[T.S.R:12205] GTL INFRA , SINTEX & IVRCL --STOCK IDEA

GTL INFRA LTD.

The country's largest independent passive telecom infrastructure company, GTL Infrastructure Ltd, is set to more than double in size after the acquisition of Aircel Ltd's passive infrastructure. But in the process, it may stretch itself financially.

The Rs8,400 crore acquisition is being done through a special purpose vehicle, in which GTL Infra will have a 51% stake. The balance will be held by GTL Ltd, a group company and Global Holding Corp.

Pvt. Ltd, the group's holding company. Around three-fifths of the total cost, Rs5,000 crore, is being funded through debt.

GTL Infrastructure's share in the equity component of the deal works out to Rs1,750 crore. The company had a cash balance of Rs1,365 crore at the end of March 2009, of which Rs458 crore was pledged towards a debt service reserve account, margin money for letters of credit, bank guarantees, and as security for borrowings by capital goods vendors and sales tax authorities. In FY09 it incurred capital expenditure of Rs1,440 crore, and assuming that capex this year was in a similar range, it should have exhausted most of its funds. At the end of March 2009, it also had a debt-equity ratio of 2.6:1, which means that raising additional debt to fund the Aircel deal as well as for recurring capex needs would be difficult. And recurring capex is likely to be high.

The company has committed to set up 20,000 towers over the next three years to meet Aircel's needs.

What's positive about the deal is that GTL Infra has also got an anchor tenant in Aircel.

But it would need to increase its tenancy ratio (number of tenants per tower) considerably from current levels of 1.2 times for the deal to make sense. In a presentation to analysts, the firm has said that it expects the tenancy ratio to rise to 2.3 times in the next three years. But this seems ambitious especially given the large capacity in the system and the presence of a number of large passive infrastructure providers such as Indus Towers Ltd, Reliance Infratel Ltd, Bharti Infratel Ltd and Quippo Telecom Infrastructure Ltd.

The markets, however, seem to be gung-ho about the prospects for the company after the deal--GTL Infra's stock has risen by 18% in the past two trading sessions.

For the telecom sector as a whole, this move of consolidation spells further bad news.

On the one hand, Aircel gets much-needed funding, which will cause it to roll out capacity at an increased speed. This will add to the overcapacity in the system. On the other hand, even profitability of the passive infrastructure segment is likely to be affected with one more large player to contend with. The spate of bad news for the telecom sector just doesn't seem to end.

 

SINTEX LTD.

Domestic plastic business picking up; Revenues in line: Sintex Industries' (Sintex) consolidated Net Sales grew by 3.4% to Rs848cr (Rs820cr) in 3QFY2010; however, sequentially they grew by 18.5%, which was in line withour estimates but below street expectations. The strong sequential revenuegrowth was largely led by the domestic single storey pre-fabs and the domestic custom moulding segments, on account of better capacity utilisation and a pick-up in orders. The monolithic segment has shown a moderate yoy growth of 1.6%, much below our expectation, on the back of slower execution; the management has maintained its annual revenue guidance of ~Rs700cr. Standalone BT Shelters and the textile segment continue to drag
the revenues. The benefit of higher raw materials prices will start showing from the ensuing quarters, by boosting Sintex's top-Line.
Operational performance impacted by a lower contribution from the textile and monolithic segments: Sintex's 3QFY2010 consolidated Operating profit stood at Rs 126.9cr (Rs127.3cr), flat yoy. The OPM for the quarter stood at 15.0%, 50bp down yoy and 320bp down qoq, on account of a lower contribution from the high margin monolithic and textile segments. However,the international business continued to show stability in its operating margins, on account of the ongoing integration process. The EBIT margin for the Plastic segment was higher by 85bp yoy, but lower by 308bp qoq, on account of a lower contribution from the high margin monolithic segment. The quarterly margins are not a fair indicator, due to the lumpiness of its monolithic business and we expect a high contribution from the segment in 4QFY2010.
The EBIT Margin in the Textile segment, which continues to remain weak, declined by 1,345bp yoy; it went up by 349bp qoq, on account of improving capacity utilisation.
Management maintains its FY2010 guidance: The management is maintaining its annual revenue guidance of Rs3,300cr and of a 5% yoy PAT growth in FY2010. As on 2QFY2010, Sintex has a cash balance of Rs1,100cr and debt of Rs1,900cr on its books; hence, it is sufficiently funded for capex and for acquisitions.

Segment-Wise Performance
• Monolithic segment drag revenues in domestic plastic segment; however management maintains its annual revenue guidance of ~Rs700cr for the same.
• Revenues in all segments, except Standalone BT Shelter, Zeppelin, Wausaukee and textiles, have increased yoy.
• Sales from the Textiles division were lower by 5.9% yoy at Rs89.0cr (Rs94.5cr), however it went up by 16.8% qoq indicating pick up in demand for high-end fabrics. The management was positive about demand revival in the in the segment in ensuing quarters.
• The Standalone Pre-fab segment, which includes BT shelter, declined by 2.8% yoy, and was impacted by a slowdown in capex for telecom towers across the industry. The BT Shelter will continue to remain weak, due to the slowdown in capex from the telecom sector.
• The Monolithic segment grew by mere 1.6% yoy on account of slower execution; moreover, the order book of Rs1,500cr provides strong revenue visibility over the next two years. We expect growth to accelerate in ensuing quarters.
• The domestic Custom moulding revenue was up by 12.7% yoy, at Rs115cr on account of surge in demand in electrical accessories as investment in power sector picks up. Bright Autoplast revenue, which grew by 78.5% yoy, was aided by the operations of its new Chennai plant. Wausaukee continues to remain weak on lower capacity utilisation and weak demand. Consequently consolidated custom moulding segment grew by11.2% yoy to Rs401cr.
Operational performance impacted by lower contribution from high margin segment The EBIT margin for the Plastic segment was higher by 85bp yoy, but lower by 308bp qoq, on account of a lower contribution from the high margin monolithic segment. The EBIT Margin in the Textile segment, which continues to remain weak, declined by 1,345bp yoy; however, it went up by 349bp qoq, on account of improving capacity utilisation and a pick-up in demand. The quarterly margins are not a fair indicator, due to the lumpiness of its monolithic business and we expect a high contribution from the segment in 4QFY2010.
Outlook and Valuation
Sintex's higher exposure to government orders provides it with higher visibility and a lesser risk of cancellation in the domestic plastic segment. The Monolithic segment has an order book position of around Rs1,500cr. Going ahead, we expect the company's business to be primarily driven by its domestic plastic segment, on account of the government's higher thrust on infrastructure and a pick-up in private capex.
We expect growth to accelerate in the ensuing quarters, as the company starts passing on the higher input prices to its customers; additionally, the recovery in the domestic auto and electrical segments will boost its custom moulding segment. We believe that Sintex will resume its historical growth trajectory from FY2011 onwards. The integration of foreign subsidiaries will act as a key catalyst for the stock's performance. However, early signs of margin recovery have already been witnessed. At Rs260, the stock is currently trading at 7.7x its FY2012E Earnings and at 1.4x its FY2012E Book Value. Historically, Sintex has traded at 13.6x its one-year forward average (two, three and five-year) P/E, which makes the current valuations attractive. Moreover, its fundamentals have been strengthened with a well-capitalised balance sheet, strong revenue visibility (monolithic order book of Rs1,500cr), and a demand revival in its domestic plastic segment. We maintain a Buy on the stock, with a target price of Rs369.

 

IVRCL

It is well known that the government's emphasis on infrastructure will help companies such as Hyderabad-based IVRCL Infrastructures and Projects Ltd. A recent report by Nomura Securities had said: "The company is aggressively pursuing BOT (build operate-transfer) projects in the roads segment. IVRCL is L1 in projects worth more than Rs5, 000 crore...."

Proof of that has come in with the company obtaining a Rs1, 550 crore road project from the National Highways Authority of India on Wednesday. The firm's shares moved up smartly on the news.

Until 2008-09, around 60% of the company's orders came from the irrigation and drinking water segment. But this year should see higher inflows of orders from roads, power and building contracts.

Analysts' consensus is that IVRCL has order inflows of around Rs2,000 crore during the third quarter ended December. At the end of September, the total order book was around Rs15,000 crore, which the management hopes to scale up to around Rs22,000 crore by end of 2009-10.

It plans to keep its order book position at around 3.5 times its present turnover.

Given the delays in the government contracts and execution, this would ensure a steady growth trajectory in revenue and profits. For example, the political uncertainty in Andhra Pradesh did affect IVRCL's revenues due to execution delays in first half of 2009-10.

Recall that in November, the group had restructured its business operations following which BOT orders would be undertaken by the IVR Prime Urban Ltd, where IVRCL holds a 80% stake. However, the construction contracts would typically be housed in the flagship company. Hence, for example, while the Rs1,550 crore BOT road contract is technically with IVR Prime, around Rs1,100 crore of construction will accrue to IVRCL Infra.

For the third quarter ended 31 December, IVRCL Infra is expected to post a 20% growth in revenue over the year-ago period of around Rs1,200 crore. However, the 20% project exposure to Andhra Pradesh will also hamper the growth rate. Operating profit margins may drop sequentially and on a year-on-year basis to around 9% as the gains from low commodity prices would have benefited it only until the preceding quarter.

Also, with competition hotting up in the infrastructure segment, especially road and power contracts, the company may have to contend with relatively lower profit margins if it has to keep its order book growing.