CAPM Portfolio: A "Recovery" Stock That's Shown Good Results
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Sintex Industries results in Q4, 2014 look very interesting. They’ve earned revenues of nearly Rs. 2,000 cr. (+42%) and profits of Rs. 161 cr. (+7%).
(From screener.in)
Twelve month EPS is flat, though, at Rs. 11.72. However there are some very interesting things going on: (See their results)
FCCB Conversion Overcome
The stock fell from the Rs. 300 levels in 2008 down to Rs. 20 in 2013, on fears of a big FCCB default. They had borrowed money that was convertible but because of the share price drop the money didn’t convert and had to be returned.
That FCCB has been rolled over with $140 million of fresh FCCBs maturing in 2017, convertible at around Rs. 75 per share. If you assume conversion, it will result in about Rs. 840 cr. getting converted to shares at Rs. 75, which is about 11.2 crore shares. They have 31 cr. shares outstanding right now, so the conversion will result in 34% dilution. If you assume that full dilution is already done, then the EPS is about Rs. 8.7 instead.
Even with that lower EPS, they trade at a price of Rs. 51, which is a P/E of 5.9.
Assume no conversion, and they have to pay back Rs. 840 cr. which they should be able to easily do from reserves (since they have about Rs. 360 cr. of profit this year, and we can assume similar profitability or more for the next three years).
The business itself has multiple lines:
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Prefabricated construction and building materials, where they’ve started things like do-it-yourself kits for expansion (versus setting up a building team themselves). Here they have started CSR initiatives like prebuilt toilets at Rs. 10,000 which should be attractive to companies that need to do CSR out of their profits (it is now compulsory to do CSR for all large companies with a certain % of profits)
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**Plastics and custom moulding **- they have a foreign arm called Nief Plastics and they do auto plastics and other things. They’re trying to move their plastics business into higher margin territory by increasing synergies between their foreign and Indian operations. Sintex is also famous for their black water tanks which have adorned the tops of buildings all across India.
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**Textiles **which has been growing significantly and they have just added a spinning plant which will start producing revenue in 2015-16.
What we like is that the business is strong and moving up, and the FCCB issue has become less of a problem. The stock has more than doubled from it’s lows of Rs. 20 and trades at Rs. 51, but even there, the P/E of less than 6 (considering full FCCB dilution) is attractive.
What’s the trigger?
Everything looks good. But there must be a trigger for expansion. The growth triggers are:
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Their CSR initiative
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The new spinning business
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The change in government (a number of their growth metrics were stuck because of lack of payments and orders from the government)
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The stock moving above 75 (conversion price) which makes the financials much less leveraged
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Promoters have been buying stock all over the place, increasing stake from 37% to 41% in the year.
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P/E expansion - a company that will grow at 15% should get a P/E of 12 at least, which is 2x the current level.
Negatives include the fear that the dollar will go up even higher, taking the FCCB repayment to dangerous territory. However they have a stronger balance sheet now. The other problem is corporate governance, where there have been some issues recently with the company investing in a subsidiary and then selling it off to a promoter linked entity for money that hasn’t entirely been received. Plus, in earlier times, the promoters have tried to prop up the stock by saying they will buy, and they eventually never did in the few months after. These are governance risks that could restrict our upside.
The technicals though, suggest a strong move up, which in the recent past has been nearly vertical. However, the 52 week high will remain a barrier at Rs. 54.
The long term chart shows a different picture - of a “recovery” stock. Sure, we missed the first Rs. 30. But will it move up and make up the rest?
The stock isn’t actually a long term new high. We like those the most.
However, the strong triggers in this stock make it attractive enough for us to buy for the 1 year horizon. Note that we will keep a 15% stop loss on this stock in our portfolio. (To be honest, we own the stock since it was around Rs. 32, but then the results weren’t this attractive)
Here’s what the Capital Mind Portfolio looks like:
What we need to understand is how to calculate returns - is the average of the gains? But entries are made in different months. How do you get an idea of how well or badly we have done? Another post on that concept soon.
Note: We have applied for, and received WonderLa shares (only 100) at Rs. 125. It has listed at Rs. 160, a 30% increase. We will add to our quantity, but it doesn’t look nice to add the entry price to the portfolio, and the fact remains that it is a very risky trade with no price history. So we’re keeping it off the portfolio for now, but we wanted you to know.
Also, of course, this is our portfolio and our money. We might be able to afford to lose it. So don’t blindly follow, and please don’t treat this as a recommendation or portfolio advice.
Disclaimer
Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.
Disclosure: The authors at Capital Mind have positions in the market and some of them m
ay support or contradict the material given above, or may involve a direction derived from independent analysis.
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