Thursday, 17 November 2011

Sintex Industries - Fallen Angel

Sintex Industries has corrected significantly over the last few quarters.


The main reason it has corrected is the currency overhang on their FCCB borrowing of $225 million. The market is assuming that since Sintex took on the loan at a rate of Rs 40.53 and the rupee has depreciated to Rs 50-51, there is a large impending forex loss.

Here is where I think the market is wrong. If you look at this year's annual report and read through the details of the FCCB, here are some of the facts you will get.

1. In respect of US$ 225 million zero coupons foreign currency convertible bonds (FCCBs) raised by the Company on March 12, 2008 during 2010-11, no FCCBs were converted into equity shares. The bondholders are entitled to apply for equity shares at a reseted price of `246.50 per share with a fixed rate of exchange on conversion of `40.53 to US$ 1. On full conversion of FCCBs paid up capital of the Company will increase by 36994928 equity shares of `1 each amounting to `3.70 crore.

2. Premium payable on redemption of FCCB conversion is 263.17 cr is already put in as Provisions in this years Balance Sheet.
3. Total Rs 986.11 cr Fixed Deposits. Rs. 507.11 cr are lying as unutilized amount of FCCB as part of the FD.
The 3rd point is the most critical one here. Out of $225 mn, nearly $100mn is lying unused in the bank as an FD. The company has a total of about $190 mn in Fixed Deposits on Mar 31, 2011. So, it should have no problems at all in paying back the FCCB. I am assuming they would not be converted as the price of Rs 246.50 will be tough to get to by Mar 31, 2013 when the FCCBs come up for redemption.

Sintex is also a company which has paid a dividend consistently for the last 78 years!!

Valuation
The Consolidated EPS for FY11 was 16.97. The management has guided a 20% revenue growth this year. Even if we take a conservative view and take a flat growth, at a consolidated Rs. 17 EPS, the stock is currently available at a PE of 5.1. This is less than half of the last 5 year's average PE of 11.

If someone can hold on for 2 years from now, the expected 2014 EPS is likely to be upwards of Rs 25. At a PE of 8-10, the possible price range is Rs 200-250. That is more than a 100% appreciation in 2 years.

Note: I am invested in Sintex and may be biased. For all investment decisions, please consult your financial planner.

8 comments:

  1. I totally agree with your analysis that Sintex has a comfortable FCCB situation, and this is more of a case where markets punish any stock with a FCCB overhang. Mispricing opportunity here.

    Having said that, would like to know your opinion on the corporate governance issue, and how far it would hurt the stock? I am pretty sure you know the issue, but for other commenters, here's the link -

    http://indiaer.blogspot.com/2011/12/sintex-industries-nirmal-bang.html

    Secondly, with this foray into EPC (where the company has no experience), wouldn't the already horrible WC cycle deteriorate further? I mean, it is 142 days due to the longer payment cycle in monolithic segment. With EPC, it could be even more.

    Would like to know your views/thoughts on the above two issues.

    ReplyDelete
  2. Hello,

    There seems to be a misinformation campaign going on where even so called experts on biz channels are either not aware of the amount lying in bank escrow account or do not want to bring it to notice purposely. The underutilized FCCB amount in escrow is about 110 Million $. The question that comes to mind is can the management not do a partial prepayment of the FCCB. As per RBI Guidelines they can do another FCCB/ECB 6 months prior to the current FCCB redemption. I had found this link from RBI earlier however since they can prepay only upto 100 Million $ might be a hindrance for the company.

    http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=6490&Mode=0

    Regarding your view above which states that the conversion rate is for 1 $ = 40 Rs. I am assuming the same does not apply to redemption of bonds as well.

    It would be great to get your views on the above.

    Regards,

    ReplyDelete
  3. The FCCB issue I think I have clarified. The company has to pay back the FCCBs loan as no investor is likely to opt for conversion to equity at a lower price.
    Regarding the Shirpur Power deal, I am not very concerned. I try to look at companies dealings (specially questionable ones) though the lens of what I would do in their place. In this case, I would be doing exactly the same thing as the promoters have done. Since as promoters of Shirpur Power, I would have to get the work done anyway, I might as well get it done by one of my own companies. The same practice is followed by all major companies. Think of large MNCs like IBM, Accenture, Cap Gemini in the IT space. Do they outsource their internal IT projects to other companies, even if they are lower cost? The answer is a resounding no. And anyways, Sintex has reasonably good experience in building and construction space after its 30% stake in Durha COnstructions, which is a private civil and mechanical contractor.
    The market seems to be overly pessimistic and hammering the stock. I was expecting it to stabilize in the 90-92 range, but since it did not, there may be some more capitulation left on this. So, I would wait for some time before buying more.

    ReplyDelete
  4. Anhishek, Its been 6 months now.. and sintex is still around 55.. do you have same view? or changed your view.

    ReplyDelete
    Replies
    1. The business performance has been very weak, primarily because of halting of government orders in the construction business. This has impacted topline growth and margins. Also, dollar has moved adversely to the rupee. It is difficult to predict short term price but I have sold all my position around 80 and covered back at 52 now. I still am bullish on the long term prospects on the company. The company should do well in 2014 onwards. Till then the FCCB overhang and lack of growth may keep the stock down.
      If you have a long term horizon you can hold/buy. But today there are other stocks which are also well placed from a overall business momentum perspective and available at reasonable valuations.

      Delete
  5. BGupta

    Hello,

    Abhishek it seems that Sintex is in 20-22 range,and do you still have the same view or changed your view,with a 12 month time frame.
    With the new proposed investment of 1800 cr in textile,will it be a further drag on the on profitability in the next 2-3 yrs.
    Regards,

    ReplyDelete
    Replies
    1. I had booked losses last year on Sintex, but I have it firmly on my radar. Although the stock looks very cheap, the business sentiment is extremely poor for its segments. The foray into textile may not be very well timed as I would have preferred the company to have cleaned its balance sheet before taking up any further new activities. Good example is how Havells managed a similar situation and has now come back.

      I would wait to get into any capital goods sector stock at this time as I am not in a general bullish frame of mind. There are lot of problems with core business in India and it may be more prudent to wait some time before taking a call.

      Delete
  6. This comment has been removed by a blog administrator.

    ReplyDelete

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