Fw: Investor's Eye: Update - Sintex Industries (Q3FY2012 results: First-cut analysis), Pratibha Industries (Exit from SAW pipe business to be EPS accretive)

 

 

Investor's Eye [January 13, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Sintex Industries    Cluster: Apple Green Recommendation: Buy Price target: Rs120 Current market price: Rs72 Q3FY2012 results: First-cut analysis Result highlights For Q3FY2012, Sintex Industries (Sintex) reported weak results that were below our expectation on the revenue (-2.1% year on year [YoY]), operating profit (-17.1% YoY), margin (down 250bps YoY) as well as the earnings front. The adjusted profit for the company came at Rs72.5 crore (down 35.7% YoY) as against our expectation of Rs90.7 crore. Disruption in monolithic business results in revenue de-growth: The income from operations declined by 2.1% on a year-on-year (Y-o-Y) basis, while the same remained flat on a sequential basis. Normally during the third quarter, the execution and the order booking from the monolithic business is high, but in this quarter due to extra slow clearance of the projects coupled with high blockage of working capital (read increase in debtors days) compelled Sintex to stall the execution. As a result the monolithic business (which has a strong order book at Rs3,000 crore) reported a huge 24.4% Y-o-Y drop in the revenue for the quarter. Though domestic custom moulding was strong, other businesses posted negative to flat growth: The domestic custom moulding segment stood strong with a revenue of Rs152 crore (+42.1% YoY). But the other segments like the international custom moulding division, textiles, prefab and BT shelter posted flat to single digit negative growth.  Margin contraction across the board spells havoc for consolidated margins: The quarter witnessed margin contraction across all the business segment ranging between 200-300 basis points (bps). The monolithic segment's margin at 16% was 200bps lower than in Q3FY2011, while the overseas custom moulding division (on an aggregate basis) saw the margin falling to single digit at 7.3%. All this led to a 250bps contraction in the consolidated margin from 16.6% in Q3FY2011 to 14.1% in the quarter under consideration, resulting in a 17% Y-o-Y drop in the operating profit.  Reported net profit down 27.1% YoY: A contraction in the operating performance coupled with an increased interest and depreciation charge continued to deteriorate the earnings further. The profit after tax (PAT; before exceptional items) was down 33.5% YoY, which is one of the largest drops in profitability over the last 12 quarters. The adoption of the new AS11 guidelines (announced by the Ministry of Corporate Affairs) resulted in booking Rs13.5 crore of gain for the quarter which restricted the reported profit fall to 27.1% YoY.  But adjusting for the FCCB write back, the adjusted profit de-growth expands: The gains booked by the company (Rs13.5 crore) on account of its outstanding exposure in FCCBs (to the tune of $115 million) is a book entry as per the standard. Due to large scale depreciation of the Indian rupee vis-a-vis the US dollar, which could have resulted in huge volatility of earnings, the government has provided an option to the players to amortise the marked-to-market (MTM) loss on foreign loans over the balance period of such loans, and Sintex has availed of the same. Adjusting for this gain (net of taxes), the net profit for the quarter declined by 35.7% YoY. Outlook: Dissecting the results we see that these were below our expectations on all parameters, while we believe that a slowdown is imminent and have built the same in our modeling and estimates. But in the wake of a higher than expected slowdown and margin disruption for Q3FY2012 (that resulted in lower than expected earnings) we would interact with the management to review our current estimates. At the current price the stock is ruling at 4.4x; we have a Buy recommendation with a price target of Rs120. Pratibha Industries    Cluster: Ugly Duckling Recommendation: Buy Price target: Rs61 Current market price: Rs40 Exit from SAW pipe business to be EPS accretive We recently interacted with the chief executive officer of Pratibha Industries, Mr. Yogen Lal, in relation to the saw pipe manufacturing business that has been put on the block. The key takeaways from the meeting are presented below. Exiting the pipe manufacturing business: Pratibha Industries is searching for buyers for its SAW pipe manufacturing business as it plans to reduce costs and improve the net profit margin. It has already received the board's approval for the same. It had entered into pipe manufacturing in 2007 in order to move up the value chain and gain competitive advantage in its water engineering, procurement and construction (EPC) business. It had also planned to use 50% of the capacity for third-party contracts.  Rationale behind the exit: However, given the competitive scenario in the pipe business, Pratibha Industries has not been able to grab any major third-party contracts for its pipe manufacturing division over the last 12-18 months as it has refrained itself from compromising on margins. The plant has so far been catering to only internal water orders. However, of late even for its internal orders it is finding it cheaper to buy pipes from the third party rather than manufacture them itself. In fact, the company saves 5-7% in cost if it sources saw pipes instead of manufacturing them. This has resulted in the plant running at less than 50% capacity utilisation level. Thus, the cost of running the plant has escalated and instead of giving it competitive edge in its water and oil & gas projects, it is hitting its profitability. However, the management reiterates that this is not a distress sale. Maintain Buy: The proceeds from the sale of the plant will help the company to reduce its debt, which had become a concern of late. Otherwise, even under the current gloomy industry scenario, the company has managed to bag large orders with better margins which reinforces our confidence in the company. It bagged Rs1,852 crore worth of orders in M9FY2012 (taking its share only) already surpassing the total order inflow of Rs1,425 crore seen in FY2011. The current order book stands at about Rs4,800 crore, 3.8x its FY2011 revenue, providing healthy revenue visibility. The stock currently trades at 5.0x and 4.0x its FY2012E and FY2013E earnings. We maintain our Buy rating on the stock with a price target of Rs61.   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.     Click here to read report: Investor's Eye

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