Macro headwinds
We spoke to Sintex’s management earlier this week to get an update on
the custom moulding business, which is the key part of the company
exposed to the global macro economic environment. Whilst visibility on
FY12 is reasonably high and the company is confident of its guidance,
there are some downside risks in FY13 given the late cycle nature of the
business. The insulated nature of the building products business (48% of
Ebitda) limits aggregate risk. We cut estimates by 2-5% to build in more
cautious assumptions for the custom moulding business. Retain BUY.
Custom moulding business exposed to macro headwinds
Sintex’s custom moulding business is exposed to global and domestic macro
headwinds. The Bright Brother’s business derives over 90% of its revenues
from the Indian auto industry while Nief, despite geographic diversification,
remains a Europe centric business. Wasaukee is focused on the wind power
segment. The domestic business focuses largely on electricals. Together,
these businesses contributed ~42% of FY11 sales and ~35% of Ebitda.
Late cycle nature suggests FY13 risks
Sintex is primarily a tier II supplier within the auto components space (Bright
Brothers, 35% of Nief). This creates a lead time between the OEM market
slowing and the effect filtering through into Sintex’s sales. This was visible in
the previous downturn, when Sintex’s moulding businesses troughed in FY10.
This suggests that macro risks for Sintex may emerge in FY13. The other
segments within custom mouldings are also OEM driven.
Aggregate risk muted due to building products
Growth in Sintex is being driven primarily by the building products business
(monolithic, prefab), which are driven by government spend on social
infrastructure. Between FY08-11, building products’ contribution to Ebitda has
risen from 38% to 49%, and we expect a further increase to 58% by FY13.
These segments are much less vulnerable to the macro environment and are
also not susceptible to environmental clearance or other delays due to the
small size of projects. As a result, even with some fairly cautious assumptions
on the custom mouldings business, the aggregate earnings impact is limited.
Undemanding valuation, retain BUY
We have trimmed forecasts for the custom mouldings business growth and
margins, driving a 2-5% earnings cut. We have also reduced our price target
to Rs190 (Rs200 earlier), 26% upside. Despite the cautious assumptions, we
expect Sintex to deliver a 19% earnings CAGR over FY11-13. This is at odds
with the undemanding valuation of 7.4x FY12 PE. Retain BUY.
We spoke to Sintex’s management earlier this week to get an update on
the custom moulding business, which is the key part of the company
exposed to the global macro economic environment. Whilst visibility on
FY12 is reasonably high and the company is confident of its guidance,
there are some downside risks in FY13 given the late cycle nature of the
business. The insulated nature of the building products business (48% of
Ebitda) limits aggregate risk. We cut estimates by 2-5% to build in more
cautious assumptions for the custom moulding business. Retain BUY.
Custom moulding business exposed to macro headwinds
Sintex’s custom moulding business is exposed to global and domestic macro
headwinds. The Bright Brother’s business derives over 90% of its revenues
from the Indian auto industry while Nief, despite geographic diversification,
remains a Europe centric business. Wasaukee is focused on the wind power
segment. The domestic business focuses largely on electricals. Together,
these businesses contributed ~42% of FY11 sales and ~35% of Ebitda.
Late cycle nature suggests FY13 risks
Sintex is primarily a tier II supplier within the auto components space (Bright
Brothers, 35% of Nief). This creates a lead time between the OEM market
slowing and the effect filtering through into Sintex’s sales. This was visible in
the previous downturn, when Sintex’s moulding businesses troughed in FY10.
This suggests that macro risks for Sintex may emerge in FY13. The other
segments within custom mouldings are also OEM driven.
Aggregate risk muted due to building products
Growth in Sintex is being driven primarily by the building products business
(monolithic, prefab), which are driven by government spend on social
infrastructure. Between FY08-11, building products’ contribution to Ebitda has
risen from 38% to 49%, and we expect a further increase to 58% by FY13.
These segments are much less vulnerable to the macro environment and are
also not susceptible to environmental clearance or other delays due to the
small size of projects. As a result, even with some fairly cautious assumptions
on the custom mouldings business, the aggregate earnings impact is limited.
Undemanding valuation, retain BUY
We have trimmed forecasts for the custom mouldings business growth and
margins, driving a 2-5% earnings cut. We have also reduced our price target
to Rs190 (Rs200 earlier), 26% upside. Despite the cautious assumptions, we
expect Sintex to deliver a 19% earnings CAGR over FY11-13. This is at odds
with the undemanding valuation of 7.4x FY12 PE. Retain BUY.
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