Saturday, March 31, 2018

Fundamental Stock Analysis: Sintex Plastics


Sintex is a household name. It was a synonym for the water tanks. They expanded their portfolio by venturing into PVC doors, pre-fab housing and also into automotive plastic components. After listing as a separate company, its stock is on a slide. In the last one year, this stock has lost 50% in the price.

Credit: Google Finance


The main reason for the fall can be attributed to negative revenue growth (though not very significant) over the last two quarters. If we assume last quarter’s earnings holds good (Rs. 0.88) as proxy for the entire year (0.88 x 4 = Rs. 3.52 yearly earning), it is trading at 16 P/E multiples and getting close to its book value of Rs. 51.

CMP
P/E
P/B
57.5
16
1.1

Credit: Trendlyne


Credit: India Infoline
If we look at balance sheet, we can notice that the company’s borrowings are at 40% of balance sheet size. It is not too high for the engineering sector companies. It seems reasonably healthy.


Trigger for re-rating:

What attracted me to this stock is the news of promoters increasing their holdings in the company. (Link: https://www.moneycontrol.com/news/business/stocks/sintex-plastics-technology-up-3-to-issue-warrants-to-promoter-2499495.html )

Promoters will pump in around Rs. 600 crores in the form of convertible debentures which will be converted into equity at the conversion price of Rs.90 a share. They have already paid 25% of the funds upfront. Company wants to use these funds to reduce debt.

This is a good news which I expect will trigger re-rating of the stock. Let us run our numbers to assess the impact.
  • Current Borrowings= Rs. 2,593 crores (Long term) + Rs. 894 crores (Short term)
  • Interest payment during last quarter = Rs. 73.47 crores (Avg. interest rate = 8.4%)
  •  Debt reduction = Rs. 600 crores
  • Yearly earnings increase due to reduced interest payment after debt reduction = Rs. 600 crores x 8.4% = Rs. 51 crores
  • Current outstanding shares = 58 crores
  • Increase in share base with warrants conversion = 6.6 crores
  • Total outstanding shares = 58 + 6.6 = 64.6 crores
  • Expected earnings per share = Rs.4.5 (approx. Rs. 1 increase due to debt reduction)

Conclusion:

Promoters increasing stake and that money being used to reduce debt will add Rs.1 per share to the earnings. At current P/E multiple of 16, it adds a value of Rs. 16 to each share. But there is an improvement to quality of balance sheet as debt levels will come down. That would demand a higher P/E multiple. Though industry P/E multiple is at 35, we can conservatively expect it to raise to 20.

Estimated future value per share = 4.5 (EPS) x 20 (P/E) = Rs. 90

Interestingly our estimate coincides with conversion price of debentures too. That gives a sense that our estimate is realistic. This means there is upside potential of 50% to this stock. It may take an year or so to realize that benefit.

Down Risks to estimate:

We have not assumed any further deterioration to revenue as business seems to be stable as per the management commentary and order book position. If our assumptions are challenged, so will be our estimate too.

Potential upside to estimate:

There could be further upside to our estimate if business comes out stronger than last quarter which looks more probable. And the company is venturing into automotive sector which has higher potential to increase earning further. That estimate is considered out of scope for this post.