Buy Sintex Industries

Sintex Industries (CMP: Rs383)

Mkt Cap: Rs62bn; US$1.6bn Bloomberg code (BVML IN)

Event

Sintex Industries Ltd through its 74% subsidiary Zeppelin Mobile Systems India Ltd has acquired Digvijay Communication and Networks Private Limited (DCNPL), in a slump sale purchase for Rs540m in an all cash transaction, valuing the company at ~5.9x EV/EBITDA and ~1.35x EV/Sales on FY08.

About Digvijay Communication and Networks Pvt. Ltd. (DCNPL)

• DCNPL is a leading provider of telecom infrastructure services in central India, particularly Madhya Pradesh and Chhattisgarh. DCNPL registered a turnover of Rs400m in FY08 with operating margins over ~27%
• Core activities comprise network infrastructure services, installation & commissioning, tower manufacturing and annual maintenance services.
• DNCPL's Infrastructure division boasts expertise to plan, deploy, maintain and optimize mega communication networks; this division contributed 60% of revenues in FY08.
• DCNPL's tower business currently has 3,600 tonne per annum tower manufacturing facility near Indore (in Madhya Pradesh), contributing ~15% of revenues.
• DCNPL currently services ~2300 annual maintenance contracts (AMC), contributing ~10% to revenues. Management expects AMC's to increase to 7500 over next two years.
• Key clients include leading telecom operators like Airtel, Idea, Reliance Communications, Siemens, Tata Indicom, etc.
• Existing management team and workforce would continue to be on board post acquisition.

Management's rationale for acquisition and other details

Opportunity to become one-stop-shop telecom infrastructure services:

Sintex's subsidiary Zeppelin operates in manufacturing and erection of BT Shelters. However, with DCNPL's acquisition, Sintex would now be an end-to-end service provider (i.e. from design to deployment) for telecom infrastructure services. Zeppelin's services would include identification of the site, manufacturing and installation of BT Shelters & towers, attaching peripheral equipments, and network maintenance and optimization, etc. We believe Sintex through this small acquisition has taken a smart step, which would lead the group to higher per site realizations.

Playing on Strengths:

Sintex's Prefab business which has grown at a 22% CAGR over the last five years (and accounts for ~24% of its standalone revenues now), relies primarily on manpower skills and logistics optimization. Infrastructure development, which account for ~60% of the DCNPL's business, also relies primarily on technical skill sets and logistics optimization. Considering Sintex's past track record on its manpower utilization skills and continuous effort to move its business more towards services, we see as a step to leverage on its strengths.

Wider geographical reach and manufacturing bases:

Zeppelin operates in manufacturing and erection of BT Shelters, with exposure primarily in north and western India. DCNPL's acquired business would lend Sintex access to low wireless density (and higher forecasted growth) states located in Central India. Moreover, we believe Sintex's other business segments (like prefabs), where logistics accounts for a major cost would benefit largely on sharing of operating facilities.

Expect a rapid growth post acquisition

Sintex's management expects revenues for DCNPL to register 85% growth in FY09, propelling total revenues to Rs750m. The company expects the acquired operations to capitalize on the immediate opportunity telecom sector offers, with installed towers expected to grow ~3x to 350,000 by 2010. Moreover, company has cited its focus on increasing its annual maintenance contracts from ~2300 to ~7500 over next two years. With services growing faster than manufacturing revenues the company expects operating margins to remain stable.

Impact and view

We see this acquisition to offer complimentary product portfolio, though admittedly it is in an area with business dynamics different than that of existing business operations. This acquisition we believe would place Zeppelin in a unique position to serve the entire service component of telecom infrastructure requirement, which constitutes a large 35% of overall spending. Zeppelin would effectively emerge as a one-stop shop for all telecom service requirements i.e., right from infrastructure development (from site identification till commissioning), manufacturing, installation and commissioning of towers and BT structures. On the other hand, Zeppelin on acquiring DCNPL, would gain access to latter's clientele, providing Sintex with unique opportunity to cross sell its products to a wider array of clients. Further, like in the case with all other acquisitions, the payback period is fast and we believe the acquisition is value accretive immediately given a very reasonable transaction value.

Maintain Outperformer; expect EPS CAGR of 70% over FY08-10E

We maintain our bullish stance on Sintex, which emanates from the management's ability to ride unexplored and scalable mass businesses. We see Sintex entering a higher earnings trajectory with improving return ratios on the back of value-accretive acquisitions as also a number of new product launches (cold storage chains and variants on BT shelters) in the near future. We believe the stock offers significant upside even from these levels. Going forward, we expect Sintex to track its earnings trajectory with inorganic initiatives providing triggers in the interim.

Key Financials

As on 31 March	FY06	FY07	FY08P	FY09E	FY10E
Net sales (Rs m)	8,535	11,178	22,742	39,863	57,480
Adj. net profit (Rs m)	922	1,307	2,321	3,930	7,108
Shares in issue (m)	99	121	153	162	162
Adj. EPS (Rs)	9.3	10.8	15.2	24.3	43.9
% growth	60.1	16.1	39.8	60.1	80.9
PER (x)	41.0	35.3	25.2	15.8	8.7
Price/Book (x)	8.5	7.1	5.6	1.8	1.5
EV/EBITDA (x)	27.7	22.6	18.1	9.7	6.2
RoE (%)	19.5	23.9	27.5	17.2	18.4
RoCE (%)	11.3	13.8	16.4	17.0	18.3

Chirag Shah / Ritesh Shah

chirag@... / riteshshah@...

IDFC - SSKI Research

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