Concerns over Equity Dilution Mar Sintex’s December Show

Sintex Industries reported a strong operational performance for the quarter to December 2012, improving sales as well as margins. The weak bottom line performance was because of the foreign exchange losses due to a weak rupee. By managing to finance the repayment of its foreign currency convertible bonds, or FCCBs, its near term concerns have been addressed.
The company posted a 23% topline growth at . 1,427 crore with a 130 basis points improvement in operating profit margins to 15.4% at the consolidated level. This boosted pre-tax profits by 45% to . 140.3 crore. Sintex also bookeda notional forex loss of . 45 crore on revaluing its long-term liabilities, while its tax outgo jumped substantially, leading to a 35% drop in bottomline at . 53.3 crore.
Although the scrip lost 2.5% on Thursday, when the results were declared during market hours, it rebounded strongly on Friday, surging 3.2%, in spite of the overall weakness in the markets.
The key concern for investors now is about the equity dilution the company had to settle for while re-financing the FCCBs falling due in March 2013.
On a fully-diluted basis the company’s per share earnings or EPS works out to . 2.1, excluding the impact of forex losses, for the quarter and . 5.3 for the 9-month period ended December 2012. Annualising these earnings, the scrip is currently valued at a price-to-earnings multiple of slightly below 10.
A number of equity analysts are terming these valuations as inexpensive. However, investors will look for a reduction in the company’s debt and improving return on capital.