underperformance on account of concerns related to moderating demand, slow execution pace and FCCBs is overdone and is getting reflected in the near bottom valuation of the stock (the stock is ruling at 4.4x its FY2013E earnings). Thus, we believe that this correction provides an attractive entry point for the investors and maintain our Buy rating on the stock with a revised price target of Rs120. Our price target implies an FY2013 price-to-earnings (PE) multiple of 7.5x, which is at a 30% discount to the average PE multiple of the last ten years. We feel this discount is warranted on account of the slower growth, the balance sheet risk and the company's exposure to an uncertain Europe.
SECTOR UPDATE Real Estate Bangalore real estate stable now but to edge lower
Residential demand at Bangalore fairly stable in comparison to other markets but might taper off in future
Residential sales have been dropping in the prime cities of India, except for Bangalore, which is seeing somewhat steady sales comparatively. Volume in Bangalore fell by just 7% year on year (YoY) as compared to 23% and 31% fall in Mumbai and Delhi respectively. In fact in Q3CY2011, Bangalore-based developers outperformed peers, with a strong sales volume. However, with the information technology (IT) industry also slowing down, the demand in Bangalore is also expected to be affected going ahead.
Bangalore's commercial market scores better but could edge down
Even Bangalore's commercial market is doing fairly well compared to other markets. While the commercial market in other prime cities is facing heat with commercial leasing touching one-year low in Q3CY2011, the Bangalore market was much better off.
Slower demand from IT/ITES may affect Bangalore developers
The inventory level is already high for Brigade Enterprises (Brigade) and Puravankara Projects (Puravankara). Now if the inventory level rises further, it would further affect the cash flow of the companies, putting strain on their balance sheets. Except for Prestige Estates (Prestige), the net debt to equity for the rest of the southern developers is already in the range of 0.7x to 0.8x. Going ahead, a slowdown in demand, rising working capital pressure and negative free cash flows will result in higher debt requirement. Infact the return on equity (RoE) is very poor across all south based developers except Prestige.
Outlook
The sector has highly underperformed over the last one to two years, making valuations very attractive. However, we are still cautious as the real estate market will take time to revive. Though the interest rates seem to have peaked out, the demand will revive only once the overall economy improves and with the developers adopting meaningful price cuts.
| | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. | | | |
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