Sintex Industries seems to have finally found a way out to counter investor pessimism. The company is demerging its textile business that accounts for the majority of its Rs.6,000 crore debt (net gearing: 1.03x). Under the scheme, shareholders of Sintex Industries will get one equity share of Sintex Plastics, as against one equity share held in Sintex Industries. Textile has been a major drag on its financials, depressing its return on equity to 11.5% and limiting valuation to 6x earnings, despite consumer-facing businesses like monolithic and prefab, which has a higher margin. (See: Poles apart)
That precisely is the rationale for separately listing its plastic business. Sintex is the market leader in plastic prefab (building material for schools, low-budget housing, defence, civil construction and temporary shelters; etc) and storage tanks. Its strong distribution, brand and the product portfolio of about 3,500 products, largely in value-added segments like custom moulding and plastic products used in high-end engineering and automobiles applications, make it a strong player.
The listed players in the plastic industry, such as Supreme Industries and Nilkamal, are currently trading at a price to earnings ratio of about 26x. Both the companies boast a close to 24% return on capital, which is higher than Sintex’s plastic business that had a 16% return on capital in FY16. In this backdrop, even at half the valuation, Sintex’s plastic business could be worth Rs.6,400 crore, as against the current market capitalisation of Rs.4,30