Sintex Industries trading at low valuations (for a reason)

Share Price: 14.20
52-week high: 38.55(20-Jul-17)
52-week low: 14.05 (03-Jul-18)

I came across Sintex Industries (textile business) during my search for bargain stocks. At first glance, I thought I had landed on a hidden treasure. A stock trading significantly lower than book value (~0.2x P/BV) and a ~6x P/E with industry P/E at ~20x. (!!)

However, after about a day of exuberance, I reminded myself that the stock must be trading this way for a reason and my job was to assess if the reason was valid because:

• 6x was the trailing eps. Perhaps the market was factoring in forward eps which could be expected to be lower
• The industry is not in a good place with rising cotton prices, and it is possible that industry valuations may go down in the coming quarters

So I started doing the work, studying the financials, presentations, and all that good stuff. However, finding information on the company gave me a serious headache, which is never a good sign. I also emailed investor relations (two weeks ago) and have not heard back.

I found that sintex industries had spun off into sintex plastics and sintex industries (textile business) about a year ago. I looked at both and decided to pass on both.

Sintex plastics has shown declining profits and revenues (and share price) for the past couple of quarters, and even though research reports indicate a buy rating with attractive valuations, there is no explanation except for the KKR debt financing, and I did not quite understand why that is a catalyst. KKR has not made an equity investment, it has refinanced a loan. The company's custom molding business is not doing well, and neither is the prefab and infra business. They had also recently wound down their US subsidiary. The company is also highly levered with a net debt/EBITDA at 4.1x for FY18. I did not need to read further, I knew this was a pass, despite IDFC and Phillips capital suggesting a 49% and 45% upside respectively. (Sidetone: people tend to underestimate how easy it is for research houses to change target when the price goes down, without changing upside)

Let's talk about sintex industries now. Sintex Industries is a textile company that produces multiple varieties of blended high-end shirting (cotton linen, cotton-silk, cotton lycra and cotton- linen-lycra)."It enjoys a major share of the structured fabric market in India by addressing the growing needs of premium men’s shirt brands" - Annual Report FY17

I do not see this need increasing much. In fact, with the younger generation moving to casual clothing, this is not a segment that I see growing in the apparel space. 

Sintex is also one of the largest corduroy manufacturers in Asia. It manufactures a range of corduroy fabrics, including yarn dyed corduroy and ultima cotton yarn based corduroy. I had to use google to figure out what corduroy is. I do not know about you guys, but I do not know anyone who wears corduroy so that was another negative for me.

The company supplies its products to renowned retailers, both domestic and international, such as Triber, Gap, DKNY, Ralph Lauren, Marks & Spencer (international) and Arrow, Zodiac, Van Huesen, Louis Phillipe (domestic). Last time I checked, these company's were not growing too rapidly and retail has not really been doing so well. 

The company has also recently created a retail distribution channel (18% revenue) in pan-India which markets ready-to-stitch fabric packs. It also has stores in Bangladesh and Dubai. I have personally not seen these stores. Furthermore, there is no information on the margins for this business or the demand for ready-to-stitch fabrics. The retail stores require investment, and it is possible that the company might end up increasing leverage as they pursue this business. 

Lastly, about 1/2 of the MD&A on their Annual report is about cotton prices. Hence, I am assuming that they are very sensitive to volatility in cotton prices. Furthermore, since all of their products are cotton-based, they are not diversified at all (compared to peers) and could be hit hard with increase in cotton prices as they have been on an upward trend due to increase in MSP by the government and decreased supply. The MSP increase also creates bottlenecks in the supply chain as the textile manufacturers will have to buy from the government post procurement.

The company also says that their margins are being hurt due to the trade war and depreciation in Asian currencies, and this shall continue. The company is also highly levered, and that is never good for margins.However, there are some tailwinds which could end up turning things around but it is very difficult to assess how much impact it will have. Tailwinds:
- Rupee depreciation could increase exports
- SGST compensation to increase income
- Government recently doubled import duty on textiles which could increase topline

Note that these are all industry headwinds. So if you'd really like to invest in textiles, the best strategy would thus be to invest in a company with less exposure to cotton and a more diversified portfolio. If you find a good one, let me know.

Now you might say, "but their results have been good?". Yes, Q1 FY19 results are good, but damn that presentation looks lousy. Also, can someone help me find the balance sheet on this? I thought they had to disclose this stuff.

Pass. Pass. Pass.

If you are too tempted, try to find the Q1 FY19 balance sheet.