Sintex considers textiles as non-core:Company official

Sintex, a listed plastics to textile company, does not think textile is a core business. The ’tex’ in the company’s name stands for the textile business. While the company was formed as a textile company, over the years, the plastics moulding and prefabricated construction business has become the dominant part of the business.

[caption id=“attachment_8577” align=“alignleft” width=“380” caption=“The monolithic plastics business is the company’s core focus. Courtesy: Sintex”] [/caption]

The company reported revenue of just over Rs 4,100 crore for the year ended March 2011. The textile business accounts for 11% of the total. The monolithic plastics business is the dominant business that is likely to drive the company’s growth in the future.

The market already anticipates some good news. Over the past one month, Sintex shares rose 20% while the BSE 500 index fell 3%. Soon after the company announced results, stock broking firms put a ‘buy’ rating on the company. There is clearly a lot of anticipation here.

According to a company official, the company is not looking to make any new acquisitions to grow revenue.

This is despite having around Rs 1,200-crore cash and Rs 2,773-crore debt. This includes the money the company raised by issuing convertible bonds worth Rs 1,000 crore in 2008. The purpose of that capital raise was to make acquisitions.

However, the company has now decided not to make any acquisitions. The last acquisition Sintex made was in December 2010 of a local construction company for Rs 42 crore. The official said that Sintex is working on improving margins from businesses acquired in 2007 and 2008.

Sintex will perhaps simply return redeem bonds to investors if conversion to equity shares is not possible. The current price is around Rs 184 and the price at which conversion would happen in 2013 is fixed at Rs 246 and compulsorily conversion at Rs 316.

It appears that the company is playing safe and conserving cash to pay for bond redemption in 2013.

Analysts expect the company to report a compounded annual growth rate in the net profit of 24% over the next two years. The company will have to invest Rs 830 crore over the next two years for capacity expansion in the plastics business, according to a note from brokerage firm CLSA.

What then are the prospects for the textile business? The company’s textile business reported revenue of Rs 430 crore and is growing at a steady rate of 11% per annum. The business is also profitable with a 17% operating margin. There appears to be no significant compulsion for Sintex to unlock value or sell the business for now. However, if the company is not able to generate enough cash flow to fund the revenue growth anticipated and at the same time has to face redemption of convertible bonds, the company could need money.

The company official did not respond to the query if Sintex could consider selling this business. “It is not a core business. The company’s focus is on building products and custom moulding,” the official simply said.

Investment bankers would consider this as an opportunity and perhaps already approached the company.