Plastic profits

Last weekend, textiles-to-plastics player, Sintex Industries, reported a good set of numbers for the quarter ended September 2007 (Q2).

On consolidated basis, revenues rose 46% to Rs 389.40 crore, operating profit by 44.4% to Rs 78.48 crore and net profit by 40.3% to Rs 44.27 crore.

The growth was driven by the plastics business (revenues up 61%), which includes water tanks, doors, windows and prefabricated (prefab) structures among others. The plastic business thus saw its share in revenues rise to 77% during the quarter, from 70% in Q2 last year.

Strong demand from user industries (including higher sales of prefab structures) and also the acquisition of Wausaukee Composites Inc, USA (81% stake; a manufacturer of highly engineered composite plastic components) and Zepplin Mobile Systems (74%) helped the plastic business report strong growth.

Textiles, which earlier accounted for a fourth of revenues, now accounts for a little over a fifth of revenues, thanks to the rapid growth of the plastic business. Better realisations (focus on high-margin products) in the textile business helped push profit margins higher by a percentage point.

Overall operating margins though slipped marginally to 20.15% from 20.39% in Q2 last year thanks to the slippage in margins (again a percentage point) in the plastic business. Analysts attribute this to the change in product mix with a higher proportion of sales of the lower-margin products. Hence, it’s nothing significant to worry about.

Finally, net profit growth was also curbed on account of higher tax outgo (up 66%) and interest costs (up 55%), which though was partly offset by a 50% rise in other income. The latter was on account of huge cash surplus (fixed deposits) and investments totalling over Rs 550 crore as on March 2007. In the first half, Sintex has reported cash profits of Rs 90 crore.

Even if one accounts for about Rs 230 crore worth of acquisitions (Rs 80 crore for Wausaukee and Rs 150 crore for plastic-based auto component company Bright Autoplastic in September 2007), Sintex still has Rs 400 crore cash surplus on hand.

While the existing businesses (including plastic auto components, textiles, prefab structures, etc) have good prospects, the cash surplus if used for acquisitions should prove to be a positive trigger for the stock.

Meanwhile, the stock has outperformed the BSE Sensex since early May 2007 and, by a big margin. In fact, it has almost doubled since then. Little wonder, even after the good results, the stock is down 1.67% post the results. At Rs 361.15, it trades at a PE of 23 times its estimated EPS for 2007-08 and, merits attention on declines.

Contributed by Vishal Chhabria & Pallavi Pengonda