Sintex Plastics Technology Limited : Demerger a very good opportunity

Introduction

Sintex Plastics Technology Limited (SPTL) was demerged from Sintex Industries last year where capital intensive textile business became a part of Sintex Industries. The plastics and infrastructure business spun out as part of SPTL. Textile business is capital heavy and didn’t generate satisfactory earnings. However, plastics business of Sintex generates significant free cash flow. Having both the businesses together in a company was putting lot of stress on balance sheet. The entire group is leveraged because cash flow generated from plastics business was dumped to textile business requirements. Hence, entire earnings of the group looked subdued. This is the reason, Sintex didn’t get deserving market valuations. As both of the businesses are demerged, plastics business creates very good investment destination for long term investors. Lets analyze what SPTL is all about and how this is a sound investment opportunity.

Business model of Sintex Plastics Technology Limited

This company deals with following subsidiaries, all of them in plastics

1. Sintex Prefab and Infra Limited: Infrastructure group primarily dependent on Govt. Policies. This group manufactures prefabricated structures like anganwadis, police-chowkis etc. They had order from Govt. of Madhya Pradesh in Kumbh-Mela. 31% of revenues comes from this side of the business.
2. Sintex Wausaukee Composites, Inc.: US based subsidiary in composites. This subsidiary is liquidated and business is shifted to India to improve margins.
3. Customer-specific custom molding: Mainly dependent on automotive sector. Group occupies the pole position in this space with more than a 60% market share.
4. Sintex NP: Automotive and aeronautics division.
5. Application-based custom molding.
6. Sintex-BAPL Limited: Custom molding for diverse and automotive sector. 69% of the business comes from custom molding side of business.

Positives of SPTL

1. Strong presence of business across 4 continents and 9 nations.
2. SPTL enjoys Fortune-500 clientèle. This is very hard to build as company has long term relationships with 80 Fortune-500 clients.
3. Custom molding business on strong footing. Exposure of Government dependent prefab business is being controlled by company. This business puts pressure on the balance sheet in terms of working capital. They want to focus on selling prefab products for CSR activities.
4. A dominant brand position in India with long order book.
5. Very good free cash flow on financial statements.
6. Currently, management is focusing on building and enhancing retail products portfolio in entire India. In this year, they focused on Northern India. In next few years, retail dealership should be spread to rest of India. Retail business is growing more than 35% YoY. This should generate more revenues in coming years.
7. Electric vehicle market is boon for plastics and composite manufacturers.
8. New plants for TVS, Suzuki and Ford will add to the revenues. Also, new orders coming in from Tata-Motors and Cummins. Company is betting big on Auto and Electric sector in India.
9. Entire free cash flow is being utilized to repay debt. Company doesn’t have lot of capital expenditure planned (figure is below 200Crs per year).

Negatives of SPTL

1. Debt-To-Equity of 0.89 as of last quarter. 3000Cr of debt is present on their books.
2. Prefabricated business is dependent on Govt.’ schemes. Cash doesn’t come easily from this business having receivables spanning many months.
3. Overall, 50% of promoters shares are pledged.
4. As business is under transformation, near term balance sheet looks subdued.

Investment rationale

1. Management’s focus to cleanup the balance sheet should result in improvement in RoE to 20%+, RoCE to 15%+. Also, huge scope for margin expansion is observed considering the focus on retail and value added products.
2. Products of SPTL are in great demand, in India as well as abroad. This generates constant revenue stream. Management has target to increase the revenues to 10000 Cr in coming 3–4 years.
3. Promoters are continuously buying shares and reducing pledged shares by significant amount. Stake of promoters in the company set to increase from 28% to 41% after issue of warrants.
4. SPTL generates lots of free cash flow. As majority of their capex is behind, free cash flow is being used to repay all debt. Company is expected to repay ~300Cr of debt in FY 2017–18. In my opinion, SPTL is currently highly undervalued at Rs. ~50 because with ~6000Crs of revenues, market capitalization of SPTL is only ~3000Crs.

References

1. http://www.sintexplastics.com
2. Annual report of last financial year.
3. Quarterly reports of last three quarters.

Call to action

If you like the article, please share and comment your views on it. Next stock will be shared in Sept-2018. This will be high quality stock with huge potential for earnings. So, please stay tune.

Disclaimer

Investment in equity market is subject to market risk. Please analyze annual reports carefully. Views expressed in this article are personal. Views should not be treated as recommendations to buy or to sell stock.

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