CLSA downgrades Sintex Industries to ‘sell’ from ‘underperform’

After four consecutive quarters of y-o-y profit fall, the 86.7 per cent jump in Sintex Industries' September quarter net profit came as a relief for investors. However, CLSA is of the view that the problems in the monolithic business are continuing, while other business segments are holding up.

Asia Pacific-focused broker CLSA downgraded Sintex Industries to ‘sell’ from ‘underperform’ but raised its target price from Rs 60 earlier to Rs 68.

“The main reason behind Sintex's profit jump was a 92 per cent reduction in its forex losses to Rs 4.9 crore that boosted its pre-tax profits by Rs 55 crore compared with the year-ago period. Excluding this, the pre-tax profits at Rs 102.7 crore were down 18 per cent,” ET reported.

The company's foreign currency convertible bonds (FCCBs) worth $225 million are coming up for repayment in March 2013 along with $66 million of premium. “The company has over $100-million cash on its books, while the remaining funds will have to be raised through external commercial borrowings,” ET said in a report.

CLSA is of the view that debt is the biggest overhang on the stock. “The focus is firmly on the balance sheet as the company planning US$160m of fresh funding across debt, equity and convertibles to meet the upcoming FCCB redemption,” CLSA added.

The company's proposed preferential warrant issue may raise around Rs 200 crore and reduce the borrowings marginally. “While the issue of 30 million warrants is a start, much more is needed and the funding requirements remain an overhang,” said the brokerage firm.

Further equity dilution means profit share of retail shareholders will go down, which in turn means that the time for investors to cheer is yet to come.