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RETAIL RESEARCH Stock Note 27 Mar 2017

Sintex Industries Ltd

RETAIL RESEARCH P a g e | 1

Industry CMP Recommendation Add on dips to Sequential Targets Time Horizon Plastic Products Rs. 99.85 Buy at CMP and add on declines Rs. 86-90 Rs. 130-149 1-2 quarters

Sintex Industries Limited (SIL), the flagship company of Sintex group is one of the leading manufacturers of plastics and composites along with a strong presence in textiles in India. SIL’s headquarter is located in Kalol (Gujarat) and company has a pan-India presence through 14 manufacturing facilities in India. Besides, its operations are spread across 12 countries in four continents through 38 manufacturing facilities and 35 global subsidiaries.

Investment Rationale: • Presence across diverse sectors – the recent demerger move aims at focused effort on two broad business segments • SIL enjoys distinct competitive and cost advantage, Geographical de-risking, • Capex plans could provide boost to revenues and margins going forward, • Proposed demerger could unlock value as plastics business could get better valuation in line with peers • Growth momentum set to improve with uptick in economy, OPMs improving from FY13 lows.

Concerns: • Currency fluctuation, Global macro uncertainties, • Low return ratios, • Prefabricated structures and monolithic construction businesses are capital intensive and policy driven in nature, • High debt could impact its net margins going forward, • Share pledged by promoters and reduction of stake by Institutions, • Payment delays and longer working capital cycles for government contracts. View and Valuation: SIL’s business model is strongly is connected with macroeconomic scenario and government’s investment plans in infrastructure. Both the segments that SIL operates in could see consistent growth in revenues going forward. However the recent investment in Textiles business is pulling down the combined performance of the company. To overcome this, SIL has proposed demerger of its plastics business into a separate entity. This could over time solve its issues of improving financial profile and getting a better overall valuation.

We expect to see continued growth story on SIL over the next two- three years with sales and PAT CAGR of 16% and 13% for FY16-19E (PAT growth impacted by a subdued performance in FY17 due to demonetization etc). With the improvement in macro-economic scenario and pick up in the government and private spending in related verticals, SIL’s business cycle seems to be favorably poised. The pending action of demerger could result in some value unlocking. We feel investors could buy the stock at the CMP and add on dips to Rs.86-90 band (~6.0xFY19E P/E) for sequential targets of Rs 127.50 (8.5x FY19E P/E) and Rs 149 (10.0x FY19E P/E) over the next 2-3 quarters. At the CMP of Rs 99.85 the stock trades at 6.7x FY19E P/E.

HDFC Scrip Code SININDEQNR

BSE Code 502742

NSE Code SINTEX

Bloomberg SINT IN

CMP Mar 24 2017 Rs. 99.85

Equity Capital (Rs cr) 52.4

Face Value (Rs) 1.0

Equity Share O/S (crs) 52.4

Market Cap (Rs crs) 5226.9

Book Value (Rs) 123.4

Avg. 52 Wk Volumes 5149000

52 Week High 103.0

52 Week Low 70.0

Shareholding Pattern % (Dec 31, 2016)

Promoters 32.5

Institutions 30.8

Non Institutions 36.7

Total 100.0 Fundamental Research Analyst Abdul Karim [email protected]

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Financial Summary (Consolidated): Particulars, Rs in Cr Q3FY17 Q3FY16 YoY-% Q2FY17 QoQ-% FY16 FY17E FY18E FY19E Net Sales 2261.8 1973.6 14.6% 1695.3 33.4% 7733.5 8729.3 10454.4 11948.4 EBITDA 412.9 328.0 25.9% 290.0 42.4% 1297.3 1514.5 1795.0 2031.2 APAT 164.9 145.4 13.4% 76.0 116.9% 628.4 576.5 750.2 906.7 Diluted EPS (Rs) 3.2 3.3 -3.2% 1.5 116.9% 14.1 11.0 12.4 14.9 P/E (x) 7.1 9.1 8.1 6.7 EV/EBITDA (x) 7.4 7.0 6.7 5.9 RoE (%) 11.4% 8.7% 9.3% 10.2%

(Source: Company, HDFC sec) Company Profile: Sintex Industries Limited (SIL), the flagship company of Sintex group is one of the leading manufacturers of plastics and composites along with a strong presence in textiles in India. SIL’s headquarter is located in Kalol (Gujarat) and company has a pan-India presence through 14 manufacturing facilities in India. Besides, its operations are spread across 9 countries in four continents through 38 manufacturing facilities and 35 global subsidiaries, which mainly include Sintex BAPL Ltd, BVM Overseas Limited, Neev Educare Ltd, Sintex Infra Projects Ltd, BAPL Rototech Pvt Ltd and their subsidiaries.

The manufacturing facilities for its plastics division are at various locations (Kalol, Kolkata, Daman, Buttiburi, Nalagarh and Namakkal) across India, while production facility for the textile division is located at Kalol and Amreli in Gujarat. SIL operates its business primarily into three segments viz. Plastics, Textiles and Infrastructure which contributes nearly 77%, 12% and 11% respectively, as on 31st March 2016.

Business Overview: SIL’s product mix in the plastics division primarily comprises prefabricated structure, monolithic construction, industrial custom moulding, water tanks, transmission & distribution accessories, fibre reinforced plastics (FRP), storage tanks, etc. It enjoys leadership position in water tanks, prefabs and monolithic construction segments in India. Its established presence in the water tanks business has made brand ‘Sintex’ a generic name. In textiles, SIL is mainly into manufacturing of cotton yarn and various type of yarn dyed structured fabrics, catering to the high-end segment of fashion shirting and readymade garment; whereas in the Infrastructure segment, SIL executes civil construction projects.

Product Overview: Particulars Details Textiles Fabric and Yarn. Plastic Water Tanks, Doors, Windows, Prefab, Sections, BT Shelters, Custom Moulding

Infrastructure Affordable Housing and EPC Contract. (Source: Company, HDFC sec)

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Plastic Division: The Company’s flagship business vertical contributed 77.4% to the Company topline driven by incremental sales of prefabricated structures, sandwich panels, water storage solutions and customs moulding. Plastic division reported 14.7% growth in FY16 from Rs 5582 cr in FY15 to Rs 6405 cr on consolidated basis. At its manufacturing facility in Kalol, the Group has developed the capability to manufacture plastics using multiple manufacturing processes, which enables it to produce the entire range of its custom moulded and building material products in one location. The Group manufactures over 3,500 types of plastics and related products of various shapes using 12 different processes. Textiles division: The textile division reported a healthy performance as revenue grew by 30.2% from Rs 728.1 crore in FY15 to Rs 948.4 crore in FY16. This superior performance was the result of a robust growth in sales volumes in the domestic market – by brands and through its retail channel. The Company’s focus on superior design creation and product development increased product acceptance in ‘Collection Sales’ in international markets. The Group’s textiles segment creates more than 36,000 designs in a year and a substantial portion of the income generated by this division comes from supplies to premium international brands and domestic readymade garment manufacturers.

Revenue Mix

(Source: Company, HDFC sec)

Subsidiaries: SIL’s presence in custom moulding in India and globally is through its subsidiaries Sintex NP SAS (Europe), Sintex Wausaukee Composites Inc. (US) and Sintex-BAPL Limited (India) (formerly Bright AutoPlast Ltd.). In addition, Sintex Infra Projects Ltd. undertakes EPC contracts for various infrastructure projects across India.

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Sintex NP SAS: The Company registered a consolidated turnover of Euros 239.5 Million Euros as against Euros199.06 Million for prior year. The main driver of this increase of 20.3% was the integration of SIMONIN group last year.

Sintex Wausaukee Composites Inc.: The combined turnover for Wausaukee Composites Inc. was $27.4 Million against $26 Million for the prior year, an increase of 5.4%. Owosso too incurred costs due to material usage and revenues declined due to weakness in the Agricultural and mining sectors.

Sintex-BAPL Limited: There has been a lot of activity under this division with the Company registering a top line growth of 19% as compared to an average growth of 8% in the auto industry. This increase in various projects led to 70%-84% capacity utilization.

Sintex Infra Projects Limited: The Company did not pursue any new projects in this segment actively due to the slow take off of the government programs. Hence focus in FY16 was on the completion of work in the Company’s kitty. There were projects in Uttar Pradesh, Delhi- NCR and Pondicherry, out of the six projects in hand, three have been completed. Sintex plans to adopt a cautious strategy while accepting new work in this division.

Subsidiaries financial overview:

S.N Company Holding ,% Currency FY14, Cr FY15, Cr FY16, Cr

Turnover PAT Turnover PAT Turnover PAT 1 Amarange Inc 100 British Virg.Isl - - - - 0 -1.04 2 Southgate Business Corp 100 British Virg.Isl - - 1.5 1.38 7.72 4.28 3 AIP SAS 100 France 109.33 6.92 109.26 9.25 105.42 7.93 4 NP Jura 100 France 181.26 3.84 155.09 3.92 163.01 6.58 5 Sicmo SAS 100 France 18.18 0.55 17.95 0.87 15.22 -1.02 6 NP Sud SAS 100 France - - 51.78 2.64 43.63 2.79 7 Siroco SAS 100 France 52.24 1.61 54.6 1.24 49.66 1.22 8 NP Nord SAS 100 France 59.12 0.71 66.88 1.25 72.7 2.69 9 Capelec SAS 100 France - - 99.35 0.55 158.2 0.16

10 Simonin SAS 100 France - - 320.08 13.57 301.65 28.57 11 NP Savoie SAS 100 France 87.23 7.39 85.92 6.86 76.03 7.06 12 NP Vosges SAS 100 France 103.67 -7.24 100.54 0.99 106.39 4.72 13 Sintex NP SAS 100 France 341.67 18.41 350.75 35.11 349.49 36.61 14 Ressorest SARL 100 France - - 8.6 0.59 7.48 0.5 15 Sintex France SAS 100 France 13.34 12.47 138.79 119.26 35.37 13.78 16 NP Germany Gmbh 100 Germany 163.29 0.98 151.22 2.57 122.95 3.82 17 NP Hungaria KFT 100 Hungary 162.09 19.16 167.55 18.13 174.05 19.63 18 Sintex-BAPL Ltd 100 India 380.61 -19.37 441.35 1.98 519.08 12.09 19 BVM Overseas Ltd 100 India - - - - 26.34 0.52 20 Neev Educare Ltd 100 India - - - - 0 0 21 BAPL Rototech Pvt Ltd 70 India - - - - 0.13 -0.6

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22 Sintex Infra Projects Ltd 100 India 702.5 17.61 783.97 18.62 918.99 24.67 23 Capelem SARL 100 Morocco - - 36.36 2.74 54.94 2.74 24 Simonin Maroc SARL 100 Morocco - - 4.91 0.84 - - 25 NP Morocco SARL 100 Morocco - - 30.56 1.28 27.92 0.59 26 Sintex Austria BV 100 Netherland - - 0.07 -0.01 0.09 -0.4 27 Sintex Holding BV 100 Netherland 0 -23.49 2.27 -26.76 67.92 46.76 28 NP Polska 100 Poland 73.42 0.1 66.83 0.56 71.06 1.93 29 NP Slovakia SRO 100 Slovakia 44.02 2.81 42.15 3.38 36.71 3.88 30 NP Tunisia SARL 100 Tunisia 109.5 12.24 94.56 11.07 88.54 8.69 31 Sintex Industries U.K. 100 U.K. 0 -0.38 0 -0.12 0 -0.38 32 Cuba City Estates LLC 100 U.S. 0 0.09 0 0.18 0 0.21 33 Owosso Real Estates LLC 100 U.S. 0 0 0 0.43 0 0.47 34 Wasukee Composites Owosso Inc 100 U.S. 46.94 -1.55 49.31 -1.1 44.31 -2.55 35 Sintex Wasaukee Composites Inc 100 U.S. 93.79 2.53 117.11 0.84 137.33 -0.25 36 WCI wind Turbine Components LLC 100 U.S. 11.22 -4.14 0 -1.39 0 -1.2

(Source: Company, HDFC sec) Products Portfolio: Global Manufacturing Bases:


Industry Overview:

Plastic Industry: The Indian plastics industry produces and exports a wide range of raw materials, plastic-moulded extruded goods, polyester films, laminates, moulded/soft luggage items, writing instruments, plastic woven sacks and bags, polyvinyl chloride (PVC), leather cloth and sheeting, packaging, consumer goods, sanitary fittings, electrical accessories, laboratory/medical surgical ware, tarpaulins, laminates, fishnets, travel ware, and others. The Indian plastic processing sector comprises over 30,000 units engaged in producing a variety of products using multiple polymer variants (polystyrene, LDPE, PVC, HDPE and

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polypropylene, among others) and diverse technologies (injection moulding, blow moulding, roto moulding, extrusion and calendaring, among others). Key updates are as follows;

During FY16, major importers of Indian plastic products were US (US$652.3 million), China (US$ 480.8 million), UAE (US$ 368.2 million), UK (US$ 271.7 million), Germany (US$ 256.2 million), Turkey (US$ 246.9 million), Italy (US$ 208.3 million), Iran (US$ 194.5 million), Nepal (US$ 141.2 million), and Bangladesh (US$ 136.3 million). Export of plastic and plastic products from India grew by 1.3% year-on-year to US$ 4.88 billion in FY16.

Among the industry’s major strengths is the availability of raw materials in the country. Thus, plastic processors do not have to depend on imports. These raw materials, including polypropylene, high-density polyethylene, low-density polyethylene and PVC, are manufactured domestically.

The per capita consumption of plastics in India (~9 kilos) is much lower than that of China (45 kilos). The Indian plastic industry has set a ‘20-20-20’ vision. According to this, it is expected that the plastic processing in India could reach the 20 million tonne-marks by 2020 from the current 8.5 million tonnes, the per capita consumption of plastic in India is expected to touch 20 kilos by 2020 from about 9 kilos currently. Domestic consumption of plastic is expected to touch 17.8 million tonne (MT) in both organised and unorganised sectors in FY17, up from 14.8 MT in FY16.

The Indian plastics industry offers excellent potential in terms of capacity, infrastructure and cheap labor availability. It is supported by a large number of polymer producers, and plastic process machinery and mould manufacturers in the country. Indian plastics processing industry is expected to grow by more than 50% to reach Rs 1,37,000 crore by FY18 (from about Rs 90,000 crore at the end of FY14).

Textile Industry: India is the second largest producer of textiles and garments in the world and one of the main contributors in the national economy. It’s also a major contributor to the national economy in terms of direct and indirect employment generation and net foreign exchange earnings – accounting for about 11% of India’s total exports. Key updates are as follows;

Availability of raw materials such as cotton, wool, silk and jute as well as a skilled workforce have allowed the country to emerge as a global sourcing hub The Indian Government has come up with a number of policies to promote exports in the textiles sector. It has allowed 100% FDI in the Indian textiles sector under the automatic route.

The government has announced Rs 6,000-crore package for the textiles and apparels sector to help it wrest a bigger share of the global market. The package also provides the sector more flexible labour laws and financial incentives. It hopes the package will create new jobs in the industry in next three years, attract Rs.74,000 crore in investment and generate $30 billion in exports earnings.

Major machineries for production of technical textiles receive customs duty concession of 5%. Specified technical textile products are covered under the FPS (Focus Product Scheme). Under this scheme, exports of selected products are entitled for duty credit scrip equivalent to 2% of freight-on-board value of exports.

The future for the Indian textile industry looks promising, supported by both strong domestic consumption and export demand. Higher fund allocation for labour skilling and end-to-end logistics solutions (as announced in Union Budget 2017-

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18), including rail and coastal shipping last-mile connectivity, will help the country’s textile industry to achieve the $350-billion target in next few years as set by the union government.

Company Structure:

Investment Rationale:

Presence across diverse sectors – the recent demerger move aims at focused effort on two broad business segments SIL has strong presence in diversified business across the various sectors in India. Its plastic-based products have gained more popularity in term of demand across fast-growing segments while the textile business has propelled itself by focusing

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on manufacturing premium structured fabrics. Besides structured fabrics, SIL is also a leading domestic manufacturer of corduroy fabrics.

In the plastics space, SIL has been able to extend its presence from water storage to power distribution, automobiles, electrical products, sanitation, building interiors and warehousing segments, and a host of other verticals. The Company enjoys a pan-India presence with 37 cutting-edge plastic processing facilities. The Company has divided its plastic business into two major verticals namely building products and custom molding to ensure equal, undivided attention to each of them.

SIL has among the largest fleet of contemporary shuttle-less looms (air jet and rapier machines with dobbies and jacquard). It manufactures high-end, yarn-dyed structured fabrics for men’s shirting, yarn-dyed corduroy, ultima cotton yarn based corduroy and fabrics for ladies wear. This business is a value driven and margin-accretive business which contributes only about 11-12% to the Company’s topline, however its contribution to its profitability is growing at a fast pace.

SIL enjoys distinct competitive and cost advantage: SIL enjoy some distinct competitive advantages which positions it as one of the strong player in the industry. A geographically diverse manufacturing presence allows faster execution and optimises logistics costs. A balanced product mix enables it to cater to demands from different spheres. In-house availability of majority of the inputs – sandwich panels, doors and windows – has lessened the time taken from

order acceptance to final delivery. Stringent conformance with established norms has allowed it to gain product approvals across 17 states. An immaculate track record, in-depth terrain knowledge and proven expertise in project management have strengthened

the brand. Better availability of power with subsidised tariff in Gujarat. Geographical de-risking and enjoy with marquee clientele: SIL’s global footprint spans across 9 countries in four continents including France, Germany, and USA and Company has a strong presence in the European, American, African, and Asian markets. Through its network of growth partners in India and worldwide, including Sintex –BAPL Limited, Sintex NP Group, and Sintex Wausaukee Composites. As of March 31, 2016, 25.6% of the Group’s total consolidated revenue and 27.9% of its consolidated expenses were earned and expended in currencies other than the Rupee, respectively. Sintex had made certain inorganic acquisitions in India and abroad between May 2006 and 2014 at a cost of more than Rs.700 cr (including the likes of Simonin of France, Zeppelin Mobiles systems of India, Wasaukee Composites of US, Bright Autoplast of India, Nief Plastics of France, Nero Plastic of US etc) to add to the breadth of its products, derisk its business and take advantage of opportunities abroad. The Group believes that it has demonstrated its ability to integrate acquired businesses. For example, the Group has managed to grow the businesses of Sintex NP, with its revenue increasing from Euro 148.5 million in Fiscal Year 2011 to Euro 215.6 million (US$ 254 million) in Fiscal Year 2015, and Sintex-BAPL, with its turnover increasing from Rs.3,261.7 million in Fiscal Year 2012 to Rs.4,411.0 million in Fiscal Year 2015.

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The Group has also achieved cost savings by shifting the manufacture of labour-intensive and high-volume products to low-cost locations, while continuing to service the needs of its offshore clients. For example, it has transferred some of the manufacturing volume of Sintex NP from France to lower-cost locations in North Africa and India, as well as locations in Eastern Europe, such as Hungary, Slovakia and Poland.

Geography-wise Revenue (%) over the last 5 years:

(Source: Company, HDFC sec) Marquee Global Clientele:


Capex plan could provide boost to revenues and margins going forward: Sintex is setting up a new spinning plant in the Central cotton hub of India, which accounts for 57% of the country’s total cotton production. The plant is being set up in Pipavav, Gujarat in 3 phases with 320,000 spindles to come online in the first phase. The total amount of Capex for the 1st phase is Rs 1,800 crore (fund raised through debt, Rs 1350 cr), and the first phase has been completed. Phase I started to add capacity utilization by December 2016. The project is economically incentivized from the state government. The company will enjoy a 7% interest subsidy over and above 4% TUFS from the central government resulting in a marginal cost of borrowing of ~1.5%. Gujarat state has surplus power which will be available for spinning units at a subsidized rate (Rs 1/unit less than standard rates), Duty exemption @ 15% on power tariff is also possible and VAT refund till cost of project is recovered.

Particulars FY12 FY13 FY14 FY15 FY16 India 75.0% 73.9% 72.5% 73.4% 73.8% Europe 21.0% 22.4% 25.5% 23.7% 22.8% Others 4.0% 3.7% 1.9% 2.9% 3.4%

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SIL has already started civil work for the phase II project, which should come up by September 2017. This consists of Phase II spinning project of 3 lakh spindle at Pipavav, Gujarat with capex of ~Rs 2100 cr. These capex plans could boost topline and margins going forward.

Further the initiatives on clean India, like Swachh Bharat Mission, Nirmal Bharat Mission and Clean Ganga Program have thrown open new set of opportunities for Sintex and its capacity utilization could pick up across the businesses which may result in upturn in margins and topline growth going forward. With healthy growth momentum in prefabs, recovery in the custom molding (both domestic & overseas) & monolithic business, increase in order flows from the new EPC segment and scale up in the textile segment, we expect net sales (consolidated) to grow by ~18% for FY18E, (after the growth rate seeing some deterioration in FY16). SIL could witness stagnant set of growth in FY17E, Which is impacted by demonetization effect in Q3FY17 as well as Q4FY17. However, bottomline growth could be impacted by higher depreciation and interest costs going forward.

Revenue and Revenue growth (%)


Reorganizing business structure could influence better revenue and return opportunity going forward: SIL has decided to transfer its custom moulding business and prefab business to Sintex-BAPL and Sintex Infra Projects, respectively. Post-demerger, there will be two companies Sintex Industries (having predominantly textile and spinning businesses) and Sintex Plastics Technology Limited, which will also have two subsidiaries - Sintex-BAPL and Sintex Infra Projects. While Sintex Industries is already listed, Sintex Plastics Technology will also be listed later. At present, textiles accounts for about 11 percent of Sintex’s revenue, with 77 percent coming from plastics and the balance from Infrastructre.

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The group expects the demerger to assist it in managing businesses and operations for the two companies more efficiently and also helps to develop & execute growth plans and strategies effectively.

In accordance with an order of Dec 08 2016 passed by the Hon’ble High Court of Gujarat, the court convened meetings of the equity shareholders, secured creditors (including Debentures holders) and Unsecured creditors of the company were held on Jan 17, 2017 for considering and approving the Composite Scheme of Arrangements and the same were approved by them with the requisite majority in the respective meeting. On March 23, 2017, the NCLT Ahmedabad has sanctioned the scheme of arrangement between the four companies and their respective shareholders and creditors. The demerger date could be fixed shortly by the Board of directors. This could result in the value unlocking process to begin. The scheme is expected to establish leadership and management focus on the core business. Carving out of business a separate entity will enable the company to manage business and operations efficiently, help businesses to develop and execute growth plans, strategies and market opportunities. This merger will enable the company to explore and achieve significant growth. As per the scheme, Sintex Industries' shareholders would get shares of Sintex Plastic Technology. For one equity share of Sintex Industries they will get one equity share of Sintex Plastic Technologies. Growth momentum set to improve with uptick in economy: The custom molding segment is witnessing a spate of rapid developments. The domestic business is well embedded to achieve next level of growth trajectory. The Automotive subsidiary Bright Auto Plast has moved into value added segments, besides investing in post molding process. The strategic move could enhance its profitability. Also, its US subsidiary has started initiating a synergistic flow to India. The plant commissioned in Pune during the previous year for LRTM (Light Resin Transfer molding) process will cater to Off-the-road vehicles, Rail carts, medical imaging, thus boosting offerings to a host of Fortune 500 OEMs present domestically yet untapped. Negotiations are already on for active conversion into order books.

OPMs improving from FY13 lows: SIL has maintained a lot of financial and business discipline with a clear idea to increase its margins. Over the last 6 years the EBITDA margin has been steadily at a range of 15-18%. The Company believes that the margins can further be enhanced over the next 2-3 years by other 100 - 150 basis points led by utilization growth on account of additional operation from Phase I as well as Phase II. Government Grants with respect to Textile Up gradation Fund Subsidy (TUFS) is deducted from finance cost. Subsidy under Textile Policy of Government of Gujarat with respect to interest and power is deducted from relevant costs, whereas VAT concession is accounted as other Income. We expect at a range of 17% EBITDA margin and 6.6-7.6% of PAT margin in next 2-3 years.

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Margins-%


Risk and Concerns:

Currency fluctuation: A large part of Sintex group’s business is denominated in foreign currencies, principally the U.S. dollar and Euro, and is therefore sensitive to fluctuations in foreign currency exchange rates. The Group has experienced and expects to continue to experience foreign currency fluctuations that could affect its gross and operating profit margins and could result in foreign exchange and operating losses.

Global macro uncertainties: Sintex derives 25% of its revenues from the overseas markets. Any sharp slowdown in SINTEX’s key overseas markets like US & Europe could impact its export business significantly. Also, the overseas exposure could result into forex/translation losses. The Group’s diverse and complex global operations subject it to risks in multiple countries that could adversely affect its business, cash flows, results of operations, financial condition and prospects.

Lower return ratio: Higher Interest and depreciation could impact its PAT margin once the textiles expansion goes on stream. Lower PAT margin and low sales to fixed assets ratio compared to its peers’ impacts its return ratio and we expect the same going forward. For FY17E, FY18E and FY19E, ROE is expected at 9.1-10.2% and RoCE at 9.1-10.6%, respectively.

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Highly dependent on Government orders: In Monolithic construction, almost all its revenues come from orders given by Government & Government related entities. Thus any change in the government policy or any slowdown in its spending on healthcare, sanitation, education as well as low cost housing could severely impact its revenue & profitability growth.

Prefabricated structures and monolithic construction businesses are capital intensive and policy driven in nature: For the year ended 31st March 2016, prefabricated structures business and monolithic construction contribute 23.5% and 14.4% revenue on consolidated basis, respectively. Its expansion plans in relation to prefabricated structures and monolithic construction businesses could potentially result in a need to increase available borrowings under its revolving credit facilities. Further, the demand for prefabricated structures is significantly dependent on the demand for low-cost public housing, the construction of social infrastructure and the increased pace of urban redevelopment in India, which are driven primarily by governments policies.

Higher debt could impact its margins going forward: As of Sept 30, 2016, the Group’s total consolidated debt was Rs ~7000 crore including short term borrowings. The Group intends to fund its new product lines and capacity expansion plans partially through debt and therefore expects to incur additional borrowings in the future. The debt equity ratio may not fall significantly from the current 1.1:1 (FY16).

Higher crude oil prices: SIL procures all of its oil-based raw materials from the spot market. Although it has not experienced any significant difficulties in obtaining PVC, LLDPE and HDPE raw materials to satisfy its plastics production requirements in the past, the Group cannot assure investors that it will be able to meet its future PVC, LLDPE and HDPE requirements. Further, any significant increase in the Crude oil prices and raw materials prices could materially affect the Group’s business.

Share pledged by promoters and reduced its stake by Institution’s could hit investor’s sentiment going forward: As of Dec 31, 2016, the aggregate shareholding of the Promoters and Promoter Group is 40.2% out of which 13.2% of the total share capital of the Company has been pledged as security for the loans taken by the Promoters and Promoter Group from certain lenders. Apart from this, institutions (Non promoters) has reduced its stake from 40.8% as on 31st Dec 2015, to 30.8% as on 31st Dec 2016.

Payment delays and longer working capital cycles for government contracts: Prefab and Monolithic businesses, being B2G (Business-to-Government) model, are dependent on government projects and government projects has lengthy process to payment of project.

Pending conversion of FCCBs: SIL issued FCCB worth $110 mn in May 2016. Unless previously redeemed, converted or repurchased and cancelled, the Issuer will redeem each Bond at 106.3324% of its principal amount together with any accrued unpaid interest on the Maturity Date. The Bonds will bear interest (i) at the rate of 7.00% per annum, from the Closing Date up to 25 May 2018; and (ii) at the rate of 3.50% per annum, from 25 May 2018 to the Maturity Date. The Bonds are convertible by holders into

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Shares, at any time on and after 5 July 2016 and up to 15 May 2022. The Conversion Price (as defined in the Conditions) will initially be Rs.93.8125 per Share with a fixed rate of exchange on conversion of Rs.67.4463 = U.S.$1.00. We have considered entire conversion of FCCB in FY18 and given effect to it in our estimates. Conversion of FCCBs could create supply in the equity markets due to fresh equity shares being issued. In the past FCCB issues, the conversion happened over a long period of time due to the fact that the conversion was not remunerative till the share price crossed the conversion price (SIL had to reset the conversion price in one case to make it remunerative for FCCB holders to convert). In the current instance if the FCCB holders are given option to convert the two resulting FCCBs at their own choice of time, the one pertaining to textiles may take long to convert. The gain to the normal shareholders would essentially come from the plastics unit getting separately listed (which could take 3-4 months). Q3FY17 Result Review: SIL reported subdued quarter with 1.5% (YoY) sales growth to Rs 2075cr, impacted by demonetization. EBITDA grew by 1% (YoY) to Rs Rs 347.8 cr and PAT was down by 38.6% (YoY) to Rs 110.8cr largely impacted by higher depreciation and interest cost in Q3FY17. EBITDA margin was flat at 16.8% and PAT margin declined by 350bps to 5.3% on YoY basis.

On 9 month performance basis, revenue grew by 10.2% (YoY) to Rs 6032cr led by healthy demand. EBITDA was up by 17% (YoY) to Rs 1050.7 cr led by lower raw material cost, Raw material cost was 52.7% of sales against the 58.7% in 9MFY16. PAT was down by 10.7% (YoY) to Rs 351.7 cr, impacted by higher depreciation and interest cost.

Post earning con-call, management said demonetization as a reason for subdued performance in Q3FY17 and it was temporary in the nature. Management believes minimal impact could be seen in Q4FY17 earnings. Valuation: We have assumed the revenues of Textiles, Plastics and Infrastructure segments to grow at CAGR of 55%, 7% and 18% over FY16-FY19. Plastic revenue growth was impacted in FY17 due to demonetization etc and hence the overall growth rate looks small; although the same could pick up smartly over the next two years. Even on a SOTP basis, the valuation of SIL works out as under:

Calculation of 1st target Calculation of 2nd target Calculation of buy on dips parameters EV PE parameters EV PE parameters EV PE

FY19 EPS

FY19 EBITDA EV/EBITDA P/E Value Value EV/EBITDA P/E Value Value EV/EBITDA P/E Value Value

Textiles 5.21 701.20 3.75 5.5 3.84 28.64 4.5 6 6.76 31.25 3.5 4 0.94 20.83 Plastic 9.62 1258.10 5.25 10 115.70 96.21 6 12 131.35 115.45 3.5 7 79.16 67.35 Infra 0.34 83.02 3 6 8.17 2.01 3 7 8.17 2.35 3 4 8.17 1.34 15.16 127.71 126.87 146.28 149.05 88.26 89.52

RETAIL RESEARCH


View and Valuation: SIL’s business model is strongly is connected with macroeconomic scenario and government’s investment plans in infrastructure. Both the segments that SIL operates in could see consistent growth in revenues going forward. However the recent investment in Textiles business is pulling down the combined performance of the company. To overcome this, SIL has proposed demerger of its plastics business into a separate entity. This could over time solve its issues of improving financial profile and getting a better overall valuation.

We expect to see continued growth story on SIL over the next two- three years with sales and PAT CAGR of 16% and 13% for FY16-19E (PAT growth impacted by a subdued performance in FY17 due to demonetization etc). With the improvement in macro economic scenario and pick up in the government and private spending in related verticals, SIL’s business cycle seems to be favorably poised. The pending action of demerger could result in some value unlocking. We feel investors could buy the stock at the CMP and add on dips to Rs.86-90 band (~6.0xFY19E P/E) for sequential targets of Rs 127.50 (8.5x FY19E P/E) and Rs 149 (10.0x FY19E P/E) over the next 2-3 quarters. At the CMP of Rs 99.85 the stock trades at 6.7x FY19E P/E.

Quarterly Financials (Consolidated): Particulars, Rs in Cr Q3FY17 Q3FY16 YoY-% Q2FY17 QoQ-% 9MFY17 9MFY16 YoY-% Net Sales 2261.8 1973.6 14.6% 1695.3 33.4% 6032.1 5474.0 10.2% Other Operating Income 25.8 14.8 74.4% 5.3 388.8% 46.6 23.2 100.9% Total Operating Income 2287.6 1988.4 15.0% 1700.5 34.5% 6078.7 5497.2 10.6% Raw Material Consumed 1230.6 1161.8 5.9% 889.4 38.4% 3180.5 3213.5 -1.0% Stock Adjustment -16.1 -1.6 916.5% -27.7 -42.0% -22.3 -4.9 358.0% Purchase of Finished Goods 115.0 50.0 130.0% 86.7 32.6% 377.5 150.2 151.3% Employee Expenses 192.2 170.9 12.5% 213.2 -9.8% 612.9 544.2 12.6% Other Expenses 353.1 279.4 26.4% 248.9 41.8% 879.4 696.3 26.3% Total Expenditure 1874.8 1660.5 12.9% 1410.6 32.9% 5028.0 4599.4 9.3% EBITDA 412.9 328.0 25.9% 290.0 42.4% 1050.7 897.7 17.0% Depreciation 95.8 70.2 36.5% 96.0 -0.2% 288.0 222.7 29.3% EBIT 317.1 257.8 23.0% 194.0 63.4% 762.7 675.1 13.0% Other Income 17.4 14.1 23.2% 6.1 183.7% 29.6 41.0 -27.7% Interest 87.3 68.1 28.2% 84.0 4.0% 253.3 193.5 30.9% Earnings before Tax 247.2 203.8 21.3% 116.2 112.8% 539.1 522.6 3.1% Tax Paid 82.4 58.8 40.1% 40.3 104.2% 187.8 129.9 44.5% Reported Profit After Tax 164.8 145.0 13.7% 75.8 117.3% 351.3 392.7 -10.5% Minority Interest After NP -0.1 0.0 - -0.2 -50.0% -0.5 0.0 - Profit/Loss of Associate Company 0.0 0.4 - 0.0 - 0.0 1.0 - Net Profit after Min Int & P/L Asso.Co. 164.9 145.4 13.4% 76.0 116.9% 351.7 393.7 -10.7% Adjusted Profit After Extra-ord- item 164.9 145.4 13.4% 76.0 116.9% 351.7 393.7 -10.7% EPS 3.2 3.3 -3.2% 1.5 116.9% 4.6 4.8 -3.8%


RETAIL RESEARCH


Segment- wise split: Particulars, Rs in Cr Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Revenue from Operations Textile 186.8 213.5 171.3 232.8 257.0 284.6 251.7 440.4 595.7 Plastics 1489.6 1672.2 1233.7 1708.5 1664.8 1843.1 1390.5 1768.1 1458.8 Infrastructure 156.5 290.6 54.0 47.2 127.9 233.3 58.3 79.1 36.0 Total Segment Revenue 1832.9 2176.3 1459.0 1988.4 2049.7 2361.0 1700.5 2287.6 2287.6 Profit/Loss Before Interest and Tax Textile 36.3 43.5 20.8 32.8 41.4 53.4 13.1 48.5 62.4 Plastics 185.6 262.9 141.5 224.4 210.7 285.8 184.6 260.0 194.9 Infrastructure 20.0 41.5 2.2 5.3 19.4 44.0 4.3 12.8 12.5 Total 241.9 348.0 164.4 262.5 271.5 383.1 201.9 321.2 269.8 Capital Employed Textile 2725.3 2963.9 3015.0 3542.0 3591.1 4876.8 5145.1 6560.1 6866.4 Plastics 4162.0 4208.5 4020.5 4502.4 4916.9 5210.1 5214.9 4970.0 5356.3 Infrastructure 846.7 869.9 819.8 914.4 921.5 811.5 713.8 738.2 275.6 Total Capital Employed 7734.1 8042.3 7855.3 8958.9 9429.6 10898.4 11073.8 12268.3 12498.4

(Source: Company, HDFC sec) Financials (Consolidated):

Income Statement Cash Flow Particulars ( Rs in Cr) FY15 FY16 FY17E FY18E FY19E

Particulars, Rs in Cr FY15 FY16 FY17E FY18E FY19E

Revenue from operations 7006.6 7733.5 8729.3 10454.4 11948.4

EBT 713.0 838.3 865.8 1110.2 1312.6 Cost of materials consumed 4149.1 4524.2 4801.1 5896.3 6870.3

Depreciation and Amortization 260.5 304.8 385.9 429.8 460.7

Purchases of stock-in-trade 160.9 233.0 436.5 480.9 489.9

Interest paid 283.5 281.7 319.5 328.2 329.6 Changes in inventories -6.1 2.6 -39.3 -43.9 -41.8

Other Adjustment -20.1 -55.0 0.0 0.0 0.0

Employee benefits exp 720.2 747.5 855.5 987.9 1105.2

(Inc)/Dec in working Capital -91.1 -281.9 -145.3 -315.8 -335.6 Other expenses 800.3 929.0 1161.0 1338.2 1493.5

Tax Paid -136.3 -200.7 -290.1 -360.8 -406.9

Total expenses 5824.2 6436.2 7214.7 8659.4 9917.1

CF from Operating Activities 1009.5 887.3 1135.9 1191.6 1360.4 EBITDA 1182.4 1297.3 1514.5 1795.0 2031.2

Capital expenditure -1684.1 -2316.7 -1150.0 -1800.0 -600.0

Depreciation and amort- exp 260.5 304.8 385.9 429.8 460.7

Proceeds from sale fixed asset 9.2 2.5 2.9 3.8 5.0 EBIT 921.9 992.5 1128.6 1365.2 1570.5

(Purchase)/Sale of Investment -226.8 253.8 71.0 33.7 25.5

Other income 96.4 133.2 56.7 73.2 71.7

Others 6.8 78.8 -474.8 -386.7 -434.9 Finance costs 283.5 281.7 319.5 328.2 329.6

CF from Investing Activities -1895.0 -1981.7 -1551.0 -2149.1 -1004.4

RETAIL RESEARCH


Earning Before Tax and EI 734.8 844.0 865.8 1110.2 1312.6

Inc/(Dec) in Share capital 84.9 11.1 500.0 741.9 0.0 Exceptional items 21.8 5.7 0.0 0.0 0.0

Inc/(Dec) in Debt 1306.5 1857.4 550.0 378.1 -110.0

Earning Before Tax 713.0 838.3 865.8 1110.2 1312.6

Dividend and Interest Paid -353.1 -458.1 -366.6 -386.4 -395.0 Tax Paid 186.3 211.3 290.1 360.8 406.9

CF from Financing Activities 1038.2 1410.4 683.4 733.6 -505.0

PAT before Share of Ass & MI 526.7 626.9 575.8 749.4 905.7

Net Cash Flow 152.8 316.0 268.4 -223.9 -149.0

Share of Profit of Associate -2.1 -1.3 -0.6 -0.7 -0.9

Opening Balance 271.4 424.3 740.1 1008.5 784.5 Share of Minority Interest in loss 0.0 -0.2 -0.1 -0.1 -0.1

Adjustment, Effect of exch rate, cash credit from sch bank 0.2 -0.3 0.0 0.0 0.0

Adj PAT 528.8 628.4 576.5 750.2 906.7

Closing Balance 424.3 740.1 1008.5 784.5 635.5 Earnings per share 12.4 14.1 11.0 12.4 15.0

Balance Sheet Key Ratios Particulars FY15 FY16 FY17E FY18E FY19E

Particulars FY15 FY16 FY17E FY18E FY19E

A. EQUITY AND LIABILITIES

No of Equity Shares-cr 42.6 44.7 52.3 60.6 60.6 Share capital 44.7 42.4 52.3 60.6 60.6

Enterprise Value-cr 7787.6 9558.1 10608.1 12031.9 12071.0

Reserves and surplus 5465.8 4655.3 6540.1 7974.1 8815.4

Money recd against shwarrants 0.0 0.0 0.0 0.0 0.0

EPS 12.4 14.1 11.0 12.4 15.0

Shareholders’ funds 5510.5 4697.8 6592.5 8034.7 8876.0

Cash EPS (PAT + Deprecn) 18.5 20.9 18.4 19.5 22.6 Minority Interest 2.1 0.0 0.0 0.0 0.0

Book Value Per Share(Rs.) 110.2 123.4 125.9 132.6 146.5

Long-term borrowings 5150.8 3181.7 6075.8 6340.5 6263.5

Deferred tax liabilities (net) 619.0 471.9 424.7 382.2 344.0

PE(x) 8.1 7.1 9.1 8.1 6.7

Other long-term liabilities 39.3 113.3 124.7 137.1 150.9

P/BV (x) 0.9 0.8 0.8 0.8 0.7 Long-term provisions 22.5 18.1 19.5 21.5 23.6

Mcap/Sales(x) 0.6 0.6 0.6 0.6 0.5

Non-current liabilities 5831.6 3785.1 6644.7 6881.3 6782.0

EV/EBITDA 6.6 7.4 7.0 6.7 5.9 Short-term borrowings 688.9 773.7 313.9 427.3 394.3

Trade payables 960.6 1011.5 1100.1 1288.9 1407.6

EBITDAM (%) 16.9% 16.8% 17.4% 17.2% 17.0% Other current liabilities 823.0 911.6 820.4 738.4 664.5

EBITM (%) 13.2% 12.8% 12.9% 13.1% 13.1%

Short-term provisions 143.1 128.1 138.4 152.2 167.5

PATM (%) 7.5% 8.1% 6.6% 7.2% 7.6% Current liabilities 2615.6 2824.9 2372.8 2606.8 2633.9

TOTAL 13959.7 11307.7 15610.0 17522.8 18291.9

ROCE (%) 11.8% 9.9% 9.1% 9.7% 10.6% B. ASSETS

RONW (%) 11.3% 11.4% 8.7% 9.3% 10.2%

Fixed assets 7903.0 5423.7 8673.0 10113.0 10353.0

Div Payout-% 6.8% 6.4% 8.2% 7.8% 7.2% Non-current investments 69.2 250.8 200.6 160.5 128.4

RETAIL RESEARCH


Deferred tax assets (net) 3.0 2.5 2.8 3.1 3.4

Current Ratio 1.4 1.7 2.0 1.9 2.1 Long-term loans and advances 1422.7 1727.1 1934.4 2127.8 2340.6

Quick Ratio 1.2 1.5 1.7 1.7 1.8

Other non-current assets 49.6 44.3 39.8 35.9 32.3

Non-current assets 9447.5 7448.4 10850.7 12440.3 12857.7

Debt-Equity 0.8 1.1 1.0 0.8 0.8

Current investments 195.5 277.2 256.4 262.9 269.4 Inventories 606.4 517.0 621.8 716.1 818.4 Trade receivables 2241.8 2305.4 2511.2 2921.5 3273.5 Cash and bank balances 740.9 425.0 1008.5 784.5 635.5 Short-term loans and advances 596.8 223.6 241.4 265.6 292.1 Other current assets 130.9 111.1 120.0 132.0 145.2 Current assets 4512.3 3859.4 4759.3 5082.5 5434.2 TOTAL 13959.7 11307.7 15610.0 17522.8 18291.9 (Source: Company, HDFC sec)

One Year forward P/E One Year Price Chart


RETAIL RESEARCH


Fundamental Research Analyst: Abdul Karim ([email protected]) HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Website: www.hdfcsec.com Email: [email protected]. ___________________________________________________________________________________________________________________________________________________________________________________________ "HDFC Securities Ltd. is a SEBI Registered Research Analyst having registration no. INH000002475." Disclosure: We /I, Abdul Karim, (MBA), authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock – No Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HDFC Securities Ltd or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes without prior written approval of HDFC Securities Ltd. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HDFC Securities Ltd may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. HDFC Securities and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HDFC Securities Ltd, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc.

HDFC Securities Ltd and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this report. HDFC Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. HDFC Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction in the normal course of business. HDFC Securities or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither HDFC Securities nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. HDFC Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report. This report has been prepared by the Retail Research team of HDFC Securities Ltd. The views, opinions, estimates, ratings, target price, entry prices and/or other parameters mentioned in this document may or may not match or may be contrary with those of the other Research teams (Institutional, PCG) of HDFC Securities Ltd.

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