Sintex Industries: Equity dilution concerns mar show for the company

Sintex Industries reported a strong operational performance for the December 2012 quarter as both sales and margins improved. The weak bottom line was due to forex loss caused by a weak rupee.

The company has arranged to repay its FCCBs, averting any immediate danger. But, investors are worried over the impending equity dilution and want to see improvement in capital efficiency.

Sintex posted a 23% topline growth at Rs 1,427 crore, with a 130 bps improvement in operating profit margins, which stood at 15.4% at a consolidated level. This boosted its pre-tax profits by 45% to Rs 140.3 crore.

The company booked a notional forex loss of Rs 45 crore on revaluing its long-term liabilities, and its tax outgo jumped substantially. This resulted in a 35% drop in the bottom line to Rs 53.3 crore.

Although operationally strong, the performance failed to enthuse investors — the stock lost over 2.5% and closed at Rs 68.5 on the BSE on Thursday. The key investor concern is about equity dilution the company had to undertake to re-finance FCCBs falling due in March 2013.

On a fully diluted basis, the company’s per share earnings ( EPS) for the quarter works out to Rs 2.1, excluding the impact of forex losses, and Rs 5.3 for the ninemonth period ended December 2012.

Annualising these earnings, the scrip is currently valued at a PE multiple of slightly below 10. Many analysts term these valuations inexpensive. The company’s debt has to come down and the return on capital needs to improve for any sustained improvement in its valuation.