Jitendra Kumar Gupta Moneycontrol Research
For shareholders of Sintex Industries the wait is finally over. With demerger of its plastics business complete, the Gujarat-based company will shift focus to creating wealth for its investors.
Under the terms of the demerger, Sintex hives off Sintex Plastics Technology, which will be listed separately over the next 40-50 days. Sintex Industries will continue to hold the textile business.
After the consummation of the demerger the existing investors of Sintex Industries will be issued shares of the plastic business in the ratio of 1:1, which effectively means for every 100 shares held in the original company, investors will be entitled to another 100 shares of the plastic business.
The textile business is typically a capital-intensive business which explains a debt of Rs 6423 crore in Sintex books as on FY16. In FY16 the textile business was giving a 3 percent return on capital as against 15.2 percent return on capital enjoyed by the plastic business.
The idea behind the demerger is simple: if the high margins and high return plastic business is separated it will command a higher valuation, putting it in the same league as Supreme Industries and Nilkamal Plastics with price to earnings in the rage of 25-30 times its earnings.
Even at 12-15 times the Sintex plastic business will be valued at around Rs 122-155 a share. Thus, the combined value of listed Sintex Industries (current market price of Rs 30) and Sintex Plastics, which is yet to get listed, will be in the region of Rs 152-180 a share. Investors who had bought the shares at the time of the announcement of the demerger last year at around Rs 80 a share well be sitting on 50-90 percent gain after the demerger.
The other side of the argument is that if there was value, why was it not getting reflected in the original company?
Sintex Plastics is less capital-intensive and has been making good profits. It has an established leadership in this business with a product basket made up of industrial products. It explains why investors preferred the plastics business to the textile one which battling debt which was crimping its ability to turn profitable.
The textile business consumes close to 45 percent of the combined capital of the entity but contributes merely 12 percent to its earnings before interest indicating that the textile was a huge drag on its performance.
So, investors can look forward to some value creation thanks to the demerger.
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