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Sintex Industries( reco buy cmp 194 trgt 233)

Sintex Industries( reco buy cmp 194 trgt 233)

Durha acquisition strengthens execution capability

Sintex Industries (Sintex) has entered into a definitive agreement to acquire a 30% minority stake in a privately held construction company called Durha Construction Pvt Ltd (Durha), which is engaged in civil and power projects. Sintex has paid Rs42 crore for the 30% stake, which is divided between fresh issue of the shares and a stake sale by the promoter. Of the Rs42 crore, Rs35 crore would be infused in the company via the issue of new shares and Rs7 crore would be paid to the promoter. Going forward, by FY2011 Sintex aims to enhance its stake in Durha to 51% for which the terms of the deal have been finalised.

The Durha acquisition is in line with the company’s strategy of increasing its geographic execution capabilities and the company had earlier indicated on various forums that it was evaluating such a transaction. Against the backdrop of the stupendous growth seen by Sintex in its monolithic business, we view this acquisition as positive and expect it to have a synergistic effect on Sintex. It will help the company grow and strengthen its monolithic and prefab businesses, and expand its building product offerings to the infrastructure and industrial space. Further it would help Sintex to increase its geographical spread, as Durha has orders spread across the north east and the northern parts of India (Punjab, Uttar Pradesh). Further, Durha offers strong revenue visibility with an order book of Rs750 crore (5x FY2010 revenues) spread across various infrastructure sub-sectors. According to the Sintex management, there is visibility that the order book would grow to Rs1,000 crore by March 2011.

We maintain our bullish stance on Sintex in view of the strong visibility of its revenues and the expansion in its margin in the wake of the strong growth in its building material (monolithic as well as prefabs) and custom moulding divisions as well as the stable performance of its textile business. We value the company at 12.7x FY2012E fully diluted earnings of Rs18.5 and thus maintain our bullish stance on its stock with a Buy recommendation and a price target of Rs233. At the current market price the stock is trading at 14.3x and 10.6x its FY2011E and FY2012E earnings respectively